Crown Dependencies - Justice Committee Contents

Memorandum submitted by the Tax Justice Network

PURPOSE OF THIS PAPER

  The Mapping the Faultlines project is based on the contention that the mechanisms that allow illicit financial flows to occur result from the synergistic relationship between the world's secrecy jurisdictions and the secrecy providers (bankers, lawyers and accountants) who provide services from them.

  As part of the project it was felt important to review in detail the operation of some secrecy jurisdictions in order to highlight features of their behaviour. Jersey has been chosen as the subject of one such case study for two reasons. Firstly, Jersey is a significant secrecy jurisdiction. It is a UK Crown Dependency, and its secrecy providers[34] are highly active in marketing their services. Secondly, unlike many secrecy jurisdictions that we reviewed, in the case of Jersey there was sufficient information available to build a case study without local cooperation.

JERSEY—STILL A TAX HAVEN

  This case study is based in part upon an analysis of the claims made by Senator Frank Walker, Chief Minister of Jersey, to the US Senate Finance Committee Hearing entitled "Offshore Tax Evasion: Stashing Cash Overseas" on 17 May 2007. The evidence has, however, taken into account issues arising after that date.

  In this paper the claims made by that minister with regard to Jersey are refuted. Instead evidence is provided that shows that far from being compliant with the requirements of international taxation and other regulatory authorities to prevent the abuse of that territory for the purposes of tax evasion and other criminal activities Jersey is in fact actively promulgating innovations that facilitate those activities.

  In his submission of evidence to the US Committee Senator Frank Walker, Chief Minister of Jersey said:[35]

Jersey is a long standing international finance centre providing a wide range of financial and professional services and in compliance with international standards. It is no part of Jersey's policy to assist directly or indirectly the evasion of taxes properly payable in other jurisdictions. Such business is actively discouraged. (Emphasis in the original).

  In addition Senator Walker said that Jersey should not be considered a tax haven under the draft US legislation, including the Stop Tax Haven Abuse Act introduced into the US Senate in 2007, because:

1. Jersey had obtained international recognition of its compliance with international standards, and of its cooperation in the pursuit of those engaged in financial crime, including fiscal crime.

2. Jersey was applying standards on a par and in some areas ahead of those in place in major OECD countries.

3. Jersey had entered into a tax information exchange agreement (TIEA) with the United States which is in accord with the OECD's model agreement on tax information exchange, which agreement was being effectively implemented.

4. The Jersey authorities had developed good relationships with the US administration; not just on tax matters, but on financial crime matters generally.

5. It was important that the action taken by jurisdictions such as Jersey to comply with international standards and to engage in international cooperation should be recognised, and the good relationship that existed between Jersey and the United States should not be damaged by unfair discriminatory legislation.

6. Jersey was keen to maintain and enhance the good relationship it has with the United States and will be pleased to extend that relationship to the Senate Committee if invited to do so.

THE COUNTER-CLAIM

  In contrast to this view this paper contends that:

1. Jersey remains committed to conventional tax haven practices, with all that implies;

2. Jersey's compliance is with the form of international standards but not with the substance of the conduct that such standards expect;

3. Jersey's co-operation with the USA is not representative of its general approach to international issues;

4. Jersey is purposefully creating structures and procedures for use by its financial services industry that will result in information not being available for exchange under internationally agreed arrangements, so nullifying their effect.

5. Jersey's recent commitments to new Tax Information Exchange Agreements and to joining the European Union Savings Tax Directive as a full member do not change this in any material way.

THE EVIDENCE

  The evidence presented here is not meant to be comprehensive. What is offered is indicative of patterns of behaviour that support our view that Jersey and secrecy jurisdictions like it remain committed to the maintenance of the secrecy which maintain them as jurisdictions offering not just low or no-tax regimes, but systematic opportunities for regulatory abuse for the primary benefit of non-residents, namely:[36]

1. No or nominal taxation is charged on relevant income.

2. There is a lack of effective exchange of information for tax purposes.

3. There is a lack of transparency of the tax or regulatory regime (eg excessive secrecy; inadequate access to beneficial ownership information, etc.) which may limit the availability of, or the access to, information when it is needed for tax examinations or investigations.

4. There is little or no requirement that activities recorded as taking place in the Island have economic substance either there or elsewhere (eg the existence of shell companies).

  The evidence in this paper is organised around these themes.

  It is the commitment to abuse that they incorporate that is inherent in the definition we offer of a secrecy jurisdiction: that they are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

NO OR NOMINAL TAXATION

  Traditionally Jersey charged no tax at all on companies registered or trading in that Island if those companies were considered not resident there or were not owned by Jersey resident persons. The rules used to determine residence did not comply with international norms and were biased towards treating companies as not resident even if their sole place of activity was Jersey.

  This was considered an artificial "ring fence" under the terms of the EU Code of Conduct on Business Taxation published in 1998[37] and as such the UK required Jersey to change these laws.

  After several false starts, one of which was highlighted by an author of this paper[38] Jersey has now introducing new tax laws that it claims comply with the requirements of the EU although it is still not clear that the EU has in fact agreed that this is the case since clearance is only given after the laws become fully operational and in the case of Jersey this did not happen until 1 January 2009. These laws do the following and have these consequences:

1. Jersey now has a notional zero per cent tax rate for all corporations incorporated or resident in the Island irrespective of ownership by a Jersey resident person or not, with the sole exception of a special rate of tax of 10% for specified financial services companies including banking, trust company services and some fund functionary activities.[39]

Jersey has recently suggested[40] this will result in a loss of tax revenue of about £100 million to the Island per annum. This sum is the same as the forecast made by an author of this report in 2007[41] but vehemently denied by Jersey at the time. This loss is significant. Jersey's annual budget for spending in 2009 is £490 million.[42] It has traditionally run a balanced budget. The reason for the loss is that almost half of Jersey's tax revenues have come from taxes on corporations, charged in large part on the financial services sector. Up to half this income will be lost under the zero—ten tax arrangement it has now adopted but such is its commitment to no or nominal taxation that it will do this rather than charge tax on companies using the Island for tax haven purposes.

With Jersey's cash reserves amounting to little more than £500 million this level of deficit is clearly unsustainable and unlike a major state it has no control over its currency, interest rates or other economic factors to help it balance its books. As such its capacity to borrow is akin to that of a company, not a state, and few companies can borrow when suffering regular and heavy losses as Jersey is now forecasting, as indicated by the following graph from the current Jersey government business plan shows:[43]

Figure 3.2  The graph shows a comparison with the forecast financial position for the Budget 2009

The States of Jersey summarised their reaction to this forecast in the following paragraph:

With this level of uncertainty and the advice of the Fiscal Policy Panel that risks remain on the downside then the States must continue to work within the existing financial framework agreed in the Strategic Plan. This will involve constraining spending to the level of the current proposals and beginning work now to prepare a strategy to address the potential challenge of a structural deficit in the medium-term. It is unrealistic to think that spending measures alone would address the level of structural deficit predicted so the strategy must include the consideration of new or increased taxes and charges in the medium-term if we are to return to balanced budgets.

The commitment to new or increased tax charges is welcome, but not if they are all on the local population and the zero per cent tax charge on corporations using the Island for the purposes of tax and regulatory abuse is maintained.

2. The claim that all companies will pay tax at zero per cent from 2009 is, unfortunately, not true. Companies owned by Jersey residents are still subject to a tax charge on their profits. This will be charged in one of two ways. If the company distributes at least 60% of its taxable (not accounting) profits in a year to its Jersey resident owners then the tax they pay on that income will be deemed sufficient to settle the tax liability of the company, meaning that these corporations will now enjoy an effective tax rate of 12% as opposed to the normal income tax rate in the Island of 20%. This is bound to increase the tax losses Jersey will suffer.

If the companies Jersey resident's own do not distribute the required 60% of their taxable profits then the shareholder is required to declare the difference between the dividend they actually receive and 60% of taxable profits as a deemed distribution to them on which deemed distribution they are then taxed at 20%. If however the shareholder says they cannot pay this tax as they have not received the income to which it relates then the company can be assessed and is required to pay for the shareholder.

It is interesting to note that in the Guide to this tax charge published by Jersey they say:

"It is critical for the administration of the deemed dividends, loans and full attribution provisions that it can be determined explicitly who is the owner of the shares in a company. Article 82A has been inserted to make this explicit. An individual is deemed to own shares in a Jersey company if he has any interest in them, whether equitable, legal or contractual, other than an interest as a bare nominee or bare trustee. Such ownership will be deemed to exist even if the individual owns the shares even if the interest is through one, or a series of, bodies corporates or trusts. These provisions are also crucially important for the information an individual is required to declare on his personal Income Tax Return.

Specifically, an individual will be deemed to own shares if:

— he has any right to acquire or dispose of the shares;

— he has any right to vote in respect of the shares;

— he has any right to acquire, to receive, or participate in distributions of the company; or,

— he has to give his consent for the exercise of any right of any other person interested in the shares, or if other persons interested in the shares can be required, or are accustomed to exercise their rights in accordance with the individual's instructions.

