I appreciate the commitment of the government to support the Finance community that provides effectively most of the resources of Gibraltar and to defend the tax-exempt company and the qualifying company regimes and to challenge the EU. Though I remain deeply sceptical as to the effect of such move.
Every reader will remain that the EU and the OCDE had been widely criticised for trying to import in low tax jurisdictions an element of their own taxation when tax competition was seen as fair game. Unless they revise their own tax rates, countries with high tax levels were bound to lose to low tax jurisdictions. The proponents of such view received an unexpected support from the meaningless withdrawal of the USA from the discussions. Although there is no indicia that the USA is withdrawing from the fight against tax evasion, quite the contrary, tax havens felt relieved and justification of their position. This is proving short sighted as countries are trying their way around to squash unfair tax competition. Suffice it to quote John Major, then UK Prime Minister, at the Lyon summit 1996 " Tax schemes aimed at attracting financial mobile activities can create harmful tax competition". That is where the Gibraltar government is ill-advised in pursuing the fight against the E.U as the leader of the opposition is rightly pointing out.
To support my contention, it is necessary to understand that the fight of Gibraltar is based, not on tax issue, but on aides issue. The contention of the EU being that the tax regime of the Gibraltar companies is derogatory or contrary to the EU aides laws and this is what the government is challenging on the ground of absence of certainty, absence of proportion and possibly absence of legal grounds. The latter being a wider concept that any lawyer can expand to suit the needs of a case.
The principle of certainty has been defined in Opel Austria vs Council of E.C (22.01.1997) and aims to "guarantee the foreseeability of legal situations and relations within the Community legal order". The claim of the Gibraltar government could fail on this point as such move could have been expected since 1976 although the case was discussed in another forum : the GATT. The legal issue is known under the "Tax Legislation cases", latter inserted into the Tokyo Round Subsidies Code, wherein the GATT’s panel defined tax systems amounting to prohibited export subsidies. These cases found a new application in the recent dispute between the US and the European Community over the taxation regime of Foreign Sale Corporations (FSC). It is worth noting the comment of the panel " viewed as an integrated whole, the exemption provided represents a systematic effort (by the US) to exempt certain types of incomes which would be taxable in the absence of the FSC scheme". The panel concluded that such findings "give rise to a financial contribution which represents a subsidy".
What Gibraltar is trying to assert through this court case is that the tax exemption of certain companies is not akin to a subsidy contravening the European aides and that the action of the E.U does not respect the principle of proportionality. This principle says that the measures must be adapted to the importance of the goal and necessary to reach it. (Denkavit France vs Forma 1986, OBEA 1985) however the judge has limited power in this case as his control is limited to ascertain whether the measures are manifestly inadequate (NMBe/a vs Commission). The onus of the proof lies on Gibraltar government; fair competition being a paramount objective of the E.U it will not be easily discharged.
In 1997, the ECOFIN adopted a series of conclusions to tackle harmful tax competition through the strict application of article 92 (1) of the Treaty. This article reads "any aid granted by a Member State in any form whatsoever which distorts or threatens to distort competition shall be incompatible with the Common Market". The "any form whatsoever" encompasses tax measures. In 1974, the Court of Justice held that any measure intended to exempt firms from the charges arising from the normal application of the general system constituted State Aid (Case 173/73 Italy vs Commission 1974 ECR 709). General system being construed as the general tax regime of a given country. Gibraltar could contend that it is not obliged under European Law to tax a particular category of income or person. This argument would fail because the issue is not whether a State is or is not obliged to tax a particular category of income or person but whether having adopted to tax a particular category of income or person, the State is permitted to carve out an exemption (WTO panel statement). The constant position of the United Kingdom as expressed by dame Dawn Primarolo during the House of Lords Hansard procedures has been to support tax competition between tax systems as a whole because it has benefited the United Kingdom low taxation regime. The same position had been clearly expressed in a publication of the European Union, Economic Affairs, DG IV "Tax competition in the European Union".
I will thus share the scepticism of Mr Caruana as to the positive result of its venture into the European Court (as expressed in your newspaper of today) where he acknowledges having not received the support of the United Kingdom. This in spite of the recognition of an MP, during a House of Lords debate "that hundred of millions of pounds come to this country –UK- through its dependencies and that to do anything to upset that flow of business would be suicidal" (Lord Pearson of Rannock). Probably it is because Gibraltar is bringing the case in front of the wrong forum. This is an issue that the WTO panel has not dealt with in its ruling against the USA or left open. Gibraltar could bring the matter in front of a tax forum. This forum would be initially the UK which is ultimately responsible for the implementation of EU regulations within its dependent and associated territories within the framework of their constitutional arrangements under the Kilbrandon report 1973. However it has always been said that the Kilbrandon report is ambiguous as to the consequences of international relations into the UK legal system. Cynically one UK’s MP stated that such ambiguity as so far served them well and should not be tempered with. It is therefore not surprising that Gibraltar is lacking the support of the British government.
As a person interested in the development of Gibraltar Finance Centre, I would have preferred the Government to take a more responsible approach rather than an antagonism one. The responsible move would have been to negotiate a low taxation rate of the Gibraltar companies, possibly some exemption, a network of international tax treaties that would have legitimate the Gibraltar companies within a tax planning exercise. What the Finance Centre wants is to attract companies, headquarters and holdings. with sound business offers. At the moment, it is possible to repatriate dividends from the USA to Switerland with a 5% withholding rate whereas the same dividends will be repatriated to Gibraltar with a 30% withholding tax. A Spanish holding company may even constitute a better offer as dividends can flow to the shareholders without any withholding tax as long as they are not domiciled in a tax haven.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.