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The European Journal, November 2001

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The Assault on Gibraltar

by Allister Heath*

The full wrath of the EU is about to be unleashed upon a small British territory the size of London's Hyde Park. As Spain prepares to take over the rotating presidency of the EU on 1 January 2002, it is keener than ever to regain control of Gibraltar, a jutting rock on its Southern coast. Although public opinion remains overwhelmingly favourable to Gibraltar's current status, the Spanish political elite scents victory for the first time in 297 years. Several recent developments in the European Union and on the wider international scene have tilted the scales in their favour.  These include the growing pressure towards EU and OECD tax harmonisation; the triumph of a politically correct and EU-centric view of history; Tony Blair's dream of 'taking the lead' in European political integration; and the upcoming Intergovernmental Conference of 2004. Even though the preamble to the Gibraltar Constitution of 1969 categorically states that "Her Majesty's Government will never enter into arrangements under which the people of Gibraltar will pass under the sovereignty of another state against their freely and democratically expressed wish," the British government appears to be getting ready to strike a deal with Spain, perhaps in early 2002.

Financial Success

Gibraltar is in many ways the victim of its own success. In an age of reduced defence spending, it has successfully reduced its reliance on Britain's military installations, which now constitute only approximately 11 per cent of the local GDP.

Instead, to the consternation of the bien pensants in London, Madrid and Brussels, it has embarked upon a tax cutting agenda to attract international commerce. "One of the biggest industries in Gibraltar is maintaining a range of duty-free stores which siphons shoppers away from local retailers all over southern Spain," one such trendy intellectual recently told me. "It would only be correct for Gibraltarians to call themselves British if they paid the same rates of income tax and Value Added Tax as we do here in the UK." Such views are sadly all too prevalent, especially among europhiles angered by the Rock's somewhat detached relationship with the EU. In 1973, when Britain joined the EEC, Gibraltar entered too, as a 'dependent territory in Europe', under Article 277(4) of the Treaty of Rome. Crucially, at the request of the Government of Gibraltar, it was excluded from the burdensome common external tariff, the Common Agricultural Policy and Value Added Tax.

Under such conditions it is hardly surprising that finance now accounts for 20% of GDP, according to data from the US Central Intelligence Agency.1   The industry now includes a broad spectrum of professional services, ranging from private banking to captive insurance management. The origin of Gibraltar's burgeoning financial services sector dates back to the enactment of the Companies (Taxation and Concessions) Ordinance in 1967, two years before powers over domestic affairs were devolved to an elected House of Assembly. The Ordinance made provision for a special tax regime for international business. The industry has made great strides since those early days, with recent developments including the establishment of a number of Swiss portfolio managers; the commencement of direct trading on EUREX, LIFFE and other exchanges; and the pioneering use by Deutsche Bank of Gibraltar as a domicile for securitisation and 'repackaging'. Four other major investment banks including Swiss giant UBS Warburg have since followed suit. Recent legislative developments include the Protected Cell Companies Ordinance (2001) designed to boost the captive insurance and funds sectors.

Tax Harmonisation

One of Spain's principal tactics in the intense guerrilla warfare it has been waging against Gibraltar has been to accuse the Rock's financial centre of fostering money laundering. This is clearly far from being the case, as even leading supporters of the EU have conceded. Gibraltar has been held up as a benchmark jurisdiction by, amongst others, Robin Cook, the former UK Foreign Secretary. Its regulatory framework increasingly resembles that of any other financial centre. A Deposit Protection Scheme came into effect in 1999 and an Investor Compensation Scheme will soon become operational. Being part of the EU, Gibraltar has to implement all relevant directives. The Financial Services Commission, established in 1989 as the local supervisory body, goes even further by matching the UK's onerous standards in financial regulation and supervision. Although these Directives are flawed, and Britain's financial regulations increasingly suffocating and arguably unjust, the point is that their adoption demonstrates the vacuity of Spain's allegations.

Unfortunately, several international bodies have recently come to Spain's rescue by accusing the Rock of 'unfair' tax practices. The European Commission is predictably unhappy about Gibraltar's special VAT status as well as by its low rates of corporation tax. The Organisation for Economic Co-Operation and Development (OECD), an increasingly meddlesome group supposedly representing the interests of developed nations, recently named Gibraltar as one of 35 'tax havens'. Gibraltar, the OECD decreed, had to improve transparency and increase its cooperation with overseas investigators. Luckily, the OECD is a toothless bully with no powers to dictate taxation or impose sanctions, even on its members and their dependencies. The organisation needs to convince its member states to implement its suggestions – in effect, this means winning over Republican legislators in the US. This is a task in which the OECD has so far failed. Thanks to a concerted effort from supporters of tax competition, led by the Virginia-based Center for Freedom and Prosperity,2  the OECD has already been forced to relax its demands and to extend its deadline to the end of February 2002.

A Potted History

To understand its current predicament, it is useful to spend a little time surveying the Rock's history. Its modern story begins with the Moors, nomads of Mauretanian origin who settled around the shores of North Africa. Led by Tarik ibn Ziyad, they crossed the Mediterranean and landed in Gibraltar in 711. They easily defeated the ruling Visigoths and rapidly spread beyond the Pyrenée mountains into France, where, as every French school child knows, they were turned back by Charles Martel at Poitiers in 732. Gibraltar remained Moorish for 751 years until 1462, a time which coincided with the gradual eclipse of the great medieval Arab civilisation. The Spanish controlled Gibraltar for just 242 years until 1704 when the Rock was seized by a joint Anglo–Dutch military force during the War of the Spanish Succession. The peace treaty which settled that war was signed at Utrecht on 13 July 1713. The Treaty ceded Gibraltar to the UK in perpetuity and the territory has remained under uninterrupted British control ever since.3   The provisions that specifically relate to Gibraltar are contained in Article X, reproduced below. As we shall see, although Utrecht is still regularly invoked in the current war of words between Spain and the UK, it is fatally compromised by little-known unsavoury passages:4

"The Catholic King does hereby, for himself, his heirs and successors, yield to the Crown of Great Britain the full and entire propriety of the town and castle of Gibraltar, together with the port, fortifications, and forts thereunto belonging; and he gives up the said propriety to be held and enjoyed absolutely with all manner of right for ever, without any exception or impediment whatsoever.