These provisions will ensure that the Jersey tax base is protected and that Jersey residents with interests in Jersey resident companies are assessable on the proper amounts applicable to them, whether their interests are held directly or indirectly.

It is important to note that these provisions apply, and consequently the deemed dividend provisions, to all unlisted and listed companies, where the Jersey resident individual has an interest of more than 2% in such a company, whether directly or indirectly."

Jersey notes as a consequence that it is vital that the beneficial ownership of shares in companies can be properly determined and has put into place arrangements to make sure it can do this to charge tax on its own resident population. However, as is noted below, it refuses to maintain a register to achieve the same effect on behalf of other tax administrations.

What the new tax rules also clearly create is a distinction between companies owned by Jersey resident people, which remain taxable in Jersey, and those owned by non-residents, which are not taxable. Thus the ring fence that is designed to ensure only Jersey residents pay tax on corporate profits remains in the Jersey tax system. This means that the system is prima facie not compliant with basic requirement of the EU Code of Conduct on Business Taxation. That demanded that such ring fences be removed. As such the claim made by Senator Walker to the US Senate dated 17 May 2007 that "All these changes are compliant with the EU Code of Conduct Group on Business Taxation requirements in respect of the removal of harmful tax practices" cannot have been true. What is true is that Jersey has tried very hard to get round the requirements of the Code in the true spirit of the tax avoider but the whole abusive structure that the Code was meant to challenge remains in force nonetheless. This is clear evidence that the contention of this paper that Jersey complies with the form but not the spirit of the demands made of it is true. Accordingly the claimed compliance with international standards in this area does not exist.

3. In an attempt to recover tax lost as a result of introducing a 0% on corporate profits Jersey has introduced a broad-based (GST) Goods and Services Tax at a rate of 3%.[44] This was expected to raise approximately £40-£45 million[45] from the local population per annum when announced; a figure that has not increased slightly to approximately £50 million per annum.[46] This will not by any means close the "tax gap" that Jersey will suffer. The tax is so broad based that many items not usually charged to such taxes are liable in Jersey eg medicines.

This tax contains a curious provision with regard to the financial services sector, to which the term "broad base" does not seem to apply. In particular, GST will not be charged on services provided to "international services entities".[47] This term will include the majority of companies, trusts and partnerships that form the international client base of the Island's finance industry. This will be the case even though these special purpose vehicles are unlikely to have a place of residence anywhere else in the world and would otherwise be considered to be located in Jersey for GST purposes. The administrators of these entities may pay a modest sum per entity pre annum to be given the status of "international services" clients.[48] This creates a "ring fence" from GST for these entities and perpetuates the myth that these entities that only have existence in Jersey are in fact stateless and exist "elsewhere" without question arising as to where that other place might be. Jersey law is, in this sense, a work of fiction and is far from compliant with international norms where it is entirely normal that GST or VAT be charged to such entities from within their host community and such tax is irrecoverable by them.

This deliberate "ring fence" for offshore financial services represents a bias to no or nominal rates of tax for non-residents, which local residents will pay increased taxation to support. This re-enforces the contention that Jersey is a secrecy jurisdiction offering services primarily for the benefit of non-residents: in this case, favourable tax treatment in the form of no or nominal tax rates. As a result the abuse that the EU Code of Conduct sought to address has not been removed, it has simply been moved from direct taxation, that the Code addressed, to indirect taxation, which it did not address. This also shows, as this paper contends is normal in Jersey, a state of what might be called "constructive non-compliance" ie apparent compliance with the opposite actually happening.

4. In January 2006 Jersey introduced a new law that effectively capped the tax paid by its tax exile residents. Section 135a of the Income Tax (Jersey) Law 1961 (as amended) provided that persons granted what is called 1(1)(k) housing consent (which basically means they can live in Jersey without having to work there provided that they buy a house worth at least £1 million and make a local tax payment) are offered special exemption from Jersey's tax law that requires a resident person to pay tax on their world wide income.[49] This concession, about which there appears to be a conspiracy of silence on the States of Jersey web site and amongst the professional advisers on the Island, provides that a person enjoying such status has a limit on their tax liability calculated by reducing the tax rate to 1% on non-Jersey income that exceeds a statutory limit. As a result all Jersey source income is taxed at 20%. The first £1 million of foreign source income is taxed at 20%. The next £500,000 of foreign source income is taxed at 10% and all foreign source income over £1.5 million is taxed at 1%.[50] Since it is easy to arrange that almost any financial income be foreign sourced it is unlikely that a person enjoying this concession will have much if any Jersey income (not least because by definition they will not work in Jersey). As such this little known piece of legislation means that wealthy residents not of Jersey origin have an effective tax cap in Jersey of little more than £250,000. Admittedly, this is not "no taxation" but if the individual had an income of, say, £10 million in a year from non-Jersey sources then the tax due would be £335,000, an effective tax rate of just 3.35%, and that can fairly be called nominal.

  In combination it is clear that, except with regard to its own resident population, Jersey has a very clear policy of charging no or nominal taxation. Its new taxes have not yet been internationally approved: they use means of calculation and assessment that do not correspond with international norms, and they maintain the fiction that special purpose entities created by the Jersey financial services industry are not resident in the Island even though they are registered, managed and controlled and can only undertake their transactions within the Island's domain. Ring fences, which are widely seen as a harmful tax practice, remain in Jersey's taxation legislation for companies, individuals and sales taxes.

  In summary, Jersey remains committed to offering taxation provisions that are clearly and unambiguously for the primary benefit of non-residents—a key component and indicator of secrecy jurisdiction activity and status. Furthermore, any cooperation it has offered in this respect to international agencies and authorities is notional at best, demonstrating a resistance to financial transparency that is again indicative of secrecy jurisdiction activity, in this case the systematic provision of financial secrecy for the primary benefit of non-residents.

LACK OF TRANSPARENCY OF THE TAX OR REGULATORY REGIME

  This issue is considered next, although out of order according to the indicative characteristics of a secrecy jurisdiction as noted above. This is in order to facilitate better understanding of the issues at stake.

  Jersey is not, and has never been, committed to transparency in its taxation and regulatory regimes. The following facts are indicative of this:

1. Jersey companies have to reveal the names of their shareholders, but these can be nominees.[51]

2. Jersey companies have to disclose their registered office, but in the case of any company that is likely to be of any interest to tax authorities it will be that of a lawyer, accountant or trust company.

3. No other information need be filed on record by a Jersey company.

4. Jersey requires that the accounts of companies registered on the Island be audited, but there is no way of knowing if this requirement is complied with since the accounts are not on public record.

5. There is no register of trusts in Jersey. No one has any idea how many trusts there are.

  All of this is typical of a secrecy jurisdiction. In effect no public information of any sort at all is available with regard to the entities registered in the Island. Secrecy remains a hallmark of Jersey's financial services industry, it is geared for the primary benefit of non-residents, and there appears no prospect that this will ever change.

  Information exchange does, however, reply upon the use of different data. That data is the information that government and regulated parties operating in the financial services sector collect. A review of this whole sector would be lengthy and unproductive. The report of the Bureau of International Narcotics and Law Enforcement Affairs of the US State Department published March 2007[52] said:

Jersey's main anti-money laundering laws are the Drug Trafficking Offences (Jersey) Law of 1988, which criminalizes money laundering related to narcotics trafficking, and the Proceeds of Crime (Jersey) Law, 1999, which broadens the predicate offences for money laundering to all offences punishable by at least one year in prison. The Prevention of Terrorism (Jersey) Law 1996, which criminalizes money laundering related to terrorist activity, was replaced by the Terrorism (Jersey) Law 2002 that came into force in January 2003. The Terrorism (Jersey) Law 2002 is a response to the events of September 11, 2001, and enhances the powers of BOJ authorities to investigate terrorist offences, to cooperate with law enforcement agencies in other jurisdictions, and to seize assets. Jersey passed the Corruption Law 2005 in alignment with the Council of Europe Criminal Law Convention on Corruption. Although the law was registered in May 2006, by the end of 2006 it had not yet come into force.

  In broad terms, the Proceeds of Crime (Jersey) Law, 1999 implemented the FATF's first 40 recommendations[53] and the Terrorism (Jersey) Law 2002 its later nine recommendations.[54] In effect, Jersey put into place the legislation required of it, although it has yet to implement the changes required by the EU's Third Money Laundering Directive or the FATF recommendations on which it is based, but is now consulting on how to do so.

  This combination of arrangements gave rise to this comment from the Bureau of International Narcotics and Law Enforcement Affairs:

The International Monetary Fund (IMF) conducted an assessment of the anti-money laundering regime of Jersey in October 2003. The IMF team found Jersey's Financial Services Commission (JFSC), the financial services regulator, to be in compliance with international standards, but provided recommendations for improvement.

