Agreement between United Kingdom and Jersey on International Tax Compliance: Ratification

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A decision made on 1 May 2014:

Decision Reference: MD-C-2014-0090
Decision Summary Title :	Ratification of the Agreement between the Government of the United Kingdom and the Government of Jersey to Improve International Tax Compliance		Date of Decision Summary:	30 April 2014
Decision Summary Author:	External Relations		Decision Summary: Public or Exempt? (State clauses from Code of Practice booklet)	Public
Type of Report: Oral or Written?	Written		Person Giving Oral Report:
Written Report Title :	Ratification of the Agreement between the Government of the United Kingdom and the Government of Jersey to Improve International Tax Compliance		Date of Written Report:	30 April 2014
Written Report Author:	Adviser – International Affairs		Written Report : Public or Exempt? (State clauses from Code of Practice booklet)	Public
Subject: Ratification of the Agreement between the Government of the United Kingdom and the Government of Jersey to Improve International Tax Compliance
Decision(s): The Chief Minister decided to lodge ‘au Greffe’ a Report and Proposition entitled ‘Ratification of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Jersey to Improve International Tax Compliance for States debate at the earliest opportunity.’
Reason(s) for Decision: An Agreement between the Government of the United Kingdom and the Government of Jersey to improve international tax compliance was signed in London by the Chief Minister on the 22nd October 2013. This Agreement is commonly referred to as an intergovernmental agreement or IGA. Also signed by the Chief Minister was an amendment to the 2009 Agreement between the United Kingdom and Jersey for the exchange of information relating to tax matters. This Inter-Governmental Agreement (IGA) is based on the requirements of the US Foreign Account Tax Compliance Act (FATCA) enacted in 2010 whereby foreign financial institutions are required to report financial account information in respect of specified persons. The purpose of these requirements is to reduce tax evasion, which the Jersey authorities are committed to support through their active engagement in a number of current international initiatives
Resource Implications: The resource implications are detailed in the main Report. It is difficult at this stage to quantify the financial or manpower implications. However, given the commitments entered into with the G20 and the international community generally, and the specific commitments to join in the fight against tax evasion to which the IGA relates, it is considered that the financial and manpower costs to be incurred are unavoidable.
Action required: The Greffier of the States to be asked to arrange to lodge ‘au Greffe’ the Report and Proposition for debate at the same time as the Taxation (Implementation) (International Tax Compliance) (United Kingdom) (Jersey) Regulations 201- (MD-C-2014-0091).
Signature:		Position: Chief Minister of Jersey
Date Signed:		Date of Decision (If different from Date Signed):

Agreement between United Kingdom and Jersey on International Tax Compliance: Ratification

RATIFICATION OF THE AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND AND THE GOVERNMENT OF JERSEY TO IMPROVE INTERNATIONAL TAX COMPLIANCE.

PROPOSITION

The States are asked to decide whether they are of opinion-

to ratify the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Jersey to improve international tax compliance, as set out in an appendix to the report of the Chief Minister dated 2nd May 2014; and

to ratify an Agreement between the United Kingdom and Jersey amending the 2009 Agreement between the United Kingdom and Jersey for the exchange of information relating to tax matters, as set out in an appendix to the report of the Chief Minister dated 2nd May2014 .

REPORT

An Agreement between the Government of the United Kingdom and the Government of Jersey to improve international tax compliance, attached as an appendix to this report, was signed in London by the Chief Minister on the 22nd October 2013. This Agreement is commonly referred to as an intergovernmental agreement or IGA.

Also signed by the Chief Minister on the 22nd October 2013 was an amendment to the 2009 Agreement between the United Kingdom and Jersey for the exchange of information relating to tax matters, as set out in an appendix to this report.

The signing was in accordance with the provisions of Article 18(2) of the States of Jersey Law 2005 and paragraph 1.8.5 of the Strategic Plan 2006-2011 adopted by the States on the 28th June 2006. The Council of Ministers has authorised the Chief Minister in concurrence with the Minister for External Relations to sign on behalf of the Government of Jersey, and has further authorized the Chief Minister to delegate the signing to the Treasury and Resources Minister or Assistant Chief Minister as appropriate.

