Brussels Attacks Gibraltar's New Tax System

by Ulrika Lomas, Tax-News.com, Brussels

18 October 2002

The European Commission set itself on a collision course with Gibraltar yesterday, announcing that it would investigate Gibraltar's proposed new corporate taxation system on the astonishing grounds that it constituted unfair State aid to 'a part of the UK'.

The Commission is able to do this because it is the UK which has had to submit Gibraltar's new system to Brussels for approval, the Rock being a colony of the UK.

The Commission's press release said:

'The European Commission has today launched a formal State aid investigation into the planned reform of Gibraltar's company taxation laws. The reform would abolish taxation of company profits and replace it with a payroll tax (a fixed tax per employee) and a business property occupation tax. In addition, two sectors, financial services and utilities, would be subject to "top up" taxes on their profits at a rate of 8% and 35% respectively. At this stage, the Commission has not been able to rule out the possibility that the new system would grant State aid to certain enterprises and has doubts that such aid would be compatible with the EU rules.

'This is the first time that an entire corporate tax system has been notified to the Commission for approval under the State aid rules.

'Commenting on the case, Competition Commissioner Mario Monti said: "The proposed reform raises questions which require a thorough investigation. However, I welcome the willingness of the United Kingdom authorities to introduce a tax system in Gibraltar that complies fully with the State aid rules."

'The UK proposals aim to reform the taxation of company profits in Gibraltar. They would replace the existing legislation on so-called Exempt and Qualifying Companies that forms the basis of Gibraltar's offshore sector and on which the Commission started formal proceedings in July 2001.'

In fact, the European Court of Justice threw out the Commission's case against Exempt and Qualifying companies on technical grounds, prior to the announcement of the new system earlier this year.

' The whole of the Gibraltar economy (except utility companies),' concludes the release, 'seems to be granted an advantage compared with companies in the United Kingdom in general. The main rate of corporation tax in the United Kingdom is 30% of profits, whilst under the reform, the maximum rate of taxation in Gibraltar is 15%.'

Gibraltar's Chief Minister Peter Caruana found out about the Commission's move from the the press release (another calculated insult) and immediately went to tell the House of Assembly. Consideration of the merits of the Gibraltar tax proposals was one thing, Mr Caruana told the House, but what was unexpected was the questioning of whether Gibraltar is entitled to have a different tax system to the rest of the UK at all.

He thinks this argument, known as regional selectivity, will pit the Commission into confrontation with many member states. "Furthermore, specifically in the case of Gibraltar the argument is misconceived because Gibraltar is not part of the UK, for EU purposes or otherwise," he added.

Nothing could be more calculated than the Commission's stance to inflame anti-British and anti-EU sentiment in Gibraltar in advance of the referendum due to be held shortly on British/Spanish proposals for the jurisdiction's future, and the news probably ensures even greater unanimity among Gibraltar's beleaguered citizens against the process envisaged by London and Madrid.

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