Hoist by their own petard

Many readers will remember how Gibraltar has been "integrated" with the United Kingdom for the purposes of the Euro-elections, its votes having been added to the South-West Region when electing MEPs.

But the EU commission now seems to have carried this logic a step too far by insisting that Gibraltar is in fact a region of the UK and therefore not entitled to devise its own, independent tax regime, forcing the Gibraltar government to challenge the commission in the ECJ.

According to The Daily Telegraph, therefore, it is insisting that Gibraltar cannot offer a more favourable tax regime than the UK.

This spat broke out after Gibraltar announced tax reform proposals in July 2002 to the EU commission, which were rejected in March 2004. Brussels argued that if it offered a corporate tax regime more favourable than the UK system, it would constitute state aid.

The original proposals included the abolition of tax on profits for all companies and introduction of a profit tax for financial services providers as well as the introduction of a payroll tax. It is estimated a blend of these measures would lead to an overall tax rate of less than 10 percent for all companies, with some paying less. Gibraltar had wanted the abolition of its corporation tax, which is currently 35 percent. UK corporation tax is 30 percent of a company's taxable profits above £1.5m.

No hearing date has been set for the ECJ but Gibraltar's chief minister, Peter Caruana, says: "The EU Commission case works on the proposition Gibraltar simply is a region of the UK. You do not need to be a scholar to know that Gibraltar is not part of the UK - it has British sovereignty but is not part of the union of the UK."

He added: "If the Commission wins, Gibraltar would not be able to have a different tax system to the UK. The tax laws would have to mimic the UK's... We would have to wait for the Chancellor's Budget and do the same. It is an absurd proposition."

Separately, Gibraltar is also driving a cart and horse though the EU's fabled "savings tax directive". It has emerged that, because the commission believes that Gibraltar is part of the UK, as opposed to an independent territory, banks in Gibraltar are not obliged to disclose the details of UK based offshore depositors to the UK tax authorities – as those in the Channel islands and the Isle of Man are obliged to do.

The other offshore havens are complaining bitterly that this "loophole" is giving Gibraltar an unfair advantage, which gives the commission an unenviable problem – albeit of its own making. To enable the "savings tax directive" to work, it must acknowledge that Gibraltar is an independent territory but, if it does, then it cannot enforce its ruling that the territory cannot apply its own tax regime.

This is what they call in the trade, being hoist by your own petard.