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Opinion & Analysis

The Spanish Tax Treaty: Realpolitik or appeasement?

by Roy Clinton

That concessions were made in the Spanish Tax Treaty has now been admitted by the Government after a marathon nine hour Parliamentary debate. The burning question that now arises is: was this an exercise in realpolitik or was it, more ominously, an appeasement of Spanish demands?

Timing of Parliamentary Scrutiny

The Spanish Tax Treaty was never debated or approved by the Gibraltar Parliament before it was signed on the 4 March 2019. The Government had promised to bring a draft to Parliament but instead it broke its promise and published the signed treaty on 6 March 2019.

The Government then brought a neutral and unamendable motion to note the Treaty on 14 March 2019, but this remained on the order paper and was never brought to debate by the Chief Minister. On calling the general election in October 2019 all outstanding Parliamentary business lapsed as did the Tax Treaty Motion.

The Leader of the Opposition on 26 February 2020 then tabled an Opposition Motion on the Treaty expressing the view that this treaty was ‘intrusive and harmful’ to Gibraltar’s interests and should be replaced with an OECD model double tax treaty. Due to Covid-19 this motion was only debated now almost two years after the signing of the Treaty. So far from being as the Chief Minister suggests an exercise in political opportunism this was unfinished business that the Chief Minister and Parliament should have addressed in 2019.

Analysis of the Treaty

There has been little real debate or analysis of the Treaty. Yes a number of law and accountancy firms have produced guidance notes on implication and method of implementation but no-one, other than the odd visiting academic lawyer, has done the exercise of comparing its contents to existing domestic Spanish Tax Legislation.
Let us first of all be clear that no-one can, or should have attempted, to evade the Spanish Tax net if they are already caught by existing residence provisions. The Treaty however goes beyond existing provisions, for example taxing some Gibraltar companies that are established in future as if they were resident in Spain even if they conduct no activity there, or taxing Spanish nationals who move to Gibraltar after the 4 March 2019 as being on Spanish Tax territory and thus liable to pay Spanish tax in perpetuity. In addition whereas only Spanish Nationals are required to pay tax for four more years after moving to a deemed Tax Haven, the Treaty has extended it to Non-Spanish nationals and thus Gibraltarians moving back to Gibraltar.

There are other more technical provisions that I analysed and contrasted with current Spanish tax law in the debate in great detail that affect how companies are taxed and how this goes against international tax conventions. The House of Lords in its report of 10 April 2019 said the Treaty included special rules on determining tax residency that were asymmetrical or biased in Spain’s favour.

In the Parliamentary debate I stated that all the Government has achieved was: “to enshrine in a Treaty those very negative measures that were directed against us because Spain chose to classify us as a Tax Haven”. The Government has now admitted this in its press release the day following the debate when it stated “There are a lot of concerns that provisions in the Treaty replicate rules for deemed tax havens in current Spanish legislation. This is true and it cannot be denied”.

The above Government admission is why the GSD are of the view that we should have had a standard OECD model double tax treaty which would have been fair and balanced to both parties. It was, and still remains, inexplicable to us as to why the Government agreed to such an unfavourable Treaty.

Bossano’s Bombshell

Sir Joe Bossano’s contribution to the Parliamentary debate on the Treaty was seminal in that in complete honesty he set out the unvarnished truth of the matter. The Treaty he said cannot be seen outside the context of Brexit and the negotiations that were ongoing at the time to ensure that Gibraltar would join the UK in any transition provisions. There was a real prospect that Spain could exercise a veto against Gibraltar being in the transition with the UK, which would have meant Gibraltar crashing out of the EU before the UK causing us great economic damage to our business with the UK let alone Europe.

Sir Joe joked with the Opposition telling us effectively that the idea of Spain agreeing to an OECD model double tax treaty for Gibraltar was fanciful given that what Spain wanted effectively was a pound of flesh cut closest to our tax heart. This is of course not the narrative that the Chief Minister has been spinning to this day.

The concessions given in the Treaty in Sir Joe’s calculation are meaningless as regards our economy or tax revenues as Hacienda are tilting at imaginary windmills if they think they will achieve anything. A view of course Gibraltar has long held that we have nothing to hide as regards the propagandist fiction of being a drain on the Spanish economy or undertaking illegal activities. We are less sanguine about those effects and continue to believe there will be detrimental economic effects to these measures in terms of attracting inward investment.

On this cold logic Sir Joe is entirely supportive of the Treaty and doesn’t care if Spain wants to discriminate against its own citizens (or Gibraltarians moving back from Spain) as it ensured our inclusion in the transition and as a bonus gets us off their own Black List.

This is a Realpolitik view of the Treaty and not one that considers its merits as to its fairness, intrusion into our tax territory, tax affairs and perhaps longer term damage to business. Sir Joe’s view is that an OECD model treaty was never on the table, I would counter that perhaps then it should have been included in the treaty as the final objective after transition if at that point it was truly unobtainable.

Other less charitable observers might suggest that Gibraltar really had no choice but to appease and give in to an aggressive Spain in the face of overwhelming odds. If this view has merit then what would this mean for future agreements? And is this now the GSLP/Liberals tactic in the face of adversity?

The Framework Agreement

The Framework Agreement is about to commence negotiation and on the table is not only Schengen but the potential of joining a bespoke customs union. In the light of the outcome of the Tax Treaty it begs the question as to what is going to be Gibraltar’s negotiating position given that Spain again holds the power of veto.

The Framework Agreement sets out a clear direction of travel towards closer economic ties with Spain and Europe in what the Spanish Foreign Minister calls an atmosphere of “co-responsibility” and “inter-dependence”.

Schengen and the ‘boots on the ground’ red line has already been clearly demarcated as an area of disagreement. The bigger question in my view is that of the customs union which will have longer term implications for our economy and cost of living.

The Endgame?

By the end of June this year we are meant to see the outlines of the EU Treaty. The Chief Minister has again promised to bring this to Parliament as he did the Tax Treaty. Given Sir Joe’s stark analysis of the position we were in as regards the Tax Treaty are we going to be treated to another pretence that they are not going down the road of accepting a loaded agreement only to then see this being admitted two years after the event as an exercise in their version of Realpolitik which is a hair’s breadth away from Appeasement, or will the Government this time turn around and walk away? In either case the people and Parliament have the right to be fully informed as to all the implications of what may soon unfold.

Roy Clinton is a GSD MP and shadow minister for public finance.

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