Evidence submitted by States of Guernsey (tav0033)

House of Commons Treasury Sub-Committee Inquiry on Tax Avoidance and Evasion

Written Evidence Submitted by the States of Guernsey

1. Executive Summary

1.1.       This evidence is submitted by the government of Guernsey to help the Treasury
Sub-Committee (‘the Committee’) to address the following questions set out in its Scope of the Inquiry:

“What part do the UK’s Crown Dependencies and Overseas Territories play in the avoidance or evasion of tax? What more needs to be done to address their use in tax avoidance or tax evasion?”

1.2.       In answer to those two questions, Guernsey already has a long track record of helping the international fight against tax evasion and the minimisation of tax avoidance through transparency, co-operation and adoption of principles of fair taxation, as demonstrated below.

1.3.       The main points are:

• Guernsey is a well-regulated financial centre with an important role in international capital markets, contributing to the UK’s financial services industry and wider economy.
• Guernsey is committed to the global effort of combatting financial crime, including tax evasion.
• Guernsey is transparent[1], committed to EU principles of fair taxation and supports principles of a level playing field.  Guernsey has a robust stance against tax avoidance.
• Guernsey is recognised as a reliable, active and co-operative partner of the United Kingdom (‘UK’). 
• Guernsey has an effective central register of beneficial ownership of companies and other legal persons which helps UK authorities like HM Revenue & Customs (‘HMRC’) to tackle financial crime.  The effectiveness of these arrangements to share information with law enforcement agencies was recently confirmed by the UK Home Office.
• The high quality of data that Guernsey provides to UK authorities, including HMRC, helps the UK to tackle tax evasion and to apply its own General Anti-Avoidance Rules (‘GAAR’).
• HMRC chose to close early the Guernsey Disclosure Facility (‘GDF’) which had been intended to run between 2013 and 2016.  The significantly lower-than-expected yield is due to a number of factors, one of which is the gap between the perceived and actual number and quantum of the instances of tax avoidance and evasion using Guernsey. 
• Guernsey recognises the need to maximise tax revenues, by reducing tax evasion and fraud, and to prevent abusive tax avoidance.  The island has no desire, or need, to harbour abusive schemes and will continue to work with international tax authorities to eliminate them.

1.4.       The government of Guernsey would be happy to provide oral evidence if this would assist the Committee to fulfil its role in examining the expenditure, administration and policies of the relevant UK public bodies in this Inquiry.

2. Background

About Guernsey

2.1.       Guernsey is part of the Bailiwick of Guernsey.  Guernsey, Alderney and Sark are
self-governing dependencies of the Crown, each with their own directly elected legislative assemblies, own administrative, fiscal and legal systems, and own courts of law. Guernsey is administered by the ‘States of Guernsey’; it is not represented in the UK parliament.  Guernsey raises its own taxes and pays for its public services without any external funding.  Although Guernsey is not part of the UK, it is a part of the British Isles and there are very strong economic, cultural and social links between Guernsey and the UK.  (Further information in Annex 1.)

Well-regulated international financial centre

2.2.       Guernsey has a diverse, vibrant and successful economy spanning (amongst other sectors): financial services, manufacturing, creative industries, business services, technology, tourism, agriculture/horticulture and fisheries.  Financial services is the largest sector providing 21% of overall employment in Guernsey and 40% of GVA[2].

2.3.       Guernsey is a well-regulated, transparent and co-operative jurisdiction committed to maintaining and promoting international financial stability and to combatting and preventing financial crime.  Guernsey plays an important role in international capital markets.

• Research by KPMG[3] published in 2015 shows that the Guernsey funds industry is a conduit for £25 billion of inward investment into the UK from global investors, and in total over £50 billion into Europe from global investors. Guernsey-domiciled funds facilitate access for UK investors investing over £25 billion into global assets, for example pension funds seeking a better return for policy holders. This inward and outward investment is done through Guernsey’s robust and internationally recognised regulatory regime.
• This research also shows that almost £35 billion of Guernsey-domiciled funds are invested in UK assets, including infrastructure such as schools, hospitals, airports and roads (as well as commercial property used by UK businesses).
• Over £1 billion of fees for UK professional services firms are generated by Guernsey investment funds – 9% of the total fees earned.

