In a bid to remove Gibraltar’s ‘tax haven’ image, Peter Caruana, chief minister of Gibraltar, recently announced the introduction of a corporate tax rate of 10% for both international and domestic companies within Gibraltar. But how will the attitudes of many businesses in Gibraltar change as a result of a prospective tax hike?

What’s happened?

Caruana is aiming to remove Gibraltar from the OECD’s ‘grey list’ of countries considered unsavoury on tax matters and on to the ‘white list’ of fiscal good guys. This will be a difficult task indeed considering Gibraltar, like many other jurisdictions, has generally been held in low esteem for tax reasons by the OECD.

He hopes, however, that through his introduction of a 10% corporate tax rate he will gain the trust of those countries that doubt the credibility of those choosing to invest their money in Gibraltar.

If this were not enough, the recent agreement signed by Caruana and the USA, agreeing to the exchange of tax information, could also shed some light on those high net-worth individuals who use ‘the rock’ to house their considerable incomes.

In many ways Caruana has molded the face of Gibraltar today; the economy is no longer dominated by the British Military but by the financial services sector. The GDP has steadily risen since 2004 from around £600m to £850m, inflation has dropped and taxes on almost all areas of business are extremely low.

Despite these promising figures, Caruana’s small-yet-affluent, state is, to many, only an offshore centre for multinationals seeking to take advantage of the 0% corporate tax rate.

What will happen?

Caruana will certainly have to consider many areas that may be affected as a result of the impending change. The 10% rate, although potentially shifting Gibraltar into the ‘white list’, may result in adverse affects to the economic stability of the country.

Given the current economic climate he may find that many businesses withdraw, to place their money in other low tax jurisdictions which are available. And having your details handed over to American tax authorities is hardly an advertising campaign likely to entice new business to the territory.

But they are holding steady. Finance director James Tipping commented on the tax rule, saying ‘our philosophy is a low tax, not no tax, jurisdiction’, suggesting the government is confident that business will stay on.

Their confidence is perhaps based on the fact that, so far, no business has declared an intention to relocate.

Gibraltar may now be a leading member in the changing face of global tax as other countries consider following suit. Caruana will be hoping that 10% is enough, but not too high a price to pay.