6. Brexit and the Crown Dependencies - Lawrence Haar

BREXIT, THE CROWN DEPENDENCIES AND THEIR
FUTURE IN INTERNATOINAL TAX MANAGEMENT
January 2018
Dr Lawrence Haar

Agenda
1. Background and Facts
2. The Crown Dependencies and the United Kingdom
3. The Relationship with the EU
4. The EU on Tax Harmonisation
5. The Crown Dependencies as Tax Havens
6. The EU on Taxation
7. British Perspective on the Taxation
8. Some Precedents
9. Brexit Scenarios and the Crown Dependencies (CD)

Key Issues: Brexit & the Crown Dependencies
What opportunities and risks does Brexit create for the Crown Dependencies?
From the perspective of the Dependencies what should the UK Government
prioritize in its negotiations with the EU over its terms of exit?
How will the constitutional position of the Crown Dependencies be affected by
the UK’s departure from the EU?
How effectively is the UK Government, and particularly the Ministry of Justice,
engaging with the Crown Dependencies on Brexit?

THE CROWN DEPENDENCIES
AND OVERSEAS TERRITORIES

Background
The Crown Dependencies are not Member or Associate States of the EU but they are part of
the EU’s Customs Union, allowing them to trade goods freely with Member States: this
provision is made under Protocol 3 of the UK’s Act of Accession 1972.
They are not covered by the EU’s other freedoms (services, capital and people). The Islands are
also influenced indirectly by the EU, for example:
• where laws in Crown Dependencies are based on (and intended to track) those in the UK, which in turn derive from EU
legislation;
• where exports to the EU require the Crown Dependencies to maintain equivalent standards to those of the EU; or
• where Crown Dependencies voluntarily adopt EU standards.
The Crown Dependencies’ formal relationship with the EU (including membership of the
Customs Union) will end with Brexit but it could be replaced by extension to them of any new
UK-EU agreement.

The Crown Dependencies
The Crown Dependencies of Jersey, Guernsey, the Isle of Man and Alderney are three island territories off the
coast of Britain are self-governing possessions of The Crown.
They do not form part of either the United Kingdom or the British Overseas Territories.
Internationally, the dependencies are considered "territories for which the United Kingdom is
responsible", rather than sovereign states.
They are not member states of the Commonwealth of Nations, however, they do have relationships with the
Commonwealth, the European Union, and other international organisations and are members of the British–Irish Council.
They are not part of the European Union (EU) although they are within the EU's customs area.
As the Crown dependencies are not sovereign states, the power to pass legislation affecting the islands
ultimately rests with the government of the United Kingdom.

EU licences)
All
All
Border controls
Financial
services
Retention of the Common Travel Area (CTA), allowing travel between the UK, the Crown Dependencies
and Ireland with minimal border controls
Protection from blacklisting by the EU, where some Member
States have shown hostility to the Crown Dependencies,
when the UK exits the EU. Financial Services is key to their
central economic sector
Jersey and Guernsey Fisheries Clarity on the future of territorial waters (and protection thereof), which involves France
All
Fisheries
Clarity on the future of the UK’s fisheries management, possibly absent EU quotas, and any implications
for the Crown Dependencies
Minimal barriers to exports to the EU (the major buyer for most of the Islands’ fisheries produce)
All Immigration Continued ability to fill demographic and skills gaps
Guernsey and the Isle of Man Manufacturing Minimal barriers to exports to the EU
Guernsey (Alderney) and the
Isle of Man
All
Online gambling
Relationship with the UK
Protection from any hostile action by the EU to this growing economic sector when the UK is not in the EU
Preserving existing constitutional, trading and other relationships (including on customs and excise) with
the UK
Jersey and Guernsey
Relationship with the UK
Ending treatment of Island residents as non-UK, non-EU or non-EEA for the purposes of some UK services
(including healthcare and higher education)

UK Commitment to the Dependencies
The UK Government is responsible for the Crown Dependencies’
international relations.
In 2007-08, it agreed with Jersey, Guernsey, and the Isle of Man a framework for developing
that territory’s international identity, which explicitly recognized that interests might not
coincide. This codification of the constitutional relationship included commitments that:
• The UK will not act internationally on behalf of a Crown Dependency without prior
consultation.
• The UK recognizes that the interests of a Crown Dependency may differ from those of the UK,
and the UK will seek to represent any differing interests when acting in an international
capacity. (viz. the relationship with the EU under Protocol 3 of Accession.)
• The UK and a Crown Dependency will work together to resolve or clarify any differences
which may arise between their respective interests.