  These concerns are reflected in this summary to their report:

The Bailiwick of Jersey has established an anti-money laundering program that in some instances exceeds international standards, and addresses its particular vulnerabilities to money laundering. However, Jersey should establish reporting requirements for the cross-border transportation of currency and monetary instruments, and set penalties for violations. Jersey should also take steps to force its obligated entities to obtain verification documents for customers preceding the 1999 requirements. The BOJ should introduce civil asset forfeiture, and implement its new corruption law. Jersey should also ensure that supervisory authorities exist to apply standards and regulations to its port activity and "exempt companies" that are identical to those used in the rest of the jurisdiction. Jersey should take steps toward a more proactive role in fighting terrorism financing by circulating the UNSCR 1267 list as well as other lists, instead of relying on the entities to research names through online public sources. Jersey should continue to demonstrate its commitment to fighting financial crime by enhancing its anti-money laundering/counterterrorist financing regime in these areas of vulnerability.

  Jersey uses the IMF report to justify the claim that it is well regulated. There are, however serious doubts about whether that is actually the case. In addition, it would appear that Jersey is going out of its way to reduce the quality of the regulation it imposes upon the financial services sector in the Island. These issues will be dealt with in turn.

  The 2009 version of this report noted:[55]

In October 2008, the International Monetary Fund (IMF) assessed Jersey's anti-money laundering/counterterrorist financing (AML/CTF) regime as well as the banking, insurance and securities sectors; the results are expected to be published in 2009. In anticipation of the assessment, Jersey took numerous steps to enhance its AML/CTF regime to bring it into greater compliance with the Financial Action Task Force (FATF) standards through issuance of consultation and position papers; enactment of new primary and secondary legislation, key amendments, orders, and regulations; and outreach to regulated entities.

  The need for this work proved the conclusions drawn in 2007 and despite this work the Agency noted in its conclusions in 2009 that:

The Bailiwick of Jersey should continue to enhance compliance with international standards. The FSC should ensure the AML Unit has enough resources to function effectively, and to provide outreach and guidance to the sectors it regulates, especially the newest entities required to file reports. The FSC should distribute the UN lists of designated terrorists and terrorist organizations to the obliged entities and not expect the entities to stay current through their own Internet research.

  This message, which is one Jersey dopes not repeat often, gives a much better indication of what is really happening in the Island than the subsequent IMF report, which it must in fairness be noted did suggest Jersey was as compliant with Financial Action Task Force requirements as any state in the world, saying:[56]

Jersey has a high level of compliance with the FATF Recommendations on preventive measures, with most deficiencies noted being technical in nature.

  However, and the following is telling:

The level of resources allocated to AML/CFT matters appeared generally adequate, taking into account the decision by the authorities to approve additional resources for the JFCU. The AG and JFSC are in a position to acquire additional legal expertise on contract to handle increases in caseload.

The resources of the JFSC may need to be increased somewhat to adequately cover its expanded areas of AML/CFT responsibility, while maintaining the level of AML/CFT supervision of financial institutions and TCBs.

  This is heavily conditional: the resources have been allocated, but may not be sufficient and it is not even clear they have actually been expended.

  The same conditionality is also noted with regard to anti-money laundering provisions where the IMF said:

While the volume of Suspicious Activity Reports s reported to the Jersey Financial Crimes Unit appeared satisfactory, there is some scope to improve the timeliness of reporting. Banks and TCBs accounted for the bulk of the reported SARs, although efforts were being made to encourage other reporting entities to increase filing rates. The legal protection for those filing should be limited to those acting in good faith and the tipping-off offence needs to be broadened to comply with the international standard. There was no requirement for financial institutions to have an independent audit function to test for AML/CFT compliance.

  The latter point is especially telling: having all the rules in the world in place is meaningless if no one reports suspected money laundering. It was only in 2006 that not a single report was made in Jersey in a whole year of suspected criminal money laundering—the category that would include tax evasion.[57] And Jersey is still not checking reports are being made. This is especially relevant when it was noted by the IMF that:

Lawyers and (to a lesser extent) accountants in Jersey are heavily engaged in providing trust, investment, and wealth-management services, mainly to nonresident clients and have been subject to prudential oversight in respect of these activities for some time. However, as they (in respect of auditing, accounting, and legal services) and other Designated Non-Financial Businesses and Professions (DNFBP) (estate agents, high value dealers) have only recently become subject to AML/CFT oversight in respect of DNFBP activities, the effectiveness of implementation could not be fully tested at the time of the assessment.

  It was also noted that:

A ... material issue relates to the extent of the concessions allowed to financial institutions and certain DNFBPs to rely on intermediaries and introducers in conducting Client Due Diligence; while valid in principle, the concessions are an overly-generous interpretation of the international standard and may increase the risk of abuse in some respects.

  In each case it is clear that recent, and urgent changes to pass necessary reviews have taken place; laws have been passed in haste, resources to enforce them are in doubt and major loopholes, especially for favoured professions remain. This is not indication of a place seeking the highest standards; it is indication of a place seeking to offer superficial compliance with minimal impact on actual activity.

DEVELOPING ISSUES

  There is in addition a developing agenda that must be explored. This is the deliberate policy of the States of Jersey to reduce transparency within its regulatory environment and hence to reduce the information it holds that might be exchanged with those making enquiry of it. At the same time, it appears to be creating opportunities for abuse within its financial services sector. These issues are explored in turn:

(a)   The EU Savings Directive

  Jersey has to date refused to follow the UK and the vast majority of European Union states in applying the provisions of the European Union Savings Directive by disclosing information on interest paid to persons not resident in Jersey to tax authorities in the EU countries in which they are resident (this arrangement does not apply outside the EU and certain dependent territories, including the Channel Islands). In making this choice Jersey opted to facilitate continuing tax evasion by large numbers of people who had placed their funds in the Island precisely because they did not want information on the existence of their bank accounts or the interest paid on them to be disclosed to their domestic tax authority.

  If Jersey really meant, as Senator Walker claimed in his evidence submitted to the United States Senate Committee, that "it is no part of Jersey's policy to assist directly or indirectly the evasion of taxes properly payable in other jurisdictions" and that "such business is actively discouraged" then the EU Savings Directive provided a perfect opportunity to demonstrate that fact. If Jersey had opted for disclosure to be made in respect of all relevant accounts maintained with Island banks there would have been no doubt that all those evading tax would have moved their funds elsewhere, straight away. The business Jersey did not want would then have gone. But that option was not chosen. The only apparent explanation is that Jersey does want this business.

  Since adoption of the EU Savings Directive the UK's HM Revenue & Customs has succeeded in securing information on bank accounts maintained by the five leading UK high street banks through their Jersey, Guernsey, Isle of Man and Irish branches on behalf of persons resident in the UK. This was not done with the cooperation of the authorities in those tax havens. It was secured because the banks in question processed the data relating to those branches in the UK and HM Revenue & Customs exploited this fact to secure the information.

  The result is that more than 400,000 letters have been sent to persons who have such accounts.[58] 42,000 actually paid tax as a result. More than £400 million has been settled. This is not small scale activity. This is systemic use of offshore banking by UK based people. That can only have happened if the activity was encouraged, as indeed it is, by the banks in question. This has been noticed by the Permanent Secretary for HM Revenue & Customs in the UK, who has suggested he may wish to question the bank's conduct in doing so.[59]

  What all the evidence suggests is that Jersey knew it had good reason not to disclose details of the bank accounts held by UK resident persons to UK tax authorities, and its action in doing so was one of purposeful non-cooperation. Furthermore, this purposeful non-cooperation is again indicative, and constitutive, of secrecy jurisdiction activity: the provision of facilities—in this case, secrecy regarding bank account ownership—provided for the primary benefit of non-residents; in this case UK tax cheats.

  It is accepted in saying all this that Jersey has announced that when the withholding rate on the European Union Savings Tax Directive increase to 35% in 2011 Jersey will withdraw the withholding option and will become a full member of the EUSTD, exchanging information on all interest paid. However, as recent reports have shown,[60] major banks have put arrangements in place to get round this and avoid the resulting disclosure and as such this would appear to be another case of window-dressed compliance when significant pressure—in this case a high rate of withholding tax—is brought to bear on Jersey.

(b)   Tax reforms

  There is a curious by-product of Jersey's tax reforms with regard to companies. If a company has no tax liability it need not submit a tax return. In practice "exempt" Jersey companies have enjoyed this facility for many years, and nor do they have to file accounts with the States of Jersey.[61] Since Jersey clearly wants its new arrangements to replicate the old as far as possible Malcolm Campbell, Comptroller of Income Tax on the Island, has said that under the new regime zero per cent companies will only be required to submit a simplified tax return.[62] In practice "simplified" is thought to mean little more than filing confirmation that the company exists, does not undertake a chargeable trade and confirmation of whether or not it has Jersey resident tax payers. This will, technically, be all that is required to ensure that the Comptroller can collect the information needed to ensure Jersey resident taxpayers do declare their "personal" tax liabilities due from the company. The company itself will no longer need to file its accounts with the Comptroller, and nor will it need to file tax return data. The data on its affairs will be submitted, if necessary, by its Jersey resident shareholders.

  This might seem an innocuous development. The practical consequence is, however, significant. Jersey will no longer receive any accounting or tax information from most companies incorporated in the island. This will mean that it will not have that information to exchange.

