ANALYSIS: Interpreting a tax treaty is complex business, even for experts
The tax treaty covering Gibraltar and Spain is at the centre of a fierce political row between the Gibraltar Government and the GSD over its implications for this community.
The GSD says the agreement is “intrusive and harmful” and is damaging for the Rock’s interests, allowing Spain a say in the tax affairs of individuals and companies here, while delivering nothing of substance in return.
But the government insists it is a good deal that normalises tax relations with Spain and includes recognition, for the first time, of the Gibraltarian and Gibraltar’s authorities, adding it will put an end to Spanish myths about Gibraltar’s transparency in business.
What is the average person on the street supposed to make of these starkly divergent views on this complex text with its multi-layered implications?
Since its publication a fortnight ago - and against a background of concern that the treaty hands Spain powers to target individuals and companies based in Gibraltar in a manner which, until now, it was unable to do - tax experts have been picking through the document and reaching their own conclusions.
Here’s one takeaway point that most of them share: the bulk of the provisions in the tax treaty are already in place through EU directives, or could be implemented by Spain unilaterally.
In other words, most of the core provisions in the tax treaty, particularly when it comes to individuals, apply already.
“The treaty does not bring into the Spanish tax net anyone that was not already in it,” said Neil Rumford, a partner and tax specialist at the Gibraltar branch of global consultancy firm EY.
“The additional ‘tests’ in the treaty for residence - for example, looking at if a spouse is resident in Spain, [whether] two-thirds of their assets are in Spain, or if the only permanent home is in Spain - would only apply if someone was already Spanish resident under the existing rules.”
“Also, these factors can be relevant under the existing rules in Spain.”
Under the treaty, for example, anyone who spends more than 183 days in a calendar year in Spain is a tax resident there and must pay taxes.
“But that is the law now and has been for many years,” Mr Rumford said.
That view was shared by Ian Collinson, a director at BDO Gibraltar, which is part of the global BDO accountancy network.
“A lot of this is just codifying what is already there, but which perhaps people didn’t realise was already there,” he said.
“If you’re a resident in Spain, you should already be paying tax if you are meeting your legal obligations.”
The treaty sets out provisions too for the exchange of information on individuals and companies, something which has alarmed many people in the community with interests in Spain.
But the reality is that, for the most part, such data already flows across the border in both directions under EU rules on tax information exchange.
Not only that, Gibraltar has long aspired to the highest standards of fiscal transparency in order to protect its reputation as a well-regulated place in which to do business.
The treaty includes some provisions on information that is not currently shared, for example relating to the ownership of vessels, aircraft and vehicles registered in Gibraltar but owned by Spanish tax residents, or on trusts where there is a link to Spain.
But as Mr Rumford said, “that will not affect most people” and in any event, banks and similar institutions have for years been under greater pressure to collect information on foreign-resident beneficial owners of financial assets, meaning a lot of that data is already shared with overseas tax authorities.
Gibraltar has agreed in the treaty to continue to abide by EU directives on tax transparency, something which practitioners welcome.
“In today’s world, not meeting those standards – or something similar – is not a realistic option for a financial centre,” Mr Rumford said.
“The Spanish authorities may have more direct access to some information, but much of it was available already.”
“It may be easier for the Spanish authorities to go on a ‘fishing expedition’ than before - as opposed to requesting specific information for a specific reason – but there is already a lot of information out there that they could access.”
And while some of the treaty’s technical provisions may sound “fairly sinister” in terms of the data shared with Spain, the procedures are set out by the Organisation for Economic Cooperation and Development and are well established.
That means they “…should not represent any erosion of sovereignty over taxation powers,” Mr Rumford said.
The reputational gains for Gibraltar from this treaty were flagged up by international consultancy firm Deloitte, which set out its view on the treaty in a briefing to clients.
“This agreement, the first international tax agreement between the UK and Spain over Gibraltar, is the latest development to reinforce Gibraltar’s commitment to transparency and exchange of information on tax matters,” Deloitte said.
“It is a big step in the efforts to have Gibraltar removed from Spain’s blacklist of tax havens, and should provide certainty to taxpayers by allowing them to understand how best to structure their tax affairs going forward.”
It was shared too by BDO’s Mr Collinson, who said that, in theory at least, the treaty would have positive overall benefits for Gibraltar.
“It will make it harder for Spain to ague what it has always argued historically,” he said.
“We’re not going to have that negative pressure, although the proof, of course, will be in the eating.”
“On balance, I think it’s positive if we can eliminate the biggest enemy we have in terms of reputation. It’ll give them less ammunition to attack us.”
“If Spain removes us from the blacklists, this is a good thing, even though there will be some negative implications for some individuals and companies arising from this.”
“Overall, I think this will be good for the jurisdiction.”
So if this treaty is so beneficial to Gibraltar, what does Spain get out of it?
That is a question that some commentators on the political right in Spain, sharply critical of the treaty and its implications for Spain, have been asking themselves.
José María Carrascal, a columnist for ABC whose trenchant views on Gibraltar are as well-known as they are old fashioned, summed up his doubts in the headline of a recent article, which read ‘Capitulation?’
