Gibraltar Bows before the Tax Cartel

The international tax system just became a little less competitive. Gibraltar has removed the distinction between onshore and tax-exempt offshore businesses in an effort to remove the nation’s reputation as a tax haven and become a “mainstream European financial services centre.”

The state has signed 18 tax information exchange agreements and has others under negotiation. With the adoption of the Act, coupled with Gibraltar’s compliance with all EU financial services regulation, money laundering and co-operation rules, Gibraltar joins the group of mainstream European financial services centres, according to a government statement. The Act introduces tough anti-avoidance measures and default financial and legal penalties to help ensure everyone based in the tiny state pay the taxes. … Many previously tax exempt banks, insurance, investment, gaming and other companies will begin to pay profit tax in Gibraltar for the first time on the same basis as all other companies starting in July 2011.

Gibraltar is still an attractive place to start a business: company tax rates will be cut from 22% to 10% as the new rules are introduced, and its English common law system is about the best available in the current uncompetitive market for law.

Still, this is an indication of what happens when powerful nations work together to thwart competition. In most industries, such behavior is frowned-upon; in the market for governance, the default assumption seems to be that competition is harmful and collusion is the only response.