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Taking on Goliath

Jon Tricker, Managing Director of KPMG in Gibraltar, looks at how Gibraltar’s positive growth continues to outstrip the competition

As David and Goliath stories go, the Gibraltarian economy would definitely fall into the camp of the plucky small contender when set against the major trading nations of the world.

Yet, while larger countries all around Europe, and indeed globally, have been embracing austerity measures and struggling to achieve any significant economic traction in recent years, Gibraltar has produced four years of double digit growth, securing an ambitious five-year GDP target almost a year earlier than predicted.

So how has this relative minnow, at just 2 square miles in size, bucked the trend so it now enjoys the world’s third highest per capita income (£50,941) out of 187 jurisdictions?*

In fact its small size is perhaps Gibraltar’s biggest advantage. With a population of around 32,000, comparatively small steps forward have a significant impact on economic growth – as proven in recent years during which the economy has grown from £1.1bn in 2012 to £1.64bn in 2015.

Being small means Gibraltar can be more nimble than its larger neighbours and this has inherent advantages for commerce as the jurisdiction can adapt quickly to changing circumstances – successive governments have been decidedly pro-business and this is felt for example in the speed with which laws can be changed for the better.

Gibraltar’s status within the EU as a well-regulated, low tax regime has long been an attraction for financial services companies and more recently the jurisdiction has also been able to draw operators from the burgeoning online gaming industry: a selective approach to licensing, coupled with the significant tax and lifestyle advantages apparent to executives, has positioned the territory as an EU centre of excellence and a jurisdiction of choice for many of the biggest operators in the business.

Helped by high profile events such as KPMG’s highly successful eGaming summit which attracts over 250 industry professionals from all over the gaming world, the transition has been so successful that eGaming is now the highest contributor to the economy ahead of financial services, insurance, shipping and tourism.

As well as being hugely significant in terms of additional employment, the growth in eGaming has brought other benefits such as reinvestment in the local economy and a sense of entrepreneurialism to a reinvigorated business community: Gibraltar now enjoys virtually full employment and the economy as a whole benefits.

But it is not just its size and agility which serves Gibraltar so well - its location on the European mainland and its position as the only British Overseas Territory within the European Union offer a unique set of opportunities to businesses operating there.  Not only can financial services products be passported to the EU, Gibraltar also benefits from the positives of EU membership such as free movement of workers ensuring there are no skills gaps as there are in other similar jurisdictions, all the while within a legal framework based on UK common law.

EU membership and the implementation of EU directives give Gibraltar additional credibility as a low tax jurisdiction and further reassurance to incoming businesses.

Whilst Spain still harbours historical sovereignty ambitions over the territory, in many ways that situation has helped foster the environment which has made Gibraltar so attractive for entrepreneurs and established businesses: for example governments in Gibraltar go to great lengths to ensure there is a robust and reliable infrastructure – all of the nation’s electricity supplies are generated from within its borders, for example, and undersea telecoms links (so important to the gaming sector) are available to operators to ensure uninterrupted supply. Spain’s claim also worked for the jurisdiction as it transitioned many years ago from offshore centre to a mainstream low-tax EU finance centre, ensuring as it did that Gibraltar retained focus on a culture of compliance and best practice, fully aware that anything less would have received heavy criticism and publicity on the other side of the border.

In fact, whilst the long-standing sovereignty dispute occasionally hits the news and grabs headlines, any change in the status quo seems extremely unlikely, and recently the biggest threat to Gibraltar’s continued success comes more from what is happening in the UK than its neighbours. The result of UK’s EU membership referendum planned for June 2016 will be a key factor for Gibraltar’s economy.  A British departure from the EU, which would necessarily include Gibraltar, could, depending on how Gibraltar’s status within the EU were to change, significantly reduce the attraction of the jurisdiction to the financial services sector.

So whilst the chances are that Gibraltar’s 2016 budget will report back another year of phenomenal growth, there is a degree of caution. Gibraltarians, who are far more pro-EU than their UK counterparts, will be following the debate around the referendum closely and hoping the result will help and not hinder their positive growth performance.

* According to figures from the International Monetary Fund

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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.'