Although tax issues have caused friction between Gibraltar and other EU members, the country has managed to introduce changes that enable it to maintain its competitive low taxation environment
Gibraltar has been in constant dispute with Spain and the UK over the issue of sovereignty. The territory is the responsibility of the UK under the Treaty of Rome, but the country acts independently.
The UK thinks Gibraltar is damaging its capabilities to grow within the EU if Spain does not share sovereignty. Gibraltar has a different view. It has always claimed its independence from Spain and its people have shown support for this in a recent referendum.
The feud between Spain and Gibraltar goes back 300 years. Spain ceded Gibraltar to Britain under the Treaty of Utrecht in 1713. Spain argues that a clause in the Treaty of Utrecht denies Gibraltarians the right to determine their own future, and decolonisation of the country can only be brought about by negotiations through the UK.
In 1984 the government decided that the only way to make progress to resolve the dispute was to talk to Spain about both the practical issues of concern to Gibraltar and the sovereignty issue that mattered to Spain.
Last year the government decided to re-launch these negotiations as it had reached the conclusion that the status quo was damaging Gibraltar and Britain.
In a speech to the House of Commons in July 2002 Jack Straw, the British foreign secretary, announced that the territory will not thrive while the dispute festers. He said its people have to put up with everyday disruption and isolation from the EU's single market and the marketplace. Added to this it has an uncertain future in the EU as tax havens are phased out.
Straw says the only way of securing for Gibraltar a stable and prosperous future is through a comprehensive and permanent settlement.
In the speech he outlined that the UK and Spain are in broad agreement on many of the principles that should underpin a lasting settlement, which includes the principles that Britain and Spain should share sovereignty over Gibraltar. New opportunities would come to trade freely in the EU, from the investment that would come in if the dispute were settled, and with the prospect of millions of pounds of EU funding to help.
A referendum was put to the people of Gibraltar on 7 November 2002 to see if they wanted to share sovereignty with Spain.
Guy Canessa, financial centre liaison officer at the Government of Gibraltar, says the referendum of 7 November 2002 showed a 99% rejection of any transfer of sovereign to the country.
The last referendum was in 1967 and the same results were obtained. Again there was almost a unanimous rejection of the status quo.
Gibraltar still does trade with Spain. Spain still represents a big potential market for Gibraltar's financial services. The majority of banks have a licence to sell products offshore and would consider Spain to be one of their biggest markets.
The increase in sales to Spain from Gibraltar was initiated in 1985 when the countries reopened their borders to each other. There are no exchange control restrictions and together with exemptions and concessions from domestic taxes for certain categories of companies, this has created substantial growth in the financial services sectors. This is especially true for trusts that can be sold to non-resident individuals who do not work in Gibraltar.
Since June 1997, the Minister of State of the Foreign and Commonwealth Office confirmed the right of Gibraltar insurers to 'passport' their products. Gibraltar's banks were given the right to passport their services throughout the EEA in August 1999.
A large number of expatriates work in Spain and banks and insurance companies sell to these markets. This has helped allow them to grow.
There are still some issues concerning the passporting of cross-border financial products from Gibraltar to Spain. Canessa says Gibraltar has passporting rights in banking and insurance products but an agreement is still yet to be reached in investment products. If new regulation is introduced this will allow investment products to be sold in Spain which will open up further growth for the country.
The passporting of investment products from Gibraltar to Spain is currently being negotiated by the UK government, according to Canessa
Gibraltar still needs to introduce an investment compensation scheme before this happens. This is expected to increase growth in this area for Gibraltar.
A lot of financial services companies see opportunities in the Spanish and other expatriate markets. Not being allowed to passport investment services in these countries has been very restrictive for growth for these companies.
The EU Investment Directive has called for countries in the EU to have in place an appropriate investor compensation scheme.
The directive has not yet been activated in Gibraltar. The UK has announced it will take action against the island if it does not implement an investor compensation scheme to the same level as in Britain. This level is slightly higher than the EU level.
Another issue concerning Gibraltar has been tax. Under the Treaty of Rome there are still issues in regard to tax that have created tensions between the UK and the EU. While Gibraltar has been cooperative on the tax issue, it still wants to do business in a low tax environment. This has caused as source of friction between Gibraltar and other EU members.
There are no direct tax implications for Spain, but other member states such as France and Germany would like harmonisation of tax rules.
But Gibraltar has seen to be generally compliant on the tax front. The Government has just introduced radical tax system reforms that are compliant with the EU directives. This requires that the same tax regime should apply to offshore and onshore companies.
Changes include the abolition of tax on profits for all companies (except financial services providers), the introduction of a payroll tax that will be charged on a fee per employee and the introduction of a business property occupational tax akin to the property rates systems.
Gibraltar has also capped the total liability to the payroll tax and business property occupational tax to a sum equal to 15% of profits. Companies will therefore pay the assessed liability or a sum equal to 15% of profits, whichever is the lower.
The introduction of a small annual companies registration fee of £300 (if the company has income) or £150 (if it does not) inclusive of current annual return fees.
Local companies will be significantly better off under the new tax regime. The changes will reduce the cost of doing business in Gibraltar and hopefully provide a boost to employment as well as bringing many offshore financial service providers into the tax net for the first time.
However, banks and financial services providers currently operating under tax exemption or qualifying status certificates will be worse off.
The new company tax regimes should not transfer any tax burden to individual taxpayers. Current government revenue from company taxation and exempt status fees (about £17m per annum) has to be maintained and therefore has to continue being paid by the corporate sector in some form or other.
Low tax environment in the island has caused friction between Britain and the EU.
Financial market in Spain represents a big growth area for Gibraltar.
British government wants Britain and Spain to share sovereignty over Gibraltar.
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