Background

The IGA is based on the requirements of the US Foreign Account Tax Compliance Act (FATCA) enacted in 2010 whereby foreign financial institutions are required to report financial account information in respect of specified persons. The purpose of these requirements is to reduce tax evasion, which the Jersey authorities are committed to support through their active engagement in a number of current international initiatives. The United Kingdom government requested from Jersey, the other Crown Dependencies and the Overseas Territories, the same degree of support in reducing tax evasion by UK residents as is to be extended in respect of US citizens under FATCA through the IGA entered into with the USA

To ensure consistency of approach, lessen the burden on financial institutions and deal with data protection issues the US offered the alternative of financial institutions reporting the required information through their home country tax authority, through an intergovernmental agreement, rather than reporting directly to the US Internal Revenue Service (the IRS). The UK, having themselves entered into such an IGA with the USA and recognizing the advantages in this approach, and with an eye to the future when similar agreements will be entered into with other countries, also offered an intergovernmental agreement to the Crown Dependencies and the Overseas Territories.

The IGA approach is supported by the finance industry. An advantage of the IGA for the financial institutions is that any significant failing on the part of a reporting financial institution will be taken up by the UK tax authority with the Jersey tax authority in the first instance. The IGA also assists in dealing with any legal impediments arising from data protection legislation.

The IGA with the UK also anticipates the implementation of a Common Reporting Standard (CRS) for the automatic exchange of tax information which will have global application. This Standard, prepared by the OECD at the request of the G20, was endorsed by the G20 Finance Ministers at their meeting in Sydney in February 2014. This move to what will be a global level playing field has been welcomed by the Jersey authorities and in March 2014 Jersey joined with over 40 other countries in a statement committing to the early adoption of the CRS . The Standard is based on the US FATCA requirements and matches closely the IGA with the US and that with the UK. The United Kingdom has indicated that when the CRS is brought into effect – currently expected to be by the end of 2015 - it will wish to make the necessary amendments to the IGA so that it is even more closely in accord with the CRS.

The IGA builds on an ongoing relationship between Jersey and the United Kingdom with respect to mutual assistance in tax matters, and a desire to improve international tax compliance by further building on that relationship. Both governments agree that the practical application of the IGA should be monitored so that action can be taken to minimize the burden on financial institutions where this can be achieved without risk to its effectiveness.

Bringing the IGA into effect

For the IGA to be brought into effect there is a need to amend the 2009 Agreement between Jersey and the United Kingdom for the exchange of information relating to tax matters (the TIEA) so that the provisions of that Agreement on procedures and confidentiality can apply equally to the automatic and spontaneous exchange of tax information. The amendment is attached as an appendix to this report.

For the main body of the IGA, and its four annexes, to be brought into effect Regulations will need to be made in pursuance of Article 2 of the Taxation (Implementation) (Jersey) Law 2004. The States will be asked to make the Draft Taxation (Implementation) (International Tax Compliance) (United Kingdom) Regulations 201- following the ratification of the IGA, if this is approved.

Annex 1 sets out for all reporting financial institutions the due diligence obligations for identifying and reporting on reportable accounts.

Annexes II and III make provision for certain entities to be treated as either exempt beneficial owners and/or as other non-reporting financial institutions, as the case may be, and certain exempt products are excluded from the definition of financial accounts. Annex II to the IGA lists the non-reporting UK financial institutions and exempt products and Annex III lists the non-reporting Jersey financial institutions and exempt products.

Annex IV provides for an alternative reporting regime for those resident in the United Kingdom who are non-domiciled for tax purposes. Such persons are not subject to tax in the United Kingdom in respect of foreign source income unless that income is remitted to the United Kingdom. It was feared that if there was not some recognition of the special status of those known as “res non-doms” they would move their financial accounts to other jurisdictions that are not subject to the same requirements. In recognition of this concern the United Kingdom was prepared to offer an alternative reporting regime. Instead of the income and account balance information that is required under the main body of the IGA the alternative reporting regime calls for information on gross payments and movements of assets into and out of the ‘res non-doms’ reportable account.

