Analysis: The economics of Gibraltar II

MADRID, Jan. 17 (UPI) -- (This is the second part of a two part review of the economics of the Gibraltar, whose future is due to be discussed between the British and Spanish governments at the highest level this spring. In the first part, published Wednesday, we reviewed the island's history and economy, and examined its place and reputation in the shadowy world of money laundering. In this second part, we look at how the European Union regards Gibraltar's position, and the part already played by the island in Spanish business, which is to a large extent dependent on it as an offshore tax haven.)

There is no hard data on how much Spanish money is being laundered in Gibraltar, but the arrival of the euro has make clear that Spanish citizens are fond of secret places for their cash.

In spite of Spain's increasing unemployment and decreasing growth, the experts have noticed a rise in spending -- especially in luxury cars, jewelry and real estate -- at the end of 2001. It's a trend that could only be explained by the amount of "dirty money" in circulation before the arrival of the euro.

Luxury car sales increased 13 percent last October, the second best recorded October. Car-makers foresee sales of 1.4 million cars in 2001, a historic record. Briefcases full of soon to be obsolete pesetas were used to buy cars.

Banks also have been flooded by calls from people that want to exchange pesetas into euros without being questioned (Spaniards can exchange up to 2.5 million pesetas -- $13,270 -- without identifying themselves, but only until March).

"I buy apartment in Madrid. Condition does not matter. I pay in cash," says an advertisement in a Spanish paper.

This is hardly a Spanish phenomenon. Billions of dollars in "dirty money" kept literally under the mattresses is emerging all across Europe. The need for bills dropped 6.4 percent last September, according to the European Central Bank, a sign that "dirty money" was being introduced in the monetary system.

In Spain, some experts calculate that between $16 billion and $20 billion -- most of it earned legally, but without paying taxes -- could have been kept in private security boxes, money that is now being spent on houses, trips, apartments and cars.

For those who do not want to spend their money, Switzerland seems to be a favorite destination. According to some experts, about 10 percent of all "dirty cash" in Europe could end up in Swiss bank accounts.

But Gibraltar also offers some benefits, including proximity.

Normally, around 8,000 corporations registered in Gibraltar operate in neighboring Málaga and Cádiz, especially in the construction sector. According to José Luis Centella, a leftist party (IU) representative, those registrations "shows the existence of an important source of tax evasion ... because a significant part of these firms is listed as an owner of property in Spain."

"Probably many Spanish and UK businesses launder money or hide proceeds from the tax man through Gibraltar and other center's offshore banks," says editor of OffshoreOn.com, Ahmed El Amin, who does not have exact numbers. "Spain's complaints about money laundering and tax evasion often could be greatly addressed internally through fixing faults in that country's tax collection and anti-money laundering systems."

One way to appease Spain's government could be an accord between both countries to give greater access to Spanish authorities to investigate potential criminal cases of money laundering and tax evasion through Gibraltar, El Amin says.

As talks between London and Madrid progress, other money conflicts may arise and may prove to be even more important.

There is a question about Spanish action over Gibraltar in the Organization for Economic Cooperation and Development, or OECD.

Elena Pisonero, Spanish ambassador to the OECD, warned that Spain would veto an agreement on "harmful taxes" within the organization unless Britain stepped in to guarantee that Gibraltar would respect it. Spain did not want Gibraltar's word on that matter, because any action by "the Rock" in the international field could be interpreted as a Spanish recognition of its international status.

As a result, the OECD's long-awaited 2001 Progress Report on its "Project on Harmful Tax Practices" has been delayed since July. The OECD extended the deadline for tax havens to meet the organization's demands to eliminate harmful tax practices first to November 2001, and later to Feb. 28, 2002.

"Gibraltar is in a list of tax havens that the OECD published in June 2000, and which it has asked to cooperate with it in its fight against harmful tax practices" said Nicholas Bray, an OECD spokesman. "So far, Gibraltar has not yet made any commitment to cooperate."

A financial stability arm of the OECD listed Gibraltar as a place that needed to make some key changes to prevent financial crime. It also fell into the "tax haven" category defined by the OECD, but was not classified as "un-cooperative" in fighting money laundering by the international Financial Action Task Force.

The Gibraltar government expects to give its commitment to eliminate harmful tax practices before the deadline. It argues that it has been in touch with the OECD in the past regarding the issue, and thinks other British overseas territories are likewise acting as best suits them without London's -- or Spain's -- interference.

The European Commission, meanwhile has launched an investigation aimed at stopping unfair tax competition that distorts the single market, said Mario Monti, an EU competition commissioner.

The EU is examining 15 tax provisions in 12 member states, focusing mainly on preferential tax arrangements granted to companies, Monti said. If tax breaks are found to be unfair, the commission can put pressure on companies to pay them back.

Under scrutiny are a special fiscal regime in Biscay, Spain; a tax exemption on foreign income in Ireland; and qualifying offshore company and exempt offshore company rules in Gibraltar.

If Monti decides Gibraltar acted unlawfully, the resulting liability could run into billions of dollars, experts say. This would be a blow not only for the Rock, but also for Britain. Britain encouraged Gibraltar to develop its offshore industry and is still ultimately responsible for it.

Under the Treaty of Rome, Gibraltar is exempt from complying with the European Community's common customs tariff, common agricultural policy and the harmonization of turnover taxes (notably with regard to value added tax, or VAT). Gibraltar does not have capital gains tax, wealth tax, inheritance tax, estate duty, or VAT. Corporate tax is set at the rate of 35 percent, but tax-exempt companies are off the hook for 25 years from any form of Gibraltar taxation.

The other principal corporate vehicle -- known as a "qualifying company" -- can apply for a tax rate of up to 35 percent. The standard rate of tax for individuals is 30 percent.

According to El Amin, Gibraltar's eventual commitment to the OECD's project, "will certainly make the cost of business more expensive, and probably hurt investment companies whose clients are using offshore centers to evade taxes."

In similar tax havens, there is a short-term drop in offshore company registrations and clients using offshore services, but no real exodus of already existing companies and registrations, El Amin said.

It's difficult to assess how much of this is due to the economic downturn and how much is a direct consequence of worries over OECD blacklists, El Amin said. Gibraltar will probably take the strategy of lowering taxes on local companies instead of raising taxes on the international sector so as to remain tax competitive, he added.

"The big question is over how much business will be lost as more and more exchange of tax information on clients between offshore jurisdictions and other countries occurs," El Amin said. "The feeling is that at the base of Gibraltar's financial sector is legitimate business, which will stay as long as Gibraltar's taxes remain competitively low, and the high standards of regulation remain in place."