Trouble on the Rock as EU probes Gibraltar tax system

The EU is probing Gibraltar’s tax system again. This is surprising as the EU Code of Conduct Group did a major review and deemed the Gibraltar tax system code compliant only in July 2013. The Code of Conduct Group is a curious animal, part of the executive arm of the EU commission, it has no political capacity and compliance with its requirements are voluntary but nonetheless it has been a vehicle through which the EU has sought to flex its tax muscles.

Gibraltar's tax system

An explanation of the scope of the code group follows:

‘Although the EU Code of Conduct is not a legally binding instrument, it has strong political force. It has become the yardstick by which harmful tax measures within the EU and in the overseas territories of the EU Member States are assessed.

The Code was adopted in 1997.

It requires Member States to refrain from introducing any new harmful tax measures (known as the "standstill principle") and amend any laws or practices that are deemed to be harmful in respect of the principles of the Code (which is known as the "rollback principle").

The Code covers tax measures (legislative, regulatory and administrative) which have, or may have, a significant impact on the location of business in the Union.

The Code Group criteria for identifying potentially harmful measures include:

• an effective level of taxation which is significantly lower than the general level of taxation in the country concerned;

• tax benefits reserved for non-residents;

• tax incentives for activities which are isolated from the domestic economy and therefore have no impact on the national tax base;

• granting of tax advantages even in the absence of any real economic activity;

• the basis of profit determination for companies in a multinational group departs from internationally accepted rules, in particular those approved by the OECD; or

• lack of transparency.

The Code is implemented by the Code of Conduct Group which is a group that pools together the tax authorities of the 28 EU Member States and is chaired by the European Commission.’

 

Gibraltar struggled for a long time to get a meaningful review following the classification of their regime as harmful, but earlier this year it’s clearance was greeted with a chorus of jubilation on the ‘Rock”.

Gibraltar

Fabian Picardo, the Chief Minister of Gibraltar had this to say in the Parliament announcing the news:

“Mr Speaker, this is a great and important day for Gibraltar as a serious, EU compliant financial services jurisdiction.

Gibraltar’s listing as a harmful tax jurisdiction under EU Code of Conduct criteria has been damaging to Gibraltar’s reputation over the last 15 years.

 

Code Group approval has eluded us since its creation in 1997.

I am therefore delighted that the work we have done and the meetings we have held since November 2012 and the amendment we made earlier this month have been found satisfactory and has now given Gibraltar, for the first time, a clean bill of health under this important process.”

He went on to say:

“Mr Speaker, those who persistently try to denigrate us, those who with compulsive blindness seek to undermine the reputation and credibility of our country, are fast running out of credible options to do so.

We will continue to expose them, Mr Speaker.

We will do so by showing them all that Gibraltar can and will adhere to EU and international standards and will prosper in the process of doing so.”

It must be hugely frustrating for the Gibraltarians to be back ‘in the dock’, this time over whether exemptions from tax for royalties and interest constitute State Aid.

The primer for this new investigation following so quickly after a thorough and exhaustive review of their tax system?

Spain complained.

In the EU it appears all members are equal, but some are more equal than others.

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