“There is no current suggestion of any divergence between the UK’s and the Crown
Dependencies’ interests in relation to Brexit negotiations. If one were to arise, it may
well be handled satisfactorily in the terms that the Government has laid out to us.
However, the current approach does not guarantee this, and is unclear in ways that
might become unhelpful to the Islands. The UK is likely to follow Brexit with a series of
major trade talks with potential implications for the Crown Dependencies,
demonstrating that their need for effective engagement and representation in
international affairs will continue to be pressing after the UK leaves the EU. We
recommend that, in its response to this report, the Government clarify its position on
representing any of the Crown Dependencies’ interests that differ from the UK’s own in
Brexit negotiations and thereafter.”

The Dependencies and the EU
Certain aspects of membership of the European Union apply to the Crown
dependencies, by association of the United Kingdom's membership. For
example, Article 355 (5)(c) of the Treaty on the Functioning of the European
Union (TFEU) states:
• The Treaty shall apply to the Channel Islands and the Isle of Man only to the extent necessary to
ensure the implementation of the arrangements for those islands set out in the Treaty concerning
the accession of new Member States to the European Economic Community and to the European
Atomic Energy Community signed on 22 January 1972.
By Protocol 3 to the UK's Act of Accession to the Community: There was an Act
to make provision in connection with the enlargement of the European
Communities to include the United Kingdom, together with (for certain
purposes) the Channel Islands, the Isle of Man and Gibraltar. [17 October 1972].

Relationship with the EU (cont.)
Of the Four Freedoms of the EU, the islands take part in that concerning the movement of
goods, but not those concerning the movement of persons, services or capital. The
Channel Islands are outside the VAT area (as they have no VAT), while the Isle of Man is
inside it. Both areas are inside the customs union.
Channel Islanders and Manx people are British citizens and hence European citizens.
However, they are not entitled to take advantage of the freedom of movement of people
or services unless they are directly connected (through birth, descent from a parent or
grandparent, or five years' residence) with the United Kingdom.
The common agricultural policy of the EU does not apply to the Crown dependencies. Their
citizens do not take part in elections to the European Parliament.

The Dependencies and Brexit
With the impending Brexit negotiations, the House of Lords has produced
a report entitled "Brexit: the Crown Dependencies" which states the "UK
Government must continue to fulfil its constitutional obligations to
represent the interests of the Crown Dependencies in international
relations, even where these differ from those of the UK, both during the
Brexit negotiations and beyond." [45] In the Great Repeal Bill white paper
published on 30 March 2017 the UK government states "The Government
is committed to engaging with the Crown Dependencies, Gibraltar and the
other Overseas Territories as we leave the EU."[46]:ch.5

EU Agenda on Tax Harmonisation
Despite a long history of reports and initiatives on the harmonisation of corporate
income taxes within the European Union, the 15 EU countries still operate their own
national corporate income taxes.
However, the increasing integration of economic activity is placing greater pressures
on these corporate income taxes, as the companies whose profits are being taxed
operate increasingly across national borders, both within Europe and beyond.
Tax differentials may also be assuming greater importance in company decisionmaking,
as other differences between countries within the EU diminish through the
adoption of a single currency within the Euro zone.

EU Agenda on Corporate Tax Harmonisation
It is not surprising that proposals for greater co-ordination of corporate
income taxes are back on the international policy agenda, notably through
the development of the EU's Code of Conduct on business taxation.
In fact, for the EU as a whole, revenues from taxes on corporate income
have increased over the last 20 years, both as a share of GDP and as a share
of total tax revenue.
Although there has been a downward trend in corporate tax rates, this has
been accompanied by both a broadening of corporate tax bases and an
improvement in underlying company profitability.

EU on Tax Harmonisation
In economies that are open to trade and capital flows, a principal impact of taxes
on corporate profits is to raise the required rate of return on investment and to
encourage capital to migrate to more lightly taxed locations.
The consequences of lower investment lessנ capital per worker, lower productivity
and hence lower wages mayנ be as harmful for employment as taxes on labour
income directly.
In any case, much of the burden of taxes on corporate income is likely to be
shifted away from the owners of mobile capital and onto relatively immobile
workers, as a result of lower investment.

The EU on Tax Harmonisation
Regardless of the Commission’s view, there is an argument that the continued
existence of separate corporate income taxes within the EU has
disadvantages.
It has been argued that the behaviour of governments competing to attract mobile forms of
investment by offering lower corporate tax rates or special regimes favouring certain business
activities may be undesirable although on the other hand it may encourage countries to have
competitive tax regimes.
It may be the case that investment is more mobile between countries within the EU than between
EU and non-EU countries, leading to a collective but unequal gain from greater co-operation over
corporate taxation within the EU.

