Gibraltar Government Reveals Extent Of Planned Company Tax Cuts

by Joe Garcia, Panorama

30 August 2001

This story reproduced by kind permission of Panorama Online Daily at: http://www.panorama.gi

As part of a plan to try and salvage the finance centre, the Government is to reduce company tax to just 8%. This would be a massive reduction from its present 35%. Such a plan would be rushed through the House of Assembly if the Government loses its court case against the European Commission next month. The measures would, in effect, suspend the tax exempt and qualifying company status, which the FU consider could be in breach of 'state aid' rules.

What it describes as "a radical reform of company tax" would seek to minimise "as far as possible" the immediate disruption to financial services. Rather than see companies pack their bags and go to other jurisdictions where no tax is payable, the Government will offer the bait of 8% company tax in the hope that at least some will opt to stay in Gibraltar. Such tax would also apply to local companies, removing discrimination.

The Government has long known that such radical changes are necessary, however it has been conscious of the negative impact it could have on the other tax payers in Gibraltar, where PAYE is deemed to be the highest in Europe. However, by playing up recent events - by being 'alarmist' as the opposition notes -the planned company tax reduction might not attract a too negative response in the rest of the community, the Government hopes.

Tax exempt companies pay no tax in return for a small annual fee of £200 or £225. Qualifying companies, which are often branches of overseas companies, are set up also to minimise the tax situation. If the choice is between paying no tax and paying 8% tax, some companies may decide to move to other tax-free jurisdictions; hopefully, there will be those who will find the 8% tax acceptable. That is the gamble the Government is taking if it loses its court case for interim relief

'NO WIN' SITUATION

However, this appears to be very much a 'no win' situation for Gibraltar. Lose or win, the FU investigation will lot go away, and Gibraltar will not be able to shake off a period of uncertainty. If, one way or another, the exempt companies finally have to go, the finance centre will lose out on what the Government calls "the fundamental, basic and principal products upon which the whole finance centre is built."

When the chief minister called the finance centre council on 2Oth August for a meeting, it was more to present the fait accompli, that it would be taking the Commission to court, than to consult them. The ink had already dried on the Press Release that was to be issued subsequently. While the public position is that there is a 50/50 chance of winning the interim relief, there is greater gloom behind closed doors.

The chief minister held meetings in London a month earlier, but returned in a mood of silence. This was because the British Government had told it that it was not prepared itself to challenge the decision by the Commission to investigate Gibraltar. The fact that the EU member state responsible for Gibraltar has reasons why it does not think a challenge should take place, in itself serves to weaken the Gibraltar position, say industry sources. There are those who think the Government should forget the court cases and go ahead with its radical reforms as there are too many potentially insuperable obstacles threatening the exempt company

It would have been preferable to have reduced company tax to 5%, as this would have appealed to more players in the finance centre, but the loss of revenue to the Government was deemed to be unacceptably high. It was also felt that a 10% tax was the answer, but this was too high to please those who now pay no tax at all. A compromise of 8% company tax finally won the day and is now on the cards for introduction if the Government loses out in Europe.

This presents the prospect of the current level of £14 million annually of company tax being reduced to just over £3 million. assuming profitability levels are lot impaired. The Government would also stand to lose the £2.3 million it derives from the tax exempt company annual fees. And, politically, it could attract the displeasure of the general body of taxpayers, who may not understand why companies will pay at just 80/o -and they at the highest levels in Europe.

Those are the crucial issues facing the Government

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