  Further alterations to the law will facilitate this change. First will be a change in the law that will allow a Jersey company to be more easily considered resident in a territory other than Jersey.[63] If approved this law will mean that these companies will not have to supply information to the Jersey Comptroller of Income Taxes.

  Second, under changes in money laundering regulations now proposed the disclosure of the beneficial ownership of a new Jersey company to the Island's authorities (at one time the Comptroller of Income Taxes, subsequently the Jersey Financial Services Commission) before the company can be incorporated (an arrangement which received strong approval in the Edward's Report)[64] is to be scrapped. The States of Jersey will no longer require this information, relying solely on the financial services sector's assurance that they "know their client". This is a marked retrograde step with regard to regulation of companies in the Island.

  In combination these changes mean that the information available for exchange about corporations registered in the Island held by the States of Jersey will be markedly reduced in future and as such it is likely that whatever information exchange arrangements might be in place the actual information for exchange is much less likely to be available.

(c)   Trust reforms

  Jersey trust law was substantially revised in 2006.[65] The principle change was the introduction of statutory provisions for reserved powers for trust settlors. This change means that a settlor of a Jersey trust may now reserve certain powers for themselves that are specified in the law, including the grant of a beneficial interest in the trust property without affecting the validity of the trust. Included amongst the powers that a settlor may reserve are:

— The power to amend or revoke the trust;

— To appoint new trustees and to remove trustees;

— To appoint or remove an investment manager or investment adviser;

— To give directions to the trustee in connection with the purchase, retention or sale of trust property;

— To give directions to the trustee for the distribution of trust property; and

— To restrict the exercise by the trustee of some of its powers or discretions.

  As a Jersey trust company has said:[66]

In a nutshell, these provisions allow the settlor of a trust to direct the trustee in the exercise of a range of powers

  As the same firms says:[67]

In summary, these wide-ranging changes to the Trusts (Jersey) Law are expected to maintain Jersey's pre-eminent position as a most desirable jurisdiction in which to establish a trust.

  The importance of these changes is hard to understate. In common law (which originated in England) a trust usually requires four participants or it fails:

1. A settlor who irrevocably gifts the asset into trust;

2. A trustee who legally owns the trust property but does not have beneficial entitlement to it, although they may be paid a fee for their services; and

3. At least two beneficiaries with differing claims on the assets held by the trust. These persons need not be named in which case the trust is considered discretionary. Only one beneficiary is needed if the asset is held for a minor.

  What is also necessary is that:

1. The trust cannot be revoked. If it can be there is no gift of the trust property, it is merely loaned;

2. The settlor cannot be the trustee. If the settlor is the trustee they have not put the asset into trust;

3. The trustee cannot benefit from the trust or the trust property was gifted to them, and not for the benefit of others; and

4. The beneficiaries cannot include the settlor or the settlor has not gifted the asset as they retain the benefit of owning it.

  If these conditions fail, so does the trust (minor points excepted that do not need consideration here). In Jersey all these conditions can now fail:

1. The trust can now be revoked;

2. The settlor can order the trustee what to do: as such the settlor is in effect the trustee, the latter acting as mere nominee for the settlor;

3. The settlor can order the distribution of the trust person to someone of their choosing. That could be themselves. They are, therefore, always potential beneficiaries of the trust; and

4. Whatever the trust deeds now say application can be made to the Royal Court in Jersey to invoke these powers.

  The consequences are obvious. There is now no such thing as a Jersey trust. There are only sham trusts in Jersey. A sham trust has been defined by Lord Justice Diplock as:

"if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the Court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create." [68]

  Admittedly, it has been argued that:[69]

An intention only on behalf of the settlor to deceive third parties, a trustee who is found to have exercised its discretion but virtually always done as the settlor/beneficiary asks, or a settlor who has reserved a number of powers in the trust deed for himself in the hope of controlling the trustee, will not be enough to satisfy the current sham threshold.

For a sham trust claim to succeed there must be a common intention of both the settlor and the trustees that the trust assets should be held otherwise than as set out in the trust deed which they both executed and that both the settlor and the trustee had a common intention to mislead third parties by giving a false impression of the position. A trustee will have the necessary intention if he goes along with the settlor "neither knowing or caring what he is signing (ie who is reckless)". The time for ascertaining such intention is at the time of the creation of the trust, or, if assets are subsequently added, at the time the assets are added. Conduct of the trustees subsequent to the creation of the trust is however admissible in evidence, from which inferences can be drawn as to intention.

  This argument has been recognised in Jersey law.[70]

  In the USA a sham trust has been more succinctly defined by the IRS as:

Generally used by the courts to describe an abusive trust that serves no legitimate purpose and lacks economic substance. The trust is disregarded for tax purposes, and all income and expenses are assigned to the true owner of the activity.[71]

  This is important in the context of the correspondence relating to the creation of Jersey's new trust laws that was sent, apparently in error, to the Observer newspaper in the UK who then supplied it to an author of this paper. That correspondence was between senior ministers and civil servants in Jersey, including its Comptroller of Income Tax, and the full text is now available online.[72] One participant (who helped design the change in the trust law) said:

The changes to the Trusts Law are intended to give statutory certainty to a practice that is already widely carried out. Currently, it is common for assets such as shares in a family company to be placed in trust, but for the settlor to wish to retain control over how the company is operated. Or an investment portfolio may be placed in trust, but the settlor may wish to manage the investments. In such circumstances, the settlor has two choices.

The first is to use a Jersey trust and through very careful drafting, define precisely the limitations of the trustees' responsibilities. The power of the trustees to replace a director or investment advisor could be limited, for example. The problem with this is that it requires careful drafting and it is uncertain whether the trustee has an overriding duty to protect trust assets. In other words, if the company or assets start performing badly, is the trustee bound to apply to court for an Order to preserve trust assets? Also, if the discretion of the trustee is fettered, there is a risk that the trust could subsequently be attacked as a sham. For an international client, these are reasons to not use a Jersey trust.

The second alternative is to simply establish a trust in one of the many jurisdictions that allow a settlor to retain stated powers. To use your example, if a Jersey person wishes to retain significant control of his assets, he could simply place them in a Cayman or BVI law governed trust. This need not have Cayman or BVI trustees—a Guernsey trustee could easily do the job.

I imagine that a large number of wealthy people all over the world (including Jersey) do just the thing you fear in your e-mail—place assets in trusts in another jurisdiction, define themselves as excluded persons for the time they are resident in a specific jurisdiction, have assets returned to them when they cease to be resident in that jurisdiction, and then receive all the gains/rolled up income tax free. If 0/10 is implemented with look-through provisions, for example, I would expect many wealthy people who might own a private Jersey investment company to simply move the assets to a company in another jurisdiction, place the shares of that company in a trust, and let the assets roll up.

So practically, the changes will not make it any easier to avoid tax. What they will do is allow Jersey to compete more effectively for international work, where wealthy families will often wish to place assets in a trust structure and yet retain certain control over the management of the trust assets. The driving reason for doing this will not usually be tax planning: a settlor may live in a jurisdiction that is politically unstable, or where there are forced heirship restrictions, or may simply wish to place his or her assets in a vehicle that would benefit his or her family in the event of any subsequent personal bankruptcy. Most often, it will be because the settlor is self-made and thinks he can manage his assets better than any professional.

The key issue remains, as always, that while it is easy to tax people when they spend, and fairly straightforward to tax people on what they earn, any attempt to tax people on unearned income or capital gains is likely to lead to those who can afford it seeking expert advice on how to structure their wealth in order to minimise their tax liability. The tax burden, as with inheritance tax in the UK, will be borne by those who are moderately wealthy but not so wealthy as to be able to afford to place significant assets out of reach for a reasonable period of time: if you have £10 million you can afford to lock £9 million away for a rainy day, whereas if you have £1 million you can't.

As Jersey is squarely pitching itself at the expert/sophisticated/ultra-high net worth end of the market, we need settlor reserved powers in order to offer an attractive product to international clients. However, other jurisdictions have been offering this product for years and I imagine that any wealthy Jersey resident minded to do so has been taking advantage of these products for years.

Hope that assists.

Paul

  It is fascinating to note that the Comptroller of Income Tax was alarmed at this legislative change, saying in two separate parts of the correspondence:

On the Trusts Law change I would not want the AG to be blamed for this at all...he just brought it to my attention .... and on the face of it, if the settlor has a new power to instruct the trustees of a trust he has settled—rather than having a "letter of wishes" as in the past—on the assets/property (sic) in the trust, then, is it not possible for a Jersey resident to settle assets/property in such a Jersey trust then appoint, say, Guernsey resident trustees, thereby achieving a "no tax" situation in both jurisdictions and, after several years, he—the settlor—becomes non resident in Jersey and then instructs the Guernsey trustees as he wishes re the disposition of the assets in the trust, ie, he gets the assets and income diverted for his own use? Or some similar structure? Or am I worrying without cause about this?

  And:

Thanks ... you have confirmed my fears! ... and I am concerned about your view in para. 4 re 0/10 implementation ... as it need not necessarily be wealthy people who might do this but also the middle classes ... because if this does happen there could be significant tax leakage.