The EU on Tax Harmonisation (cont.)
The uneven distribution of the benefits presents a major obstacle to further corporate tax
harmonisation, at least so long as Member States retain a veto over tax matters.
A further concern relates to the behaviour of companies, which can exploit differences between tax rules and tax rates in
different countries to reduce their tax bills. The interactions between imperfectly co-ordinated corporate income taxes
present numerous opportunities for firms to benefit from perfectly legal forms of tax planning.
Simple examples include the manipulation of transfer prices for transactions between affiliated companies, with the
effect of shifting profits from high-tax to low-tax jurisdictions, and intra-group borrowing and lending, with the effect that
interest payments are deducted against corporate tax at a high tax rate in one country and taxed at a lower rate when
received in another country. These opportunities for tax avoidance result in lost revenues for governments and add to the
perception that corporate tax revenues are under threat.

“UK gov’t defends offshore jurisdictions’ zero corporate tax rate in Brussels”
By: Jonathan Boyd | 08 Nov 2016
The UK government on Tuesday was preparing to defend
the corporation tax policies of such jurisdictions such as
Jersey, Guernsey and the Cayman Islands at an Ecofin
meeting in Brussels under EU pressure to label countries
with zero corporation tax rates as “non cooperative” for
purposes of blacklisting.
One of the key measures proposed is a so-called Anti Tax
Avoidance Directive, which would implement six legally
binding anti-abuse measures which, the proposals state,
“all Member States should apply against common forms
of aggressive tax planning.
Putting aside the potential implications of the UK being outside
the EU following Brexit and what this means in terms of antiavoidance
measures that are legally binding on the remaining
EU27, the directive would aim “to create a minimum level of
protection against corporate tax avoidance throughout the EU,
while ensuring a fairer and more stable environment for
businesses”.
France and Germany were reported ahead of the latest
meeting of the Economic and Financial Affairs Council to be
pushing for a definition that would mean ex-EU jurisdictions
adopting a zero corporation tax rate were therefore be in
breach of the screening rules and should be put on an EU
blacklist of countries that are deemed to be “non
cooperative” in providing sufficient levels of financial
transparency intended to combat financial crime.
The official statement from Brussels notes that
“agreement was reached at a meeting of the Economic
and Financial Affairs Council, without discussion,”
suggesting that the UK on this point agrees with other
EU states on the need to push ex-EU jurisdictions into
providing the automated tax information needed to
identify the beneficiaries of any offshore funds.

Unitary Taxation….the Precedent
• High court throws out tax appeal by Barclays.
• By
• James R. Kraus
• Published
• June 21 1994, 1:00am EDT
• The U.S. Supreme Court has ended more than 17 years of litigation by
ruling against Barclays Bank of London in a California tax dispute.
• The court's ruling on Monday, by a 7-2 vote, upheld a California Supreme
Court decision allowing the state to impose a so-called unitary tax on
multinational corporations.
• A unitary tax is based on a company's worldwide operations, according to
a complex formula taking into account global revenues, payroll,
employees, and volume of business within the state.

Wednesday 21 March 2018 12:00pm
EU unveils new tax proposals aimed at tech giants to create
"a level playing field" for all firms
• The European Commission today unveiled proposals for new rules it
said will ensure the fair taxation of tech giants, including a three per
cent tax on certain digital revenues of major firms like Amazon and
Facebook.
• It has drawn up a double-layered plan to reform rules to tax digital
firms where they make sales - regardless of where their physical
presence is.
• So, online firms will ultimately face contributing "at the same level" as
traditional bricks and mortar companies, according to the
Commission. The first part of the proposal states the need for a
major reform of the EU's corporate tax rules for digital business

Tax Avoidance Means Transparency
British Overseas Territories
Caymans, Bermuda and BVI face
new corporate transparency
laws (FT, 2-5-18)
UK approves plans for public registers about company owners in
overseas territories
The government of the
British Virgin Islands
has reacted angrily to
the UK move © AP
“Fewer dark corners for dirty money
to hide. The House of Commons
votes to require transparency in UK
overseas territories.”
3-5-2018 Financial Times

