For the first time we have full visibility on corporate tax reform options - they all fall far short of filling the deficit and come with uncertainty
- Consultation on five different options for corporate tax reform
- Estimated revenues range from losses to raising an extra £18.4m. a year
- Policy & Resources put the structural deficit at £98m. a year
- Work on corporate tax being done at the same time as a GST package
- Final tax decision earmarked for the summer
Five options for corporate tax reform are being consulted on with the most optimistic said to be capable of raising an extra £18.4m. a year, but it also has a downside risk of actually losing £5.1m. should business react badly.
The States is running two parallel workstreams as it attempts to come up with a solution to what Policy & Resources has calculated as a £98m. annual structural deficit - driven by the need to invest in major infrastructure projects at the hospital, schools and ports among others.
Earlier this month proposals were published for how a GST could be introduced alongside a raft of other changes to protect lower income households and raise £50m. a year.
Nick Mann
Now details of how corporate tax could change, an alternative option which many candidates at election time hitched their colours to, have been pushed out to consultation by the sub committee in charge of making recommendations to P&R.
By the summer the States has to decide which package, or combination of options, to go with.
Use our Deficit Calculator to see how the £98m. deficit could be filled and how much money you are left for big infrastructure projects. For a full screen version, click here.
Guernsey's current corporate tax regime is already split into bands, with companies either being taxed on their profits at 0%, 10%, 15% or 20%.
Corporate tax options
Option One: Full Profits
This option proposes that companies already subject to the 10% intermediate rate (such as banks or fiduciary firms) would pay that rate on all their profits, rather than just the income derived from specifically regulated activities.
• Objective: To simplify administration and align with the approach taken in Jersey.
• Revenue Potential: This is the smallest revenue raiser, estimated to generate less than £0.5 million annually due to its narrow application. It could lead to a loss of the same amount.
• Risks: It could lead to businesses restructuring to split their regulated and non-regulated activities to avoid the tax.
Option Two: Sector Extension
This would expand the current 10% and 20% tax bands to include additional sectors of the domestic economy that are currently subject to the 0% standard rate.
• Target Sectors: The primary targets are Construction, Retail, and Professional Services (such as lawyers and accountants).
• Objective: To ensure consistency within economic sectors where profits are derived from similar activities or are subject to regulatory oversight.
• Revenue Potential: Estimated to raise between £0.8 million and £16.3 million, depending on the rates applied and the degree of behavioral change.
Option Three: Zero-15
Under this model, Guernsey would replace the current "Zero-10" regime with a "Zero-15" regime. Companies currently paying 10% would see their rate increase to 15%, while the 0% and 20% bands would remain unchanged.
• Objective: This could be implemented unilaterally or in alignment with other Crown Dependencies.
• Interaction with Pillar 2: The consultation notes that revenue potential is limited (likely less than £3 million) because many large companies in the 10% band are already subject to the 15% Pillar 2 minimum tax. At worse it would lead to a £1.7m. loss.
• Risks: If Guernsey acts as a "first mover" without other Crown Dependencies, it faces a significant risk of companies migrating their business elsewhere.
Option Four: Territorial Tax
This represents a major shift where corporate profits are taxed based on the source of the income. Only profits derived from activity within Guernsey would be subject to tax, while foreign-derived income would be exempt.
• Proposed Rates: The consultation analyzes rates of 10% or 15%, excluding fund managers and international insurance companies from this specific change.
• Revenue Potential: This is the highest-yielding corporate tax option, estimated to raise between £3.3 million and £18.4 million if there was minimal behavioural change, by the 15% rate could lead to a £5.1m. loss in a worst case scenario.
• Risks: This option is highly likely to trigger a detailed external review by the EU or OECD, which could lead to a period of economic uncertainty. It would also require complex new measures like a transfer pricing regime.
Option Five: Corporate Levy
Instead of changing tax rates on profits, this option proposes a flat annual fee (a levy) for all registered Guernsey companies.
• Proposed Fees: The levy would be set at either £250 or £500 per year.
• Objective: It would be collected by the Guernsey Registry alongside existing annual validation fees.
• Revenue Potential: Estimated to raise between £5 million and £10 million annually.
• Advantages: It is considered unlikely to trigger an external review from international bodies because it is a fee rather than a traditional taxation measure on profits.
Deputy Charles Parkinson, chair of the Tax Review Sub-committee which is behind the consultation, said its work was progressing well and remains on course to make recommendations to the Policy & Resources Committee before the end of March as planned.
“As part of our business and community engagement, we are running a consultation about corporate tax reform.
“While the majority of the questions in the consultation are necessarily technical in nature and have a distinct business focus, we are keen to hear from all interested parties including members of the community. There is no requirement to answer all questions so a response can be submitted with answers to any of the questions stakeholders want to express a view on.”
Deputy Gavin St. Pier, vice President of the Policy & Resources Committee who has led on the GST package and also sits on the sub committee, said: “Tax reform is a complex subject, especially when reviewing options for corporate tax changes and the potential implications – both in terms of predicted increased revenue versus seeking to understand the reaction and decision-making of business operating in Guernsey.
“It is a delicate balance and before making recommendations to the full Policy & Resources Committee, the Tax Review Sub-committee wants to receive feedback from interested parties on the options that remain on the table at this stage.
“The consultation document published today is part of our collective commitment to carry out our work in an open way, and both keeping the community informed and providing an option for people and organisations to contribute in a meaningful way.”
The consultation asks people whether they think the current corporate tax system, Zero-10 and the newly implemented Pillar 2 rules, represent a fair and proportionate contribution to revenue.
Pillar 2 is a global initiative that establishes a minimum corporate tax rate of 15% for the largest multi-national enterprises.
Guernsey implemented these rules effective 1 January 2025, effectively levying a 15% tax on the Guernsey-based activities of these large groups.
It is forecast to raise £40 million in 2026, which represents approximately 41% of the current structural deficit, but the money will not be seen until 2027 and there is uncertainty about how reliable this revenue stream will be.
For each of the five proposed options, the consultation asks the same seven questions to assess their impact:
- What are the views on the general impacts of the option, including possible risks, issues, and effects on business decisions?
- How much confidence would the option provide for a business to implement its long-term plans?
- To what extent would the option act as an impediment or obstacle to business growth?
- What is the anticipated impact of the option on Guernsey’s international competitive position?
- What are the perceived opportunities or benefits presented by the specific option?
- Would the option cause a business to consider relocating or downsizing its operations in Guernsey?
- Are there specific mitigation strategies that could reduce the risk of businesses downsizing or leaving the island under that option?
The consultation also asks for general views on corporate tax that may not have been asked.
The consultation does not propose changes to the tax treatment of collective investment vehicles, dividends paid to non-residents, loss relief, capital gains, or charities.
It is not within the mandate of the Sub-Committee to consider levels of States spending.
The consultation can be found here and the deadline for submissions is 27 February.
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