His fear was that Spain was “…selling its birth right over Gibraltar for a plate of lentils.”
EY’s Mr Rumford said one key win for Spain from the treaty is that it would continue to have access to information about Spanish tax residents after Brexit, when EU law no longer applies to Gibraltar.
“The most obvious example of this would be information on cross-border workers,” he said.
“It also helps them to ensure that Gibraltar companies that are operating or holding assets in Spain are paying tax in Spain.”
“It also gives them – as it does to those in Gibraltar – more certainty on when someone should be regarded as tax resident in Spain.”
Despite the sense that the treaty will bring gains on both sides of the border, the practitioners harbour concerns and unanswered questions about how it will work in practice.
The treaty puts in place a joint committee of tax officials from both sides of the border responsible for resolving any disputes that arise as to residency.
“A lot of these questions will only be clarified once the treaty is in practice and disputes are resolved,” Mr Collinson said.
“But what if the dispute committee can’t agree? Is there a possibility to appeal?”
“We don’t know how it’s going to work in practice.”
The treaty sets out a number of tie-breakers to resolve cases where tax residency is in doubt, for example looking at whether someone’s spouse is resident in Spain, or whether two-thirds of their assets are in Spain, or if their only permanent home is in Spain.
But these only apply when someone is already caught by the Spanish tax net under existing Spanish rules. And even then, the wording of the treaty may be beneficial for some people in that situation.
At present, for example, Spanish tax authorities use “the majority of someone’s assets” as a factor in establishing tax residency. In other words, if over half of a person’s assets are in Spain, then that would be added toward that person being tax resident in Spain.
Under the treaty, that figure increases to two-thirds of a person’s assets, “…and that’s a concession to us,” Mr Collinson said.
The treaty will have implications, however, for Gibraltarians and non-Spanish nationals who live in Spain but want to move to Gibraltar.
One of the tie-breakers that has drawn most concern is a clause that states any Gibraltarian or non-Spanish national who has been resident in Spain but moves back to Gibraltar will continue to be taxed in Spain for four years.
One general tax practitioner, who asked not be named but believes the agreement is heavily slanted to Spain, suggested Spain applied this rule only to countries on it blacklist.
“If we are going to be delisted by them, then this rule should not apply,” he said.
There are some exceptions to that rule, but in broad terms it will make it more difficult for Gibraltarians – or anyone else - living in Spain to simply cut their ties with the Spanish tax system if they return to Gibraltar.
The upshot is that once someone is in the Spanish tax net, “…it can take more time to escape it,” Mr Rumsford said.
“It is unusual to have a rule like this for nationals of other countries [and] I don’t really see that Spain will benefit from this,” Mr Rumford said.
“Obviously it will entitle the Spanish to continue taxing people after they move from Spain to Gibraltar, so I guess that is the logic behind it.”
“However, it will probably encourage some that can afford it to make a move into Gibraltar before this takes effect [and] there is a window of opportunity to do this.”
“Also, it may discourage people, particularly high earners relocating to Gibraltar, from living in Spain in the first place.”
The treaty hardens the rules for Spanish nationals even further, making them permanently tax resident in Spain even if they live in Gibraltar.
This clause has generated significant concern and has been described as a “fiscal incursion” into Gibraltar, at least in respect of Spanish nationals.
But there are similar measures in place in other parts of the world where one country border another with a lower tax rate, while some states have even more draconian rules for their citizens.
“There is a parallel here with the US, which keeps US nationals in its tax net wherever they are in the world,” Mr Rumford said.
“However, to apply it specifically to people moving to a jurisdiction that struggles to accommodate 30,000 people perhaps betrays a certain sense of paranoia.”
BDO’s Mr Collinson said that much of the arrangements for establishing tax residency were modelled on situations where one country wants to make sure that people do not slip off the tax net by moving to a neighbouring jurisdiction with lower tax rates.
“If this is applied in good faith, I think the local who is doing things right should not have a problem,” he said.
But given the track record in the relations between Gibraltar and Spain, can this community expect Spanish tax authorities to apply the terms of the treaty in good faith?
The immediate response would be to say no, but past precedent might suggest otherwise.
At the moment, Spain provides unilateral tax relief for people who work in Gibraltar and pay taxes here but live in Spain. In other words, the Spanish tax authority recognises the tax paid here and charges those people only the difference to the higher Spanish tax rate.
“That’s a surprisingly good concession that we’ve had which they could easily have used to cause significant problems for individuals,” Mr Collinson added.
“They haven’t squeezed people who have tried to do things right.”
“But that’s just based on good will. The treaty actually formalises that relief.”
Given the firm views expressed by Gibraltar’s government and opposition parties on the treaty in recent days, the political row over whether this agreement is beneficial or damaging will continue in the coming weeks and in the run-up to the general election, whenever that might be.
They will be much more said and written about its contents.
But as it stands right now, the treaty has been agreed signed and, once ratified by the UK – on Gibraltar’s behalf – and Spain, it will come into force.
Faced with that prospect, the best option for anyone who fears its implications is to seek professional advice from the tax experts.