HOSTILE DIVORCE CLEAN BREAK AMIACABLE TRANSITION CHANGE OF HEART
Talks collapse. Britain exits the EU
with minimal transitional
arrangements, losing most if not all
preferential access to the EU single
market. It sets out to become a lowtax,
light-regulation magnet for
global businesses — aggressively
undercutting the EU.
Relations between Britain and the EU are strained but solid enough to
arrange a tariff transition, agree trade terms and ratify the deal in the
European Parliament and 38 national and regional assemblies.
Talks are difficult but amicable; disruption is minimised;
changes are phased. Britain remains part of the EU
single market, but on adjusted terms.
Britain invokes Article 50 of the EU treaties — known
as the “exit clause” but pulls out of the formal process
before it is complete, remaining a full member of the
EU.
Britain rework its rules and tax
system to attract global business
and new lines of business for the
City with reverting to minimal World
Trade Organisation trading terms as
“a perfectly sound bottom line for
the UK in the negotiations”.
British financial services would lose their EU “passport” to sell products
and raise funds throughout the single market and have only limited access
in specific areas. Rather than full single market access, Mr. Davis has
stressed the need to keep “tariff free” trade, something he believes the
EU will offer. “They depend as much on us, more on us actually, than we
do on them,” he said. Political goodwill on both sides would be required to
see through a multiyear wait for ratification, and near continuous further
negotiations to cope with changes in UK or EU market rules.
Brexit Britain is satisfied with more control over some
policy areas, such as agriculture. Crucially, the EU
allows an “emergency brake” that could restrict the
inflow of EU migrant workers in overloaded job sectors.
In return, the UK forgoes almost all its influence on EU
rules that it must follow. The financial services passport
remains, but its value is eroded over time. Britain still
contributes to the EU budget, but pays slightly less.
This scenario rests on a counter-revolution in British
politics. After talks Mrs. May or a future prime minister
may fail to win voter approval for an exit deal either in
another referendum or in a general election.
Alternatively, EU politics may dramatically change,
making the terms of EU membership, or some form of
“associate membership”, look more appealing to
Britain. Economic hardship in the wake of the Brexit
vote would be an important factor.
EU officials recognise that the threat
of a British light-touch business
haven off the shores of continental
Europe could lead the bloc to make
concessions on trade. But while the
economics may work for the City,
the rest of the country’s economy
could suffer without a substantive
trade deal with the UK’s biggest
market.
This scenario accommodates two political red lines: Britain’s need for
immigration controls and the EU’s allegiance to free movement and the
single market’s founding principles. Economics takes a back-seat to
Politics. Focusing on a trade deal would curb how Britain can sell itself in
the world economy. If the UK shows too much competitive independence
from the EU — either in regulation or tax — it would risk trade access
terms and the ratification of any deal.
Companies would also face years of uncertainty while the politics plays
out. “If it takes a decade or more to sort this out and get clarity on trade,
some businesses will ask some serious questions,” said Adam Marshall of
the British Chambers of Commerce, adding that some would see the
upside of quickly cutting loose and “at least having certainty”. Transition
arrangements are possible. EU officials have looked at a model where the
two sides mutually agree to not raise goods tariffs while a trade deal is
completed. Services would be more vulnerable. The big questions is
whether they win [over] the British people once they think about that and
if it is genuinely in the interests of the UK.”
This is the preferred continuity option for big business
and the City of London. There are two big potential
flaws. The first concerns limitations to free movement.
Britain must win concessions not only from promigration
eastern Europe, but from France and the
Netherlands, which do not want to set a precedent for
anti-EU populists.
The second issue is whether this would be enough for
Britain. Some EU officials think compromise is possible,
but only on carefully limited migration curbs. And the
UK would be a rule-taker on the single market, obliged
to follow EU laws on everything from financial services
to digital policy. Mr Vimont reckons losing the right to
set rules would be an impossible sell for the British
prime minister — control of free movement is
regained.
This is in the hands of the political gods. As one senior
British official said: “If we stay in the EU it will be by
mistake.” Mrs. May has promised that “Brexit means
Brexit” and it would be a brave politician to reverse
course without a fresh voter mandate. But this is a
long, uncharted process. The option to remain in the
EU will probably remain well into late 2018 or 2019,
even after Article 50 is invoked. By that point, Europe
will have been through French, German, Dutch and
Austrian elections that could upend politics on the
continent. Sir Christopher Meyer, a former senior
British diplomat, said: “This is a case where we hang
loose, we trust in God, and we keep our powder dry,
and we don’t take the decision until very near the
moment when we take the decision

SCENARIOS AND THE CROWN DEPENDENCIES
Hostile Divorce
Beneficial for the CD as they are used to attract global
business and finance.
Clean Break
Risk to the CD as putting Politics ahead of Economics means
their interests are not prioritised.
Amicable
Transition
Change of Heart
Status quo ante and the activities of the CD are left
unchanged. Perhaps some agreement with the EU reducing
commitment to tax harmonisation and competition.
GB returns to the fold as redeemed sinners but it requires a
renewed commitment to tax harmonisation. UK commitment
to protect the interests of the CD is weakened, de facto.

Conclusions
‣Apart from the hostile divorce Brexit scenario, some changes to
the tax status of the Dependencies appears inevitable.
‣Although rates of taxation may not be changed, we can expect
full information disclosure of companies registered in the
Dependencies.
‣The adoption of Unitary Taxation based upon apportioned
revenues may undermine attractions of zero taxation locations.