  It is very rare to get such an insight into the real thinking of those who run tax haven administrations and several points should be noted:

1. It was recognised that current practice amongst Jersey professional people did not match the requirements of the law. In practice the discretion of trustees was being fettered, and this might be seen as a sham. Rather than attack the malpractice, Jersey officials seem to have taken the view that since the abuse was commonplace they should legitimise it. In other words, they knowingly created what are in effect sham trusts.

2. They did this because they know that "a large number of wealthy people all over the world .... place assets in trusts in another jurisdiction, define themselves as excluded persons for the time they are resident in a specific jurisdiction, have assets returned to them when they cease to be resident in that jurisdiction, and then receive all the gains/rolled up income tax free". In other words it seems that those writing these e-mails:

(a)Acknowledged that this is the intention of the parties to some trusts at the outset and that there is connivance in this respect between settlors and trustees. As the legal decisions noted above make clear, this is a necessary condition for a sham trust to exist;

(b)Knew that this action is fraudulent ie that the statements the "settlor" makes are untrue and therefore constitute tax evasion because they recognise that it is always the intention of the parties to eventually unwind the trust and have the trust property returned to the settlor tax free;

(c)Knew that they were creating an arrangement to facilitate this activity none the less;

(d)Did so whilst acknowledging that this might harm the tax base of Jersey. They appeared quite indifferent to the fate of other countries in this respect;

(e)Knew that this would be exploited by the rich alone. As they say, "The tax burden ... will be borne by those who are moderately wealthy but not so wealthy as to be able to afford to place significant assets out of reach for a reasonable period of time: if you have £10 million you can afford to lock £9 million away for a rainy day, whereas if you have £1 million you can't". This market they clearly designate as being for the "expert/sophisticated/ultra-high net worth end of the market".

(f)Think that this market requires such services. As they say "we need settlor reserved powers in order to offer an attractive product to international clients".

  That "product" is, in effect, tax evasion. As another participant in the correspondence noted:

Finally I am very concerned by the apparent retrospective attack—inspired it seems by the A[ttorny] G[eneral]—on a major feature of the recent trust law change on the ground that it ostensibly facilitates greater tax avoidance.

  This correspondent, unlike all others, does not see the problem to which Jersey's own Attorney General had drawn attention when using the local euphemism of tax avoidance to embrace tax evasion. But tax evasion is precisely what the law encouraged, and the Attorney General's concern was well placed, if understated. The result is that:

1.On application to the Royal Court in Jersey all Jersey trust are now revocable;

2.In that case they should in every case be identified as being the property of the settlor;

3.In that case the EU Savings Directive should be applied to all Jersey trusts as if the settlor is the owner of the property with deduction of tax being made if appropriate and information exchange being required to take place; and

4.Trusts used for inheritance and estate planning purposes almost certainly now fail in to comply with the requirements of other legislatures.

  It is only a lack of knowledge—and Jersey's own cloak of secrecy that has been drawn over the consequences of these provisions—that has prevented this legislation being reviewed in this way. It is high time, however, that it is: Jersey's trusts and those of the many other jurisdictions that allow similar arrangements are mere shams used for the purpose of the evasion of tax and other regulatory requirements and as the correspondence quoted shows, those running these administrations appear to know this is true. Those trying to tackle the tax haven problem should also be aware of this fact.

(d)   The International Cell Company

  Protected Cell Companies (PCC) were first provided by Guernsey in 1997.[73] That territory has a specialisation in the provision of offshore re-insurance arrangements. In effect a PCC operates as if it were a group of separate companies except all are part of the same legal entity. There is, therefore a "parent level" which provides management services for the company but in addition there are a number of further segregated parts called cells. Each cell is legally independent and separate from the others, as well as from the "parent level" of the company.

  As has been noted:[74]

The undertakings of one cell have no bearing on the other cells. Each cell is identified by a unique name, and the assets, liabilities and activities of each cell are ring-fenced from the others.

If one cell becomes insolvent, creditors only have recourse to the assets of that particular cell and not to any other.

  This use in insurance terms is worrying. Anyone insuring with such an entity cannot be sure what assets might be used to cover their risk. No doubt that is the intent of those using them. More worrying though is their further possible use, of which some are now becoming aware:[75]

The astute offshore practitioner can employ an offshore protected cell company as an effective asset protector and privacy enhancer.

With an offshore insurance corporation, it is market practice that provides tangible benefits; with the protected cell company, it is the structure of the entity itself—think of a house with a locked front door, and rooms inside, each with a separate lock and key.

Protected Cell companies have—in concert with other entities—been used to construct what has been called "an impenetrable wall" against creditors and prying eyes. Whilst these claims can only be tested by time, this novel use of a PCC for asset protection and financial privacy is an interesting approach and a valuable piece of intellectual property.

  This is the logic of secrecy jurisdictions: professional people use legislatures to create structures that they can sell to those from outside the jurisdiction wishing for secrecy, the only realistic use for which is the evasion of obligations arising under the laws of other countries.

  Guernsey is no longer alone in supplying these companies. Jersey has offered them since 2005. As is typical in this market, each territory seeks to innovate and develop such a product to out-compete other tax havens in the legal structures they have to offer. Jersey's innovation has been to offer an "incorporated cell company", the difference from a protected cell company being that each cell has its own, notional, legal identity so that recognition in countries that will have nothing to do with the "protected cell" concept is easier to achieve.

  Superficially the resulting structure looks like a group of companies. Indeed, as leading Jersey lawyers Carey Olson say:[76]

Indeed, at first glance, an ICC structure resembles a group structure, with a company at the top—the ICC or parent—and other companies below—the cells or subsidiaries. There is, however, a crucial difference between an ICC and a standard group structure: while the ICC has significant control over the cells it creates, it is unlikely to own the cells. The cells may be owned by investors, whereas the ICC might be owned by the financial institution structuring the investment product or by a charitable trust so that it is an "orphan" ICC.

  This is actually far removed from a group structure. What it does instead provide is a new means for undertaking disguised transactions at low cost. As the same firm says of the use of a Jersey ICC:

The purpose of a cell company—whether an ICC or a PCC—is to provide a vehicle which can create cells, separate parts within which assets and liabilities can be segregated. This concept of "ring-fencing" is fundamental to cell companies. The key principle is that the assets of a cell should only be available to the creditors and shareholders of that cell.

The administrative benefits of a cell company are significant. Once a cell company structure is in place, repeat transactions can be established in a much reduced timescale. This is particularly attractive in projects such as collective investment funds and securitisations, where negotiating transaction documents can be a complex and lengthy process, and where a successful initial structure will often lead to a demand for further, similar structures using the same key participants.

A framework can be established which includes all of the participants in the structure—such as administrators, managers, investment managers and custodians—and model agreements entered into governing the contractual roles of those participants. Regulatory consents can be obtained in advance for the structure, and then, as new cells are added, the level of regulatory scrutiny that will be required is much reduced, as the fundamental structure has already been agreed.

When particular transactions are envisaged—for example, adding a fund to invest in a specific country or sector, or a new vehicle to acquire receivables in the course of a securitisation—a cell can be created specifically to act in that defined role.

As the functionary agreements and regulatory consents have already been agreed with respect to the form of the transaction, a new cell can be added at a fraction of the cost and time that would be required were the structure to be established from scratch.

  This may be true, but by adopting the logic of this argument, it is equally easy to see how this structure could be used for a variety of abusive purposes. In addition, since such structures are at present virtually unknown in populous states, their role has not been taken into consideration in information exchange agreements as yet. Another barrier to securing data has been established as a result.

(e)   Redomiciliation

  Since the Competition (Jersey) Law 2005 came into full force on 1 November 2005 it has been possible to redomicile a Jersey company. Redomiciliation allows a company registered in one place to apply to be removed from registration in that location and to be re-registered in another country or territory. The company is not dissolved in the process. What happens is that, for example XYX Limited of Malta with company number 444555 in that location becomes XYZ Limited of Jersey with company number 777888 in that new location. The company carries on trading without change, it has simply shifted the country to which it owes legal duty by way of registration. As one Jersey lawyer[77] has reported since then they have:

    advised a number of clients in relation to moving companies from Jersey to other jurisdictions, including Delaware, Spain, Liechtenstein, Switzerland, Portugal and Malta.

  This trend is worrying. Information exchange has no doubt motivated interest in companies being able to relocate themselves. Most territories take time to reply to enquiries on information exchange. Corporate relocation often takes less time than it takes an offshore tax authority to deal with an information request. As such relocation is an obvious flight strategy in the event of enquiry talking place. Jersey's participation in this activity is not a sign that it is committed to the highest standards: it is instead a sign that it is willing to allow companies to flee in the face of a challenge being made to them.

  The danger is obvious. Capital flight could easily become a simple matter of corporate flight with the world populated by roving, unaccountable companies whilst the secrecy jurisdictions are held hostage to lowest common denominator practices for fear that those located there will leave. This effectively means that realistic attacks on offshore have now to be focused on the suppliers of offshore services and the facilities that these companies use as much as on the companies themselves.

