In 2023 the States of Guernsey and Jersey agreed to voluntarily sign up to the Organisation for Economic Co-operation and Development (OECD) Pillar Two global minimum tax framework.
The OECD Pillar Two framework is a global initiative that seeks to implement an ultimate tax rate for multinational groups, removing the ability for organisations to ‘shop around’ for preferential rates.
Through a series of tax rules the OECD framework will implement a global minimum tax rate of 15%.
Pillar 2 includes an option for jurisdictions to introduce a tax top up, so organisations based there can meet the minimum 15%. This is the route Guernsey and Jersey have chosen, which retains the ‘0/10’ system while also bringing relevant multinations up to the 15% limit.
The Policy and Resources Committee has now revealed that its nearly ready to publish two policy letters that will edge Guernsey closer to implementing the above tax rate.
The ‘Income Inclusion Rule’ and a ‘Qualified Domestic Minimum Top-Up Tax’ will be presented to the assembly to vote on later this year.
“The Income Inclusion Rule imposes a top-up tax on a parent entity in respect of the low taxed income of a foreign subsidiary. The Qualified Domestic Minimum Top-Up-Tax will bring the effective tax rate to 15% for in-scope entities in Guernsey that are not already charged an effective tax rate of 15% or more,” said P&R in a recent press statement.
Deputy Lyndon Trott, President of P&R, continued:“Guernsey has a well-established and stable corporate income tax system, and longstanding and independently assessed track record of meeting international standards. We are proud of our global leadership in tax cooperation, combatting money laundering and countering the financing of terrorism and proliferation financing, and in providing appropriate and effective transparency.
“Guernsey has consistently championed the need for a level playing field in tax cooperation and we have a long track record of maintaining the highest standards in tax transparency and fairness. In its implementation of the OECD Pillar Two initiative, Guernsey wants to provide certainty and stability for businesses in the island, ensuring Guernsey remains competitive while staying at the forefront of emerging global norms in tax matters.”
This move towards a 15% tax rate could bring millions into the States coffers and is something Deputy Charles Parkinson has been talking about for years.
He previously tried to amend P&R’s tax proposals in October 2023, by pre-emptively introducing a new corporate tax regime.
His amendment to P&R’s tax plan, seconded by Deputy Liam McKenna, would’ve given deputies the option to introduce a new corporate income tax regime on a territorial basis with a general rate of 10% to 15% to raise a minimum of £30m a year.
It was defeated however, with some politicians describing it as “dangerous”, “snake oil” and damaging to business and investment. A similar proposal previously brought by the pair lost 11-28 in an earlier tax debate.
Deputy Parkinson told the States that a territorial tax system is about to come in for some companies regardless of any decisions taken by politicians.
The OECD’s Pillar Two global corporate tax rules, which hundreds of countries have signed up to, will see companies with an annual turnover of at least £750m be taxed 15% or more on profits. That will be introduced in Guernsey from 2025 and is in essence a territorial tax regime, he said at the time.
“Corporate income tax reform is already on the slipway ready to be launched and is going to be launched whatever this assembly decides today,” he said.
“We are going to have one for larger companies”, he said, urging members to be a leader before these changes are inevitably brought in before the end of the decade.
I decided to touch base with Deputy Parkinson following the announcement of P&R’s next steps and the news that two policy letters will be going to the chamber for approval.
“The OECD initiative has 134 countries signed up to it… the reality is that if Guernsey chose not to tax the subsidiaries at a rate of at least 15%,those profits would be taxed somewhere else.The companies are going to be paying the tax, the only question is whether we want them to pay tax here.”
He tells me that Pillar Two will bring “tens of millions” into Guernsey.
“Which is what I’ve been saying for years… under the previous P&R Committee, I was consistently poo pooed. They said their expert advisors told them it will be no more than ten million, and I‘ve been saying that‘s just wrong.
“The Treasury team… now admit that it will bring in at least £30 million. That’s what they’ve said publicly but we know that in fact it’ll be much more than that.
“I’m happy that I’ve been proved right, and that the Treasury team have been proved wrong. But…the admission that they were wrong came out after we had the capital projects debate… we had a whole lengthy and difficult debate over whether the island should undertake the PEH phase two modernisation project, or whether we should do the Transforming Education Programme and all of that debate took place against a fundamentally false background.
“The cost of the PEH phase 2 was understated by £30 million, which we didn’t know at the time,and also[we weren’ttaking into account] the resources available to the States via [Pillar Two].
“This extra £30 – £40 million, or whatever it turns out to be, will happen every year, this isn’t just a one off.”
“With that kind of extra income coming in… we could afford to do much more than what we’ve been told we could afford to do.”
He tells me that the move towards implementing the OECD Pillar Two framework has left him feeling vindicated, but frustrated.
“I think the immediate effect will be that both projects [PEH Phase 2 and TEP] will go ahead, because there’ll be the money in the kitty to do it. But, you know, we wasted a lot of time debating problems that didn’t exist.
He says the policy letters from P&R are just the start, and that implementing these policies won’t be easy.
“It’s not an easy thing to do.There’s a lot of work to get to the point where next year, we can start implementing it.”