Zero Ten: it is Europe Jersey should worry about

The Jersey Evening Post is carrying a letter From Richard Murphy, director, Tax Research LLP and a senior adviser to TJN. This follows mutterings from the Jersey financial sector that they would like to break away from Britain - a desire that is not supported, it seems, by the island's populace.

Richard's letter refers to an article by the former Bailiff of Jersey, Philip Bailache, in which the latter criticised the UK government for not protecting Jersey's abusive zero-ten policy which puts a ring-fence between resident and non-resident individuals receiving dividends.

Now the Bailiff is a Crown appointment: he has the dual role of head of the judiciary and president of the legislative chamber - a lack of separation of powers that contributes to poor governance on the islands. However, when Bailache was Bailiff he often abused his position (through what he called the bailiff's prerogative) by making political speeches (see here.) When TJN's John Christensen was Economic Adviser to Jersey he used to get complaints from politicians along the lines of 'we've been summonsed to Headmaster's office - he won't allow us to ask a question because the question is not acceptable.' This particularly applied to questions seeking to investigate and challenge the government's policy towards tax haven activity. The Bailiff would block these questions, as a matter of routine.

Anyway, back to Murphy's letter. It is an important one, and we reproduce it in full.

SIR Philip Bailhache (JEP, 14 December) is wrong when he says Jersey’s fight over zero-ten is with the UK. It never has been, and it is not now.

Indeed, until 2009 it is almost certainly true that the UK provided considerable protection for the Crown Dependencies against the impact of the EU Code of Conduct on Business Taxation.

It is well known that Dawn Primarolo MP, who chaired this group for a decade while a UK Treasury Minister from 1997 onwards, took the view Jersey now promotes that personal taxation was outside the scope of the code and as such zero-ten worked despite the continued ring fence created by the enforced distributions of companies being taxable within the personal taxation system even though this was very obviously a blatant ruse designed to undermine the whole purpose of the code.

It was only in 2009 that this position changed in the Treasury, when more enlightened ministers stood back and looked at what they were being asked to support and realised it was akin to blatant and aggressive tax avoidance. They then withdrew their support for the position the Crown Dependencies have maintained. To their credit coalition ministers have supported this view.

Whether or not they did and do, however, is not relevant. It was always going to be the European Commission who reviewed the compliance of the Crown Dependencies with the code and their reviews, undertaken recently and which I have seen, are unambiguous. In terms of overall approach and in respect of three out of the five detailed areas where compliance is required the European Commission has found that the zero-ten systems of each Crown Dependency (including, implicitly, Guernsey) failed to comply with the code of conduct. This was not a UK decision. I stress, the technical analysis was done by EU staff. I have seen their work and the rulings are unambiguous. They have been adopted by EcoFin on behalf of the European Commission as a result.

It is equally unambiguous that the UK must comply with this decision and impose – I stress, impose, even if against the will of the Crown Dependencies – this decision on Jersey, Guernsey and the Isle of Man. But that is not whether or not the Treasury wants to do so; it is because the EU requires the UK to do so because as far as the EU is concerned the Crown Dependencies are, at least for these purposes, part of the UK.

In that case almost all that Sir Philip Bailhache writes is straightforwardly wrong and thoroughly misleading, as is his claim that he is writing in his capacity as a lawyer. I doubt that. I think he is writing as a well-known proponent of Jersey becoming independent from the UK. No doubt in that context he would like a constitutional fight with the UK, but it’s one he can’t win, and nor can Jersey. That is because the costs of independence will be far higher when Jersey’s inability to manage its budget – which has now been ongoing for several years – becomes more starkly apparent as events develop over the next few years and Jersey needs every friend it has got to bail it out.

The reality is then that, as I predicted in 2005, Jersey has created a tax system which was always and very obviously going to fail to meet Europe’s requirements. I knew that at the time because unlike Jersey officials I went to Brussels and bothered to ask them. In which case it is now time for Jersey to stop laying down smoke screens and accept the truth which is that this is the time for it to stop abusing international rules on tax and get on and comply with them.

At the end of that 2006 blog we raised the following challenge:

Here's a challenge to Philip Bailhache: Let's see whether your ideas can survive critical scrutiny from real experts. Provide answers to the above questions and I will have them published in the next issue of Tax Justice Focus, which as it happens will have tax competition as its principle theme and me as its guest editor.

We are still waiting to hear from him - or his successor.