CM announces corporate tax increase to 12.5% after ‘revenue wrecking’ pandemic
Chief Minister Fabian Picardo on Tuesday announced a hike in corporate tax from 10% to 12.5% and an increase in electricity rates as he delivered a “rebuilding” budget aimed at revitalising Gibraltar’s economy and public finances after a “revenue wrecking” pandemic.
In a speech to the Gibraltar Parliament lasting nearly four hours, Mr Picardo reviewed Covid and Brexit developments over the tumultuous two years since the last normal budget debate in 2019, and after the emergency Covid budgets of 2020.
In doing so, he left no doubt as to the challenges faced by this community as it emerges from the pandemic and as rising cases offer a reminder that Covid-19 has “not gone away” and Gibraltar should not be “lulled into a false sense of security”.
Five years after the Brexit referendum, Mr Picardo expressed confidence that a treaty could be reached for Gibraltar’s post-Brexit future that would benefit the Rock, the Campo de Gibraltar and the wider EU.
As he spoke, the European Commission published its long-awaited negotiating mandate that Mr Picardo again said “is likely to leave a lot to be desired”.
“This will be only the EU’s opening position, it will not bind us in any way,” the Chief Minister said.
But even before negotiations for the treaty start, Mr Picardo warned too that neither Gibraltar or the UK would compromise on the Rock’s British sovereignty and, despite their commitment to reach a deal, would continue in parallel to prepare for a ‘no deal’ Brexit.
“We will not ever countenance any concession on sovereignty,” he said.
“And we will not permit any presence or any function on Gibraltar of any Spanish national authorities.”
“Any EU mandate which suggests that will not represent what we will be prepared to agree in a final treaty.”
And he again stressed that Gibraltar would never enter into any customs arrangement that would “impoverish” its businesses.
Gibraltar was looking to do the opposite and deliver “a rocket boost” to its economy and, be extension, that of the neighbouring Campo.
But as he delivered the budget, Mr Picardo added too: “In the context of the historic juncture in which we find ourselves, I have no doubt that today it falls on me to deliver the hardest budget in our history as a people since the closure of the frontier.”
In analysing the “war-type annihilation” of Gibraltar’s economy over the past year, Mr Picardo laid the blame squarely on the impact of the Covid pandemic, anticipating Opposition criticism of his management of public finances over preceding years, which GSD leader Keith Azopardi later described as “reckless” and laden with “off the books” debt.
The cost of responding to the pandemic had topped £250m, most of it used to fund shortfalls in government revenue.
Gibraltar’s GDP for 2020/21 is forecast at £2.44 billion, down 4.9% from £2.57 billion in the preceding year and £2.46 billion in 2018/19.
Mr Picardo said his government was projecting deficits of £158m for the 2020/21 financial year and £50m for the following year, with a return to surplus by 2022/23.
He thanked the UK for its support with the vaccination programme and for agreeing to a sovereign guarantee that enabled the government to borrow £500m at far more favourable rates than in the open market.
But he added too that Gibraltar’s economy had been “X-rayed” by lending banks and the government had had available £500m even without the UK’s sovereign guarantee.
“So when the banks have X-rayed our economy and our public finances, they have considered our public finances and our economy strong enough to lend us half a billion pounds,” he said.
“The professionals have considered that we are doing a very good job managing our public finances, although of course right now every nation is suffering pressure on the public finances and we are in a deficit situation.”
What the UK guarantee had done was secure the borrowing at a much lower rate, he added.
Covid, Mr Picardo said, had been equivalent to “…a war time catastrophe affecting the otherwise reliable revenue of the Government and there is no one in this House or outside it who saw it coming or who could have managed the public finances in the decade before in a manner than would not have resulted in a deficit and need to rebuild.”
Mr Picardo said Gibraltar had been one of the world’s fastest-growing economies prior to the pandemic and was well-placed to bounce back, adding that the measures in the budget sought to offer incentives to generate new jobs and training, while protecting those who were most in need.
He said the “sensible, reasonable and realistic” people of Gibraltar would understand the changes the government had made.
And he added a swipe too at the Opposition for “breathing life into the notion” that “necessary actions” were “somehow unfair”.
“That’s why I am clear also that what awaits in the months to come is not a winter of discontent,” he said.
