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The European Commission has newly published the letter that it addressed to the United Kingdom in October 2014 concerning the preliminary findings of its investigation into Gibraltar's tax ruling regime.
On October 1, 2014, the Commission wrote to the UK, of which Gibraltar is an overseas territory, to inform the UK Government of its decision to extend its probe into tax rulings granted to companies by Gibraltar in the years 2011-2013. It is investigating whether Gibraltar's new corporate tax regime, introduced in the Income Tax Act 2010 (ITA 2010), selectively favors certain categories of companies, which would be in breach of EU state aid rules.
The new Gibraltar ITA 2010 introduced, among other changes, a tax rulings practice which allows companies to ask for advance confirmation of whether certain income, generated by companies incorporated in Gibraltar or that carried out an activity which generates income, are subject to taxation in Gibraltar. In October 2014, in a publicly released statement, the Commission said it had assessed 165 tax rulings, and said based on the information submitted by the UK authorities, it appears that the Gibraltar tax authorities grant formal tax rulings without performing an adequate evaluation of whether the companies' income has been accrued in or derived from outside Gibraltar and therefore is exempted from taxation in Gibraltar. It said, even if the Gibraltar tax authorities are given considerable margin of manoeuvre under the ITA 2010, a misapplication of its provisions could not be excluded at that stage.
It said in its October 2014 letter: "The Commission has concerns that potentially all assessed rulings may contain state aid, because none of them are based on sufficient information so as to ensure that the level of taxation of the activities concerned is in line with the tax paid by other companies, which generate income that is to be considered accrued in or derived from Gibraltar."
"The Commission therefore has doubts as regards the compatibility with EU state aid rules of the way in which Gibraltar tax authorities have applied the ITA 2010 using tax rulings. The Commission has therefore extended its ongoing in-depth investigation with regard to the ITA 2010, which was initiated in October 2013 to also cover the tax rulings practice. The Commission will now continue investigating to determine whether its concerns are confirmed."
The newly released non confidential text of the letter alleges that:
The Commission said most of the tax rulings granted by the Gibraltar tax authorities (40 out of 165 tax rulings that on October 1, 2014, had been reviewed) are related to companies acting as the intermediary of a business carried out outside Gibraltar. "In such cases," the Commission said, "the companies ask for the income generating trade activity to be considered as exempted from taxation in Gibraltar based on the fact that the trade activities occur outside Gibraltar and that the amount of profits received in Gibraltar for the intermediary activity is 'minimal.' The Gibraltar tax authorities do not request any additional document to prove that the business activities of the companies are carried out outside Gibraltar or to prove the amount of income that those companies received from the intermediary activity." The Commission said there is no definition of what is considered minimal.
The Commission added that a number of tax rulings (32 out of 165 tax rulings) exempt income from consultancy fees from taxation in Gibraltar. "In all cases, the provider of the service is a company that is resident in Gibraltar. In some tax rulings, it is indicated that the consultancy services are provided to various companies (some of which are Gibraltar-based companies and some of which are based in other countries). In other cases, it is indicated that the company that receives the service is located in a specific country. In all cases, without providing any evidence or further explanation, the consultancy services are declared to be rendered wholly outside of Gibraltar and therefore in all the tax rulings the income is considered exempt from taxation in Gibraltar."
Later, it added: "In none of the tax rulings examined the tax authorities asked for any kind of evidence in order to prove that the consultancy services are effectively provided outside Gibraltar and without conducting any further assessment, the tax authorities used in all the tax rulings granted the following automatic clause: 'on the facts and in the circumstances set out in your letter, I confirm that no corporation tax would be chargeable in Gibraltar in respect of its income arising from the described consultancy and advisory services.'"
The Commission has invited feedback from stakeholders on its findings, set out in greater detail in the letter, by November 6, 2016.
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