Gibraltar’s long-awaited new corporation tax system has been in the pipeline for many years due to a challenge to the jurisdiction’s proposed reform’s legitimacy by the European Commission (EC), an argument centred on Gibraltar's fiscal autonomy from the UK. The European Court of First Instance ruled in favour of Gibraltar on December 28, 2008, allowing it to continue with its reforms, to implement a tax regime to replace the existing regime, to be fully phased out by end-2010.

As part of the negotiations with Brussels in respect of its tax system, Gibraltar was forced to phase out elements of its existing offshore regime. Gibraltar dissolved its ‘qualifying’ company scheme in January 2005, in a move which cost the government an estimated GIP1.5m (GBP1.5m, USD2.25m) in annual tax revenues. These companies paid corporate tax at a rate agreed by the company and the government, set anywhere between 0% and 35% (but generally between 5% and 10%). As a transitional measure, the 80 or so qualifying companies registered in Gibraltar were switched to the ‘Exempt’ Company Regime (which paid annual fees and no percentage based corporation tax). However, later that month, it was announced that Gibraltar had been given until 2010 (2007 for new companies) to phase out its exempt company tax regime after the European Commission ruled that the scheme violated EU state aid rules.

In order to maintain government revenues and the jurisdiction's position as a thriving finance jurisdiction, the Chief Minister announced, on Gibraltar Day 2008, that the necessary legislation would be put into place for the new tax system by July 1, 2009, in order to implement the new regime in the 2010/11 fiscal year.

Outlining the new measures, in an address to parliament, Caruana stated:

“Mr. Speaker, as the House knows, the Exempt Status Tax Regime must end by December 31, 2010. It is essential for Gibraltar’s socio-economic prosperity that our corporate tax rate should be as competitive as is compatible with government’s revenue needs. Without this there would be large scale loss of economic activity and job losses.”

The new regime is to introduce a corporate income tax rate of 10% as of January 1, 2011. The basis of taxation will not change and will thus continue to be on an accrued and derived basis, effectively what is known as a source based system but will include wide-ranging and far-reaching anti–avoidance provisions.

In a guidance paper included with the release of the Act, the government, discussing compliance, said: “Historically, there have been problems in collecting arrears of tax and enforcing the collection of PAYE and Social Insurance. There have also been problems with evasion of tax through the understatement of or failure to disclose profits.”

“The tax leakage involved was never morally sustainable in that it results in an uneven playing field detrimental to compliant taxpayers. Fiscally the continuation of the leakage would be an unacceptable burden where the government is reducing the take from corporate tax to 10% and moving towards lower rates of tax for all others.”

“These problems have in large part arisen because both the statutory powers to obtain the information to enable the Commissioner to investigate returns and the powers to penalise those who do not pay on time have been inadequate. The revisions to the Act are targeted at empowering the Commissioner to obtain information both in advance of and after the submission of a return and to penalise in a clear and simple way those who pay tax late or attempt to cheat the system.”

The Income Tax Act, therefore, in addition includes new information powers, to enhance the tax authorities' ability to tackle non compliance; this will include enhancing the authority’s ability to investigate companies’ and individuals’ returns. The Act also codifies new rules surrounding payment and late payment including fines for non-compliance.