The law the legislators like to ignore.

Next week the States are to debate a proposition which has the potential to be up there in the top five worst pieces of legislation the States have adopted see:  Draft Taxation (Companies - Economic Substance). Like one of other pieces in my top 5 - the introduction of 0/10 - it is a response to 'defend ' the finance industry from external  actors.   As the Intro puts it the law provides the means by which commitments of the States of Jersey to address the concerns of the EU Code of Conduct Group (Business taxation) ("COCG") regarding economic substance are met.



I've no problem with them addressing that.  But it is the impact on quite legitimate business that really concerns me.  Like the 0/10  it the law of unintended consequences that the legislators are ignoring. I became aware of it when a few weeks ago an acquaintance who runs a perfectly legitimate non finance business told me he was preparing to wind up his company if this proposition were passsed as it stands.  (There are no amendments and no alternatives on the table as yet so it is all or nothing).


But it is worse than  that because it seems to be  built upon a fundamentally flawed concept too.


The intention , again quoting the  report of the proposition is to  deal with " The jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction".  It should be obvious  there are three elements involved here - attracting profits, offshore structures and arrangements, and real economic activity in the jurisdiction.  The proposition only addresses the last item.  Profits are only mentioned twice - in the report, not the body of the proposed law. Offshore is similarly only mentioned once  - in the quote I gave above. 


As I read it, and I am certainly not alone in this, the proposed law applies to all Jersey companies, not just those that need to be addressed in the COCG objective.  Most established companies won't actually have any difficulty in passing the economic substance test, but some most definitely will.  There is a list in section 3 that identifies the relevant activites.  they include most finance activities of course, but also intellectual property holding business.  That's where my acquaintance is  caught.  It would equally cover software developers, playwrights, artists, authors, plant breedrs who retain breeders rights, patent holders etc etc.

There is  a sort of get out clause in the introduction.

A "high risk IP company” is a company which carries on an intellectual property holding business and –(a) the company
– (i) did not create the intellectual property in an intellectual property asset which it holds for the purposes of its business,
(ii) acquiredcthe intellectual property asset–(A) from a connected person, or
(B)in considerationfor funding research and development by another person situated in a country or territory other than Jersey; and
(iii) licences the intellectual property asset to one or more connected persons or otherwise generates income from the asset in consequence of activities (such as facilitating sale agreements) performed by foreign connected persons; or
(b) the company does not carry out research and development, branding or distribution as part of its Jersey core-income generating activities;




The part I would draw your attention to is the first bit of paragraph 5 . 

5 Requirement to meet economic substance test

(1)

Subject to paragraph(8), a resident company must satisfy the economic substance test in relation to any relevant activity carried on by it.

(2)

A resident company meets the economic substance test in relation to a

relevant activity if –

(a)

the company is directed and managed in Jersey in relation to that activity;

(b)

having regard to the level of relevant activity carried on in Jersey

–(i) there are an adequate number of employees in relation to that activity who are physically present in Jersey (whether or not employed by the resident company or by another entity and whether on temporary or long – term contracts),

(ii)

there is adequate expenditure incurred in Jersey, and

(iii)

there are adequate physical assets in Jersey;

(c)

the company conducts Jersey core-income generating activity; and

(d)

in the case of Jersey core-income generating activity carried out for

the relevant company by another entity, it is able to monitor and

control the carrying out of that activity by the other entity.

Anyone who has ever run a start up business, especially in software development or research will be laughing their heads off. Such entities start in one of two ways - the owners working  unpaid hours to develop product, or they get a large dollop of investment  cash  . 90% of the time it is the former.  And if you are developing software you are like playwrights and authors and artists producing intellectual property - something that is licensed rather than sold.  It is a shoe string operation usually there are no employees (directors are office holders that are not necessarily employees - if they are unpaid they cannot be!).   There' s no income initially in development, and of course much of what you need to buy , if anything, is likely to be software tools  not available locally.  Assets are minimal , possibly don't even belong to the business, but are the personal proporty of the owners.  Not much chance of meeting the economic substance test. 


Now if I can go back to the key error.  It arises in  the item quoted above 
i) did not create the intellectual property in an intellectual property asset which it holds for the purposes of its business.   That is always true!  For much the same reason companies cannot go to prison - they are legal structures.  A structure cannot create intellectual property.  You need a sentient being for that - almost always a human, put I guess art created by elephants or dogs might qualify.  It is the reason anyone who works in research or software development will always find their employment conditions  stipulate they assign their employer all rights to intellectual property created. It is troubling that the law seem to be so  ignirant of the realities of  the creation of intellectual property.


The penalties for falling foul of this all encompassing law are steep if you are a minnow start up, potentially £100,000 pounds.  Peanuts to the biggest players who may  make  huge gains from doing exactly what the COCG want to stop, but disasterous for small legitimate businesses.  There is a form of appeal set out in articles 12/13.  First to the Comptroller (the one who raises the penalties and presumably whose department benefits from the fines !) .  After that to a Commission.

4)A Commission of Appeal shall be constituted for the purpose of hearing an appeal under Article12 as it would be constituted  from the Commissioners of Appeal appointed under Article 10(1) of the 1961 Law for the purpose of hearing appeals under the 1961 Law.

