Even though Gibraltar is outside of the EU for VAT purposes, the new rules require local electronically supplied services to charge VAT and for it to be paid to each of the countries where the individual private customers reside.

As Sandra Skuszka, KPMG’s Head of Tax responsible for Isle of Man and Gibraltar, pointed out: “For more than four years non-EU suppliers (such as Gibraltar) offering electronic services to consumers have potentially had an obligation to register for VAT in the EU country where their customer consumes the service – it’s just that very little seems to have been done by the authorities to enforce this yet, perhaps because it has been inherently difficult to do so.”

But things are changing and it would seem “the authorities in different EU countries are starting to think about it” as the regulations in respect of suppliers in the EU come into line with those applicable to non-EU suppliers from January. “It won’t matter where the supplier is; it is where the consumer is that will determine where any VAT is due. My feeling is that the authorities will wake up and be looking to see what extra revenue they can gain by applying the EU proposals for VAT,” she declared.

It will be the responsibility of all suppliers of electronically supplied services to pay any VAT due in their customer’s member State – part of a general EU drive for a form of place of consumption tax, Skuszka opined.

Gaming margins already tight

Leif Goeritz, an advisor involved in the establishment of Lottoland Solutions, a gaming company that has grown from 20 to around 100 staff in 18 months, asked if it was an extra tax for e-gaming firms. “In Germany, there is a 16.5% gaming tax, plus there is 19% VAT! If that is the case, it will mean gaming companies’ margins, already tight, will be almost non-existent,” he remarked.

Sandra Skuszka explained: “Individual country’s VAT legislation often refers to exemptions if the provider is located in the jurisdiction and paying Duty there. In short, some business may be exempt if already paying a different type of tax there.” But there was no clear-cut situation for all EU countries.

It is up to each business to know whether VAT will apply and the rate of VAT in each country where they have personal consumers – VAT can range from 15% (Luxembourg) to 27% (Hungary) and the UK is 20% – and businesses will need to decide whether to register for the tax in up to 28 EU jurisdictions, or use a Mini One-Stop Shop (MOSS) payment system in any one country.

Evidence determines location

Andrew Haynes, a lawyer representing Gibraltar Chamber of Commerce, heard that if Gibraltar did change to adopt VAT, it would have to provide a MOSS facility and make it available as a free service from government.

Mike Nicholls, chairman of estate agency, Chesterton (Gibraltar), and a local Chamber of Commerce board member, spotted a problem – “Is it where the consumer receives the service or where he is resident?”

KPMG’s Skuszka noted: “Generally a consumer is considered to receive the service where he is resident; you will need to provide at least two pieces of evidence to show that– the physical address, the IP address and where the payment is coming from, (which bank account, for example)”, she said. The EU Commission is providing further advice on this.

But as she identified: “In the UK, the VAT exemption is quite wide; in other countries, the legislation may say that games of chance, for example, are not subject to VAT – but what constitutes a game of chance in the context of e-gaming?”

Gibraltar gaming companies operate basically within four different VAT regimes, pointed out Adam Craig, head of tax for e-gaming company, BwinParty.

In some countries, companies were clearly exempt from VAT on gambling; some countries exempted firms that were locally licensed, or which paid tax there, and some had different licences for sports or casino betting.

“Then there is France, which uniquely treats online operators as providing an organisational service subject to VAT. This enables French operators to recover VAT on their costs,” he said.

With around 40 staff, Enterprise Insurance Company (EIC) is engaged in passporting insurance services and products in 12 EU countries and established locally in 2003 “principally because Gibraltar was seen as an up and coming financial services centre with an accessible and approachable regulatory regime”, chief operating officer, Andrew Stone explained. Whilst low taxation generally was not the most important issue, it was certainly an advantage.

“We operate an outsourcing model, appointing intermediaries and service providers in EU countries. The administrative services they provide to us are generally either zero rated or VAT exempt, so we only pay VAT on a fraction of our business. What we want to preserve is low general tax and no VAT – it is what companies find attractive in Gibraltar.”

Stone added: “If we were subject to VAT on such services, it would have a significant effect on our business. We will have to wait to see the effect of what changes are proposed regarding Gibraltar potentially adopting VAT.”

