Wendy Benjamin considers how Jersey’s laws and regulations continue to address economic and political challenges and to support the island’s position in international finance.
The last 12 months have brought their share of challenges for Jersey’s finance industry. It started well with the 2010 first quarter’s statistics showing marked increases in the net asset value of funds administered and in deposits held in the island. But the statistics collated by the Jersey Finance, the representative body for the finance industry, show that for the quarterly period ending 30 June, 2010:
the net asset value of funds under administration in Jersey decreased by £4.6 billion during the second quarter to £175.9 billion;
the total number of funds decreased by 33 to 1287 over the second quarter although the number of unregulated funds increased;
company formations rose by 9.9 per cent against the same period in 2009 and the number of live companies on the register increased by 191 in the second quarter of 2010 to 33,570;
bank deposits fell by £10.7 billion during the second quarter to just under £167 billion.
Unsurprisingly the statistics suggest that Jersey’s economic recovery is unlikely to be entirely even, instead with peaks and troughs in growth. That bank deposits have fallen in the second quarter is to be expected with interest rates remaining low and currency fluctuations during the period. Whilst overall net asset values of funds may have also fallen in the second quarter, the curve is upwards when looked at on a bi-annual basis and some classes, such as private equity funds, grew over the quarter. Also encouragingly, inflation remains within government targets. The Jersey Retail Price Index for the 12 months prior to September 2010 stood at 2.1 per cent, down by 0.7 per cent from the previous quarter. The figures for gross national income (GNI) for 2010 will not be available until April 2011. It will be interesting to see how they compare with 2009. The States of Jersey Statistics Unit annual report, Jersey in Figures 2009, showed that the island produced an annual gross national income (GNI) of £4 billion, and a GNI per capita of £44,000 in 2009, approaching double that of the United Kingdom and representing one of the world’s highest. Such statistics suggest that Jersey’s global reputation and standing has helped it through the worst of the economic downturn. That is no accident. In recent years the island has focussed upon a series of regulatory and legislative measures aimed at maintaining and enhancing its international reputation and competitiveness. The latest Global Financial Centres Index in September 2010 ranks Jersey 22nd overall, ahead of its neighbour Guernsey which falls into 26th place, the Isle of Man at 32 and Cayman at 34. It was 12 places above the highest ranking Caribbean jurisdiction. The report notes that Jersey and Guernsey are the only offshore centres to achieve a rating over 600 and are working hard to change perceptions and rise above the status of offshore centres to be the only ones close to achieving wider recognition as “global specialists”.
Tax Information Exchange Agreements (TIEAs)
One of the ways in which these standards can be met is through TIEAs being entered into by jurisdictions to permit the exchange, on request, of information relevant to tax matters covered by the agreements. Jersey signed its first TIEA with USA in 2002. It has since gone on over the last eight years to sign another 18 TIEAS, many of which are with OECD member nations. The most recent TIEAs this year include Portugal, China, Turkey and Mexico. There are another seven TIEAs initialled or ready for signing including those with India, Brazil, Argentina, Canada and South Africa. There are more TIEAs in well advanced negotiations including Japan. Partially as a consequence of its TIEA network, Jersey was one of the first offshore centres to be “white-listed” by the OECD.
Information is typically delivered by the Comptroller of Taxes in Jersey within 40 days of request, in the absence of any appeal. The taxpayer has a right of appeal to the Royal Court of Jersey. To date there have been relatively few cases of disclosures following the above proving processes. The EU Code of Conduct Group met in Brussels in November to give further consideration to elements of Jersey’s zero/ten tax regime. Under the regime there is a general corporate income tax rate of zero with a higher rate of 10 per cent applying to income arising from certain financial services and of 20 per cent applying to utilities carried on in the island and income derived from Jersey real estate. No doubt the discussions on this point will continue for sometime. In the meantime it is helpful to note that the zero/ten regime as a whole is not the focus and that no substantive concerns have been raised under the Code with that framework as a whole. Jersey’s tax regime will thus continue in a competitive and efficient basis. The successful funds regime in Jersey has developed following changes of legislation and policy by the Jersey Financial Services Commission (JFSC) over the past decade. The success began in earnest with the introduction of the expert fund category, which is targeted at institutional, professional and sophisticated investors. Funds falling within this category benefit from a fast-track approval process and light regulatory touch from the JFSC. Then a new category of unregulated funds aimed at institutional and other eligible investors investing more than an initial US$1 million was introduced in 2008. Provided a fund can ensure compliance with this requirement, the regulatory obligations placed upon it in Jersey are minimal. In particular, an unregulated fund will not be required to appoint any Jersey-based service providers.
