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Brexit
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union” cannot be achieved without some form of direct tax harmonisation, and even if it is implemented in a patchwork approach it will radically alter the landscape for tax professionals in Gibraltar.
In 2016 the EU Expert Group on Direct Taxation issued a report which proposed, amongst other things:
One-Stop-Shop for paying Savings and Investment Tax. A one-stop-shop established in each jurisdiction will allow cross- border workers to pay tax to a single jurisdiction, which would be distributed to any relevant tax authorities.
A single EU-wide definition of tax residence. Many “mismatches” which tax planners utilise result from different definitions of tax residence. The Expert Group proposed a unified definition of tax residence to eliminate such mismatches.
A directive on income tax deductions. To allow a coordinated approach to deductions between Member States this directive would harmonise the EU income tax system and limit Member States’ freedom to act.
This summary only addresses some of the proposals under consideration. Whilst some may take years to come to fruition the direction of travel is toward ever-increasing coordination and the limitation of variance between jurisdictions. Gibraltar could be dragged along by the UK and see it’s hard-won tax independence as confirmed by the EU Court undermined by a rush to harmonisation.
Leave
The landscape for a Gibraltar outside the EU is no less uncertain. It will be freed from direct EU interference but the UK’s involvement and leadership in the Organisation for Economic Cooperation and Development (OECD) will mean that Gibraltar will remain subject to pressures to conform with the hostile environment for tax avoidance schemes. It is highly unlikely that Gibraltar will undo recent amendments to its tax law, such as tax on inter-company interest or royalties. Gibraltar has worked hard to earn its rank of 28th on the Corporate Tax Haven Index (behind such “tax havens” as Spain, the US and Germany), and it is doubtful that any government would seek to preside over retrograde steps with risks of being blacklisted and the reputational damage that would imply.
As to changes moving forward the OECD is likely to be the main engine for change in the Leave scenario and is working on a number of
proposals at the moment, including: Continuing to develop BEPS. The
OECD’s Base Erosion and Profit Shifting (BEPS), has driven the global shift to tackle tax avoidance. BEPS aims to prevent international tax rules from facilitating artificial shifting of corporate profits from high to low tax jurisdictions. The drive towards transparency, ensuring economic substance and
eliminating “brass plate” companies is being pushed through BEPS. We can expect more substance requirements, greater transparency requirements, and increased blacklisting of uncooperative jurisdictions.
There have been many BEPS-driven changes, but implementation is continuously reviewed and tweaked. BEPS will adapt and tackle newly-identified planning solutions.
Tackling challenges from Digitalisation. In March 2018, the OECD reported on “Tax Challenges Arising from Digitalisation”. The OECD has identified blockchain as a threat to tax transparency and intends to manage taxation and transparency of blockchain transactions.
As to the preferred OECD method of taxation for digital businesses these three main approaches are being considered:
i) The “User Participation” approach. For businesses featuring user-created content, value is generated through user participation and as such should be taxed wherever the user is. This will demand a coordinated approach from authorities, and undermine the concept of “tax residence”, thus limiting the use of low tax jurisdictions.
ii) The “Marketing Intangibles” proposal. Aimed at businesses with marketing functions in a jurisdiction where they have no physical presence. Profit would be taxable in the jurisdiction in which the marketing intangible (customer lists or similar data that aids sales) is held, further undermining the concept of tax residence.
iii) The “significant economic presence” proposal. Aimed at businesses with sustained interaction with an economy whilst remaining non-resident, the test will include, the operation of a website in a local language, collection of local currency, sustained marketing in a jurisdiction, and volume of digital content derived from a jurisdiction. Businesses meeting the test will incur liability in that jurisdiction. This departs from international taxation norms. The aim is to create a digital “Permanent Establishment” which will justify taxation on
otherwise untaxable income attributable to that location.
Tax on base eroding payments. The OECD propose that expenses be non-deductible from payments where the receiver is taxed below a set level. This rule is to be complemented by a “subject to tax” rule which will disallow treaty benefits related to most types of income.
General Developments. The OECD will assist jurisdictions to update their laws and make systems more efficient. The OECD takes a more decentralised approach than the EU, as it seeks to change norms and establish frameworks, rather than implement direct proposals. Nonetheless. the requirements affecting Gibraltar will be no less radical.
If Gibraltar leaves the EU it will no longer be forced to comply with EU proposals, but the general direction of international tax compliance means business is increasingly challenging for international finance centres. Gibraltar has worked hard to achieve its reputation as a compliant and transparent jurisdiction, but as the OECD increases pressure to ensure that base erosion and profit shifting is eliminated, company administration in Gibraltar without actual local economic substance will become less relevant. Presence will need to be increased if tax planning is to be protected.
Conclusion
Remain or Leave, the future for international finance centres is uncertain. Gibraltar is uniquely placed with an educated workforce and access to the UK market to weather the storm. If Gibraltar Remains, it must implement OECD and EU proposals. If Gibraltar Leaves, it will suffer the consequences of the EU proposals but will not necessarily apply them, though it will almost inevitably implement OECD proposals.
The future is unknown, but a professional and transparent jurisdiction will thrive regardless. Uncertainty is what harms business, so whatever the result is, it must be resolved swiftly so that Gibraltar’s professionals can get on with the task of building the future.
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26 Gibraltar International
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