(f)   Money laundering reforms

  Jersey is revising its money laundering regulations to bring them into line with latest FATF requirements which would also bring it into line with the EU's Third Money Laundering Directive.[78] However opportunity is being taken to revise the Jersey Financial services Commission's Handbook for the Prevention and Detection of Money Laundering and The Financing of Terrorism[79] at the same time.

  Some aspects of this are welcome. For example, section 2.8.5 on fraud related offences says:

    Fraud, including fiscal offences (such as tax evasion) and exchange control violations, are commonly and mistakenly regarded as distinct from other types of crime for money laundering purposes. They are not. Any fraud related offence is capable of predicating an offence of money laundering in Jersey where it satisfies the requirements of the definition of criminal conduct within the Proceeds of Crime Law.

  The clear statement that tax evasion is a money laundering offence is obviously correct, but It makes the fact that not a single Suspicious Activity Report was filed with the Jersey Police in 2006 even more surprising. This is especially so as the EU Savings Directive was in full operation for the first time during that year. At least 70% of all those asked in Jersey if they wanted interest paid on their accounts to be declared to their home government under the terms of this Directive declined the offer.[80] Any bank receiving such a request should have suspected that tax evasion was a possible explanation for this reluctance and accordingly filed a suspicious activity report with regard to that account. As is apparent, this cannot have happened. This Handbook may exist but it is obvious that it is ignored by Jersey's financial institutions when it suits them to do so.

  The new handbook also contains a number of worrying developments:

1. New clients can be assessed as being of lower, standard and higher risk.[81]

2. Once assessed as being "lower risk" a customer of a financial services company is only required to disclose their name, residential address and date of birth[82] when opening an account. However, proof is only required of the first and one of the last two.[83] In other words, a low risk client can give a false address and this will not be detected if a single document eg their passport (which shows their identity and date of birth) has been offered as evidence of identity to the financial services provider;

3. One Jersey financial services provider can now rely on the customer checking procedures of another Jersey financial services provider and does not have to replicate the 'know your client checks' that the first has done.

  The implications of these changes are obvious. In an environment such as Jersey's where there is little evidence of compliance with the requirements of money laundering rules, as the absence of Suspicious Activity Reports with regard to money laundering proves, there will be a tendency for financial services providers to rank their customers as having low risk, so avoiding the need for property proof of identity to be given before a bank account of other facility is opened. There may be merits in this onshore (or even for Jersey passport holders in Jersey) but in money laundering terms anyone wishing to open an account in an offshore financial services centre has to represent a risk with regard to money laundering, if only in the form of tax evasion. Accordingly the availability of this category of risk and the lax approach to client identification that it allows is a major cause of concern and is bound to facilitate offshore abuse. Abuse of the EU Savings Directive is the most obvious example: this Directive only applies to persons resident in the EU. If a false address is given outside the EU it need not be checked and the requirements of the EU Savings Directive will be fraudulently avoided. The likelihood of this happening is high and an immediate review of the standards and codes in operation in Jersey and elsewhere is needed to prevent this abuse becoming commonplace.

(g)   Foundations

  Jersey did, until 2009, not offer Foundations as a form of offshore structure. Foundations, which were at the heart of the abuse perpetrated in Liechtenstein, are, however now available in Jersey as a result of new legislation passed in 2008 and enacted in 2009. As a local lawyer says of this new legislation:[84]

    Foundations are neither a company nor a trust but have some similarities to both. Foundations also provide certain advantages over companies and trusts. They are useful to act as a holding vehicle and to provide an orphan or independent structure. They also assist private individuals with global asset management, by dealing with succession and inheritance planning, wealth preservation, ensuring assets are located in a tax neutral jurisdiction to avoid tax legitimately and to avoid probate requirements in various countries.

    Foundations are a distinct and independent legal entity created for a particular purpose. They are, in effect, a purpose entity without shareholders and with or without beneficiaries. Having a distinct legal personality, they hold assets in their own name like a company holds assets and they can contract with others. Just as it is possible to have purpose trusts or trusts with beneficiaries so too it is possible to have foundations set up solely for a purpose or set up for beneficiaries. There will be no Jersey income or capital taxes for non resident taxpayers.

  Every characteristic that defines Jersey as a secrecy jurisdiction is highlighted in this summary. Secrecy jurisdictions are defined as places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so. The lawyers who notes the favourable (in his sight) qualities of the foundation law highlights that:

1. It is aimed at non-residents—for it is for global wealth management;

2. Non one need own or benefit from it, on paper—the ultimate in secrecy;

3. It undermines probate, tax, inheritance and other laws of other states;

4. It also may well not pay tax.

  Whilst Jersey continues to promote abusive structures of this sort its commitment to transaparency has to be considered token at best.

LACK OF EFFECTIVE EXCHANGE OF INFORMATION FOR TAX PURPOSES

  In the face of international pressure to exchange information, Jersey has signed a Tax information Exchange Agreement with the USA.[85] It also has double taxation agreements with the UK, France and Guernsey (but no other location).[86] However, as LowTax.Net[87] said in 2007:

    As a matter of policy Jersey does not normally enter tax treaties. However, double taxation agreements exist with the United Kingdom and Guernsey, and a limited agreement with France exempting a resident of either country from tax in the other country on profits from shipping and air transport.

  They go on to say:

    The UK and Guernsey treaties do not conform to the OECD standard model treaty. The agreement with the United Kingdom specifically excludes dividends and debenture interest from its provisions.

  In addition, the French agreement is:

    limited to exempting a resident of either country from tax in the other country on profits from shipping and air transport.

  This was hardly evidence of a commitment to effective information exchange. This lack of willing on its part is obvious from its reaction to the UK imposed requirement that it participate in the European information sharing agreement that forms the basis of the EU Savings Tax Directive.[88] It agreed to this obligation only after considerable pressure from the UK had been applied. When doing so it opted for the deduction of a withholding tax from account holders by default rather than exchange information. This minimised information exchanged and provided continuing shelter for those using its banks from within the EU for the purposes of tax evasion.

  Jersey only appears willing to engage in international agreements relating to financial services when they suit its purposes. As such in October 2003 Jersey signed a Memorandum of Understanding with the International Organisation of Securities Commissions designed to combat securities and derivatives violations.[89] Twenty four countries are party to this. It has similar agreements with Bahrain, Dubai, Cayman and Qatar to promote offshore finance arrangements. These do not constitute information sharing agreements.

  That process of change only under pressure of threat of considerable duress if compliance at a nominal level is offered is apparent from the reaction of Jersey to pressure arising before the G20 meeting in London in April 2009 when it was announced that any secrecy jurisdiction that had not entered into at least twelve OECD style Tax Information Exchange Agreements would be subject to black or grey listing by the OECD and possible sanctions in due course. Jersey signed (but has yet in most cases to bring into effect) agreements with twelve jurisdictions just before the Summit made this announcement—so just avoiding the grey list process. Some of the agreements in question must, however, be considered nominal. Those with Greenland, the Faroe Islands and Iceland or not, for example, likely to be used much. This is typical of token compliance by Jersey. So too is the fact that having initialed the requisite twelve agreements[90] (in addition the existing US arrangement) prior to the G20 meeting (11 in the period October 2008 to March 2009) it has signed just two more since ie its rate of progress towards transparency has slowed dramatically now it can claim to be compliant. Full transparency with all 200 or more jurisdictions in the world may take many decades at this rate of progress

CONCLUSIONS

  This paper has shown that:

1. Jersey remains committed to conventional secrecy jurisdiction practices, with all that implies;

2. Jersey's compliance is with the form of international standards but not with the substance of the conduct that they expect;

3. Jersey's co-operation with the USA is not indicative of its general approach to international issues;

4. Jersey is purposefully creating structures and procedures for use by its financial services industry that will result in information not being available for exchange under internationally agreed arrangements, so nullifying their effect;

  The evidence supports these conclusions. Jersey is offering no or nominal taxation to those using its legislation and secrecy space, whilst increasing the tax burden on its local population to pay for this. This is indicative and constitutive of secrecy jurisdiction status and behaviour.

  The new laws it is introducing on corporate tax, the taxation of high net worth individuals and GST do not comply with international norms. Jersey's new money laundering arrangements will allow abuse not possible at present. At a time when increased standards are expected internationally Jersey is finding ways to lower those it operates whilst offering only apparent compliance with internationally imposed obligations. Its new laws on trusts, incorporated cell companies and redomiciliation are all an indication of this. At the very least each makes information exchange harder: in the worst possible case each could be of benefit to those undertaking fraudulent transactions, and in the case of the trust laws correspondence that has been seen shows that the government in Jersey knew this to be the case. In all cases, the clear aim of providing benefits to non-residents through the use of secrecy structures is both indicative and constitutive of secrecy jurisdiction status and behaviour.

  It is apparent that in the light of this extremely limited range of tax agreements into which it has entered that the cooperation that Senator Walker claimed Jersey is providing to the USA in his submission to the US Senate dated 17 May 2007 is illusory. Even if some cooperation is being offered to the USA, it is unusual for secrecy jurisdiction activity to exist on a pure bilateral basis. As such if a US transaction is routed to Jersey via another location it is highly unlikely that effective information exchange arrangements will be in place to track it, so nullifying many of the benefits of the US (or any other) TIEA.

