The implementation of stricter taxation scrutiny globally shows no sign of abating. Nonetheless, Guernsey is well-placed to meet many of these challenges, and indeed thrive in this new world order. Guernsey has repeatedly demonstrated an ability to comply with international obligations and adapt to challenges and changing circumstances and the evolving tax landscape is no exception. But what are the rule changes, and how are they affecting Guernsey?
FATCA (US and UK)
The US through its Foreign Account Tax Compliance Act (FATCA) set the ball in motion. FATCA is a clampdown on US citizens failing to pay income tax, and is widely considered to be the benchmark by which all future tax legislation is measured against. FATCA obliges foreign financial institutions with US accountholders to report details of those accountholders either directly to the Internal Revenue Service (IRS) or indirectly through the jurisdiction's own tax body, who will subsequently pass this data to the IRS. A failure to comply can have punishing consequences. Aside from the reputational risk, the IRS will impose a 30 per cent withholding tax on all US-sourced payments and interest going to any recalcitrant accountholders or financial institution.
In order to make FATCA more amenable to third countries, the US announced the creation of Intergovernmental Agreements (IGAs), which allowed for the US to provide data on third countries' own recalcitrant investors in exchange for their cooperation with FATCA. Guernsey was one of the first offshore jurisdictions to sign an IGA with the US indicating its willingness to conform and comply with global tax initiatives, something the jurisdiction's critics do not give it credit for.
In 2013, the UK introduced its own version of FATCA whereby the Crown Dependencies and Overseas Territories including Guernsey, Jersey, Isle of Man, Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands were required to exchange information on UK accountholders with the Inland Revenue, and vice versa. Guernsey is fully compliant with the UK's information exchange rules. As such, Guernsey is at a competitive advantage in terms of its compliance with international tax regimes putting it in a very strong position to compete against regimes where transparency and adherence to international tax norms is not as rigorous.
Going forward (OECD's CRS and BEPS)
The Organisation for Economic Cooperation (OECD) is pushing through two initiatives which will have a substantial impact on global tax practices – the Common Reporting Standard (CRS), and Base Erosion and Profit Shifting (BEPS). CRS has been dubbed Global FATCA or GATCA, which is indicative of its global reach. The CRS, which has been accepted in principle by more than 50 countries, is an international tax information exchange mechanism between governments. It requires governments to share financial account information such as balances, dividends, interests and sales proceeds. The OECD's stance on information exchange is broadly in line with the US and UK variants of FATCA, which Guernsey is already in compliance with. As such, Guernsey is wellplaced to meet the obligations which CRS will require.
BEPS remains to be a major unknown. BEPS was never intended to target offshore jurisdictions but rather multinational corporations that operated out of low tax jurisdictions with minimal substance in those jurisdictions.
BEPS targets entities including fund managers deliberately shifting profits to low tax countries or utilising double taxation treaties to lower their tax bills. One of the central aspects of BEPS is that it requires financial institutions to have a meaningful presence in their tax jurisdiction. This is a requirement which Guernsey is more than capable of meeting and already is for regulatory substance and central management and control rules. Financial institutions in Guernsey are not letterbox entities, but have a strong relationship and presence in the jurisdiction. Some Fund managers reside on the island, most of their non-executives do and much of the servicing of funds is also carried out on the island. Unlike certain other jurisdictions, Guernsey requires financial institutions to demonstrate substance, and this should enable them to be well placed to satisfy the standards laid down by BEPS.