March 2019 – a significant month for the specialist global finance centre of Guernsey. And nothing to do with Brexit, and what did, or did not, happen. Focus in Guernsey was, as it had been for at least the previous 18 months, on satisfying the requirements of the EU Council’s Code of Conduct Group on Business Taxation over ‘substance’.
The island was always confident of the substantive nature of our finance industry, but we were delighted, and, to a degree, relieved, to have it confirmed by ECOFIN, the European Council of Finance Ministers, that we had satisfied its specific economic substance requirements for entities operating in or through the jurisdiction. As a result, Guernsey was reaffirmed as a cooperative jurisdiction in terms of good tax practice and transparency.
And our global competitiveness has been significantly enhanced by this development.
But what is the EU’s definition of substance? And how does a finance centre like Guernsey satisfy it?
In 2017, the EU raised general concerns in relation to legal economic substance requirements in a number of jurisdictions, including Guernsey. It raised the prospect of certain companies being used to artificially attract profits not commensurate with economic activities and presence within the jurisdiction.
The outcome of that process, confirmed in March this year, is formal recognition that not only does Guernsey meet the international standards of tax transparency, the principles of fair taxation, and is committed to fighting base erosion and profit shifting (BEPS), but now also addresses any concerns that profits were not commensurate with the actual economic substance in the island.
The new Guernsey regulations, which came into force in January 2019, establish tests for tax resident companies carrying on what is defined as ‘relevant activities’.
Those tests require companies within the scope of the regulations to demonstrate they have economic substance in Guernsey, including being ‘directed and managed’ in the island, have certain ‘core income generating activities’ (now known as CIGA – because as one leading local tax consultant put it, ‘there’s just not enough acronyms in the world’) undertaken locally, and that companies have adequate and proportionate premises, employees and expenditure in Guernsey.
The regulations are subtly different for the various sectors of financial services business carried on in the island.
The preparation for this vital work was completed in less than a year, working very closely with the other Crown Dependencies (Jersey and the Isle of Man) and their respective financial services industries, who readily recognised the importance of the issue and engaged accordingly.
Guernsey has a history of nearly 60 years as a specialist global finance centre, and over that time we have built up a substantial community of advisers, practitioners, executives and directors in the sectors in which we specialise. For this reason, we were always confident that our industry was based on real substance and that with a number of clarifications and improvements, we would be recognised as a jurisdiction of true substance.
Our diversity, breadth and depth of expertise naturally creates a competitive global finance centre, based on the substance of the advice and services we deliver, and the governance that our first-class regulation demands.
Not only is this a clear signal of our substance, it should also be seen as a real endorsement of Guernsey as a co-operative jurisdiction, and further indication of our ongoing commitment to meeting international standards not only in tax, but also in regulation, transparency, and the fight against money laundering and the funding of terrorism. It positions us clearly as fully engaged as a good global citizen, fully committed to being part of the solution to global international issues.
In meeting those standards, we are able to provide the certainty, stability and competitiveness that our clients demand, and meet the reputational criteria that are as important to them as they are to us.
This commitment to being a mainstream competitive jurisdiction is at the heart of our offer, and it has been for many years.
When I moved to the island from London in 1995, it was as part of the upskilling of the insurance industry in the island in response to changing sensitivities of the UK tax authorities with regard to the ‘arm’s length’ nature of contracts of insurance between captive insurance companies and their shareholders and policy holders.
The captive industry needed to adopt proper underwriting processes and appropriate transfer pricing of risk in order to satisfy the UK Revenue that captive insurance companies were not simply being used to accumulate untaxed group funds for tax avoidance or deferral reasons.
We have always properly managed captives which is just one part of our burgeoning insurance sector, and in turn, just one part of the island’s broad financial services offering.
Economic substance follows a long series of initiatives designed to curtail the use of captives for corporate tax avoidance – a process with which we have fully cooperated at every stage. That has involved strong governance processes, competent and credible insurance skills, proper analytics and technical underwriting, and proper adherence and enforcement to the rules.
This has always been Guernsey’s approach – proportionate and appropriate, but requiring that companies which are tax resident in Guernsey undertake core operational and governance activities in the island, and have appropriate resources – both physical and human – available to fulfil these, which is why we always firmly believed that we would achieve a positive outcome from the EU Code Group review.
Guernsey’s Chief Minister, Gavin St Pier, has been at the forefront of defending the island, and the other Crown Dependencies, over public transparency of registers of beneficial ownership in recent months. He was equally robust in demonstrating confidence over the substance issue.
‘We have consistently maintained as a matter of fact, that we are a jurisdiction of substance,’ he said.
‘We have worked closely with the EU, Jersey and the Isle of Man to demonstrate the existence of robust legal substance.
‘I hope that it is now clear to EU Member States that they can have confidence in the work of the Code Group and consequently there is no further role for national blacklists, the basis of which are often arbitrary and prepared without any dialogue.
‘As we have repeatedly said, Guernsey does not facilitate financial crime, including tax fraud. We adopt the highest standards and we are willing to cooperate with our neighbours to address reasonable concerns. We remain committed to ongoing co-operation and dialogue with the EU institutions. We stand ready help other jurisdictions, including any relevant EU Member States, to develop and implement substance requirements.’
The matter of assessing substance is now in the hands of the Income Tax authorities in Guernsey. It will assess tax-resident companies to judge economic substance in their activities.
But Guernsey, as Mr St Pier made clear, will not stop in its commitment to meet global standards. The island’s government has already committed to implement mandatory disclosure rules this year and is committed to working with the EU on developing a new international standard for the exchange of beneficial ownership information and committing to working with the EU to more readily share corporate beneficial ownership information on a reciprocal basis.
‘We have demonstrated once again that Guernsey delivers on its commitments and can hold its head high as an exemplar of good practice,’ he said.
‘International taxation and cross-border cooperation has been and is likely to remain a rapidly evolving area, particularly if the EU moves to harmonise corporate taxation after the UK has left the EU. As we have for some time, we will continue to monitor and, as necessary, evolve our own domestic regime in response to international developments.’
Dominic Wheatley is Chief Executive of Guernsey Finance, the promotional agency for Guernsey's finance industry. His role includes business development and the promotion of Guernsey's finance industry in the Island's target markets including Europe, the US and the emerging markets, technical research to support promotional activities and liaison with industry associations and government. He was previously Chief Marketing Officer of the Willis Global Captive Practice and Managing Director of its Guernsey business, and has over 25 years of finance experience in London and, for the past 19 years, in Guernsey.