Changes to Jersey's tax system will come into force in five years

The island is under pressure to bring certain tax measures in line with the EU rules.

Part of the EU tax package was agreed on Tuesday, allowing Jersey's finance industry to continue managing overseas companies attracted to the island by its tax perks.

But that will change in five years when it is thought a zero corporate tax will be brought in, and Jersey could lose up to �100m a year in taxes when that occurs.

The agreement this week has been hailed as good news for the finance industry.

By 2008 or 2009 we are looking at deficits of up to �100m to be funded Senator Terry le Sueur, Finance president

But Finance president, Senator Terry le Sueur, said when that period ran out, the system would have to change, costing Jersey the equivalent of the health department's whole budget every year.

He said people in Jersey would have to pay more taxes to cover the cost - and borrowing the money was not an attractive option.

"If the island borrows, it has to pay back even if the interest rates are at an all-time low," he said.

"The fact remains it is an interest rate, you have to pay back not just the interest but the capital.

Large deficit

"To carry on borrowing is just to delude yourself that you can live within your means.

"The island may need to borrow a certain extent if there are obvious ways in which we can see the money can be paid back.

"By 2008 or 2009 we are looking at deficits of up to �100m to be funded."

He added: "We have been aware this sort of liability is going to occur and plans are already in hand to deal with this over the next five years.

"But it is important we start making those plans and putting them into effect right away and not waiting until the last minute."

Charge fee

The island's financial authorities still have not decided whether to go for a withholding tax or exchange information.

These refer to savings accounts in Jersey held by EU residents.

Guernsey has already said it prefers the withholding tax, allowing them to charge a fee which would be passed on to European governments.

If Jersey goes for the exchange of information, then the amount of interest earned on EU residents accounts will be passed on to their government's tax departments.