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Gaming on the Rock

Sponsored post: More e-gaming companies want to set up on Gibraltar than are eventually licensed to do so. The Gibraltar Betting and Gaming Association sets the scene.

 Gibraltar’s history makes it a unique place to live and work within the EU. Its small population and size and its geographic position on the Southern point of the Iberian peninsular makes it naturally European facing in its business and outlook.

Gibraltar has over 15 years experience in remote betting and gaming. This makes it one of the most stable, experienced and important e-gambling jurisdictions in the world. Likewise the online gaming is crucially important to Gibraltar, since it represents over 20 per cent of its GDP and employs more than 10 per cent of the local workforce. In turn, the industry hugely benefits the economy in both Gibraltar and in the surrounding areas of Southern Spain.

Gibraltar has a population of around 30,000 and there are around 10,000 workers who cross the border from Spain to work there every day. In addition, the Rock has seen a significant increase in migration by highly skilled and experienced e-commerce workers and executives from around the world. Gibraltar has minicommunities of people from the US, China, Sweden, Denmark, Germany and the UK (to name but a few).

The concentration of operators in Gibraltar, coupled with its highly respected licensing and regulatory regime, has also attracted secondary market gaming suppliers, such as software suppliers and affiliates, who do not necessarily provide gambling services themselves. It has also helped to attract a growing regulated electronic money and payments sector. Access to employees and commercial advisors who are experienced in Europeanwide transactions and activities and proximity to many leading gaming operators makes Gibraltar a great choice for other businesses in the e-commerce sector.

In terms of e-business, benefits are significantly based on Gibraltar being part of Britain and subject to English law. Those who have experience of operating in different territories know the benefits of the business-aware law and regulations and the work ethic that is evident in a British territory. The legal system is virtually the same as that in the UK including a mirroed structure of higher courts with judges from the Court of Appeal presiding in Gibraltar.

Tax Benefits of Gibraltar

Lower taxes and sensible structuring of them are also a significant contributor to economic success. Gibraltar is not alone in the EU in having business friendly taxes. Indeed, the UK is restructuring its tax codes to try to encourage more multi-national businesses to establish their headquarters and their intellectual property portfolios in the UK. Likewise many other member states, e.g. Ireland and the Netherlands, also work hard to encourage both investment by local and multi-national businesses.

Gibraltar’s zero VAT obviously has advantages for businesses. Corporation tax is relatively low at 10 per cent. Gaming and betting duty is 1 per cent of turnover or yield and is capped at £425,000 per annum. In addition, there are no capital gains taxes. However, Gibraltar should not be viewed as a ‘tax haven’ as local gaming companies must have local offices, taxes are and licensing fees are collected and paid and are invested back into the regulatory regime and for the wider good of Gibraltar. In addition, Gibraltar is a willing participant in the increasing international efforts on exchange of information for tax purposes.

The licensing process, whilst not overly complicated and onerous, is nevertheless thorough and if an operator does not achieve the high standards expected, they will not be licenced. Gibraltar has one of the most effective, well-respected and longstanding regulatory regimes for online gaming in the world, balancing strict safeguards with a competitive offering for consumers. The reputation of the industry in Gibraltar is closely protected and defended and it is something about which the industry and community is rightly proud.

European Challenges

Online gambling services are, in fact, one of the few areas in which European operators have established themselves as world leaders in the online sector. Despite, therefore, the current economic challenges in Europe, this industry (and to a large extent Gibraltar’s economy) has continued to grow and develop with a strong European foothold. Gibraltar now rightly boasts that it has been instrumental in helping to develop a European technology hub which is, in fact, capable of being leveraged and extended to the wider ecommerce sector.

The biggest overall challenge for the online gambling operators, which also affects other e-commerce industries such as some players in the financial services sector, is the fact that their businesses naturally cross national borders. This is all very well until the national laws (and often the politics) of a particular territory mean that an operator from another EU territory is not welcome to supply local customers. The EU is a unique construction, seeking to have EU wide laws while allowing member states the necessary freedoms required of countries in such a union. However,laws need to converge so that all member states agree on a similar and sensible approach to managing online businesses that naturally cross borders.

At present, there is a minefield of different laws, regulations and interpretations within the EU and adherence to EU law is no guarantee, at present, that an operator will not fall foul of national laws or political pressure. There are concerns that in Europe, some member states are acting contrary to EU principles and this is unlawfully affecting what operators can do when dealing with customers in certain territories. This has led to a balkanization of the European online market. Germany has been one of the most high-profile states in this respect and its laws are currently under EU review and a decision is eagerly awaited.

To give some wider international perspective to these issues: the United States has overwhelmingly secured the lion’s share of the growing and broader online based technology sector (as witnessed by the success of Google, Apple, Amazon, EBay, PayPal, Kickstarter and others). After some reticence, the USA is now clearly moving towards the licensing and regulation of online gambling services. Careful note should be taken of comments earlier this year by an eminent US policy-maker (Mr. Mark Lipparelli – former Chairman of the Nevada State Gaming Control Board) who cites the regulatory approach being adopted by Europe as mistakes that the US must seek to avoid in formulating and implementing its policy in this area. Mr. Lipparelli appears to see the current European balkanisation of online gambling licensing and regulation as yet another US e-commerce opportunity.

