Corporate tax experts have confirmed that while territorial tax was an acceptable system in some countries, notably Hong Kong, the risk of a significant overhaul of the local system, and the requirement to have it scrutinised for global tax fairness in the process, was considered likely to damage the industry and scare off business.
The States’ own Tax Review sub-committee had already identified that there would be a potential risk of lost business.
In its own consultation document, published in January, Policy & Resources identified that such a move was ‘highly likely’ to be subject to an external review and, depending on whether a 10% or 15% tax rate was charged, could raise as much as £18m. a year for the island, or potentially lose up to £5m. in States revenues.
The move would have also had a potential requirement for economic substance requirements to apply to a wider scope of companies, which would have led to greater uncertainty of defining the tax base.
The Guernsey International Business Association, which represents all elements of the local finance industry, has welcomed the decision to take territorial tax off the table.
‘We have previously expressed concern about the potential impact such a system could have on Guernsey’s finance sector and the island’s overall competitiveness,’ said Giba chairwoman Jo Peacegood.
‘We recognise the importance of addressing Guernsey’s fiscal challenges and ensuring sustainable public finances, and look forward to continuing to engage constructively with deputies and policymakers as the wider tax review progresses.’
Mark Savage, tax director at BDO, said he was pleased that P&R has listened to representations from industry.
‘In our view, the potential risks that this posed to Guernsey’s reputation as a stable place to do business far outweighed any possible tax take,’ he said.
‘This was reflected in the figures for potential tax revenue – and loss of revenue – included in the original consultation document.’
Under a territorial regime, corporate profits are taxed on the basis of the source of income from which those profits are derived.
Only profits arising or derived from activity in Guernsey would be subject to tax, which the States was considering being at 10 or 15%.
Guernsey was planning to exclude fund managers and international insurance companies from the regime.
And it was accepted that the proposal would also bring extra compliance, regulation and administration costs to businesses, and the need for additional measures to be introduced, including a transfer pricing regime.