Skuszka was asked why financial services generally were exempt from VAT. Her answer only served to heighten concern when she said: “There are generally two reasons for VAT exemptions: one is for social reasons and the other is that it is too difficult to determine the value on which VAT should apply. I feel financial services and gaming were considered too hard for VAT, however, EU legislation has not kept up with the times.

Gaming tax & VAT likely

“We have Insurance Premium Tax and the EU is now talking about a financial transaction tax, so having both gaming tax and VAT is likely. Cash strapped authorities want to apply tax.”

EIC’s Stone noted: “We already apply Insurance Premium Tax (a form of VAT) to our premiums in each EU country. The rates are different and complex; what is a straightforward 6% in the UK may be 18% in France and 10-20% in Greece, for example – so we are already dealing with paying tax where the customer is located.”

According to Sandra Skuszka: “A lot of countries have not said whether gaming will attract VAT if they are already regulated. It is my opinion that there could be a lot of legal challenges. The challenges – most likely from the private sector – will be around applying VAT to businesses because they are not licensed in those countries and yet not allowing business from outside those countries to be licenced and, as such, potentially the VAT exemption not applying”, she observed.

Haynes wanted to understand more about the “anomalous position of the IoM as part of the UK” in regard to VAT and what that meant should Gibraltar want to also become part of the UK for VAT purposes. There was a similar position with France and Monaco, where that country got to keep its VAT, he suggested.

The IoM is “unique in being part of the Customs Union, via the UK, and the calculation of the revenue sharing agreement under which the IoM just gets a percentage of the VAT collected, has changed – quite considerably”, KPMG’s Skuszka explained. “The VAT income is very important to the IoM. Corporation tax, however, is different; in the IoM it is very low, zero generally.”

And she agreed: “VAT is a big factor in a gaming company’s decision-making process. Corporation tax in Gibraltar is 10%, but IoM gaming companies pay VAT at exactly the same rate as the UK. Tax is up there in the decision making process, with companies choosing to stay in the IoM for a variety of other reasons.”

Chesterton’s Nicholls, who said his 330 fellow Chamber members had “some concerns over the possibility of Gibraltar joining the Customs Union”, asked whether EIC found “that the current uncertainty – not so much over Britain perhaps leaving the EU, but on VAT – is affecting future planning? Do you find companies are sitting and waiting for a decision before recruiting more people or double in size in Gibraltar, or even go to a new country?”

From EIC’s insurance perspective, Stone said: “VAT is not a big issue for us at the moment. We sit behind the brand of our intermediaries, so marketing for us is not a major spend. I suspect that most insurers are focusing on regulatory changes surrounding Solvency II at present.”

However, “if our service providers in the various EU states were to have to start charging us VAT, that would be a significant hit for us and other insurers operating similarly, and would impact on our cost base”, he reported. “The UK coming out of Europe would also be a massive issue (as we could lose our passporting rights), but I don’t think that is likely at the moment.”

To put the new VAT moves into context, Craig suggested: “Even though it is changing for Gibraltar businesses, there is also a change for businesses in all of the 28 EU countries. So because it is a change for them you can perhaps anticipate that in some countries the taxability of these types of [electronic] services will be managed in a different way and you might begin to be asked about things that you were never asked about before.”

Targeting e-commerce

He pointed out that “governments across the world – and in particular across Europe – are short of money and mightily perplexed by the business model of electronic businesses like Amazon, Google.” They were annoyed and “have got e-commerce businesses in their sights.”

One of the ways big business sector is being attacked is “through the OECD and its programme to tackle tax base erosion and profit shifting. And the number one action of 16 actions dealing with all the things that big companies do that they don’t like, which minimise tax, is around the digital economy”, Craig asserted. As a result, VAT rules are being updated to apply to electronically provided services in the EU and in other countries too, he concluded.

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The first annual exchange of personal information will affect tax years beginning on or after 01 July and for companies it is in respect of reporting periods from the start of this year. The move involves all financial institutions with personal accounts and investments, including certain insurance companies.

