Spanish EU Commissioner could target Gibraltar in new anti-tax drive

It’s no big secret that for years the Madrid Government together with their so-called impartial EU Competition Commissioner Joaquin Almunia have been on Gibraltar’s back regarding the Rock’s income tax laws.

Last week I covered for Panorama the Gibraltar Government visit to Brussels where Mr Picardo and his team had a series of successful meetings with EU Commission senior officials, MEPs including engagements on tax issues.

Whilst all this was going on the Spanish Government EU dimension was also hard at work planning to create more problems it seems, by again placing under the EU microscope Gibraltar’s tax regime.

Speaking at the third ‘European Competition Forum in Brussels’ the day before the Gibraltar Government delegation were due to return home from the EU capital, Almunia announced he would investigate moves by national governments to tailor their tax laws to allow companies to avoid paying tax had the same effect as a subsidy.

At the same conference Vince Cable the UK Secretary of State for Business, Innovation and Skills made a keynote address saying that periods of crisis increase pressure on governments to break or circumvent competition law. For this reason, Cable added, robust competition control at EU level is needed more than ever and he pledged the full support of the British government.

The European Commission now intends to assess whether governments re-writing their tax laws offer corporate tax breaks which amounts to illegal state aid, the EU’s head of competition Almunia said.

Almunia Could Be Out to Discredit the Rock Again!

It is not known at this stage how Almunia intends to conduct this latest EU tax related investigation; frankly, I’m not even sure if those concerns surrounding the investigation will apply to Gibraltar. Although one thing sources in Brussels did tell me when I asked was that there would be a level of focus on so called tax havens.

And as we all know what Almunia thinks of Gibraltar and the ‘tax haven label’ he and his government refuse to remove!

Almunia’s comments come amid growing criticism of schemes used by Starbucks, Apple, Amazon and others operating within the law to minimise their taxes by shifting their profits to so called tax havens.

US internet companies have been especially effective at cutting their overseas tax bills, because weaknesses in European tax rules mean it can be hard for tax authorities there to claim the right to tax online sales revenues.

European Union regulators will now start examining corporate tax loopholes across Europe that allow companies to cut their tax bills, to see if they are anticompetitive, this is what the Spanish EU’s antitrust chief said late last week.

The news comes as a Group of 20 leading economies have launched a drive to tackle profit shifting. The Spanish Competitions Commissioner has said he was concerned about such aggressive tax planning.

“In those cases where national laws or tax-administration decisions permit or encourage these practices, there might be a state aid component involved and I intend to go to the bottom of it,” he told the conference last week.

“This is why in the last few months we have been sending requests for information to some member states where we have doubts about the consistency of some aspects of their legal framework or of their administrative practices”, he said.

Almunia continued saying that where national laws or tax-administration decisions permit or encourage these practices, or where there might be a State aid component involved was something he intended getting to the bottom of.

Generally the EU believe that “aggressive tax planning” is going against the principles of the EU’s single market, and this latest in a series of EU salvos is aimed at clamping down on corporate tax avoidance.

Tax Amendment Approved Last Year

In fact, if Gibraltar is now to be roped in to another EU tax investigation it will come after the European Council of Economic and Finance Ministers (ECOFIN) only last summer approved an amendment introduced by the Gibraltar Government which gave the thumbs up to the Rocks income tax act after it was amended to address concerns raised by the inter-governmental group that monitors the EU Code of Conduct for Business Taxation.

Up until than most thought the Gibraltar Tax Act was fully compliant and not considered harmful, in fact it triggered at the time some angry comments from the Chief Minister Fabian Picardo who said “those who persistently try to denigrate Gibraltar, particularly those who with compulsive blindness seek to undermine the reputation and credibility of our country, are fast running out of credible options to do so”

Four months after the amendment was passed, in October, the European Commission opens up another Gibraltar investigation this time to verify whether the new Gibraltar corporate tax regime selectively favours certain categories of companies, in breach of EU state aid rules.

This investigation as expected is also headed by Almunia who said in October that the investigation would examine the exemption for passive income such as royalties and interest from corporate tax. Also announced at the time, was that the investigation gave interested third parties an opportunity to submit comments, which they also said would not prejudge the outcome of the investigation.

This investigation came about after the EU Commission received a complaint from you know who ‘Spain’ about the Gibraltar Income Tax Act, claiming that it would continue to grant a selective advantage to offshore companies through the combined effect of the territorial system and the tax exemption for passive income. Following this complaint, the Commission carried out a preliminary investigation.

Gibraltar Tax has been on EU Menu for Many Years!

Gibraltar has been through all this before in exactly the same circumstances.

In August 2002, the United Kingdom notified the European Commission of the government of Gibraltar’s proposed reform of corporate tax. This tax reform foresaw the abolition of the classical corporate tax system where a percentage of benefits is taxed, and its replacement by a hybrid system. Under the latter system, companies domiciled in Gibraltar would have been subject to a yearly payroll tax of £3,000 per employee and to a business property occupation tax (BPOT). Total tax liability (payroll + BPOT) would have been capped at 15 per cent of profit. If a company makes no profit, there would have been no tax liability.

The Commission then considered such a tax regime as being materially selective. The tax regime being applied was deemed by the European Commission to constitute illegal state aid in terms of EU law.

The Government of Gibraltar and the United Kingdom at the time filed an appeal from this decision to the then Court of First Instance (now known as the General Court). The latter court annulled the Commission’s decision. It maintained that in order to prove that the tax system at issue was selective the Commission should have demonstrated that certain elements constituted derogations from Gibraltar’s “normal” tax regime.

Both the European Commission and Spain filed an appeal from this ruling before the European Court of Justice. The latter court in turn overturned the judgment of the General Court. It maintained that the fact that a different tax burden results from the application of a “general” tax regime is sufficient on its own to establish the selectivity of a particular tax regime.

The impact of this judgment on the points under examination hardly had any impact due to the fact that the Gibraltar government later introduced a different tax regime, to the one, which was analysed and ruled upon by the court.

Observers believe the European Court of Justice had nonetheless sent a clear message to all those member states, which attempt at circumventing state aid rules through the application of tax regimes, which are advantageous to a particular category of companies to the detriment of others. Such measures it seems can be considered as state aid and possibly illegal which is what generally, Almunia says he intends to look at now as he announced last week at this high level conference in Brussels.

Panorama posed a question to the Government “if the EU Commission had made any contact with GOG regarding a general investigation by them where legislation in certain could EU states allow companies to avoid paying tax which could be considered a state subsidy. The EU we understand are examining corporate tax loopholes across Europe that allows companies to cut their tax bills, to see if they are anticompetitive”

The answer from the Government spokesman was rather sketchy “that Gibraltar’s tax regimes have been examined under EU state aid rules since 1999!

Calling Gibraltar a ‘Tax Haven’ has become a well-known Spanish pastime. The Spanish Government through people in top EU posts like Almunia continue to create uncertainty around Gibraltar’s financial industry. Repeatedly targeting the area of tax to discredit Gibraltar.

I have no doubt this latest EU Commission investigation announced last week by Almunia will in some way, shape or form attempt to rope Gibraltar in.

Credit: Panorama