Companies should not wait until guidance notes over the Economic Substance Law are issued by the States to take action, a top local tax head has warned.
The new law, which means that companies must show they have 'economic substance' if operating in the island, and are therefore not 'shell' companies, will be effective for some businesses from 1 January 2019.
The warning came from Wendy Martin, EY's Partner and Head of Tax in the Channel Islands, at a recent seminar run by her firm.
In it, she told businesses: "It is important not to be complacent, as the consequences of getting this wrong could be costly; both financially and, in the cases of persistent non-compliance, can result in being struck off the register."
“For companies undertaking relevant activities, do not assume that the nature and number of board meetings which have previously taken place and the minutes documented will be sufficient to evidence economic substance under the new requirements. Given that companies will have to make a formal declaration that they comply with the law, each in-scope company will have to go through certain processes to enable it to make that declaration," Mrs Martin continued.
There are three key steps involved in meeting the EU’s economic substance criteria: identifying the relevant activities, imposing substance requirements; and ensuring there are enforcement provisions in place.
The 2018 tax returns will be amended to require businesses to disclose their activity, with alignment to the relevant activities in the law. Mrs Martin further explained that in future more disclosure will be required on tax returns, increasing the risk and burden to companies and businesses should start thinking about how they will deal with this.
“If a company is undertaking relevant activities, then further information will need to be disclosed, which will make the tax returns more complex, placing an increased risk and resource burden on your business," Mrs Martin said.
"To minimise the risk, you will need to ensure your internal processes are robust and adequate training is provided to your staff to ensure the returns are completed correctly. We have already seen a number of businesses outsourcing their returns to minimise the burden on their business."
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