Throughout the negotiation of the IGA and the alternative reporting regime Jersey authorities have pressed the United Kingdom to include in tax returns to be completed by ‘res non-doms’ a request for the same information as that being required in Annex IV. This would create more of a level playing field in that the “res non-doms” would be under an obligation to provide information that would not discriminate between the jurisdictions in which foreign source income was being held, and would lessen the risk of accounts being moved to jurisdictions with whom the United Kingdom does not have an IGA.

The United Kingdom is of the view that automatic exchange is about providing additional information which allows revenue authorities to risk assess for tax evasion. They are of the view that there is a risk of tax evasion with the “res non-doms” and that for this to be discouraged information is required under the IGA in respect of those in this category. The preferred position of the United Kingdom was to draw no distinction between their residents in the reporting required under the IGA but they were prepared to adopt Annex IV as what they saw as an acceptable compromise between their interests and those of the Crown Dependencies. The United Kingdom government does not agree that assisting in the fight against tax evasion should be conditional on what they include in their tax returns.

The Common Reporting Standard (CRS) which is expected to have global application does not provide for any arrangement for alternative reporting for the “res non-doms” because the latter concept is peculiar to the UK. The UK has stated that, as the CRS is to be adopted globally, the alternative reporting regime for the “res non-doms” should be seen as a transitional arrangement that was put in place to cope with the competitor threats pending the move to the global standard and its global application. All countries that commit to automatic exchange of information through the signing of the OECD Convention on Mutual Administrative Assistance in Tax Matters (Luxembourg, Singapore and Switzerland are among the signatories) will exchange information in accordance with the CRS. By 2017 when jurisdictions will begin to be assessed for compliance with this international standard it is to be expected that the ”res non-doms”will be faced with the same reporting requirements whether an account is held in Jersey or in one of the island’s major competitor jurisdictions.

Prior to the global application of the CRS some new and existing “res non-doms” business could be lost to other jurisdictions, although this is difficult to quantify. At the same time Jersey is fully committed to assisting the United Kingdom in fighting tax evasion and not to provide the United Kingdom with the information they require would be seen as inconsistent with that commitment. In signing an IGA including Annex IV all three Crown Dependencies agreed that a sufficiently mutually acceptable balance had been struck between their interests and those of the United Kingdom.

Procedures

Under the terms of the IGA Jersey Financial Institutions will provide the Comptroller of Taxes with the required information. The Comptroller will forward that information to the Competent Authority in the United Kingdom (HMRC). The Comptroller will not audit the information provided but will check that the returns are complete. It will be the responsibility of the reporting financial institutions to provide the correct information in the correct format. The Comptroller will enforce the obligations placed on the reporting financial institutions in cases of significant non-compliance identified and reported on by HMRC.

The IGA provides for 2014 to be the first reporting year in respect of specified UK persons with a reportable account as from 30th June 2014. For 2014 the information required must be reported to the Comptroller by the 30th June 2016. For 2015 and the years thereafter information must be reported to the Comptroller by the 30th June of the year following the reporting year

The IGA will be supported by Guidance Notes on which the finance industry has been consulted. Not least because there are many financial institutions with offices in each of the Crown Dependencies, it is considered important that as far as possible and subject to differences in domestic law, the Guidance Notes issued by each Crown Dependency should be the same for the same business area, and should be issued at the same time to financial institutions in all three Islands. The Crown Dependencies have worked closely together in the drafting of the Guidance Notes.

Financial and manpower implications

The passing of the required information to the UK tax authority will call for the Taxes Office to put in place the necessary systems to receive the information from the reporting financial institutions and provide for that information’s onward transmission. The Taxes Office will also be in receipt of queries from the UK tax authority about the returns received which the Office will need to take up with the financial institution concerned. In certain respects this will be an extension of the arrangements currently in place for the passing of information to the EU Member States under the Agreements on the Taxation of Savings Income.

It is difficult at this stage to quantify the financial or manpower implications. However, given the commitments entered into with the G20 and the international community generally, and the specific commitments to join in the fight against tax evasion to which the IGA relates, it is considered that the financial and manpower costs to be incurred are unavoidable.

2nd May 2014