“It is a winter of a loud minority of malcontents.”
The decision to increase corporate tax comes against the backdrop of an OECD initiative for international tax reform, which aims to ensure large multinational businesses pay tax where they operate and earn profits.
The initiative, which is still in early stages, envisages a minimum global corporate tax rate of 15%.
Gibraltar is among 139 countries and jurisdictions that have registered support for this framework, which will “likely” exclude financial services companies of the sort that play a key role in the Rock’s business model.
“Whilst I understand this will present challenges to this jurisdiction and its model of taxation, I do not believe it is in Gibraltar’s interest to be the outlier that would not sign up to this framework and would seek to resist it,” Mr Picardo said.
“Our future is as a leading, innovating, value added jurisdiction on the right side of the global transparency and accountability spectrum, not on the opaque side.”
The increase in corporate tax means any company commencing a financial period after the budget will pay 12.5% tax on profits instead of the current 10%.
“This means that if the new global agenda prospers, when we are required by the OECD to move to 15% the increase will be less significant,” the Chief Minister said.
In parallel, the Chief Minister also announced a series of tax incentives aimed at helping businesses recruit new people and bolster training, as well as make capital and green investments.
Those measures are time-limited to June 30, 2023 and included:
• An allowance of 50% of basic salary for every new job created.
• A 10% increase in the training allowance to 60%
• A 50% allowance for marketing costs
• Increases in plant and machinery allowances, and a new definition to include fully electric vehicles used in a business
There were changes to the Category 2 regime too, with the minimum tax payable to increase to £32,000 from £22,000 and the tax cap increased from £27,560 to £37,310. The changes to apply as from August 1, 2021.
There were change to the HEPPS scheme too, also applicable from next year.
‘NOTHING TO GIVE AWAY’
There were few give-aways in the budget announcement – “there is nothing to give away,” Mr Picardo said – but there were no increases to personal taxes or moves to tax pensions either, and a commitment to continue paying tax rebates.
But alongside pre-budget announcements of increases to social insurance and voluntary contributions, there were measures to increase the cost of electricity and raise duties on cigarettes by 50p to £15.50 for a carton of 200, alongside a 12p per litre levy on fuel supplied to pleasure boats and superyachts as a result of removing a one-third reduction in the existing applicable rebate.
The Chief Minister sought to highlight his government’s economic record after 10 years in office and insisted repeatedly that Gibraltar’s public finances had been “annihilated” by Covid-19, as had economies around the globe.
“Anyone who thinks the economic and public finance issues we face today as a people are the fault of the Government is deluded,” he said, anticipating Opposition criticism of his government’s handling of Gibraltar’s finances in the years leading to the pandemic.
He softened news of increases in the price of electricity by reminding the community that rates for both commercial and residential consumption had remained unchanged since 2010 and had last been increased by the GSD.
Each will now go up by 20% and 16% respectively - less then annual inflationary increases over the past 10 years, Mr Picardo said - and by inflation beyond that.
There were no changes to personal tax allowances other than for “modest” targeted increases in areas such as age allowances for single and married individuals, blind and disabled persons, single parents, nursery fees and families with children in further education, among others.
There were inflationary increases to disability benefits and old age pensions too.
Likewise the minimum wage will increase to £7.50, in line with a five-year escalator approved in legislation in 2019 and despite representations from the Chamber of Commerce and the Federation of Small Businesses. Beyond that, the next two increases will provide for inflation.
“We believe that our five-year escalator for the minimum wage was the right thing to do and we should not stop or pause the escalator,” Mr Picardo said.
Other measures announced included allowing people renting berths in the Small Boats Marina the option to purchase them at a cost of between £32,000 and £40,000 depending on size.
The purchase price will increase by 10% every April and any subsequent sale at open market value would attract 5% stamp duty.
Underpinning much of Mr Picardo’s address was a sense that Gibraltar had done well for many years and that Gibraltarians enjoyed wide-ranging benefits across many areas of life.
The budget, he said, was a “carefully calibrated” package of measures designed to protect the income of working people, “giving only to those that need it the most”.
“We cannot continue to be the spoilt child of Europe,” Mr Picardo said.
“We have to understand that the pandemic will change some things.”
“Not any of what I might call our community’s sacred cows, but certainly some aspects of life that we are overdue in addressing.”