But that abuses and frauds may be avoided by importing any kind of goods, the Catholic King wills, and takes it to be understood, that the above-named propriety be yielded to Great Britain without any territorial jurisdiction and without any open communication by land with the country round about.

Yet whereas the communication by sea with the coast of Spain may not at all times be safe or open, and thereby it may happen that the garrison and other inhabitants of Gibraltar may be brought to great straits; and as it is the intention of the Catholic King, only that fraudulent importations of goods should, as is above said, be hindered by an inland communications it is therefore provided that in such cases it may be lawful to purchase, for ready money, in the neighbouring territories of Spain, provisions and other things necessary for the use of the garrison, the inhabitants, and the ships which lie in the harbour.

But if any goods be found imported by Gibraltar, either by way of barter for purchasing provisions, or under any other pretence, the same shall be confiscated, and complaint being made thereof, those persons who have acted contrary to the faith of this treaty, shall be severely punished.

And Her Britannic Majesty, at the request of the Catholic King, does consent and agree, that no leave shall be given under any pretence whatsoever, either to Jews or Moors, to reside or have their dwellings in the said town of Gibraltar; and that no refuge or shelter shall be allowed to any Moorish ships of war in the harbour of the said town, whereby the communication between Spain and Ceuta may be obstructed, or the coasts of Spain be infested by the excursions of the Moors.

But whereas treaties of friendship and a liberty and intercourse of commerce are between the British and certain territories situated on the coast of Africa, it is always to be understood, that the British subjects cannot refuse the Moors and their ships entry into the port of Gibraltar purely upon the account of merchandising. Her Majesty the Queen of Great Britain does further promise, that the free exercise of their religion shall be indulged to the Roman Catholic inhabitants of the aforesaid town.

And in case it shall hereafter seem meet to the Crown of Great Britain to grant, sell or by any means to alienate therefrom the propriety of the said town of Gibraltar, it is hereby agreed and concluded that the preference of having the sale shall always be given to the Crown of Spain before any others."

Supporters of Gibraltar emphasise that Utrecht stipulates that the Rock was handed over in perpetuity; the Spanish point out that the Treaty gives Spain – rather than the people of Gibraltar – the right of first refusal in the event of Britain disposing of its colony. This reliance on Utrecht is a mistake. Apart from anything else, the Treaty possesses profoundly anti-Semitic and racist clauses, which fortunately have long been ignored by the British authorities. Additionally, in the twenty-first century the right to self-determination must be non-negotiable. It should no longer be acceptable for two former colonial powers to decide the future of a territory without democratically consulting the populations concerned.

Some commentators hold up the example of Hong Kong's enforced decolonisation to justify Spain's 'Utrecht approach' and British withdrawal from Gibraltar. But the grounds for comparison are actually rather limited.5   Although Kowloon and Hong Kong Island itself were granted to the UK in perpetuity by China, the New Territories were governed by a 99-year lease signed in 1898. When Lady Thatcher opened negotiations with the Chinese in 1982, she simply included Kowloon and Hong Kong Island in the deal. Unlike the case of Hong Kong, where residents were never given the opportunity to vote on their future, Gibraltarians overwhelmingly backed the status quo in a democratic referendum in 1967. The geopolitical situation is also radically different. Hong Kong was surrounded by a hostile communist power armed with nuclear weapons which could probably be relied upon to seize control of Hong Kong regardless of any deal in 1997. In contrast, Spain is one of Britain's EU 'partners' and a member of NATO.

Sacrificing Gibraltar

That Spain refuses to relinquish control of Ceuta and Melilla, its own territories in North Africa, both of which are claimed by Morocco, as well as its other so-called plazas de soberania (places of sovereignty) appears to matter little to the anti-Gibraltar crowd. All that counts is that Tony Blair wishes to woo Madrid in the run up to the Constitutional Convention which will precede the 2004 IGC. Already, David Blunkett, the Home Secretary, chose the occasion of a speech in Madrid in November 2001 to announce the creation of pan-European police teams. He also told an audience at the aptly-named Universidad Europea in Madrid that he planned to sign a new agreement to speed up extradition of criminals between Spain and the UK as a step towards adopting an EU-wide arrest warrant.

One commentator perfectly encapsulated the Blairite view when she argued that "if the people of Gibraltar are so keen to be British they could be given the opportunity of emigrating to this country so that they could enjoy the climate and the taxes as well. I wonder how many would take up the offer. The present situation is not only a ridiculous anachronism but an ongoing source of friction with a fellow member of the European Community and an affront to Spanish national pride."6   Only massive and organised opposition in Britain could now prevent Tony Blair from sacrificing Gibraltar on the altar of European integration.


1 See

2 See for regular updates on the campaign against OECD tax harmonisation.

3 Chief Minister's Address to the Grimshaw Club, London School of Economics, 24 October 2001

4 See

5 See

6 Suzanne Tiburtius, "Our pledge to Gibraltar", Independent, 22 November 2001, p. 2


*Allister Heath is Head of Research at the European Foundation. He can be reached by telephone on 020 7930 7319; fax 020 7930 9706; e-mail:


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