As Europe’s economies struggle to pay off high debts and concern is expressed over sustainability, Gibraltar appears to be an island of stability and economic prudence.

“Throughout the crisis the Gibraltar economy has demonstrated a robustness and resilience that reflects its solid foundations, the benefit of the extent of diversification that it enjoys for one so small, and the fruits of our policy focus on high standards and high-quality operators in our principal economic sectors,” said Gibraltar’s Chief Minister (the equivalent of a prime minister) Peter Caruana to the local Chamber of Commerce in mid-November 2009.

“We have worked hard to achieve this solidity and stability and the success of our economic model is best tested in hard and stressful times for the rest of the world. I think it has passed the test with high marks,” he added.

Gibraltar’s economy has continued to grow with over 8% GDP growth in 2008 and at least 6% in the year to March 2009. All current indicators point to continued significant growth for the remainder of the 2009/10 financial year ending March 2010.

Caruana says the country is “conservatively and very provisionally” estimating at least 5% growth which would produce a GDP of around £900 million at March 31, 2010.

“It is a measure of the extraordinary success of our economy that it has grown by 145% since 1996. That is an average of over 11% a year,” he notes.

Assuming just 5% growth over each of the next two years, Gibraltar’s economy will have nearly trebled in size in just 15 years.

Unlike most of the rest of Europe, Gibraltar’s government’s fiscal position remains strong despite the global recession. Government revenue from its principal sources remains strong. The government is predicting a significant overall budget surplus for 2009/10 of at least £15 million or around to 5% of the government’s total expenditure, and 1.75% of GDP.

Gibraltar’s public debt is used only to fund investment, not recurrent expenditure. Its public debt remains low; at March 2009, the government’s net public debt stood at 7.3% of GDP.

“Gibraltar is not just having a relatively good global recession and financial crisis, but is further positioning itself well to move into a significant new growth phase when the global economy and markets recover,” declares Caruana.

A new 10% across-the-board corporate tax rate will be introduced in the next tax year. This rate is already available for new business start-ups. Caruana expects Gibraltar’s “conventional but competitive tax model coupled with Gibraltar’s many other attractions as a business location” to fuel further economic growth and development of business.

The government is committed to Gibraltar’s focus on selective licensing, high but reasonable standards of regulation and guarding its jurisdictional reputation. Although the government does not undertake public investment programmes to stimulate or grow the economy, there is a significant pipeline of projects to provide an important boost to many sectors of the economy which are expected to add significantly to growth.

Caruana says Gibraltar continues to study the “desirability, viability and feasibility” of a new locally owned bank.

Gibraltar maintains low tax regime

Despite attempts by the European Commission to question Gibraltar’s low-tax regime, the government’s proposed changes to the Income Tax Act and corporation tax is likely to make the state even more attractive, particularly for disgruntled high earners resident in London, hopes Chief Minister Peter Caruana.

The exempt-status tax regime that Gibraltar has been running must end by December 31, 2010.

“In order to maintain Gibraltar’s socio-economic prosperity the corporate tax rate needs to be as competitive as it is compatible with government’s revenue needs,” noted Caruana in his budget speech to parliament at mid-year 2009.

“Without this there would be large-scale loss of economic activity and job losses. Existing corporate tax payers (who presently pay 27%) will be huge windfall beneficiaries of the need to eliminate tax-exempt status and its replacement with a low rate for all companies,” he added.

The new rate will be 10%. Energy and utility providers – including electricity, fuel, telephone service and water providers – will pay a 10% surcharge, bringing it up to a rate of 20%.

Most exempt-status companies currently hold exemption certificates that are valid, subject to repeal of the legislation, for 25 years.

The government believes it should honour this commitment and not remove the tax benefit provided by the exemption certificate until midnight on the December 31, 2010.

The flat corporate tax rate of 10% becomes effective on January 1, 2011, which means that the rate will change to 10% from the 2010 rate halfway through the year. Therefore companies that are presently tax exempt will have to pay tax at 10% for the second half of 2010/11 only.

Those that are not tax exempt will pay at the corporate tax rate in force for the first half of the year and tax at 10% for the rest of the year.

The preceding year’s basis of assessment will be abolished in favour of an actual basis. Commencement provisions will also be abolished and there will be transitional rules.

The basis of taxation will not change and will continue to be on an accrued and derived basis, effectively a source-based system.

There will be wide-ranging and far-reaching anti-avoidance provisions.

Until the new regime comes in, the corporate tax rate has been reduced from 27% to 22% (effective July 1, 2009).

As a further transitional measure and to encourage business start-ups, the government also introduced a start-up rate of 10% from July 1, 2009. This applies to any business established in Gibraltar after that date.

Tax will be assessed on an actual-year basis.

Personal taxation
The government also introduced a dual-tax system under which taxpayers may choose between two different systems for their tax. One, known as the allowance-based system, is the tradition model. The other is the gross income-based (GIB) system, under which the tax rates are lower but the taxpayer is entitled to no allowances.

The tax rate under the GIB system is: 20% on the first £25,000 of income; 30% on the next £75,000; and 38% on the remainder. This is considerably less than the tax imposed in other jurisdictions and most notably the UK.