There have been no radical changes to Jersey’s company law this year, although there were some changes to approval and oversight of auditors and auditing. Jersey is continuing to promote the recently introduced foundations as an alterative to trusts, particularly in jurisdictions unfamiliar with trust law concepts. Aside from new products, the island has also been looking at new markets and increasing its visibility in key jurisdictions by removing barriers to business development. A good example of this is in relation to the Hong Kong. Jersey companies were recently approved for listing on the Hong Kong Stock Exchange and a number of successful listings have followed this year. The promotional activities of Jersey Finance have included establishing a permanent representative office in Hong Kong coupled with several delegations in the region.
In conclusion, Jersey continues to offer a low tax business environment with economic and political stability with easy access to London, Europe and further afield. Its laws and regulations continue to address economic and political challenges and to support the island’s premier position in international finance.
Legislation introducing new incorporated limited partnership (ILP) and separate limited partnerships (SLP) was approved and is due to be enacted in 2011 following Privy Council approval. ILPs will be corporate bodies with separate legal personality whereas SLPs will have separate legal personality but will not be bodies corporate. As such they will be transparent for the purposes of UK income tax, corporation tax and capital gains. (ILPs will lack transparency for capital gains.) The introduction of SLPs and ILPs broadens the range of limited partnerships available.
New products and markets
The EU Alternative Investment Fund Managers Directive (AIFM Directive) raised some issues for Jersey’s funds industry. Constitutionally, Jersey is a self-governing dependency of the British Crown and is not part of the United Kingdom or the European Union. It has complete autonomy in relation to its domestic affairs including tax and business law. However, the ability to market funds domiciled in Jersey into the EU is an important element for the continued success of its funds industry. So the vote in November on the final text of the AIFM Directive was welcomed in Jersey as it is confident that it will meet the agreed criteria for ongoing market access into Europe. Jersey is expected to be amongst the first jurisdictions to obtain a passport for non-EU alternative investment funds and managers when, as expected, the passporting regime is extended to include third countries in 2015.
Next came the introduction of a listed fund category (which recognises listings on AIM, Euronext, the London Stock Exchange, and other recognised exchanges) - the flexible and fast-track approval process which had been achieved for Jersey expert funds was adapted for listed funds.
The Code is not the only issue originating from Europe that Jersey has had to face this year. Another has arisen in the funds industry.
The specific areas under review are the deemed distribution provisions applicable to shareholders and the combined effect of company and shareholder taxation. This aspect is very narrow and affects Jersey resident individuals with shareholdings in Jersey companies. No conclusions as to whether or not these aspects come within the definition of business taxation covered by the Code has yet been reached. Jersey contends that the deemed distribution provisions do not, instead arguing that they come within personal taxation.
Zero/ten tax regime
Jersey is also building its network of double taxation agreements (DTA). This year a new DTA with Malta came into force. Further DTAs with Estonia, Bahrain, Belgium and Qatar are in well advanced negotiation.
TIEAs aim to strike a balance between exchange of information and protection of taxpayer’s privacy. Wholesale ‘fishing exercises’ are not possible under TIEAs. Information is not automatically exchanged following a request by a relevant jurisdiction. A request must be substantiated under TIEAs by the requesting jurisdiction providing information such as:
A key element of Jersey’s international strategy has been developing its network of TIEAs. The OECD’s initiative on harmful tax practices emphasises international standards of transparency and exchange of information on tax matters.
As a result it has achieved global recognition for its financial sector regulation and supervision, which were found to be of a “high standard” and to “comply well” with international standards by the IMF report in 2009. Jersey is compliant or largely compliant with 44 of the 49 general FAFT recommendations, compared to Singapore and USA at 43.
Jersey has still outperformed major market indices and many of its competitor jurisdictions. Against a background of global austerity measures and sharp falls in financial markets indices such as FTSE100, down 13.43 per cent during the same period, Jersey appears to be performing well. The third quarter’s statistics which were released at the end of December reported growth across the majority of key financial sectors. Anecdotally the results of the final quarter of 2010 should show further encouraging signs.
Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Jersey, Mauritius, Seychelles and Shanghai.