2.4.       Guernsey takes very seriously its responsibilities to stand with the rest of the world in complying with international obligations and the rule of law, to prevent terrorism and to promote international peace and security.  This includes all necessary steps to prevent financial crime, including tax evasion.

2.5.       The use of terms, such as ‘offshore’, to classify financial centres does not distinguish between those jurisdictions which are well-regulated and transparent and those which are not. Pejorative terms used without definition, such as ‘tax haven’, are often applied to successful small island economies. This fails to distinguish those jurisdictions that are co-operative and form part of the solution (such as Guernsey) from those that fail to meet international standards.  By a number of objective measures, reports and assessments, Guernsey has been validated as being
well-regulated, transparent and co-operative.

3. Tax policy

3.1.       Guernsey has a well-developed taxation system.  Taxes are set on the basis of the need to fund public services and to ensure that Guernsey’s economy remains strong.  Guernsey has the same need as the UK to protect its public finances, which are totally dependent on direct and indirect taxation regimes designed to meet the domestic economic needs of the jurisdiction.

3.2.       For individuals, the standard (and only) rate of personal income tax is 20% (a rate unchanged for over 50 years). Since 2008, certain financial service activities are taxed at 10% and utilities (e.g. telephone services providers) and companies deriving income from an interest in local property are taxed at 20% (as are large retailers in Guernsey, since 2016). For profits from all other activities, the standard rate of corporate tax is 0%.

3.3.       The standard rate of 0% corporate tax is based on two key principles: the EU Code Group principle of non-discrimination between resident and non-resident owned companies; and the principle of tax neutrality combined with transparency.  As an international finance centre, Guernsey acts as a ’financial entrepôt’ in facilitating the investment of funds drawn from around the world into the UK and other European financial markets.  The return to investors should be taxed according to the legislation in their home country and the business activity generated by the investment in accordance with the laws in the jurisdiction where that activity takes place.

• This tax policy is grounded in the desire to be a good neighbour to the UK and the EU.  In 2003, Guernsey voluntarily committed to the EU Code of Conduct for Business Taxation to enable market access in certain areas whilst not upsetting the EU’s level playing field within the single market.  In 2017, Guernsey worked with the EU in a screening exercise to identify non-co-operative tax jurisdictions.  The resulting list of non-co-operative jurisdictions did not include Guernsey[4].  This process identified concerns relating to legal substance requirements, which Guernsey committed to implement by the end of 2018.  It is already engaging with the EU Commission to develop proposals for a substance requirement that demonstrates that profits in Guernsey are commensurate with the economic activity in the jurisdiction[5].
• The island’s tax policy is designed to prevent double taxation.  Guernsey is not used for profit shifting and transfer pricing to the extent experienced by other jurisdictions, such as Ireland and Luxembourg.  Nevertheless, Guernsey plays a full and active role in implementing global standards (Guernsey is a member of the Organisation for Economic Co-operation and Development (‘OECD’) Base Erosion and Profit Shifting (‘BEPS’) Inclusive Framework). This helps to ensure that profits are taxed where the economic activity that generates them is carried out and where the value is created.

3.4.       The tax policies of Guernsey are underpinned by strong GAAR (since the 1970s).  Tax crime is a predicate offence for anti-money laundering (including tax-related fraud) purposes and has been for nearly twenty years. In addition, there are no allowances or exemptions of the sort found in many other countries; which have the effect of producing effective rates of corporate tax much lower than the headline rate there.  This provides for simple tax structures.  Guernsey has little need of ‘tax rulings’ of the kind found in other jurisdictions[6].

4. Tax co-operation with the UK

4.1.       Guernsey has a long history of tax co-operation[7].  For many years, Guernsey has been able to provide tax information to the UK tax authorities, and has done so spontaneously and whenever requested to assist investigations by HMRC and, since the mid 2000s, on an automatic basis[8].