As a consequence the GBGA are engaging in an open and constructive dialogue with the EU institutions and with the member states across Europe, with the ob- jective of ensuring that the delicate balance that currently exists between strict safeguards and a competitive offering for consumers is not damaged.

The GBGA believes that any potential regulatory or public policy changes to ecommerce activity must be justified, proportionate and based upon a sound evidential and legal footing. For example, the recent inclusion of online gaming in the draft 4th Money Laundering Directive is welcome but the ‘special treatment’ that is being suggested for the sector (without an apparent evidential underpinning) shows that more needs to happen to ensure that online gaming operators are granted the same rights as operators in other sensitive forms of e-commerce such as financial services. Otherwise, the danger is that only EU-wide obligations will be imposed on this sector.

UK Challenge to Gibraltar

The proposed legislation in the UK relating to point of consumption licensing and taxation are causing particular concern at present ('POC measures'). Given the importance of gaming to the local economy and the lack of consumer detriment under the current UK regime, it is hard to avoid the conclusion that the UK has paid little enough attention to the law of unintended consequences for itself and no attention to any impact on Gibraltar when constructing these proposals.

The industry view is that the proposed POC measures will not be recognised by an ever growing number of unlicensed operators and marketing affiliates in poorly regulated jurisdictions that are keen to exploit the UK market whilst sitting beyond the UK authorities’ reach.

The UK Government is strongly opposed to the proposed Financial Transactions Tax (FTT). The UK can not sensibly on the one hand advocate going it alone for a POCT for gaming but then claim it will bring a legal challenge for any financial services tax brought in by other Member States if they are not agreed at EU level. EU tax law makes no such distinction between the two sectors and there is a real danger that with a POCT the UK is opening up the imposition of extra-territorial taxes by other European countries against the hugely important UK e-commerce and financial services businesses (and potentially undermining its position in any political or legal challenge against FTT).

Gibraltar operators lawfully supplying the UK market may also face substantial dual or additional regulation, compliance and licensing costs. The unnecessary additional costs, aggressive tax structure and rate and the absence of effective measures to control unlicensed operators and marketing affiliate will be hugely damaging to the regulated sector and UK consumers.

In addition, the proposals appear to allow UK licence holders to base their operations anywhere in the world with no distinction even made between EU operators and those based outside of the EU. We note the real dangers of misuse of UK licensed status by unscrupulous operators that do not share a common EU legal framework (including e.g. for money laundering purposes). The industry would suggest that, for example, extension and modification of the EU passporting model in financial services would be a better, safer and more lawful approach to dealing with any valid UK regulatory concerns.

Ultimately, the proposals are a poor deal for UK consumers as they increase prices whilst diminishing the quality and safety of the UK market. If the legislation is brought in as it is currently drafted, many UK consumers will move to unlicensed or poorly regulated operators outside of the EU. The GBGA is actively seeking direct discussions with the UK authorities regarding more careful structuring of the proposed POC measures to ensure that Gibraltar can continue to be a competitive online jurisdiction and that the UK does not undermine its own interests or introduce unlawful measures that make matters worse for UK consumers. The UK and Gibraltar are natural allies and should act accordingly.

What about the relationship with Spain?

Gibraltar’s relationship with Spain has always been interesting and has been even more tense as a result of the fishing dispute that sparked issues with the border in the summer of 2013. Given the significant levels of Spanish unemployment, the Spanish population close to Gibraltar does not share the same sentiment as central Government in Madrid - which some say has used the dispute to divert attention away from its many more significant domestic problems.

Despite the significant pressures imposed on people’s right to enjoy living and working freely within the EU, without fear of harassment and intimidation, people in Gibraltar continue to remain positive and buoyant. People living and working in Gibraltar are also heartened by the strong support shown by the UK and the fact that senior members of the UK Government are clearly supporters of the Rock:

‘We will continue to respect the wishes of the people of Gibraltar and we will adopt any action that is necessary to protect Gibraltar, it people and its economy’. (William Hague.)

Gibraltar recognises the Spanish market e-gambling licence requirements and many Spanish licence-holders (inc. Gibraltar based ones) currently have servers in Spain.

Investment?

Subject to more careful consideration of any proposed changes to the UK gambling laws, there is no reason why the online industry cannot continue to grow and prosper in Gibraltar.

The country is a natural launch pad for investment in Europe. Gibraltar benefits from a significant level of world leading ecommerce expertise to help ensure that Gibraltar remains ahead of the curve in an increasingly fast moving world economy. Efforts are being made at all levels to ensure that more e-commerce related companies see the benefit of being located in Gibraltar. Gibraltar is a well-run and well-regulated place and it is rightly proud of its community values. Its small size allows for agility and means it is easy to work with Government and regulatory bodies in relation to economic concerns, and those concerns are then addressed within the context of respect for the rule of British and EU law. Gibraltar remains a great place to live and invest in.

The Gibraltar Betting and Gaming Association comprises over 20 operators based in Gibraltar, many of whom are the leading names in world online gambling. The GBGA is an active industry association that is also an affiliate member of the EGBA (European Gaming and Betting Association).

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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.'