Death of The Rock?

Gibraltar's attempts to move away from being a haven for tax dodgers to an all-encompassing financial services centre are in jeopardy from the dark spectre of the European Union.

The European Commission is currently in dispute with Gibraltar over The Rock's tax-exempt status after the EC shot down Gibraltar's reform proposals last year, resulting in a showdown in the European Court of Justice.

The EC says Gibraltar is a region of the UK and so, argues the EC, Gibraltar cannot set its own tax regime and must mimic and adopt the UK's tax system as if it were Surrey or Yorkshire.

With a long history of its own sovereignty, Gibraltar disputes this with a passion. Peter Caruana, Gibraltar's chief minister, says: "Gibraltar is not part of the UK - we are British - but we are not part of the union of the United Kingdom. Even the most basic scholar of the law or politics can see we are not, so for the EC to say we are is demonstrably nonsensical. And it should be noted that we are supported by the UK government in our objection."

The origin of Gibraltar's financial services sector dates back to the enactment of the 1967 Companies Ordinance, which made provision for a special tax regime for international business. Currently, existing exempt companies will be able to continue to benefit from their tax-exempt status until 31 December 2010.

And although Caruana states: "We believe our prospects in this case are very good," if the unthinkable happens and judgment comes down on the side of the EC, Gibraltar's tax status would be reduced to a mere region of the UK.

"We would have to sit and wait for statements from the UK chancellor's Budget to implement our tax regime. It is absurd. But I cannot see that happening."

But does the EC have a point? During EU elections Gibraltar is categorised as South West England. However, Caruana says: "We have commemorated the 300th anniversary of our administering power's sovereignty which is a mighty long time."

The Rock has traditionally had the best of all worlds in its relationship with the EU. It is part of the EU's financial services system but exempt on the tax front (at least for now), is not in the customs union and is not part of the much-disputed Common Agricultural Policy. "We hardly need to be part of the CAP," quips James Tipping, Gibraltar finance centre director, as The Rock produces only a few fruit-bearing trees for its famous apes.

But for Caruana, this spat is the latest in a long line of confrontations with the EU. "Our financial services have developed and grown despite challenges from the EU," he says.

And ironically, this fight with the EC comes at a time when Gibraltar no longer sells itself just on tax. "We have progressed from a tax-haven model to adding more value and become a more mainstream international finance centre," says Caruana.

"We are less and less based on tax and more and more based on professional services. The attraction for companies to come to Gibraltar is tax but not solely tax," he adds.

But it is all part of Gibraltar's tumultuous relationship with the outside world.

"We are the most reviewed regulator on the planet," says Marcus Killick head of Gibraltar's Financial Services Commission. "But we match the regulatory standards of the UK and beat international standards every time."

Gibraltar has seen off many international probes in the past. "The key is to be approachable and have a light, business-friendly regulatory environment without it being soft on regulation. In an over-regulated world, I believe we have the balance absolutely right," says Killick.

But Killick admits there is no guarantee that money laundering has been wiped out completely. "There is no such thing as a zero failure system," he says.

Gibraltar currently has 45 insurance companies mainly comprised of motor insurers and a small but growing number of captives. The total worth of the insurance companies is £391m and this is part of The Rock's growing ambitions.

"We are approachable and are able to turn things around very quickly for companies. In the UK, the FSA takes around six months, we take about six weeks," say Killick.

Tipping says: "We make sure companies have easy access to regulation and the regulators and with a lower cost base than other jurisdictions we place an enticing offering to insurance firms. We are looking for the number of insurance companies to grow further."

And in the meantime, the economy continues to grow and get on with business. Caruana says: "The Gibraltar economy is very robust and diversified. It finances itself, with health, social and transport services able to sustain itself and this has been the case for many years." IT