The status of Jersey as a well regulated international financial centre03 Feb 2014
The Channel Islands comprise Jersey, Guernsey, Alderney, Sark, other islands and islets. The relationship with the British monarchy is a long and strong one. Continental Normandy and the Channel Islands were one duchy at the time of the Norman Conquest of England in 1066. In 1204 England lost Continental Normandy but the Channel Islands continued their allegiance to the British monarchy. The origins and the development of the right to independence of the Channel Islands dates from that time over 800 years ago.
This briefing looks at a number of related issues including:
- Jersey's relationship with the UK and the EU
- An overview of international reports
- The value of Jersey to the UK
- International financial centres, tax havens and offshore finance centres
- Secrecy and privacy
- Tax offences, fraud, evasion and avoidance
- Fiscal strategy in the Channel Islands
- The background to the G20 summit in April 2009
- The IMF Report: the Financial System Stability Assessment Update 2009
- The Foot Review: financial regulation and reform 2009
- The UK House of Commons Justice Committee Report of 2010
- The UK foreign and Commonwealth office white Paper, June 2012, in relation to the British Overseas Territories
- Earlier reports on Jersey's regulatory system
Jersey's relationship with the UK and the EU
What is Jersey's relationship with the United Kingdom?
Jersey's status as a Crown Dependency gives the Island constitutional rights of self-government and judicial independence. It has a considerable measure of autonomy within its separate constitutional relationship with the UK but is not wholly independent of the UK. It does not form part of the UK, however, it forms part of the British Isles.
In practice, responsibility for the Island’s international representation rests largely with the UK government through the Ministry of Justice. However, the UK always consults Jersey on its obligations under international law and other international agreements. It is included in many of the important international conventions to which the UK is a party, including human rights legislation and international sanctions.
In recent years the island authorities have renewed entrustment in relation to certain matters to enable those authorities to negotiate and agree such matters direct with foreign countries.
In 2007, the Chief Minister of Jersey signed an International Identity Framework Document with the UK Secretary of State for Constitutional Affairs: Framework for developing the international identity of Jersey.
This framework clarifies the constitutional relationship between the UK and Jersey, and assists in the development of its international status and identity.
Jersey and the European Union
Jersey also has a special relationship with the European Union (EU). In simple terms, the Island is treated as part of the EU for the purposes of free trade in goods and non-discrimination amongst EU members, but otherwise is not a part of the EU and its legislation does not apply.
The Island's status as a respected international finance centre is well known throughout the world. The Channel Islands have led the way in conforming with international standards at the highest level, for example, in supporting multi-national initiatives to regulate financial services business and the prevention of international criminal activities.
The Global Financial Centres Index as of 2013, places Jersey 28th in its world city ranks and ratings of financial places out of a total of 80 financial centres. London is placed first and there is no doubt the commonality of interest, those of proximity, and the business and cultural links contribute to the wellbeing of both.
An overview of international reports
Jersey has featured in a number of official reports independently compiled by governmental and private bodies of standing such as the G8, the IMF, the FATF, the OECD, the EU and the UK Government. Some of these set standards and often assess standards. Generally Jersey is listed as compliant or substantially compliant. Examples are set out in the Appendix.
The value of Jersey to the UK
The 2013 Capital Economics report provides the most comprehensive analysis to date of the relationship between Jersey’s economy and that of the UK.
While much of the data concerns the impact of Jersey’s international finance industry, the report is representative of the island’s overall benefit to the UK across all sectors and, as indicated, generates £2.3 billion on tax revenues each year and supports 180,000 British jobs.
Other key findings include:
- £1 in every £20 of money invested by foreign individuals and companies in assets located in Britain reaches the UK via Jersey.
- Each year, Jersey banks send around £120 billion of their deposits to parent operations in the UK, representing 1.5% of the funding of the whole UK banking system.
- Two-fifths of all assets administered or managed across Jersey’s financial and wealth management sectors come from markets outside the UK and EU.
The report also considers the issue of so-called ‘tax leakage’ from the United Kingdom mediated through Jersey, concluding that:
- Losses to the UK Treasury through legal tax avoidance are estimated to be no higher than £480 million a year and are probably much less.
- No more than £150 million a year of British taxes could potentially be evaded using Jersey, but that recently approved information exchange agreements will substantially reduce or eliminate the potential for tax losses.
- Although some UK tax may leak through Jersey, the amounts are dwarfed by the estimated £2.3bn of taxes paid on British jobs and profits supported by Jersey.
