The cost of this pandemic to the Gibraltar taxpayer will be tens of millions, possibly more, in terms of increased costs and lost revenues. On 14th April we published Who pays the bill?, some initial ideas as to how we can restore the public finances. This was followed up on 20th April by the COVID-19 Government Car Tax Bond idea from a reader. Whilst governments plan their exit strategies and scientists focus on vaccines, economists are seeking ways to restore good health in public finances using fiscal measures. Here are some more ideas for Gibraltar:

Digital Services Tax

It’s fair to say that the online economy will outperform the more traditional economy both during and after this pandemic. Digital giants such as Google, Facebook, Apple and Amazon are being targeted by the Organisation for Economic Co-operation and Development (“OECD”) as methods of taxing these online powerhouses are being discussed across its member network. These online companies pay taxes where production occurs rather than where the consumer is located and are not subject to corporate income tax in the foreign countries. However, the OECD process is not fast enough for many nations. About half of all European OECD countries have either announced, proposed, or implemented a digital services tax (“DST”), a tax on selected gross revenue streams of large digital companies.

According to a report from KPMG which was updated 24th April 2020 entitled Taxation of the Digitalized Economy, Austria, France, Hungary, Italy, Turkey and the UK are amongst 20 leading economies to have implemented a DST. The Czech Republic, Norway, Slovakia and Spain are amongst a further fifteen major economies to have legislation in draft or formally considering a DST. 

The implementation of the 2% tax in the UK which started 1st April 2020 has largely gone unnoticed by much of the media due to the coronavirus outbreak. It applies to businesses generating worldwide relevant revenues of more than £500m with at least £25m of these revenues being derived from UK users. Relevant revenues are social media platforms, internet search engines and online market places. Financial and payment services providers, sale of own goods, the provision of online content, and radio and television broadcasting services are excluded.

£25m is the minimum threshold in the UK with a population of 68 million people, therefore the pro rata threshold for Gibraltar on a much smaller population would be £12,000. It’s a near certain, in my opinion, that these online powerhouses earn more than £12,000 revenue each from Gibraltar annually. So, Gibraltar could implement a tax of 2% on revenues above this £12,000 threshold and not be out of sync with any other advanced nation. Indeed, the rate is 3% in France and 5% in Austria!  The UK legislation is there, ready and waiting to be copied. Google, Facebook, Apple and Amazon should contribute to our economy on revenues they earn from Gibraltar users, just as they are now having to do in an increasing number of economies worldwide.

Selling freeholds or extending leaseholds

The majority of property in Gibraltar is held on a leasehold basis, ie property is owned for a certain number of years. An underlease term typically grants 149 years less a few days, although there are variations on this. The lease reverts to the lessor (the Crown) at the expiry of that term unless the term were to be extended. There is no automatic right to renewal or an extension of the term in Gibraltar. The current practice is to grant renewals to holders of expired leases for a premium, such premium to be agreed with the lessor or management company and split between the number of apartment owners.

It is not the policy of the government to grant freeholds. Those freeholds that do exist are historical and are mostly concentrated in the central town area.

In the UK, The Leasehold Reform, Housing and Urban Development Act 1993 gave leaseholders the right to get together to buy the freehold of their block of apartments provided certain criteria are met. This process is known as “collective enfranchisement”.

In Gibraltar, the remaining term on underleases varies, depending upon when the building was granted its initial lease (usually at the time the building is built) and what period lease was granted at the time. There is no right for underlessees to be able to extend their lease and there is no control upon lessors as to how much to charge for lease extensions as there is in the UK. This gives rise to both unfairness and mortgage issues, as banks do not like lease terms less than 70 years (although that varies subject to circumstances).

Adapting the UK Leasehold Reform, Housing and Urban Development Act to suit circumstances in Gibraltar, government could raise significant revenue by enacting a more formal process for lease extensions and freehold sales which would see those who could and wanted to, extend their leases and / or buy the freehold, with the public purse as the main beneficiary.

Means testing

This topic is politically challenging and was sent in by one of my readers. In the new era of “what can we do for Gibraltar not what can Gibraltar do for you” the government may decide to implement some measures on expenditure which is not means tested but perhaps could be. Government social housing is attractively priced compared to the real value of the property being purchased or rented.  Various politicians have called for means testing to ensure the right tenants or purchasers benefit from the subsidised cost, those who need it the most, limiting the higher earners from the same level of subsidy as those more in need. This theory could also extend to student grants whereby the full university fees plus a rent contribution is paid by the taxpayer for all Gibraltar resident students.  Tampering with either would most likely be unpopular but grading as opposed to eliminating the level of subsidy, or simply focussing on the rent contribution as opposed to the university fees, could be a socially acceptable way to save money?  A tough one.

Developing the car tax idea

Many readers responded with continued ideas to develop the car tax idea. One such reader noted that Bermuda’s policy may be worth reviewing. Their objective is to restrict the number and length of vehicles on the roads due to its small winding road infrastructure and limited capacity for more vehicles. Just one private car is allowed per household and annual taxes are one of the highest in the world. The lowest sum for a private vehicle (eg Peugeot 107) is £250 pa, whilst class H, meaning cars over 169 inches in length (eg Nissan Qashqai) incurs an annual £1,360 fee.  Many large cars are banned altogether. So an average of £175 per annum as suggested in the Car Tax Bond idea would appear to be good value.

This will not be one of my most palatable blogs. However, finding ways that restore public finances which are both socially justifiable and environmentally positive are going to be required one way or another.