In
July 2002 Gibraltar's Chief Minister, Peter
Caruana announced a new corporate taxation policy
setting a zero rate of corporation tax for all
companies but introducing new taxes on company
personnel and property occupation which will
be capped at 15% of profits. The existing corporate
forms which allowed zero taxation, the Exempt
and Qualifying companies, would be abolished.
Debate
between the Gibraltar government and the European
Commission over the proposed measures is ongoing,
but in the meantime, the Brussels officials
have agreed that the existing situation (confusing
as it is) may be allowed to continue - at least
as regards Exempt companies - until 2010 (2007
for new companies).
Gibraltar
dissolved its qualifying companies tax regime
in January, 2005. In a move estimated to have
cost the Gibraltar government an estimated £1.5
million in annual tax revenues, the remaining
qualifying companies, of which there were about
80, switched to the ‘exempt’ companies regime.
In
March 2007, Gibraltar's
Chief Minister Peter Caruana travelled to Luxembourg
to give oral evidence at the court hearing of
Gibraltar’s tax case against the European
Commission in the European Courts.
The
Gibraltar Government and the UK Government were
challenging the EU Commission decision which
stated that under EU law Gibraltar is not entitled
to have a tax regime different to the UK’s.
“This
oral hearing is very much the final stage of
this litigation," Caruana commented.
"Under
the EU court system the exchange of written
arguments is the main part of the procedure.
The oral hearing is quite brief. It’s
a different system to ours. During the written
argument stages Gibraltar has formulated and
submitted an impressive array of arguments,
all of which are supported by the recent landmark
ruling by the European Court of Justice in the
Azores case. We are thus confident in the merits
of our case," he explained.
In
the Azores case the ECJ had to determine the
principles that apply in deciding whether a
tax regime is in breach of state aid rules on
grounds of Regional Selectivity. Portugal had
permitted the legislative assembly of the Azores
to cut rates of income tax by as much as 30%
in 1999 in recognition of the unique structural
difficulties of its economy. However, under
European Union state aid rules, member states
are only permitted to grant special tax regimes
to certain regions or industries if they are
proportionate and in keeping with the current
tax system in place in that country, in the
interests of maintaining a level tax playing
field.
But
according to Gibraltar, the ECJ's decision "fully
vindicates" its own arguments before the
Court as to why it is entitled to have a separate
and different tax regime to that of the UK.
"The
judgment confirms that the principles to be
applied in deciding this issue, are the very
principles upon which the Gibraltar Government’s
case is based and pleaded," a government
statement argued following the Azores case judgment
in September last year.
"The
Government is encouraged, in particular, by
the fact that at para.68 of the judgment, the
Court sets out the principles to be applied
by upholding the UK Government’s arguments.
Those arguments are the same ones as both the
Gibraltar and UK Governments are making in the
Gibraltar case. This judgment is therefore extremely
helpful to our case," the statement added.
Major
changes to Gibraltar's corporate tax regime
were announced in Peter Caruana's June 2007
Budget speech.
Mr
Caruana explained that:
"The
Tax Exempt Company has been the backbone of
the development and growth of both our finance
centre and the online gambling industry, and
thus of a very significant part of our economy.
It continues to underpin thousands of jobs in
Gibraltar and large amounts of Government revenue."
"In
order to comply with EU law we must phase out
the tax exempt company in 2010. However, in
order to sustain our successful economic model
we must retain a commitment to a very competitive
corporate tax model."
Since
it is no longer legally acceptable to have one
tax model for ‘local’ companies
and a different one for ‘foreign’
companies it is necessary to have a low tax
system for all companies because without a low
tax system for overseas companies they will
leave, and our economy will suffer hugely. Thousands
of jobs would be lost, as well as significant
Government revenue. I have therefore already
said, and I reaffirm now, that the Gibraltar
Government is irrevocably committed to the principle
of ‘low tax’ for our economic operators."
"By
mid-2010 the Government will have introduced
an across the board flat, low corporate tax
rate. This will most probably be set at 10%,
but in any event not higher than 12%. This will
be similar to arrangements that already exist
in Ireland, Cyprus, Malta and other EU Countries."
"In
the intervening period, the Government will
engage in an intensive, detailed and lengthy
process of consultation with the different economic
sectors."
"In
order to signal the Government’s seriousness
of purpose in this respect I am today taking
the first step in the process of reducing corporate
tax rates in Gibraltar, by 2% for the year of
assessment 07/08 from 35% to 33%, and with effect
from the year of assessment 2008/09 by a further
3% from 33% to 30%."
"
I would also signal the intention of a further
reduction the year after that to 27%, in anticipation
of the introduction of the flat low tax rate
in 2010."