Notably:

• In the 1920s legislative controls were first introduced regarding the process of formation of companies to ensure their object and purpose was not for unlawful purposes, including tax evasion[9].
• Guernsey’s double tax agreement (‘DTA’) with the UK was signed in 1952.   This was updated in 1994, 2009, 2015 and 2016.  A fully renegotiated DTA, incorporating BEPS minimum standards, is to be signed shortly following recent negotiations[10].
• In 2002, Guernsey publicly announced its commitment to participate in the OECD’s initiative on transparency and exchange of information and is a Member of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes[11],[12].
• In 2004, Guernsey voluntarily adopted measures equivalent to the EU Savings Directive (‘EUSD’), and moved to full automatic exchange of information by 2011 (before several EU Member States).  This was repealed in 2016 following the global standard of automatic exchange developed by the OECD, known as the Common Reporting Standard (‘CRS’)[13].
• In 2009, Guernsey signed a Tax Information Exchange Agreement (‘TIEA’) with the UK, which entered into force the same year, allowing for the exchange of information on request.[14]
• In 2013, Guernsey entered into an Intergovernmental Agreement (‘IGA’) with the UK, which came into force in 2014[15],[16].  This allowed for greater levels of automatic exchange of information than under the EUSD.  The UK IGA has since been superseded by the CRS[17].
• In 2013, Guernsey requested the UK to extend its ratification of the OECD Convention on Mutual Administrative Assistance in Tax Matters (‘MAC’)[18] to Guernsey, coming into effect in 2014[19].
• In 2013, Guernsey issued a statement committing to the early adoption of the CRS.  The CRS set a new standard of automatic exchange of financial account information in tax matters at a global level.  The CRS, therefore, replaced the earlier framework of automatic exchange agreements that Guernsey had with the UK.  The first exchange of information under the CRS was in 2017[20].
• Guernsey is an active participant in the BEPS Inclusive Framework.  Guernsey is committed to implement the BEPS minimum standards and has introduced the OECD standard for country-by-country reporting (‘CbCR’) by large multinational corporations (BEPS Action 13[21]) into domestic law; is exchanging tax rulings, and was in the first wave of signatories of the BEPS Multilateral Instrument in June 2017[22].
• Guernsey has been exchanging beneficial ownership information with the UK authorities for a number of years[23] and in 2017 took a further step by establishing a central register of beneficial ownership information to exchange information with UK authorities, including HMRC, to a new agreed standard.

4.2.       Information and co-operation from Guernsey enables HMRC to act more effectively to tackle tax fraud in the UK. 

4.3.       In 2011, HMRC categorised and graded other jurisdictions for the purposes of applying ‘offshore penalties’. Guernsey has always been classified as ‘Category 1’ meaning that domestic penalty levels would be applied by HMRC in any cases of non-compliance with a person’s tax obligations.  This distinction was made on the basis of the automatic exchange of tax information relationship with the UK.  Cases of
non-compliance involving jurisdictions in categories 2 and 3 would involve higher levels of penalties as deterrents.  This provides evidence of the constructive relationship between Guernsey and HMRC.

4.4.       Guernsey’s law enforcement agencies (including Police and Customs) have very close links with HMRC.  The training of Guernsey Law Enforcement staff is delivered by HMRC and the City of London Financial Crime Academy and most procedures and standards used in Guernsey are equivalent to those used by HMRC.  Guernsey tax officials have also undertaken HMRC training, from time to time, over many years.

4.5.       The Guernsey financial intelligence unit, known as the Financial Intelligence Service[24], has a memorandum of understanding with HMRC covering the timely and effective exchange of financial intelligence between the jurisdictions. 

4.6.       There is a long-standing co-operative relationship between Guernsey and HMRC (as well as other government departments and agencies, parliamentarians and officials).  The ongoing engagement includes regular and frequent meetings and discussions on all matters of mutual interest, including to manage and mitigate the impact of Brexit. 

4.7.       Guernsey is absolutely committed to continuing its work in partnership with the UK on issues such as tackling individuals and entities who might wish to attempt to engage in tax avoidance or evasion.

5. International standards

5.1.       It is established government policy that Guernsey adheres to international standards as they emerge and evolve.  This is reflected in the current government business plan[25].

