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Guernsey has both a significant structural and a cyclical fiscal deficit. As a result of the global economic downturn Guernsey’s structural deficit is set to reach approximately £65 million this year. On top of its structural deficit Guernsey’s Treasury and Resources Department’s consultants estimate that public finances will suffer a cyclical deficit of about £25 million to £30 million per annum over the next few years.
Half of the Guernsey’s Contingency Fund is due to be used to meet revenue spending shortfalls to cover the current 2009 and 2010 period. In addition, significant tax increases are planned to reduce the deficit over the longer term.
Treasury and Resources Minister Charles Parkinson said that with the proposed use of up to half of the Guernsey’s Contingency Fund to meet revenue spending shortfalls is likely to cover just 2009 and 2010, further income-raising measures will be required. His Department is now considering revenue-raising options to collect an extra £52 million a year – which would start within the next 12 months – to allow the States to balance the books year-on-year by 2017.
Various and significant tax increases are being considered in Guernsey. These include revisions to corporate income tax and higher rates of income tax. ‘We do need to take urgent action to reduce the structural deficit. Any delay will impact on the ability of the Contingency Reserve to fund the shortfall – and the risk of Guernsey truly slipping into the red,’ said Charles Parkinson.
Governmental and political system
Guernsey’s parliament is called ‘The States of Deliberation’ and is democratically elected. There are no political parties in Guernsey. The States meet on a monthly basis. They have a special meeting in December to consider the Budget and to debate the annual Policy Planning procedure. The functions of Government are carried out by ten Departments led by a Minister who is elected by the States of Deliberation.
As with other offshore centres Guernsey has been coming under increasing scrutiny from the UK government, the EU and the G20. Guernsey has emphasised, in answer to questions put to it by the UK’s Treasury Select Committee, that it has a regulatory regime that exceeds established standards on regulation and anti-money laundering. It also likes to make the point that the classification of financial centres as offshore and onshore is inappropriate. “This does not fairly distinguish between those jurisdictions which are well regulated and transparent and those which are not," said Chief Minister Lyndon Trott.
Stability and infrastructure
Guernsey is a highly stable domicile with a well developed financial infrastructure. There are several major alternative fund managers, and fund of fund managers, that have chosen to locate their own back office in Guernsey (which distinguishes this domicile from almost all others).
Threats to this domicile
The global economic downturn has played havoc with Guernsey’s finances. It’s structural and cyclical fiscal deficit is surprisingly large but is being tackled. It will, however, lead to further tax increases. There may well need to be a number of these increases and this will likely impact this domicile’s fund industry.
Along with other UK domiciles Guernsey faces the prospect of operating in an environment of increasing hostility to offshore fund jurisdictions. The pressure that has been bought to bear on offshore centres recently from the G20 and the EU threatens to erode its fiscal autonomy. The ‘zero-ten’ corporate tax issue is a recent example of this trend.
On top of which Guernsey has to wait to see how, if at all, the AIFM Directive will affect patterns of offshore alternative fund domiciliation. Guernsey is, in particular, a major centre of private equity fund administration.
On June 11, 2010, FundDomiciles.com hosted a panel discussion which looked at fund servicing domiciliation issues in Guernsey. Here are some of the key points which were discussed.