But Chris White, head of tax for Hassans law firm, told Gibraltar International in mid-April: “No mechanics have yet been arranged on how to transfer information to the Government, although from July we have to send information about residents of EU Member States, including income from employment, directors’ fees, life insurance policies, pensions and ownership of and income from immovable property.

“This is in addition to bank interest, which has been in place for some time.” Nor has there been clarification yet on what the UK position is regarding proposals for public disclosure of beneficial ownership on central registers that also may include trusts. The European Parliament has voted in favour, but some countries including the UK, are still uncertain.

White, a former head of the UK Revenue specialist investigations unit including overseas interests, declared: “Any list of beneficial ownership will be treated as a target list for tax inspectors with nothing being done by way of any research, and so embracing many people who otherwise would not be investigated.

Spain seeks data

“Instead of guessing, authorities will be able to go down a list, tick some names and start off issuing investigation notices”, he observed, adding: “At the end of the day we have no choice, but have to make the best of what we have got.”

While the current state on both tax moves has created a degree of uncertainty, there is “a certain inevitably about this and reinforces what people deep down already know but don’t want to admit to. There’s always been a lot of burying heads in the sand.” And he revealed that there had been “30-40 [tax] information requests from Spain and a couple from the UK – these are the ones we know about and I suspect there are many more”.

Information notices were now being issued “as a first resort rather than a last resort” and whereas under Tax Information Exchange Agreements (TIEAs) – of which Gibraltar has 27 – the requests had to be taxpayer-specific, “under the new information exchange process that Gibraltar signed up to in November, information exchange is automatic from 1st July and information for 2014 has to be passed on at the latest by 2016”. It is the same for all of Britain’s Overseas Territories, he said.

Political reality

An OECD advance Group statement maintained: “Tax evasion is a global problem and requires a global solution. This will provide a step change in our ability to clamp down on tax evasion, which reduces public revenues and increases the burden on those who pay their taxes.”

An advertisement in the Sunday Times newspaper late in March – under the heading: “Hiding undeclared income Offshore?” – appeared with the strapline: “We are closing in on you” over a world map and eyes peeping through it.

A packed briefing seminar organised by Hassans and attended by 120 people, heard that although some Gibraltar practitioners may regard the new tax approach to be invasive, there was now no other course – “it’s a political reality”.

Existing EU arrangements and through inter-government Tax Information Exchange Agreements (TIEAs) meant that some countries – principally the UK and Spain – had begun requesting information about individuals claiming to be resident in Gibraltar, but they could not conduct “fishing” expeditions.

However, as White reasoned: “The jurisdiction that has issued the [information] notice clearly has not done so for fun and Gibraltar’s Tax Commissioner is not going to ignore it. The enquiring country first needs to know the identity of whom they are investigating and that is going to get easier as we have FATCA, an automatic release of information from July on foreign residents who have sources of income in Gibraltar.”

Residence information

Richard Morley, a BDO tax investigations practitioner specialising in dealing with Britain’s HMRC, explained: “The Revenue gets its information not just from third party practitioners and banks, but most will come from existing risk review process, from tax returns and informers – there is a heck of a lot of information sent in from aggrieved
persons, most of which the Revenue treats with a pinch of salt, but they are duty bound to follow up on most of it.”

But increasingly, information comes from information notices, affecting clients and third parties, trustees, practitioners, agents, etc. “The notices are being issued as a first resort, rather than a last resort”, he noted, and “I am aware of UK Revenue sending information notices to Spanish counterparties in respect of residence, which can be equally with Gibraltar, particularly given the new UK residence rules that are being closely examined.”

Nicholas Jordan, a Clifford Chance partner specialising in tax litigation, said the original US FATCA was “a bit of a gamble, but it seems to have passed the critical mass test and spawned a worldwide panacea for these things. How it will work out in practice is very difficult to say, but I don’t think the structure is going to go away.”

One-way exchange

And he added: “Anyone who thinks American banks are going to take part can think again; they have made it very clear that in no way are they going to spend vast sums of their own money to become outreach departments for the tax authorities of the UK, Ireland, Spain or anywhere else.

“They have taken a more political stance than our own banks, so there are no obligations on the American end; it will be one-way so far as the US is concerned, but not so far as the rest of the world is concerned”, Jordan advised.

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