5.2.       Guernsey’s reputation as a premier provider of international financial services has been built on a number of foundations, including: an effective regulatory regime that meets or exceeds all international standards on financial regulation, anti-money laundering and combatting the financing of terrorism; international co-operation on regulation and the investigation of financial crime; regular, external and independent reviews – in the majority of cases at Guernsey’s express invitation and in all cases with Guernsey’s full co-operation and assistance.

5.3.       The Guernsey Financial Services Commission (‘the Commission’), established in 1987, was one of the world’s first unitary regulatory bodies.  It has wide-ranging powers to supervise and investigate regulated entities under a variety of regulatory laws.  It also takes appropriate enforcement action when necessary.  The Commission is actively involved with international regulatory and supervisory organisations. 

5.4.       The Commission has the legal authority to disclose information to other supervisory authorities and to other authorities for the purposes of preventing, detecting, investigating and prosecuting financial crime.  The Commission shares information with supervisory authorities and other bodies spontaneously as well as on request.  It has 13 Memoranda of Understanding (MoUs) with international partners[26].

5.5.       The authorities in Guernsey have substantial and specialist investigative powers, including in financial services.  They work closely with counterparts in other jurisdictions (and in particular those in the UK such as HMRC and the National Crime Agency) in investigating regulatory, taxation and criminal matters.

5.6.       Tax evasion has long been criminalised and subject to substantial penalties under Guernsey law.

5.7.       Guernsey’s standards and record on its role in the international financial system and regulatory standards are exemplary. The standards of tax transparency are
peer-reviewed with the OECD Global Forum[27] and found to meet the required international standards[28]. Guernsey has been assessed as being amongst the best quality financial centres in the world when measured against the 2003 international standards for tackling money laundering and terrorist financing set by the Financial Action Task Force (FATF).  Guernsey was last reviewed by MONEYVAL in 2016[29],[30]. 

6. Sharing beneficial ownership information

6.1.       Since 2001, Guernsey has regulated its trust and company service providers (‘TCSPs’).  Consequently, TCSPs are required to verify and collate beneficial ownership information.  Guernsey has repeatedly offered to share the benefit of this experience with the UK and remains willing to do so.

6.2.       Guernsey has a leading position on the retention and sharing of beneficial ownership information with law enforcement agencies, including HMRC.  Guernsey’s policy position is to maintain a register of beneficial ownership that is transparent – but that respects privacy – and this position has the support of the UK Government. 

6.3.       The government of Guernsey shares the same goal as the UK in seeking
outcome-based, rather than rules-based, regulation.  Guernsey ensures, and always has ensured, that full and accurate information is shared promptly with authorities that have a legitimate need to know. The information held on Guernsey’s beneficial ownership register is up-to-date and accurate and populated with verified[31], rather than self-declared, data (unlike that of the UK).  Guernsey’s central register was established in the summer of 2017, but was a step that built on our own long-standing good practice in ensuring that beneficial ownership information is established, verified and shared with law enforcement and tax authorities. This is about full and accurate information being shared promptly with authorities that have a legitimate need to know. 

6.4.       In 2016, Guernsey signed an exchange of notes with the UK on sharing information with UK law enforcement agencies, so that they can investigate and fight financial crime effectively.  In a Written Ministerial Statement (1st May 2018[32]), the Home Office recognised the effectiveness of Guernsey’s beneficial ownership register – and the effectiveness of the arrangements to share this information with UK law enforcement agencies.  This was a result of the first review of the functioning of the Exchange of Notes on beneficial ownership and will be followed by annual reviews.

6.5.       Guernsey will move to a public register of beneficial ownership if that becomes an international standard; there must be a level playing field[33].  This policy position has the support of the UK Government[34].  The government of Guernsey supports the development of information exchange principles in respect of beneficial ownership and in 2016 offered to support the development of a system of automatic exchange of beneficial ownership information initiated by the G5 countries[35].

7. HMRC disclosure facility – the gap between perception and reality

7.1.       As part of a package of agreements (including the IGA between the UK and Guernsey), a disclosure facility (the ‘GDF’) was established in 2013 to allow people to regularise their tax affairs with HMRC.  The government of Guernsey required financial intermediaries to contact their clients proactively to make them aware of the GDF.  Similar packages (a series of intergovernmental agreements for the automatic exchange of tax information and disclosure facilities) were agreed at the same time between the UK and the other Crown Dependencies.  The UK Government estimated those agreements would raise a total of £1,050m between 2013 and 2018[36].   Guernsey made it clear at that time that these estimates, so far as they pertained to Guernsey, were not realistic.

