In a blog published last week on the Tax Research website ahead of Friday’s meeting of the Code group, Murphy said: “Informed sources tell me that the EU has now considered the issue of Jersey and the Isle of Man, but not for Guernsey who have already agreed to reform their system. And that informed source tells me it is bad news for Jersey and the Isle of Man: they have failed on the first three criteria… but have passed the last two.”
Murphy did not name his source or provide any clues as to whether it was someone on one of the islands or within the European Union.
Isle of Man officials have said that the zero-10 matter was due to be discussed by the Code of Conduct Group at its Friday meeting.
An Isle of Man Treasury official told International Adviser late on Friday that he had had “no news”.
Zero percent corporation tax
Under zero-10 regimes, most businesses pay no corporation tax, while some industries, such as banks, pay 10%, and a few pay 20%.
The Code of Conduct Group is looking into the zero-10 regimes in response to concerns from some EU officials that they are ‘predatory’. However, they are a major element in the incentive package some offshore jurisdictions use to lure businesses to their shores.
The zero-10 concept was actually conceived in response to concerns by the Code of Conduct Group over other tax codes, such as the International Business Company/International Company and Exempt Company structures, which allowed companies owned by non-residents to pay low or no tax on their profits.
The Isle of Man was the first of the three crown dependencies to introduce a zero-10 regime in April 2006, and it was initially examined by the Code of Conduct Group and found to be sound.
Guernsey and Jersey subsequently adopted their own versions of zero-10 in 2008 and 2009 respectively.
Ecofin to consider ‘in December’
As International Adviser reported in September, offshore industry officials believe that the full Ecofin Council is thought likely to consider the Code of Conduct Group’s recommendation on the subject of zero-10 tax regimes at its next meeting in December. At that point, if the council were to declare zero-10 regimes non-compliant with the EU’s Code of Conduct on Business Taxation, it is expected those jurisdictions which have them would be given a year or two to replace them.
The three ‘failed’ criteria
The three criteria which Murphy says the EU Code of Conduct Group found Jersey and the Isle of Man failed to meet were:
• whether the advantages of the tax system “are accorded only to non-residents or in respect of transactions carried out with non-residents”;
• whether the advantages “are ring-fenced from the domestic market, so they do not affect the national tax base”; and
• “whether the advantages are granted even without any real economic activity and substantial economic presence within the [EU] member state offering such tax advantages”.
Murphy, a vocal opponent of zero-10 tax systems, low tax regimes and tax havens generally, said in his blog that “the logic of the zero-10 system…was always to get ’round the requirements of the EU code, and not to comply with it”, and added: “I argued this in 2005 in a report I prepared for the States of Jersey. Unfortunately for the Crown Dependencies the EU could not consider the issue until their laws were in force, but now they are.”
According to the Tax Research website, the organisation is funded by, among other entities, the Joseph Rowntree Charitable Trust, in the form of a grant; the Trade Union Congress; and the Task Force on Financial Integrity and Economic Development, which in turn is funded by the Norwegian government.
Isle of Man and Jersey officials were not immediately available for comment on Sunday evening.