International financial centres, tax havens and offshore finance centres
On 10 September 2013 and following the 2013 G8 and G20 meetings, David Cameron defended the UK's overseas territories and Crown Dependencies by saying "They all agreed to take the necessary action on tax exchange with the UK, international tax co-operation and beneficial ownership, all of which was set out at the meeting I had with them. I cannot recall the exact timetable off the top of my head, but I will make this point: I do not think it is fair any longer to refer to any of the overseas territories or Crown Dependencies as tax havens. They have taken action to make sure that they have fair and open tax systems. It is very important that our focus should now shift to those territories and countries that really are tax havens. The Crown Dependencies and overseas territories, which matter so much - quite rightly - to the British people and Members have taken the necessary action and should get the backing for it."
The Oxford English Dictionary tells us, very generally, that a tax haven is "a country or autonomous area where taxes are levied at a low rate". This non-technical definition may provide an indication, but it would now appear ripe for refinement. A "tax haven" might now, properly, be defined as a "secrecy jurisdiction" for example, a jurisdiction that has laws and practices which make it difficult for other countries to evaluate whether those laws and practices are being used to evade taxes.
The word "offshore" is a confusing one and can in no way be said to be synonymous with the concept of an island or haven for illicit fiscal activity. Other finance centres which one might regard as "onshore", including London and New York, also do work of an "offshore" nature. Manhattan is, in any event, an island and other "offshore" jurisdictions such as Switzerland, Liechtenstein and Luxembourg have no coastlines.
Nor is the definition really about tax. London offers a low tax environment to international investors and Germany, Spain, France and others offer low or no tax holding company tax regimes. Ireland and Holland also offer certain tax advantages. The real issue here is regulation. The following are a selection of relevant observations taken from the Hines Report:
- International finance centres are countries and territories with low tax rates and other features (including regulatory policies) that make them attractive locations for foreign investment.
- Economic evidence strongly suggests that international finance centres contribute to investment, employment, and the efficient functioning of markets and government policies in other countries.
- International finance centres contribute to economic activity by, for example: improving the potential profitability of business operations elsewhere, stimulating investment, contributing to the comprehensiveness of financial markets in the regions in which they are located and making credit more freely available in countries proximate to them.
- Among the notable features of international finance centres are their very high levels of governance quality measures which include: accountability, political stability, government effectiveness, rule of law and control of corruption (which factors are included in the World Bank's cross-country measures of governance quality).
- International finance centres are typical of small countries in imposing low income tax rates and instead relying on expenditure taxes (such as excise taxes, sales taxes and imported goods tariffs). Contrary to popular belief, recent evidence indicates that international finance centres are not the locations of choice for anonymous accounts and other forms of international tax evasion.
- The complaints levelled at international finance centres (which include banking secrecy, eroding the tax bases of higher tax jurisdictions, fostering criminal activity, and reducing the transparency of financial accounts) are generally "economic" complaints. As such, they are capable of empirical and economic analysis and, upon close examination, appear to have little economic merit.
- Most small international financial centres are in the top quartile of countries with little corruption according to the Corruption Perceptions Index 2011.
Secrecy and privacy
The Channel Islands do not have secrecy laws but have levels of regulation and sound supervisory controls, within which clients can still benefit from appropriate levels of privacy. Jersey's protection of the privacy and confidentiality of financial information for the legitimate activity of law-abiding persons is similar to English principles, which have derived over many years from the common law. It was summed up in I.B.L. Ltd and Meridian Group (U.K.) Ltd v Planet Financial and Legal Services Ltd and Webbe 1990 JLR 294,312 in this way "confidentiality depends upon legitimate private business affairs being properly conducted".
The Channel Islands' legal systems and financial regulations focus upon transparency and openness, both of which are principles fundamentally different from that of secrecy. Jersey has committed to the OECD principles of transparency and information exchange and concentrate, among other things, upon accountability, access to information, clarity and predictability, which are all essential elements of a well regulated environment. Transparency does not necessarily need to go hand in hand with a loss of privacy for legitimate activity. Where disclosures are made in order to prevent abuse, these will be strictly limited to dealing with the purpose for which disclosure is required, with restrictions on any wider disclosure and on the use to which such information can be put. Legitimately confidential information will therefore remain protected.
Tax offences, fraud, evasion and avoidance
What amounts to a tax offence, as we have known it, looks set to come under detailed scrutiny with growing international focus on the practice of "tax avoidance". Historically, there has been a long-standing and simple distinction between acceptable, tax avoidance, and unacceptable, tax evasion. For many, simple and accepted means of paying less tax include: tax free savings, investment in pensions, and maximum use of tax allowances, all of which are quite normal tax planning measures that are in no way illegal or unacceptable. Similarly, banks, companies, and individuals (whether or not of high net worth) are entitled to manage their affairs, domestic and international, in sensible, legal and tax efficient ways.
Aggressive and abusive tax arrangements are hard to define and have understandably been criticised.
