OH no – not another crisis! It makes you wonder whether it’s worth being a tax haven.

But hang on … our beloved leaders tell us that we’re not a tax haven, so why all the fuss about the zero-ten tax régime not being acceptable to the EU? Why does it matter if we don’t have to worry about tax?

Perhaps that was our first mistake – thinking that resorting to semantics would protect us. Of course we’re not a tax haven in the traditional sense, but our finance industry relies heavily on providing tax advantages, and to most people that’s what a tax haven is.

It doesn’t matter that just about every other jurisdiction in the world competes on tax and provides various tax benefits to outsiders. Our problem is that we’re in the lucky position of having low taxes to start with, and until our tax rate is the same as everyone else’s we will always be considered a tax haven.

So we might just as well come out and admit it – we’re a tax haven because we compete on tax, but we’re a tax haven that adopts the highest of international standards and we won’t accept money laundering, corruption or tax evasion.

Of course it’s whether we compete fairly or unfairly that’s at the heart of the problem, and that brings us back to the EU.

It was because the EU complained that certain tax dodges provided in Jersey constituted unfair tax competition that we were forced to rewrite our whole tax régime.

We agreed to phase out international business companies and instead we adopted the zero-ten tax strategy. The hope was that we could shift the burden of tax to a certain extent while still retaining tax advantages for those who want to use the Island’s finance sector.

It’s the news that some EU member states are less than impressed with these attempts to get around the EU business code that has caused panic in some quarters.

It’s the kind of occasion when we are all wise after the event. Many now admit that our attempts to appear to comply with the letter of the EU rules while ignoring the sprit of them were doomed to failure.

Indeed, it was only a few months ago that we were all crowing about the fact that the savings tax directive had huge holes in it and so we could carry on as before because trusts and companies were not required to report taxable interest. It was as though we believed that the EU officials involved were so naive that they didn’t realise that the original directive could be so easily avoided. Perhaps it was just a case of making hay while the sun shone. Well, it’s not shining any more.

So what can we learn from this episode? Well I think there are five things. The first is that taxation is still crucial to the future of the finance sector, and it’s pointless denying it. Tax on its own certainly isn’t enough to attract business, but we are not going to get much business if we don’t start by being competitive on tax.

The second lesson to be learned is that the Channel Islands have to work much more closely together in this area. We might know of the significant differences that exist between the islands, but it is doubtful whether even the UK looks upon us as being separate jurisdictions. Certainly many EU members consider us to be the Channel Islands, not Jersey or Guernsey. Perhaps we should acknowledge that truth and behave accordingly.

There is even a strong argument for working together with the Isle of Man, so that outsiders can’t adopt a ‘divide and conquer’ approach.

The third lesson is that we cannot rely on the United Kingdom. They appear to have done what they could to help the islands as far as the EU business code is concerned, but frankly, it isn’t particularly in their own interests, and you can’t get away from the fact that it is the UK Prime Minister who has taken a leading role in the fight against offshore centres.

After all, it was the Prime Minister who emphasised the need to tackle tax avoidance, which is lawful, as well as tax evasion, which is not. From now on it appears that Jersey must comply with new tax standards that insist on obeying the spirit as well as the letter of the law.

The fourth lesson to be learned is that we need to be very much better informed about what is going on in the EU and elsewhere. We do have a couple of officials who work feverishly trying to keep up, but few resources in the States are devoted to this area. After all, in the current economic climate it is unlikely that the States would want to see more pen-pushers, as some people disparagingly call civil servants.

Once again, the answer could be to work much more closely with Guernsey and share resources. For example, it’s nothing short of crazy that at a time of restraint, Guernsey’s Policy Council wants to spend £200,000 on setting up a Brussels office. No doubt Jersey’s Council of Ministers will also eventually agree we need an office in Brussels.

After all ,it’s the only way to really keep up to speed with what’s going on in the EU, much of which affects us greatly. So the islands will eventually have two offices in Brussels, each staffed by highly paid civil servants with a remit to monitor the same things for jurisdictions which, from a constitutional point of view, are identical.

The last lesson is that we shouldn’t rely too much on our ability to meet international standards. Of course it’s crucial to have those standards and work to them, but that’s not enough on its own. We can conclude as many Tax Information Exchange Agreements as we like, and we can receive any number of glowing reports from the International Monetary Fund and other international organisations, yet our business can still be threatened because we do not comply with the spirit of EU rules.

Meeting minimum international standards in terms of money laundering and financial regulation just gets us to the starting blocks. It does not win us the race.
Peter Body is editor of Business Brief magazine