7.2.       The schemes were closed a year early (on 31 December 2015) following a lower-than-expected yield.  In November 2015, the Office of Budget Responsibility (OBR) revised the UK Government’s forecast by 20%, from £1,050 to £800m[37].  By March 2016, the OBR had further reduced this by a further £530m (to £270m) – a quarter of the initial estimate.  The GDF only yielded £700,000 from 25 settled cases connected to Guernsey[38].  Whilst this significantly lower-than-expected yield is due to a number of factors, one of them is the significant gap between the perceived and actual number and quantum of the instances of tax avoidance and evasion using Guernsey.

8. Conclusions

8.1.       Guernsey has volunteered this evidence to help the Treasury Sub-Committee to fulfil its role in examining the expenditure, administration and policies of HMRC and to answer the questions that the Sub-Committee has posed for this Inquiry.

8.2.       Guernsey helps to minimise the avoidance or evasion of tax by individuals or entities and will continue its work in that regard.  

8.3.       Guernsey is a well-regulated, transparent and co-operative jurisdiction committed to maintaining and promoting international financial stability and to combatting and preventing financial crime.

8.4.       Guernsey’s centuries-old constitutional relationship with the Crown is vitally important.  Guernsey has competence over its domestic affairs, including tax matters. 

8.5.       Guernsey has effective and willing co-operation with UK (law enforcement) authorities, including HMRC, to fight financial crime.  Guernsey is recognised as a reliable, active and co-operative partner of the UK in this regard.

Policy & Resources Committee

States of Guernsey

May 2018

Annex 1: Background on Guernsey

The Government of Guernsey

Guernsey has its own elected legislature called the States of Deliberation (‘the States’).  The administration of public affairs is undertaken by committees of the States including a senior committee (Policy & Resources Committee) and six Principal Committees.  Those committees are each led by a minister[39] with four other elected members of the States.  Guernsey raises its own taxes and pays for its own public services.

Guernsey’s constitutional relationship with the UK

Guernsey is part of the Bailiwick of Guernsey[40] and is one of the Channel Islands.  It is not part of the UK.  Guernsey, Alderney and Sark are self-governing dependencies of the Crown, with their own directly-elected legislative assemblies, their own administrative, fiscal and legal systems, and their own courts of law.  As a Crown Dependency, Guernsey has a unique relationship with the UK and the rest of the British Commonwealth through the Crown, in the person of the Sovereign.

Although Guernsey is not an independent state in international law, it has competence over its domestic affairs.   The States of Guernsey is, and always has been, distinct from the UK with the full capacity to legislate for the Island’s insular affairs.  Guernsey is not, and has never been, represented in the UK parliament – nor does it seek such direct representation.   It is a long standing constitutional principle that Westminster does not legislate for us without our consent on purely domestic matters.  The Lord Chancellor and Secretary of State for Justice is the Privy Counsellor with special responsibility for managing the relationship with the Crown Dependencies.

The UK is responsible for Guernsey’s international relations and for its defence.  In 2008, the UK formally recognised the appropriateness of Guernsey having greater independence with respect to international relations[41], particularly where those affairs relate to matters within the domestic competence of the States.  For instance, Guernsey has entered into a number of tax co-operation and information exchange agreements, and double taxation agreements, with other sovereign States in its own right.

Guernsey is economically self-sufficient.  It does not receive any tax revenues from the UK. It has a population of c.63,000 people with a highly skilled workforce and provides
high-quality public services from its tax revenues.  The majority of the tax revenue comes from the income tax of individuals resident in Guernsey.

Guernsey’s relationship with the EU

Guernsey is not part of the EU.  There is a formal relationship between the Channel Islands and the EU which is governed by Protocol 3 to the UK’s Act of Accession to the European Economic Community in 1972 (“Protocol 3”).  This relationship, amongst other things, allows for the trade in goods and placed Guernsey in the EU Customs Union.   When the UK leaves the EU this Protocol 3 relationship will end.