Memorandum submitted by Paul Carney
Further to recent coverage within the Jersey
Evening Post, the following perspective may be of interest for
the current review of the relationship between the UK and the
crown dependant territories (notably the Channel islands and the
Isle of Man).
At the present time, I have a young family and
I've worked within the finance industry for the past 12 years
or so (based in Jersey since 2001).
I have professional qualifications in tax and
law.
From a "selfish" perspective, the
finance industry here in Jersey provides a relatively comfortable
living and fosters a sense of wealth and well-being within the
local economy generally. Of particular note in this context is
the existence of a safe, clean & prosperous environment that
would probably not be available if that industry contracted.
Conversely, I recognise that this industry is
founded in the attractiveness of the political stability a small
island offers combined with a simplistic system of taxation. In
particular, these islands either do not apply tax or adopt a zero
rate to transactions and income generated through "investment/wealth
management" vehicles that are beneficially owned by individuals,
families and companies that "live" in other parts of
the world.
The size and population of the island and the
evolution of political history have produced the crown dependency
status which enables the islands to work with the UK in their
international affairs in a manner not dissimilar to the devolved
nations of the United Kingdom. In addition, the close proximity
of these dependencies to the UK and awareness of cordial political
relationships obviously attracts wealth from & investment
into the UK via these islands.
However, a fair "bargain" for these
benefits & the most equitable point of taxation for such activities
is certainly a moot point, especially when the crown dependency
relationship is a key facilitator of interaction between the islands
and third nations, albeit the UK already retains the power to
monitor legislative developments (eg the recent Privy Council
approval of Jersey's Foundations Law).
Of course, a good proportion of the wealth managed
within the crown dependencies does not originate from the UK—notably
the middle east and countries within the British Commonwealth.
Members of the finance industry (within both the crown dependencies
and the UK) occasionally question the "optimum" point/rate
of taxation arguing that any measures to increase UK tax revenues
from the investment vehicles based in the crown dependencies will
direct this wealth to alternative jurisdictions (especially in
our global economy) and thus reduce taxable revenue, economic
activity and adversely impact jobs and wealth for the population
at large in each jurisdiction. For example, a number of AIM listings
comprise third country companies using a crown dependency vehicle
to raise investment which contributes to the economy of both jurisdictions
and might be directed elsewhere in the absence of the current
regime.
In my experience, a key factor is the complexity
of the UK tax system and its piecemeal development which has produced
a range of differing tax rates. Most accountants and many lawyers
within the UK have consequently developed differing degrees of
tax planning practices to negotiate domestic residents/businesses
and outside investors through this maze —which essentially,
utilise opportunities to "exploit" gaps in the legislation
&/or double tax treaties to manage and generate wealth —whilst
legitimately paying as little tax as necessary.
Specialist trust, company and partnership vehicles
in particular can primarily act as a conduit for cash/asset flows
and affect the timing of cash being accessed/used by the ultimate
owners & indeed, any other party interested in the vehicle.
Such practices are prevalent in all economies but the growth of
the finance industry within the crown dependencies has certainly
been fuelled by this practice.
In many cases, the operation of these products
is primarily focused on indicators that management and control/records
are held in the dependency rather than true management and control
occurring there. For example, most trustees would find it impossible
to be skilled in the spectrum of investment classes that they
take decisions on and whilst some proportion of investment activity
is genuinely out-sourced to professionals specialised in particular
investment/business classes many "decisions" result
from discussions with clients and their families that verge of
direct instructions.
A root cause is greed & regardless of political
allegiances, the crown dependencies thrive on income/wealth that
would not be channelled into them if non resident clients did
not want to avoid/mitigate their tax liabilities (occasionally
there are confidentiality concerns around using an entity located
in the dependencies but the tax sweetener is always relevant).
The pricing of crown dependency financial products (& wealth
generated within their finance industries) can reasonably be claimed
to be "largesse" & certainly incorporates the very
funds that would otherwise be tax revenue for the UK had wealth/investments
been generated and managed directly within the UK without involving
a crown dependency vehicle.
As with other economies, there is a sense that
the upper echelons of society & definitely the finance industry,
have secured obscene personal wealth which is not so much sourced
from aggressively sold complex financial products as the basic
fact that people will pay to route transactions and financial
affairs through a zero or low tax jurisdiction. Bonuses for example
are often pro-rata'd per position within an organisation (&
associated responsibility) , although most financial workers simply
receive a relatively small addition to the normal salary unlike
the "City" figures bandied about in the media.
Another consideration therefore is the optimum
use of the skills and intellectual ability applied by the finance
industry.
In one sense, much of this gainful employment
basically pushes paper and assets around without generating anything
of tangible value to the world at large and yet, the generation
of wealth encouraged by this industry provides the very investments
desired by tangible industries to utilise the planets resources
efficiently and sustain economies around the globe (eg investments
in farming, alternative energy sources etc). A recent BBC documentary
for example, demonstrated the ability of ex City bankers to work
within and assess the operations of differing businesses (a struggling
dairy producer and hotel in this instance) and identify opportunities
to secure:
— income/efficiency improvements; and
— maintain employment very, very quickly
and such skills are certainly encouraged by a buoyant finance
industry. As such, a social conundrum exists around whether the
wealth/investments generated through & for the crown dependencies
by their finance industry would be created at all if they did
not offer low tax regimes and associated skills. Equally, the
removal of tax advantages could very quickly result in economic
disintegration for the islands themselves.
On balance therefore, I would maintain that
the UK is perfectly entitled to review and possibly maintain the
existing relationship, although logical alternatives (for the
UK public) include:
— seeking to ensure that the crown dependencies
adhere fully to UK legislation, thus maintaining existing rights
as British passport holders etc & securing health care etc
at a fair price (ie adopt & pay over UK taxes, NIC's etc);
or
— offering full independence to operate
on their own in international affairs over and above their existing
autonomy.
[Such action could theoretically provoke a rapid
rise in their domestic tax obligations with an associated impact
on the economy, as well as impacting the relationship between
government/states services and their access to UK counterparts
(ie health and education infrastructure)—although again,
if they're not willing to pay a fair price (tax) for access to
UK facilities/expertise why should the UK be expected to provide
such services primarily on the basis of an historical association.]
The historical nature of the crown dependency
relationships and the evolution of attitudes towards history has
seen an increasing propensity (in my experience) for islanders
to question the validity of an allegiance with the UK crown, whilst
being very happy to accept wealth from UK residents or promote
investment into the UK that wouldn't come anywhere near them if
the vehicles that the crown dependencies can provide were subject
to the same taxes as would occur for direct UK investment.
As such, a review of these relationships appears
very well timed and I look forward to seeing the outcome of this
process when information from all interested parties has been
considered.
August 2009
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