The issue of "tax abuse" requires greater certainty as to what can be done. It brings focus, not just to the issues of regulation and transparency, but also to taxation of businesses and the wealthy, wealth planning and structuring, and the related use of the international finance centres. Moves by the UK government to tax the wealthy more heavily and focus more closely on tax avoidance suggest that measures which are currently legitimate are somehow immoral. There is general acceptance that the assessment of tax needs to be based on law and cannot be based on morality. This is a potentially dangerous route to follow with the prospect of far-reaching and damaging consequences for global prosperity and the rule of law. It will tend to discourage wealth creation and, consequently, employment prospects and general financial wellbeing in both the public and private sector.
In September 2012, Griffith University of Australia Centre for Governance and Public Policy produced a report entitled "Global Shell Games: Testing Money Launderers' and Terrorist Financiers' Access to Shell Companies" by Michael Findley, Daniel Nielson and Jason Sharman.
The study tests compliance with client identification requirements in 185 countries using 7400 email solicitations. The report concluded that:
"The overwhelming policy consensus, strongly articulated in G20 communiqués and by many NGOs, is that tax havens provide strict secrecy and lax regulations, especially when it comes to shell companies. This consensus is wrong. It is more than three times harder to obtain an untraceable shell company in tax havens than in developed countries. Some of the top ranked countries [in the study] are tax havens such as Jersey, Cayman Islands and Bahamas, while some developed countries like the UK, Australia, Canada and the US rank near the bottom of the list. It is easier to obtain an untraceable shell company from incorporation services (though not law firms) in the US than in any country save Kenya."
Fiscal strategy in the Channel Islands
Since 2010, the economies of the Channel Islands have contracted and there has been an increase in the level of unemployment. The latest statistics appear to have reversed this trend (read the States of Jersey Statistics Unit - Jersey Economic Trends 2013). Jersey has a budget surplus in 2013 and a "rainy day fund". In December 2013, the Island government was given an AA+ credit rating. Jersey operates a "zero/ten" regime (introduced in June 2008 in Jersey) to comply with the EU Code of Conduct for Business Taxation and to promote equal tax treatment between companies. As against this, it must be remembered that Jersey has maintained sound public finances and made plans to address the deficit by means of a number of measures introduced some years ago. In the current economic climate, all aspects of the finance industry, including financial policy and practices, and taxation, come under close scrutiny. Jersey built financial reserves during periods of prosperity and so faces little immediate domestic fiscal pressure. However, it must consider whether its tax regime might expose it to international scrutiny which could have a damaging effect upon its reputation as a leading international finance centre and, recently, questions have been raised, even by those EU authorities who had approved of the zero/ten regime.
Jersey has a broad and diversified tax base which accords closely with the recommendations of the "Foot Review". It is vital for the continued success of the finance industry that it continues as a globally competitive jurisdiction, remaining attractive to investment and business through its tax structures. In the Foot Review, it was observed that "In recent months, a number of multinational companies and financial institutions have announced plans to leave some of the jurisdictions, citing international pressure on tax". In recognition of the fact that the economic situation is changing opinion, together with the internationally applicable norms in this area, the Crown Dependencies have agreed to work together in order to review the existing fiscal strategies. This is but one further example of where the Channel Islands must continue to demonstrate their commitment to meeting the highest and ever changing international standards by ensuring that their tax regimes remain motivating to investment, transparent, efficient, competitive and internally sustainable. Jersey Finance has produced a briefing on the subject of the Jersey Fiscal Strategy Review 2009 which can be accessed on their website. Also of interest are the extracts from a speech given by Jersey Finance's Chief Executive, Geoff Cook, at the Adam Smith Institute on 4 November 2009, entitled "Tax Competition, Economic Freedoms and Sovereignty" available on the Jersey Finance website.
Jersey offers the highest regulatory standards to ensure the continuance of its position as a leading international finance centre of repute. The ongoing commitment of the Channel Islands to maintaining high regulatory standards is vital to preserve the integrity of its financial services industries and in continuing to attract new business of the right type. Jersey will continue as a centre of vitality for legitimate international finance, leading the way in funds, structured finance and other capital markets activities.
Jersey has performed exceptionally in all areas covered by the recent reports, demonstrating its strong track record, highlighting the value of its contributions to the UK economy and to the importance of London as a centre of global finance. As on previous occasions, Jersey will continue to adapt to an ever changing environment and will respond positively and in accordance with the emerging consensus. As highlighted by the Foot Review, there is "no room for complacency". Jersey must review those areas where further consideration needs to be given (for example, to financial services ombudsman schemes), and continue to evolve so as not only to meet, but to lead the way, with regard to changing global regulatory and other financial services industry requirements which are set only to continue to rise.