Gibraltar The Rock and Taxes

With Brexit looming and Spain and Britain at loggerheads once again over Gibraltar, Germany will make its views known clearly.

Sigmar Gabriel and Boris Johnson, foreign ministers of Germany and Britain respectively, both play up their jovial nature and irreverent humor when tackling controversies. But when Mr. Gabriel flies to London today to meet Mr. Johnson, who was the most flamboyant proponent of Brexit in last year's referendum campaign, their discussion will become tense nonetheless. That is because the issue of Gibraltar will come up. For Britain and Spain, it is laden with emotion. But ultimately, the fate of Gibraltar will be decided by the whole European Union, and must therefore reflect Germany's stance against tax havens in the E.U.

Barely a week into the negotiations about Britain's coming exit from the EU, this ancient spat between Britain and Spain has thus already raised tempers on all sides. Gibraltar is a dramatic rock off the Iberian coastline (called the Pillars of Hercules in ancient times) but has been under British rule since the Treaty of Utrecht in 1713. Since then, Spain has repeatedly tried and failed to get it back. Now, with Brexit looming, Spain insists that Gibraltar should not automatically be included in any deal Britain strikes with the E.U. once Britain leaves the bloc.

Britons are outraged. Over the weekend, Michael Howard, a former leader of the Conservative party, said in a television interview that the prime minister would safeguard the sovereignty of Gibraltar as Margaret Thatcher protected the Falklands -- implying that Britain would even go to war with Spain.

Prime Minister Theresa May backed away from this incendiary position. But the impasse is yet another excuse for Britain's euroskeptics to vent their hostility. The Sun newspaper today shows the Gibraltar rock shrouded in the union jack, with the phrase ‘up Yours Senors.’ Britons immediately recognized this as a reference to another of its famous anti-European front pages: ‘up yours Delors,’ written when Margaret Thatcher confronted then-E.U. Commission president Jacques Delors.

But for Germany, the issue of Gibraltar is less about sovereignty and primarily about money. Wolfgang Schäuble, Germany's often hawkish finance minister, sees the fight against tax havens as one of his biggest missions, which often puts him at odds with Britain and its overseas territories, several of which have prospered by attracting money with few strings attached. Addressing Philip Hammond, Britain's Chancellor of the Exchequer, in January, Mr. Schäuble warned his counterpart: “You can’t compare Great Britain with the Cayman Islands. If a big country thinks it could have the benefits of a small country...this will go awry.” Tax havens, he added, will "not be tolerated by the rest of the world."

In this quest to dry out tax havens, Mr. Schäuble has secured the backing of France. Great Britain, Ireland and the Baltic countries have been less zealous -- the U.K. in particular is fighting for the interests of the Channel Islands and other overseas territories. But the Franco-German tandem, as so often, has now swayed the entire E.U. to fight tax havens. This year Brussels is drawing up a new blacklist of places that offer zero or near-zero corporation tax.

You can’t compare Great Britain with the Cayman Islands. If a big country thinks it could have the benefits of a small country...this will go awry. Wolfgang Schäuble, German finance minister

And now: Gibraltar. Could it become just the sort of tax haven, half in the E.U. and half out, that Mr. Schäuble wants to root out? There are signs that it already is. Technically a British overseas territory, it serves up a picture-postcard version of Britain, complete with fried fish and chips and red telephone boxes in its narrow streets. But its economy is based on the far less picturesque sectors of finance, banking, shipping and more recently, online betting.

More to the point, Gibraltar used to charge no taxes on companies incorporated in the territory but doing business abroad. In 2011, it imposed a blanket 10 percent corporate tax rate, making it a low-tax, rather than a no-tax zone, but it still has no sales tax and no capital gains tax. To Germans it looks, sounds and smells like a tax haven. Spain had indeed pushed for Gibraltar to be included in an earlier version of an E.U. blacklist, published in 2015. It will try harder this time.

This is the background as Mr. Gabriel and Mr. Johnson meet. Gibraltar itself, meanwhile, insists that it complies with all E.U. regulations for financial services. But once Britain leaves the E.U., these regulations may no longer apply. Gibraltans do not share the euroskepticism of their motherland -- 96 percent of them voted for Britain to remain in the E.U. So they may even be open to ideas such as Spain's recent proposal for share sovereignty over the Rock that would let Gibraltar keep access to the single market after Brexit.

Naturally Gibraltans feel that they should have the right of self-determination about whose jurisdiction they will fall under. For now Fabian Picardo, the chief minister, argues that Gibraltar wants to remain British. But as Europe's great powers meet in northern capitals, that identity remains unsettled for now.


Meera Selva is an editor at Handelsblatt Global. To contact the author: [email protected]