A polling station during the 2014 European parliament elections in Gibraltar. (Photo: Getty)
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The Rock and the hard place – Gibraltar and the EU

A few weeks ago outgoing Gibraltar Chronicle editor and now Chief Minister’s Special Representative Dominique Searle put out a plea for the UK to stay in the EU. This week he looks into the history of its membership and how relations between the UK and Spain have shaped this membership.

The Rock became part of the EU through UK’s accession  in 1973 but,largely because of Spain’s hostility including the closed border,it was excluded from the Customs Union. That allowed for access to food supplies from nearby Morocco and other goods that had to be shipped from third countries. Like the UK the Rock is outside Schengen and  can now only join   with consent from all members states including Spain.

The obvious fear in Gibraltar  is that, if UK opts out of the EU, Spain will not hesitate to close the border again as it did for 16 years from 1969.

It’s legend, but almost certainly true given those who whispered it to me, that one the first things Jose Manuel Garcia-Margallo did when he first strolled into his office as Spanish Foreign Affairs Minister was to ask officials ‘Can I close the gate?’

It’s worth explaining a little about this. The gate (verja) -  Spain declines to recognise it as a true border -  is literally an old green metal gate that separates Gibraltar from Spain. It’s been open for 30 years now, since February 1985. It’s no secret that Spain disputes Gibraltar’s right to exist as an independent country, or even as a British Overseas Territory and those close to Sr Margallo thereforenot only don’t recognise the gate as a frontier, they think it was a mistake to have opened it.

But that ‘gate’ is an EU border and Margallo has had to live with the fact that, whilst Gibraltar is part of the EU, there are ‘ freedoms’  that he is obliged to respect. His diplomats told him as much.

It was the Spanish dictator General Francisco Franco who closed the border in 1969. His reasoning was his fury with the use of the territory as a British and NATO military base and Britain’s decision to give the Rock increasing emancipation by legislating for a Gibraltarian parliament along the lines enjoyed by other small Commonwealth territories at the time. After Franco died in 1975 the frontier gates remained closed, to all but the occasional ‘humanitarian’ passage of a coffin, for an even longer period under the democracy of the ‘Transition the period of amnesty that allowed for democratic government in Spain.

The leverage point, balancing the obvious importance to the West of bringing Spain into the EU and making it a NATO ally with the huge economic benefits promised by membership, came in the early 1980s as Margaret Thatcher skillfully put pressure on both sides.

In 1984 she closed the last bastion of the military dominance by closing the naval dockyard and declaring tourism and financial services as the new pillars of the economy. With military spending accounting for over 70% of that economy Mrs Thatcher was clearly aware that this would bring pressure to bear on Gibraltarians to at least see some benefit in friendly relations with a hostile but changing neighbour.

With the border still a stumbling block to accession; flying in the face of EU principles that had applied to Gibraltar through the UK’s European status since 1973, Spain did not want its citizens entering Gibraltar under the hospitality of the British. And Britain could not support the accession of Spain to the EU and partnership in Nato  without this thorny issue being resolved.

In the event talks, stalled by the Falklands invasion, produced the November 1984 Brussels Agreement which opened the border fully in February 1985 but created a process of negotiations at which Spain could raise sovereignty but which remained open-ended in that respect. That is, UK could hold to its commitment to Gibraltar that it would not do any sovereignty deals against the wishes of the people. Spain was free to be persuasive.

That agreement also ‘advanced’ EU rights to Spaniards in Gibraltar so that, although they were not actually in the European Community until January 1986, no noses were put out of joint for that process to take place.

The status has been like an uneasy truce ever since. Spain makes its displeasure at Gibraltar’s status clear from time to time but mostly the status is tolerated – until the spectre of a referendum on British membership of the EU is raised, bringing with it the possibility of a UK exit. The sustainability of Gibraltarian membership after that would have to be open to question and Chief Minister Fabian Picardo has accordingly made noises about a new relationship with Europe.

It would be simpler and, many believe, beneficial to all, if the UK just stayed put.

 

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.'