From a legal and tax point of view, Gibraltar is a British Overseas Territory in the European Union where EU regulations apply fully, except VAT —in a similar way to the Canary Islands. Therefore there should not be any obstacles for Gibraltar to remain in the EU from a technical point of view if the EU decides so —providing there is an agreement between UK and Spain.

Therefore, there should not be any obstacles for Gibraltar to remain in the EU from a technical point of view if the EU decides so – providing there is an agreement between UK and Spain.

Having said that, the political and tax-economic future of Gibraltar is being questioned and the main reason is simply the anachronistic Spanish sovereignty claim – based on the Utrecht Treaties of the early eighteenth century.

A last minute maneuver by Spain following the triggering of article 50 (2) TJUE created great upheaval. The fact that the UK did not specially mention Gibraltar (which with a majority of a 96% voted in favor to remain) in the letter addressed to EU Council President Tusk was used ultimately by Spain as a tactic to press the UK over Gibraltar status

Spain then took advantage of the Brexit situation to claim sovereignty over Gibraltar, as well as, including in the EU draft guidelines a `veto right´ on future agreements between the EU and Gibraltar. Not being content with that, the Spaniards used the occasion to propose a co-sovereignty proposal over The Rock which has further poisoned the Brexit debate at this first stage.

The press picked the opportunity to animate the Gibraltar debate in the UK and the government rapidly responded by emphasizing that any decision about Gibraltar sovereignty will need the consent of the Gibraltarians. End of debate.

However, this is not just a political dilemma but a serious issue affecting not only Gibraltar’s financial and tax system but the Spanish area nearby. Nowadays there are 12,000 Spanish workers in Gibraltar, relieving the 35% high unemployment rate in the area. With a population around 30,000 people, Gibraltar’s tourist sector is also booming with over 11 million visitors per year. Finally, the financial industry and the online gambling sector, being the largest professional employers in Gibraltar, will suffer depending on the way the final negotiations are concluded.

But let’s talk about Gibraltar’s economy to further understand the issue. Taking the 2015 – 16 financial year, Gibraltar GDP per capita would place it in fourth place worldwide at $90,165 and a gross debt under 2.1% of GDP. Therefore, they can justify the low tax system compared to other European countries due to its undoubted economic and financial strength.

Spain, against the recognized evidence that Gibraltar offers a sustainable financial ecosystem, keeps pushing for Gibraltar to be blacklisted as a tax haven. Spain does not seem to have come to terms with the OECD and the European Commission’s 2014 decision to accept Gibraltar compliance with international tax avoidance standards. Gibraltar has signed 53 agreements for the exchange of tax information and transparency to prevent tax avoidance. However, Spain will not sign an agreement with Gibraltar as it does not recognize the legitimacy of its government.

Another argument played out against Gibraltar is its lower corporate tax rate. However, it is important to recognize that this is not an exception within the EU until corporate tax harmonization becomes an EU reality – which is not on the near horizon. Cyprus, Ireland or Bulgaria have similar tax rates (12.5% and 10% respectively), compared to Gibraltar.

Considering the above issues there are different positions and potential scenarios which may surface during the next few months.

  1. We could argue that an easy way to solve the potential threats to its independence is for Gibraltar to remain strongly linked to the UK and adopt fully the UK Tax system as proposed by Professor Richard Murphy (City University). However, this may not be aligned with Gibraltar’s aims to be recognized as an independent nation.
  2. The Spanish government proposal for Gibraltar is to get to a situation of co-sovereignty between the two governments. That is a proposal that does not make sense considering the enormous differences between the two countries, starting with culture, society, language and the political system and ending with the legal and financial structure.
  3. Some people in Spain and Gibraltar will support the idea of coming back to the trilateral forum (UK-SPAIN-GIBRALTAR) abandoned some years ago. This proposal could secure Gibraltar tax singularity and access to the four freedoms in the EU (goods, capitals, services and people) which are essential to the Gibraltar economy.
  4. If the UK opts for a soft-Brexit, which may be a very likely scenario, Gibraltar, as part of the UK, will continue to have access to the single EU market.
  5. Gibraltar to be granted an independent status by the United Nations special committee for decolonisation – which does not seem a short term amicable solution to end this dispute after 300 years of conflict between Spain and the UK.

The above five options are now on the table and will affect Gibraltar political status, largely depending on the UK and secondly on Spain.

However, Gibraltar has a say in its own territory and a very important say. After Brexit, and unless the general elections bring us another surprise, it seems that Gibraltar will continue to reaffirm its international position in Europe and will find a way of doing so. But overall, it will continue developing its position in the OECD treaty network – by itself.

-Published originally in Finance Publications Offshore