That's all well and good, but what is this Law - it isn't named or titled. I am guessing it is the 1961 Income Tax (Jersey) Law.  That Law doesn't give commissioners  powers over fines, only assessments of income tax. Just because it happens to be administered by the same office doesn't give rise to addiitonal powers.  And I doubt thos commssioners are any better qualified than the Comptroller to know what is an appropriate number of employees for an IP busienss, or indeed the necessary local expenditure to be of economic substance.


Hopefully you will have already identified the other open goal in this whole charade.  This proposed law explicitly and only refers to companies.  There is no provision for sole traders, partnerships, trusts or foundations that undertake the exact same activities.  It is quite implausible that the legal advisors to the States (the AG or SG) did not see this.  Of course those other mechanisms are excellent business for some  parts of Jersey' legal fraternity.  What a strange and quite unfathomable coincidence !!

Is the CoI a bigger issue than you imagined?

It seems we are finally to have a debate in the States on setting up a Committee of Inquiry into child abuse in the Island. It is on the order paper for the sitting on 5th March, see http://www.statesassembly.gov.je/AssemblyOrderPapers/2013/2013.03.05%20Order%20Paper.pdf . For reference, the original move to request a Inquiry was in 2011 (see http://www.statesassembly.gov.je/AssemblyPropositions/2011/45258-28763-222011.pdf.  For a detailed run down of why it has taken so long to come about you could take a look at Bob Hill's blog at http://bobhilljersey.blogspot.com/2013/03/jerseys-historical-abuse-inquiry-no.html

There are of course numerous stakeholders in this process.  The victims and survivors, particularly those whose cases were not prosecuted, who deserve and indeed may need a chance to voice publically what happened to them.  There are former staff.  There are the agencies who should have realised something was amiss and either did  not identify an issue, or identified it but ignored or possibly colluded with it.  There are the past politicians and the senior civil servants in the States who could and should have identified and acted on problems. And of course there are the actual perpetrators of abuse and their colluders.

Missing from that list is the Law Officers. Yet I think they have a huge amount at stake in the CoI. In fact I would go as far as to say this CoI has the potential to be as constitutionally significant to us as the reforms of 1948.  I think this explains is why certain statements and comments have been issued to try to shape the debate and the approach of the CoI even in advance of it being sanctioned by the States.

Perhaps the best place to start is what  an inquiry is and is not. Canada makes a lot of use of Public Enquiries similar to our Committee of Inquiry.  There is a good piece discussing a number of important topics such as whether judges should chair at
http://www.ontariocourts.ca/coa/en/ps/speeches/publicinquiries.htm.  The item I would like to take up is the purpose of the inquiry ' Broadly speaking, there are two types of independent inquiries: those that have a mandate to find and report on facts, and those with a mandate to make recommendations for the development of public policy.'  Our CoI has nothing to do with policy formation - it is about finding and reporting the facts. 

Regulation 6 of the CoI regulations http://www.statesassembly.gov.je/AssemblyPropositions/2007/7471-48374-562007.pdf  is clear. "Because a committee of inquiry can be seen as a quasi- judicial process witnesses can, if the committee wishes, be examined on oath. " The key phrase is 'can be seen as quasi-judicial'.  Quasi means resembling or being akin to, but not actually being.  Can be seen as means it is one possible view.  To put it in other words it is NOT a judicial process.   Indeed point 10 of the AGs comments says 'At the conclusion of its deliberations, a Committee of Inquiry reports back to the States Assembly. It does not, however, make any finding of guilt or innocence in a criminal sense nor does it determine a legal right.'


Last month Tony Musing blog made some important observations on the comments from the Attorney General at http://tonymusings.blogspot.com/2013/02/prejudging-issues.html.  However I think it is worth re-reading the AG's comments (http://www.statesassembly.gov.je/AssemblyPropositions/2012/P.118-2012%20Com.pdf) bearing in mind the points above. This leads to some further questions.   Why in item 14 does the AG refer to people accused by complainants?  There can be no such thing in a fact finding non-judicial process.  There are only witnesses and evidence.

In item 23 we read  'There is a fundamental principle that the prosecution process should be free from any political influence or interference in any way'.  The quid pro quo of that is the prosecution service should not act politically or influence political process. A point missing from the AG's comment. Why?  In fact the whole of section D section could be read so an attempt to head off questioning of prosecution decisions and processes.  However as an independent CoI is neither a political body nor a judicial one, it is perfectly free to question and inquire into the prosecution process without breach of the fundamental principle outlined above.

If the AG succeeds in his presentation of this CoI as a judicial process with accusers and defendants and the use of lawyers to represent the opposing sides, then he wins a much larger point.  He will in effect have established  that the Law Officers are unchallengeable by any format or any body in the Island.  Much as he might tout the fundamental principle of individual prosecutions and processes being free of politics, that situation would violate an even more important and precious principle that none, not even Law Officers, is above the law or public scrutiny.  We have come perilously close to that state.  It is that sort of thinking that got us in a position that a magistrate cannot be relieved of pay and office when found guilty of a crime.

It is imperative that all States members understand the hugely important and significant repercussions of the amendments and the comments of the AG when voting on this proposition and amendments. This is a turf war that the people , transparency, accountability and democracy cannot afford to lose.