  So what is happening? The best explanation appears to be the simplest one. As pressure mounts for secrecy jurisdictions to exchange information, so they are reacting by ensuring that they either do not have that information, or by providing mechanisms that make it both harder to secure, and easier for it to flee. The result is that corruption in places like Jersey can no longer be tackled at the transaction level. Put simply, transaction data will soon be unavailable or in perpetual transit between secrecy jurisdiction locations. As such offshore corruption can now only be tackled at the systemic level. This requires a changed approach. The corrupt user of secrecy jurisdiction services is no longer the problem; the corruption of the secrecy jurisdictions themselves is the problem now.

  It is time to tackle the suppliers of corruption services if the integrity of the world's economy, taxation systems and democracies is to remain intact. Secrecy jurisdictions are at the heart of this challenge to the way we live. And tackling them systemically is the solution to this problem. We have really not begun that process as yet despite all the recent changes in this area, and Jersey remains at the forefront of abuse.

Richard Murphy and John Christensen

Jersey

October 2009

Release120606.htm accessed 12-6-07

THE ISLE OF MAN—COSTING THE UK £1.5 BILLION A YEAR

PURPOSE OF THIS PAPER

  This paper is based on a blog by Richard Murphy and shows that, contrary to local press reports, the Isle of Man must cost the UK not less than £1.5 billion a year in tax subsidies and revenue lost.

THE EVIDENCE[91]

  IoMtoday, published by the Isle of Man press carries the following story:

Customs and Excise bosses have rejected claims that the UK Government is "subsidising" the Isle of Man.

Critics argue that the Isle of Man receives more back from the VAT sharing arrangement it has with the UK than it puts in—effectively providing a subsidy from the UK government.

The Tax Justice Network, which has spearheaded the campaign to close tax havens and reform offshore jurisdictions, claims this so-called "subsidy" amounted to some £221 million last year.

But figures produced by Customs and Excise show this not to be the case—and that in fact the Isle of Man has made a net contribution in each of the last two years. In 2007-08 the Island's share of VAT receipts was about £339m but the Island collected and so contributed some £420 million to the pool.

  I am, of course, the author of this criticism of the Isle of Man. Reproduced below is the blog posts from February 2009 that made the accusation that the Isle of Man receives significant subsidies from the UK.

  But now we there is new data which suggests that in fact the IoM collects more VAT than it receives back from the Common Purse agreement (again, follow above link for explanation). We do at least agree on the figure of £339 million—but it is now claimed that this is an underestimate of VAT collections on the Isle of Man.

  Let's consider this for a minute. Do so remembering these facts (updated since I last wrote): that the Gross Domestic Product of the Isle of Man is now £1.8 billion according to the latest data I can find from the IoM government. Even the CIA do not seem to have more up to date data than that. That for the UK is £1,460 billion, in contrast (computed for March 2009, from data here).

  In 2008-09 the Isle of Man expects to collect £339 million in VAT—59% of its total government income of £574 million. This is 18.8% of IoM GDP.

  In the UK the identical VAT system (for all practical purposes) collects £83 billion a year—or 5.6% of GDP.

  That means the IoM, which has reason to have a much lower VAT collection rate because of the very large size of its exempt VAT outputs in the financial services sector collects 13.2% more of its GDP in VAT than the UK does using an identical (indeed, shared) system.

  From that I impute that over £230 million of the VAT receipt in the Isle of Man is subsidy and not derived from real economic activity. The Isle of Man press quote a lower slightly earlier estimate. The ball park remains the same.

  Note also that the population of the Isle of Man is 76,500. That of the UK is 61.1 million. That makes IoM GDP per head about £23,529. That in the UK is, by chance, £23,701. According to the CIA this is about right. They say Isle of Man GDP per head is $35,000 pa and that in the UK is $36,600. This indicates remarkable consistency.

  But, apparently each of those people in the Isle of Man pays net £5,490 of VAT according to the latest Isle of Man data that claims £420 million a year of VAT is collected. That requires them at 15% VAT rate to spend £36,600 a year each on VAT chargeable goods (priced net of VAT, or £42,090 in total). In contrast in the UK each person pays net £1,347 each—requiring spending of £8,982 a head each (£10,329 gross) on VAT chargeable items.

  Now I have to say that the UK data appears entirely plausible; take food, taxes, rents and mortgages and so on out of account and I think that level of spend per head looks plausible. There is a sanity check inherent in this data.

  And I have to say this: to suggest that each person in the Isle of Man spends 178% of their annual income on VAT chargeable items a year is just plain straightforwardly utterly implausible. I hate to say this: but at face value the IoM data is simply wrong. How can people spend 178% of their income on VAT chargeable goods in the IoM? They can't: that is obvious

  So what are the explanations. They appear to be:

1. The IoM data is wrong. It doesn't appear to be far out on GDP: there's a sanity check on that. So it must be the VAT data that is wrong. I find it incredible that the £420 million figure is right. I have a strong suspicion that is gross for a start ie before claims for repayment from traders for input tax.

2. I'm right: easily the most plausible explanation. It is well known that the Common Purse was meant to subsidise the IoM. Why is it still not doing so?

3. The IoM has attracted a massively artificial tax base and these activities are not in any event taking place in the island, the VAT supplies are simply being "booked" from there in classic tax haven fashion. They are actually, in that case, made in the UK but the profits are artificially booked in the IoM. In that case it remains the case that the UK is still subsidising the IoM with VAT because this would mean the VAT was always due in the UK in the first place and would have been collected here if, for example, the IoM operated VAT as does any other distance seller.

4. If option three is right there is another factor to consider: not only is there a VAT subsidy there is a corporation tax loss too. Let's assume, generously, that the VAT profile of the IoM is the same as the UK, when we know it should actually collect less because of the profile of the financial services sector. And let's assume the £420 million figure is right for a minute. In that case the implied VAT to GDP ratio is 23.3%. It should be 5.6%. That implies an excess rate of 17.7%. In this case that means about £320 million of excess VAT is collected. This is net, I'll assume, of trader claims for input so a good approximation to profit—which is not being earned by staff in the IoM as we have already allowed for their normal rate of return in the calculation and so must not do so again. That means at a 15% VAT rate some £2.1 billion of excess profit must be declared in the IoM to justify this level of VAT on turnover that is not actually located there in reality. Let's reasonably assume that this should be subject to 28% tax in the UK where the supplies must be taking place for the charge to arise. This sum of £2.1 billion is probably not taxed at all in the IoM. That's a tax loss to the UK of £588 million.

  So now we can say that the new data revealed by the Isle of Man proves first of all that the VAT subsidy of over £230 million from the UK government to the Isle of Man is undoubtedly real—because the VAT claimed to arise there cannot possibly relate to economic activity really located in the island, and that the corporation tax loss arising from the artificial relocation of that VAT turnover to the Isle of Man is costing the UK not less than £588 million a year.

  In other words in the case of just two UK taxes VAT and corporation tax—abuse promoted by the government of the Isle of Man costs the people of the UK a combined minimum of about £820 million a year.

  But then we must add on the cost from the Isle of Man refusing to exchange data as it should under the European Union Savings Tax Directive. Directly this refusal costs at least £27 billion a year. Extrapolated, quite reasonably, using the methodology in the link, and the loss to the UK from income tax abuse through Isle of Man based structures is likely to be not less than £700 million a year.

  Add this together and the total loss to the UK from allowing the Isle of Man to operate as a tax haven—an activity we directly subsidise—is not less than £1.5 billion a year.

  So much for the Isle of Man's government claim that it pays its way. Anything further from the truth is very hard to imagine.

THE 2009 VAT ANALYSIS[92]

  I last reviewed the Isle of Man's subsidy from the UK as a tax haven in tax year 2004-05. Then I estimated it to be as high as £270 million a year. The VAT subsidy alone was some £233 million a year.

  I have recently been challenged on this issue—some people saying that the subsidy has been eliminated as a result of the revision of this VAT sharing agreement in 2007. Others have questioned the data used because of the range of years involved. I have recalculated the data to deal with this issue.

  The Gross Domestic Product of the Isle of Man is now £1.8 billion according to the latest data I can find from the IoM government. That for the UK is £1,275 billion, in contrast.

  In 2008-09 the Isle of Man expects to collect £339 million in VAT—59% of its total government income of £574 million. This is 18.8% of IoM GDP—which leapt in the meantime, including by an improbable 11.2% in 2006-07.

  In the UK the identical VAT system (for all practical purposes) collects £83 billion a year—or 6.5% of GDP.

  That means the IoM, which has reason to have a much lower VAT collection rate because of the very large size of its exempt VAT outputs in the financial services sector collects 12.3% more of its GDP in VAT than the UK does using an identical (indeed, shared) system.

  This is, obviously, impossible. Just as it is also impossible for a country to collect more in VAT than its GDP multiplied by the VAT rate (17.5% when the IoM budget was set). As such it is glaringly obvious there is still a subsidy. I now suggest that the VAT subsidy is 12.3% of its GDP—or £221 million a year. There are other subsidies on health and defence over and above that. I have not revisited those issues.

