More jobs could be moved to Jersey under new OECD rules

Wednesday 07 October 2015

Jersey’s finance industry could get a major lift from international rules on profit shifting that will force companies to establish more of a presence here to get tax benefits.

Changes to rules designed to stop multi-national companies from shifting profits around to reduce their overall tax burden – after a stream of stories about Starbucks, Google and Amazon paying little corporate tax by manipulating corporate activity – have been put forward by the OECD.

Those new rules are likely to take effect over the next two or three years, according to Justin Woodhouse, Tax Partner at PwC Channel Islands, and could motivate firms to shift more employment and activity to the Island to support their presence here.

He says that the changes are not targeted at the Channel Islands, but are intended to tackle companies that operate in high-tax jurisdictions, but shift their profits to low-tax jurisdictions to reduce their overall bill.

An example of the rules is a change to the way that “mobile income” is taxed. If the rules are approved, it will not be enough to put capital or intellectual property here – the assets will have to be “actively managed” in the Island, and there will have to be “substance” behind companies’ presence in the Island.

Mr Woodhouse said: “There will be a much greater focus on active management, if you are to sustain your right to say “well, the profits belong here”.

“The OECD give examples of things that will not be sufficient – formal approval of decisions made in other locations is not going to be good enough, simple minutes of a board meeting or signing of decisions is not going to be good enough, there has to be other evidence that there has been real consideration of issues and real active management.

“I think that could be quite good for the islands, and is entirely in line with the whole trend that people want to have more substance and governance in the Island so that, actually, is healthy and helpful.”

The various strands of the OECD’s work are likely to come into force by legislation changes, and by a multi-lateral instrument through which up to 70 states could agree a treaty accepting the new rules. But that is likely to take at least two years.

There is work still to do, particularly on treaty abuse, which could have an impact on hedge funds and private equity funds.

But Mr Woodhouse said that the changes were neither “good news” nor “bad news” – just a challenge and opportunity for the islands.

He said: “A lot of consensus has been achieved by the OECD, probably more than we were expecting. A lot of this is going to go ahead, it certainly has the full support of the G20 heads of government and finance ministers.

“I think this does represent change. But I think that the islands are so flexible that they will be able to respond. There are challenges here rather than ‘bad news’. But I believe that a lot of the businesses here will be able to adapt, and the big positive is that it will require more substance here.

“In Jersey and Guernsey we are not tax havens, we are safe havens, we are much more about providing a tax neutral environment for the aggregation of investment. Although having said that, we do risk some of the fallout.”