Nigel Farage wants out of the European Union, but what would it mean for Gibraltar? (Getty Images)
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The rise of UKIP: would an EU exit cut Gib’s throat?

Gibraltarians have grown disenchanted with the EU, yet their continued economic success depends on it. In light of UKIP’s surge in the recent European elections, Michael Castiel asks what an in-out referendum would mean for the Rock and which areas of industry might be able to go it alone. 

Gibraltarians are generally politically savvy, lean away from extremist views, and are far more enthusiastic in support of their choice of party than most of their British counterparts.  But the average Gibraltarian's growing disenchantment with the European Union - stemming as much from the avalanche of Brussels-spawned directives and regulation as from the European Commission's (EC's) lacklustre approach to Spain's border violations - was reflected in the low turn-out in last month's European parliamentary election.  Fewer than one-third of the Rock's electorate voted - in a jurisdiction where local general elections draw percentage polls of 70 per cent or more, and are consistently higher than in most other western countries where voting is not mandatory.

Rightly or wrongly, there is a public perception that Brussels and Strasbourg are “on the other's (i.e. Spain's) side”.  And more recently - at least among those in business and finance who observe events in the EU with closer interest - this perception is being coupled with concern that the probable next president of the EC is Jean Claude Juncker - not only a federalist likely to uphold the status quo in any dispute between Gibraltar and Spain, but also a former prime minister of Luxembourg, a bitter rival of the Rock in the provision of financial services. 

So, the existing disenchantment is understandable.

Yet Gibraltar's continued economic success - which has allowed the Rock to weather the financial turmoil of recent years better than most other financial centres, big or small - depends on our continued membership of the European Union.  Our burgeoning financial services sector is based largely on Gibraltar's role as a stepping-stone for non-member states into the EU, with its potential market more than double that of the US.

Indeed, any British decision to quit the EU would cut the Rock's economic throat, for our membership - so frequently under fire from Spain - came and remains under Britain's umbrella, Gibraltar having become an EU territory when Britain joined in 1973 and forming part of the UK Member State.  Even any renegotiation of the UK's relationship with Europe could have an impact on Gibraltar's economic welfare.

Should Britain decide to quit the EU and Gibraltar applied separately for membership in her own right, almost certainly Spain would block that route.

Earlier this year, Gibraltar's Chief Minister Fabian Picardo suggested that if Britain left the EU, Gibraltar would “go it alone.” But in the same brief statement, he acknowledged that this goal might be impossible to attain.

"The snapshot is that it would be a disaster," the Chief Minister said.  "If we had to apply our minds to an economic model that might enable us to survive exit from the EU, it might be possible to design something where a lot of belt-tightening might mean that we might not actually disappear from the economic map.  But I think everyone in Gibraltar agrees that we don't want to even countenance that, because the short answer - that it would be disastrous - is actually the best way to represent what would happen."

Against this backdrop, the results of the recent European parliamentary elections are doubly ironic for Gibraltar. Not only has the South West constituency*, of which we are part, swung (along with many others) further towards UKIP, but the former Liberal MEP Sir Graham Watson lost his seat, and Sir Graham (one of the highest profile MEPs to go) was the staunchest of the Rock's advocates in the European Parliament and in the media.

The Chief Minister’s argument - peppered as it is with “mights” - that Britain's withdrawal would be “disastrous” for Gibraltar is sound, but may be overly bleak. There are some significant sectors of the economy where we could still hold our own on the international stage.

Across-border tourism would be hit, though impacted by the recent border queues and deliberate delays to traffic. However it is possible that the growing numbers of cruise-ship visits could compensate for this.

Our links with Britain would remain as would the close ties between our financial services industry and the City of London – though, here, as its own business lessened, we would feel the greater impact. 

And although our motor insurance sector would lose business from expatriates in Spain, it presumably would continue to account for a tenth of all British car-owners' cover. 

Similarly, our growing expertise in the international funds industry would stand us in good stead - while we would lose support from investors in EU countries, we would find other markets.

And this would apply to the economically significant online gaming industry, a sector already looking with some success to the lucrative sources of the Middle East and China.

Our Admiralty Courts (maritime courts) and bunker services - we're still the biggest supplier of fuel at this end of the Mediterranean - should also remain unaffected.

So perhaps we could survive a British exit from the EU? Yes. But only just...and at what cost? Gibraltar will continue to eye a possible UK referendum on Europe with some apprehension.

Michael Castiel is a partner at Hassans International Law Firm

 

*Formed in 1999 to replace a number of single-member constituencies, the South West was expanded to include the Rock before the 2004 elections.  This followed a European Court of Human Rights ruling that Gibraltar should be entitled to vote in European elections. A Spanish complaint against Gibraltar's participation was dismissed by the ECJ (European Court of Justice).

Photo: Getty
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Gibraltar - impact of Brexit

Last week our editor took a general overview of some of the scenarios for Gibraltar if Britain were to leave the Euro. This week, as the atmosphere in the British Conservative Party becomes ever more toxic, Michael Castiel, partner at Hassans lawyers on the Rock, goes into more detail (this piece written before the Iain Duncan Smith resignation and subsequent arguments happened).

