Adrian Pilcher reports on a jurisdiction whose economy continues to defy the international fluctuations that have de-stabilised so many financial centres recently.
2009 began on a high note for Gibraltar as an international finance centre after the European Court of First Instance (the Court), in a judgment delivered on 18 December 2008, annulled the European Commission’s decision that Gibraltar’s proposed reform to its corporate tax system constituted unlawful state aid.
In August 2002, the United Kingdom (UK) notified the Commission of Gibraltar’s proposed corporate tax reform. That reform included in particular the repeal of the former tax system and the imposition of three taxes applicable to all Gibraltar companies, namely a registration fee, a payroll tax and a business property occupation tax (BPOT), with a cap on liability to payroll tax and BPOT of 15 per cent of profits.
In 2004, following a formal investigative procedure, the Commission decided that the proposed system constituted a scheme of state aid that was incompatible with the common market and accordingly could not be implemented.
In its decision, the Commission found that the reform was regionally selective (since it provided for a system under which companies in Gibraltar would be taxed, in general, at a lower rate than those in the UK) and that some aspects of the reform were materially selective (i.e. that certain measures within the tax regime derogate from that common regime and thereby differentiate between economic operators who are in a comparable factual and legal situation).
In brief, the Court held that Gibraltar had institutional, procedural, economic and financial autonomy, and that, accordingly, no comparison could be made between the tax system applicable to companies established in Gibraltar and that applicable to companies established in the UK for the purpose of establishing a selective advantage favouring the former. As regards material selectivity, the Court found that, since the Commission had not begun by identifying the common or ‘normal’ regime under the proposed tax system, it was impossible for it to have established that certain of the elements of that system were selective vis-à-vis the common or ‘normal’ regime. The Court therefore found that the Commission had imposed its own logic as to the content and operation of the proposed tax system.
On the basis of the above, the Court annulled the Commission decision, and although the Court of First Instance’s decision is currently being appealed, the judgment nevertheless bodes well for Gibraltar’s future, and signifies the acceptance by the European Union (EU) of Gibraltar’s institutional, procedural and economic autonomy, and its consequential right to pass its own tax laws.
On another positive note, the uncertainty about the future of Gibraltar’s corporate tax rate finally came to an end on 25 June 2009 when the Government made the following announcements:
Another noteworthy development in 2009 has been Gibraltar’s signing of 13 Tax Information Exchange Agreements (TIEAs), which has seen it transferred by the Organisation of Economic Cooperation and Development (OECD) on to its ‘white list’. To date, Gibraltar has signed TIEAs with the following countries: United States of America; Ireland; Germany; New Zealand; Australia; UK; Denmark; Austria; France; Portugal; Finland; Greenland; Faroe Islands.
Like most countries, and in order to avoid discrimination against its own Finance Centre, Gibraltar first waited for the establishment of a level playing field before actively seeking out partner countries with which to sign such agreements. This was achieved in March when Switzerland, Luxembourg and Austria, who as full members of the OECD had not yet themselves accepted the tax information exchange principle, did so. Accordingly, in April 2009 the Government declared a 20 November target date to sign at least 12 agreements and pass to the white list. By 20 November they had in fact signed 13 TIEAs.
At its most recent meeting, the G20 gave notice that it was not just a matter of signing 12 agreements, but also of who the agreements were entered into with. Countries that had sought to reach the number quickly by signing TIEAs with other less economically relevant countries would face new difficulties. In this respect, Gibraltar is well placed since they have focused on signing up with the principal countries of the OECD.
The Government of Gibraltar has declared that for Gibraltar this is not simply a ‘numbers game’, and that Gibraltar is committed to the underlying principles of the commitments that they have given. Therefore, in addition to the 13 signed agreements, Gibraltar has already negotiated and initialed several more, which will be signed when the corresponding countries complete their internal constitutional procedures for doing so. The Government has further confirmed that its offer to sign a TIEA with whatever country wants to sign one with Gibraltar remains open.
The Government will shortly be publishing a Bill for an Act of the Gibraltar Parliament to put the agreements into practice. The Act is expected to be law by the end of 2009.
Over the last year, the combined effect of the global recession and the credit crunch has fuelled a very significant reduction in consumer demand and in investment, and thus economic activity in almost all sectors of the global economy has suffered, which in turn has caused a huge rise in job losses and unemployment around the world, and the sharp deterioration of public finances for most governments. In Gibraltar, this has not been the case. Even though Gibraltar is not immune to what is happening elsewhere, its economy has in fact continued to grow at a healthy rate and the number of jobs in its economy has continued to grow to record levels. The prospects for Gibraltar’s economy, both in the short and the long term, remain very sound and stable.
Adrian Pilcher, Senior Associate, Isolas, Gibraltar, firstname.lastname@example.org