However, the impact on business of any such potential extra requirements could be limited, according to Jo Huxtable, a Guernsey partner at accountancy firm Deloitte. She said the EU was appearing to take a proportionate approach to economic substance in its latest guidance note on the issue.
In simple terms, economic substance looks at whether companies registered for tax purposes in a particular jurisdiction carry out real activity – or are shifting profits from another country to avoid tax.
A car manufacturer, for example, might be expected to have a factory, staff and pay local taxes in that location. Financial services such as investment management and investment holding do not necessarily require large numbers of people. Recognition of such differences could prove vital in how the financial services sectors in Guernsey and the Crown Dependencies are treated by the EU.
Last year, the EU published a list of non-cooperative jurisdictions, with Guernsey staying off the list. However, the island committed to implementing steps to strengthen its approach. At the time, P&R president Gavin St Pier said these steps could include additional accounting or tax reporting obligations.
Jersey also stayed off the EU’s blacklist, but was asked by the EU to address the issue of economic substance. Ian Gorst, the island’s last chief minister, has previously said that new legislation was being considered in response.
Responding to the EU’s latest guidance note, Ms Huxtable said: ‘At this stage, it is too early to predict what the final legislation on economic substance will look like and whether it will be tax legislation or whether wider changes are needed in company law or regulation.
‘That said, the publication of the guidance document is a significant step forward from the situation since December 2017. The timetable is very important and we expect the next step locally will be for the government to consult more specifically with industry so that the necessary changes can be agreed and set out in legislation to take effect from 1 January 2019.’
She added: ‘On balance, this document is welcome in that it should allow for proportionate requirements to be introduced which address the EU concerns while ensuring the practical impact on local companies and the finance industry in general is reasonable.’