However unlikely it may prove, the prospect of Britain's withdrawal from the EU sends shivers through Gibraltar's financial services, gaming and tourism industries, which are at the core of Gibraltar’s economy. For, if Britain leaves the EU, Gibraltar goes too, and, should Brexit occur, it is Gibraltar’s relationship with the UK that as in the past, largely will shape Gibraltar's future.

Gibraltar joined the European Union in 1973 as part of the UK. While rights to freedom of services across borders of EU member states apply between Gibraltar and the rest of the EU, because Gibraltar is not a separate member state (and is in fact part of the UK Member State) those rights do not apply between Gibraltar and the UK. Instead a bilateral agreement, formalised almost two decades ago, gives Gibraltar's financial service companies the equivalent EU passporting rights into the UK. Accordingly and pursuant to such agreement, where EU rights in banking, insurance and other financial services are concerned, the UK treats Gibraltar as if it is a separate member state.

This reliance on the special relationship with the UK is recognised by both the Government and the Opposition in Gibraltar, and when the territory (which in this instance as part of the UK electorate) goes to the polls on 23 June, the vote to remain in the EU is likely to be overwhelming. This may have symbolic significance but realistically seems unlikely to influence the outcome. In actual terms, although some non-EU jurisdictions use Gibraltar and its EU passporting rights as a stepping stone into Europe, almost 80% of Gibraltar’s business dealings are with the UK.

But whether or not Britain maintains the 'special relationship' with Gibraltar, if Brexit becomes a reality, other factors will come into play, with the ever-present Spanish Government’s historic sovereignty claim over Gibraltar topping the list.

Recently Spain's caretaker Foreign Minister Jose Maria Margallo went on record that if the UK voted to leave the EU he would immediately 'raise with the UK the question of Gibraltar.' If this was to come about it could take one or more of several different forms, ranging from a complete closure of the border between Spain and Gibraltar, demanding that Gibraltar passport-holders obtain costly visas to visit or transit Spain, imposing more stringent border controls, or a frontier toll on motorists driving into or out of Gibraltar. The latter idea was in fact floated by the Spanish Government three years ago, but dropped when the EU Commission indicated that any such toll would contravene EU law.

Here, again, imponderables come into play, for much will depend on which political parties will form the next Spanish government. A Spanish government headed by the right wing PP party is likely to take a less accommodating attitude towards Gibraltar (the Foreign Minister having recently indicated that in case of Brexit the Spanish Government may opportunistically push once again for a joint sovereignty deal with the UK over Gibraltar) whereas a left of centre coalition will likely adopt a more pragmatic and cooperative relationship with Gibraltar in the event of EU exit.

The most significant changes to Gibraltar's post-Brexit operation as an international finance centre are likely to be in the sphere of tax, and while Gibraltar has always met its obligations in relation to the relevant EU rules and Directives, it has also been slightly uncomfortable with aspects of the EU's moves towards harmonisation of corporate taxes across member states.

Although it was formed as a free market alliance, since its inception fiscal matters have been at the root of the EU, but Gibraltar's 'special relationship' with Britain has allowed considerable latitude in relation to what taxes it imposes or those it doesn't. However, as is the case with other member states, Gibraltar has increasingly found in recent years its fiscal sovereignty eroded and its latitude on tax matters severely curtailed.

As in Britain, Gibraltar has benefitted from several EU Directives introduced to harmonise and support the freedom of establishment, particularly the Parent-Subsidiary Directive which prohibits withholding taxes on cross-border intra-group interest dividend and royalty payments made within the EU.

As a stepping stone for foreign direct investment, should Brexit come about EU subsidiaries could no longer rely on these Directives to allow tax-free dividend or interest payments to their holding companies based in Gibraltar. In the case of the UK, bilateral double tax treaties will no doubt mitigate the impact of the non-application of any tax related Directives. Gibraltar, however, is not currently a party to any bilateral double tax treaties. Accordingly, Gibraltar would either have to seek from the UK the extension of all or some of the UK’s bilateral tax treaties to Gibraltar (subject of course to the agreement by the relevant counterparties) or it would need to negotiate its own network of bilateral double tax treaties with a whole series of EU and non EU Member States. To say the least, neither of these options would be straightforward to implement at short notice and would need the wholehearted support of the British Government

Whilst Gibraltar’s economy is likely to be adversely affected should Brexit occur, there may be some potential benefits. An EU exit would result in fewer regulations and possibly may provide Gibraltar with greater exposure to emerging economies.

From a tax perspective, an EU exit would probably enable Gibraltar to introduce tax rules and incentives that are contrary to EU tax laws and would provide the Gibraltar Government more freedom to adopt competitive tax regimes that may be considered contrary to EU state aid rules. How possible or effective any such strategy would be is doubtful given the OECD driven anti-tax avoidance climate affecting all reputable jurisdictions whether within or outside the EU.

In this as well as other possible change much will hinge on any post-Brexit relationship with the UK - an issue which the Gibraltar Government addressed recently in a paper sent to Westminster's Foreign Affairs Committee. It stressed not only that 'EU membership has been an important factor in the development of Gibraltar’s economy' but also the importance of 'clarity as to the rights the British Government will protect and defend for Gibraltar in the context of its own negotiations.'