Gibraltar's much anticipated new corporate tax law finally came into effect on 1 January 2011. There has been considerable discussion about the changes in the financial press, but what does it actually mean for Gibraltar? And why should a simple thing such as a new tax rate be heralded as such good news?
I must start with my usual "health warning". My work at Sovereign Trust means I am involved with these changes on a daily basis but what follows reflects my own personal thoughts. As readers will see, the changes have resulted from much discussion between the Gibraltar government and various international bodies but I will attempt to avoid entering into any "political" debate. My personal opinion is that this new regime is unquestionably good news for Gibraltar. There is now certainty and with a comparatively low corporate tax rate of 10%, I think the Rock should see an increased level of interest by firms considering where to establish their business. There are many implications – that extend far beyond my own horizon of setting up and managing companies – that will affect all of us here in Gibraltar. Read on.
The original discussions that have resulted in the changes we are seeing now in 2011 actually go back 15 years – so we are at the end of a very long road. In common with other jurisdictions labelled as "offshore" or "tax havens", Gibraltar has had to come to terms with the new realities imposed by such bodies as the European Union and the OECD. Although much of the debate was initiated by political policy in the United States, in my view the pressure exerted by the EU on Gibraltar and other financial centres in Europe – the Channel Islands, the Isle of Man, Monaco et al – has been much more significant. Here in Gibraltar, we depend on good relations with the EU. A large number of firms within our financial services sector – banks, insurance companies and investment managers – are able to "passport" their services into the EU from Gibraltar, so it was vital that we addressed the concerns raised across Europe about our previous "tax exempt" company regime.
So what has actually happened? Simply put, the new Income Tax Act, including the key provisions relating to company taxation, came into force on 1 January 2011. As the Gibraltar Chronicle put it on New Year's Eve, "it ends all distinction between 'onshore' and 'offshore' business". In his New Year address, Chief Minister Peter Caruana went even further, saying: "We are no longer a tax haven. We have become a mainstream, respected and reputable international finance centre and business location."
So in the future, it seems I can tell prospective clients that Gibraltar should no longer be categorised with the traditional list of offshore jurisdictions in Europe, the Caribbean or South Pacific. But can it be now be categorised alongside the truly international financial centres like London, New York, Zurich or Hong Kong? Would I be justified in making such comparisons or would this just be hyperbole on my part?
As always it depends on your point of view. Of course Gibraltar cannot be compared with London in terms of size, but it can rightfully claim to have made the step up from "tax haven" to a fully-fledged European financial services centre. It's perhaps too easy to dismiss our admittedly small finance centre when compared to the big boys. At a stroke the new company tax rules have excised the main criticism that used to be levelled at the Rock – that it was "unfair" or "discriminatory" because it provided non-residents with a more favourable tax treatment than that which was generally available.
The difference in the recent past was that in some sectors a comparatively low tax rate was imposed. Gaming companies for example paid just 1%, while a number of firms in the financial sector enjoyed fully "tax exempt" status and paid no corporate tax at all. Local businesses in Gibraltar, on the other hand, paid the standard tax rate of 22%. This has now changed. All Gibraltar companies doing business here will now pay corporation tax on profits at the uniform rate of 10%. This is an extremely attractive rate – and it is imposed across the board. It cannot therefore be considered as a concession designed specifically to unduly affect the location of business activity in the EU.
OK, so we have this new tax rate – that's all very well and good one might say. Certainly, it's a much lower rate than almost anywhere, particularly in the EU. But will it be enough on its own to attract international businesses to our shores? Typically, the answer is probably not a simple "yes" or "no". In my daily work I speak with many individuals looking to relocate due to high taxes in places such as the UK, and elsewhere. The new corporate tax regime is likely to have a significant impact on their thinking. The new rules are intended to propel Gibraltar into the European mainstream but, of course, tax isn't the be all and end all – other factors will also play a critical role in persuading any international entrepreneur to relocate here.
I have written in this column before of other areas such a person might consider – so what follows is not new but coming together with these new tax rules, it is no surprise that we are already seeing an upsurge in enquiries.
Infrastructure. To begin with, the much-vaunted new airport terminal should be ready by spring 2011. There are those who feel that the project is too expensive but nevertheless it is a most impressive facility and new airline routes are already in the pipeline as a result. In addition nobody passing the airport recently can have failed to notice the increasing number of executive jets seen on the ramp. Businesses also require office space and this is a commodity in short supply locally. Plans announced recently by Ocean Village to develop a World Trade Centre of some 11,000 square metres at a new site in Marina Bay have been warmly welcomed by government and the business community.
But it's not just about infrastructure. We also have a well-regarded legal system and a good regulatory regime. And, as I have said on many occasions, what attracts me to Gibraltar is the well-trained, highly educated multi-lingual workforce. New businesses considering a move here from abroad will no doubt bring some of their own people with them but local employment will also benefit from any upsurge in interest.
If you then go on to consider the increased taxation revenue that the Treasury will attract from all this new activity, then you begin to see why this new corporate tax regime is so important. When the EU agreed to Gibraltar setting its own corporate tax rate at the very end of 2008, a public holiday was called. At the time several people not working in financial services asked me what the fuss was all about. Two years on, the reality is finally with us. Let's hope that the results of all the hard work done to date are as positive as some are predicting. Taxing times indeed but this is one occasion when a new tax might just be what the doctor ordered. We watch with interest.
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