  In other words, for all practical purposes the revised Common Purse Agreement of 2007 has left the Isle of Man enjoying exactly the same subsidy as it did before the change. And they use this to do three things:

(a) Force down tax rates in all the Crown Dependencies, so undermining their financial stability—a process the Isle of Man started when it announced 0% tax rates on companies in 2000—a move it could only afford because of the UK subsidy, and which Jersey and Guernsey had to copy despite not having a similar subsidy; and

(b) It undermines tax revenue in the UK. For example, it refuses to automatically share data with the UK under the EU Savings Tax Directive, and so hides UK tax evaders in its banks. £400 million was recovered from such evaders as a result of a UK tax amnesty covering the Isle of Man in 2007.

  The obvious question is this: when UK government revenue is so tight, why are we spending more than £200 million year to subsidise a tax haven to steal our tax revenues? Surely this is a question the Treasury has to answer.

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34   The term refers to the lawyers, accountants, bankers, trust companies and others who provide the services needed to manage transactions in the secrecy space. These organisations, working together, congregate in a secrecy jurisdiction for the purpose of providing these services. Back

35   http://www.gov.je/NR/rdonlyres/9265D0B9-7217-4C05-8052-642B5237E896/0/WrittenTestimonyoftheChiefMinister.pdf accessed 2-10-09 Back

36   Based on the testimony of Jeffrey Owens of the OECD on 3 May 2007 http://www.senate.gov/~finance/hearings/testimony/2007test/050307testjo.pdf accessed 6-6-07 Back

37   http://ec.europa.eu/taxation_customs/taxation/company_tax/harmful_tax_practices/index_en.htm accessed 6-6-07 Back

38   http://www.richard.murphy.dial.pipex.com/4180-12935-2962005.pdf£search=%22states%20of%20jersey%20shadow%20scrutiny%20committee%20richard%20murphy%22 accessed 2-10-09 Back

39   http://www.gov.je/NR/rdonlyres/37E79D78-637F-4C8E-A0CE-06DEF0B117B4/0/IncomeTaxAmendment28.pdf accessed 2-10-09 Back

40   http://www.gov.je/NR/rdonlyres/19EA3036-0629-40EB-9794-75C8183CF0D4/0/CompleteDraftBusinessPlan.pdf accessed 2-10-09 Back

41   http://www.taxresearch.org.uk/Blog/2006/10/10/jersey-gets-it-rong-again/accessed 2-10-09 Back

42   http://www.gov.je/NR/rdonlyres/19EA3036-0629-40EB-9794-75C8183CF0D4/0/CompleteDraftBusinessPlan.pdf accessed 2-10-09 Back

43   Ibid Back

44   http://www.gov.je/NR/rdonlyres/19A91841-E843-4B5A-A2F1-E03228420499/0/JMattachment110507GoodsandServicesTaxJerseyLaw200.pdf accessed 2-10-09 Back

45   http://www.crownagents.co.uk/projects.asp?step=2&contentID=279&sectorID=10&serviceID=10&regionID=1 accessed 2-10-09 Back

46   http://www.gov.je/NR/rdonlyres/19EA3036-0629-40EB-9794-75C8183CF0D4/0/CompleteDraftBusinessPlan.pdf accessed 2-10-09 Back

47   http://www.gov.je/NR/rdonlyres/19A91841-E843-4B5A-A2F1-E03228420499/0/JMattachment110507GoodsandServicesTaxJerseyLaw200.pdf Part 12 accessed 8-6-07 Back

48   http://www.volaw.com/pg470.htm accessed 8-6-07 Back

49   http://www.gov.je/TreasuryResources/IncomeTax/IncomeTaxLegislation/Income+Tax+(Jersey)+Law+1961/accessed 8-6-07 Back

50   http://www.gov.im/lib/docs/treasury/incometax//taxcap.pdf accessed 8-6-07 Back

51   When undertaking research on the ownership of a major UK group an author of this paper discovered it was owned by two Jersey nominee companies. Upon investigation it was discovered that these two companies owned each other. There was, therefore, no apparent beneficial owner. Back

52   http://www.state.gov/p/inl/rls/nrcrpt/2007/vol2/html/80887.htm accessed 6-10-09 Back

53   http://www.fatf-gafi.org/document/28/0,2340,en_32250379_32236930_33658140_1_1_1_1,00.html accessed 6-10-09 Back

54   http://www.fatf-gafi.org/document/9/0,3343,en_32250379_32236920_34032073_1_1_1_1,00.html accessed 6-10-09 Back

55   http://www.state.gov/p/inl/rls/nrcrpt/2009/vol2/116555.htm accessed 6-10-09 Back

56   http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/15_09_09jersey_imf.pdf accessedn 6-1-0-09 Back

57   http://www.taxresearch.org.uk/Blog/2007/03/02/jersey-officially-a-money-laundering-free-zone/accessed 6-10-09 Back

58   http://business.timesonline.co.uk/tol/business/money/tax/article1875552.ece accessed 8-6-07 Back

59   ibid Back

60   http://www.guardian.co.uk/business/2009/sep/21/lloyds-panorama-tax-avoidance-allegations accessed 6-10-09 Back

61   http://www.offshore-formations.co.uk/offshore_company_formations/offshore_formations_jersey.htm accessed 8-6-07 Back

62   http://www.thisisjersey.com/finance2006/showfir.pl?ArticleID=000017 accessed 8-6-07 Back

63   http://www.gov.je/NR/rdonlyres/7A8C11C5-F9F4-48AC-9BF3-FB8699D7DCD8/0/IncomeTaxAmendment27.pdf accessed 8-6-07 Back

64   Para 10.6.2 http://www.archive.official-documents.co.uk/document/cm41/4109/a-chap10.htm accessed 8-6-07 Back

65   http://www.gov.je/StatesGreffe/MinisterialDecision/EconomicDevelopment/2006/Trusts+Amendment+no+4+law.htm accessed 18-6-07 Back

66   http://www.volaw.com/pg605.htm accessed 8-6-7 Back

67   ibid Back

68   Snook v London and West Riding Investments Limited [1967] 2 QB 786 at 802. quoted at http://www.mondaq.com/article.asp?articleid=43332 accessed 8-6-07 Back

69   http://www.mondaq.com/article.asp?articleid=43332 accessed 8-6-07 Back

70   See http://www.jerseylegalinfo.je/Publications/jerseylawreview/feb04/JLR0402_Hayton.aspx accessed 8-6-07 Back

71   http://www.irs.gov/businesses/small/article/0,,id=106554,00.html accessed 8-6-07 Back

72   See http://www.taxresearch.org.uk/Documents/JerseyMail0906.pdf accessed 8-6-07 Back

73   http://www.legalinfo-panama.com/articulos/articulos_41a.htm accessed 31-1-07 Back

74   http://www.offshore-fox.com/offshore-corporations/offshore_corporations_030404.html accessed 31-1-07 Back

75   ibid Back

76   http://www.mondaq.com/article.asp?articleid=44136 accessed 18-6-07 Back

77   http://www.mourant.com/section/132/index.html accessed 18-6-07 Back

78   http://europa.eu.int/eur-lex/lex/LexUriServ/site/en/oj/2005/l_309/l_30920051125en00150036.pdf accessed 18-6-07 Back

79   See http://www.jerseyfsc.org/the_commission/general_information/press_releases/release169.asp accessed 12-6-07 Back

80   See http://www.gov.je/TreasuryResources/IncomeTax/Bulletin+Board/EuropeanUnionSavingsDirective/EUSDPress Back

81   http://www.jerseyfsc.org/the_commission/general_information/press_releases/release169.asp Section 3.3.5 Back

82   ibid Section 4.3.1 Back

83   ibid Section 4.3.2 Back

84   http://www.bedellcristin.com/Newspagetitle/JerseyFoundationsLaw Back

85   http://www.gov.je/TreasuryResources/IncomeTax/TIEA/TaxationUSAJersey2006.htm accessed 18-6-07 Back

86   http://www.gov.je/TreasuryResources/IncomeTax/IncomeTaxLegislation/accessed 18-6-07 Back

87   http://www.lowtax.net/lowtax/html/jje2tax.html accessed 8-6-07 Back

88   http://ec.europa.eu/taxation_customs/taxation/personal_tax/savings_tax/index_en.htm accessed 8-6-07 Back

89   http://www.lowtax.net/lowtax/html/jje2tax.html accessed 18-6-07 Back

90   http://www.oecd.org/document/7/0,3343,en_2649_33767_38312839_1_1_1_1,00.html accessed 6-10-09 Back

91   Based on http://www.taxresearch.org.uk/Blog/2009/05/18/isle-of-man-costs-uk-at-least-15-billion-a-year/ accessed 6-10-09. Back

92   Originally published at http://www.taxresearch.org.uk/Blog/2009/02/10/the-isle-of-man-still-subsidised-by-the-uk-to-be-a-tax-haven/ accessed 6-10-09. Back

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Prepared 30 March 2010