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EU tax proposals could stall key Gibraltar industry and cast Northern Ireland adrift

28 September 2021

Gibraltar’s burgeoning bunkering industry could stall, and Northern Irish businesses competitiveness in Great Britain could be eroded if the EU adopts proposals altering tax rules, according to a new report from the influential European Scrutiny Committee.

MPs on the Committee were critical of what they called the Government’s lack of interest and that no impact assessment had apparently been conducted on the proposal’s effects.

The draft Energy Taxation Directive proposes yearly increases in the minimum tax on energy and fuels in line with inflation, removing several tax exemptions and linking tax levels to a fuel’s environmental performance. This could hit drivers, consumers, and businesses in the pocket, according to the report.

While it was an EU member, the UK rejected similar proposals.

Gibraltar

The Port of Gibraltar’s ship refuelling – or bunkering – facilities are among the largest in the Mediterranean and have benefited from exemptions on tax on maritime fuels under the current regime that are now earmarked for the axe.

This could increase costs and affect the competitiveness of the key Gibraltan industry should negotiations between the UK and the EU on Gibraltar’s future trading relationship with the bloc result in full EU alignment.

Gibraltar is not covered by the UK-EU Trade and Cooperation Agreement signed at the end of the transition period. Instead, the relationship has been governed by temporary arrangements reached at the eleventh hour in December.

Negotiations on a permanent deal will begin before the end of the year at which the EU’s current negotiating position includes effective control for Spain over Gibraltar’s tax levels. Gibraltar would still receive the taxes raised, but rates would be set in Madrid. This could end up being higher than the EU minimum, especially given Spanish concerns over pollution around Gibraltar. It would also be controversial in the context of EU member Spain’s territorial claim for the peninsula that borders it.

Although Gibraltar is not part of the UK, as a British territory the UK Government is responsible for its foreign affairs and will be negotiating with the EU on its behalf.

Northern Ireland

Northern Ireland would automatically have to follow the EU’s new energy tax proposals if the Government was unable to achieve its desired substantial amendments to the Northern Ireland Protocol, the report warns.

Linking energy tax levels to inflation would result in the costs of fuel for end users in Northern Ireland accelerating away from rates in England, Wales and Scotland over time if there are no equivalent rises in Britain. Energy intensive Northern Irish goods would become increasingly uncompetitive in its home UK market as a result.

Depending on the tax levels determined by the EU there could also be some immediate tax rises in NI and the potential for fuel smuggling to become more prevalent, if the proposals are adopted.

There is a risk of social consequences to this as unionists are opposed to any separation from the UK mainland, as riots early in 2021 against the Protocol showed.

The Protocol was a compromise agreed between the UK and the EU to keep the border with the Republic of Ireland open with Northern Ireland adhering to EU regulations and accepting checks on British goods entering NI.

Must be taken seriously

Chairman of the European Scrutiny Committee, Sir Bill Cash, said, “Regardless of the Government’s intentions to negotiate more flexible settlements, as things stand Northern Ireland will, and Gibraltar may have to follow EU tax rules. The potential erosion of competitiveness of key industries in Northern Ireland and Gibraltar, and the possible social ructions that would follow, must be taken into account and taken seriously.”

More analysis by the Committee

The Committee regularly publishes reports covering proposed EU legislation across all legal and policy areas. Also included in this week’s report:

Draft EU Machinery Regulation (Update): The Government has informed the Committee that it is considering potential implications of EU proposals tightening regulations on machinery safety testing after the Committee reported on the subject in June. The planned changes could render UK machinery exports less competitive.

Further information

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