Traditionally, tax havens were believed to be insular financial centers scattered across the Caribbean Sea. Andorra and Gibraltar, although landlocked, have long been the quintessential tax havens in Spanish popular culture. In the new-found age of tax transparency, is this perception still justified?
Co-Authors: Luis Leis, Professor Tax Law at IE Law School, and Alfonso Brandín Clastre, Bachelor of Laws student
Once ill-famed for turning a blind eye to smuggling of all kinds during World War II, the Principality of Andorra experienced remarkable post-war economic growth, and it became notorious for its near to tax-free jurisdiction and banking secrecy. Contrastingly, Gibraltar’s tax haven status was based on its embracement of various tax-minimizing, if not entirely tax-neutralizing, corporate entities, along with the rubber-stamping of tax-motivated and secrecy-oriented trust structures.
This instilled into Spanish popular culture the idea that Andorra and Gibraltar constitute what we have denominated the Spanish tax haven myths. Whether this characterization has been, or will continue to be, accurate is debatable.
Nevertheless, driven by the worldwide media attention that the tax haven phenomenon has attracted in the wake of the Panama Papers and, more recently, the Paradise Papers, the average Spanish taxpayer has been left wondering to what extent the two Iberian microstates have given in to the sociopolitical pressure recently imposed on alleged tax havens.
What is a Tax Haven?
In 1998, the Organisation for Economic Cooperation and Development (“OECD”) published a groundbreaking report titled “Harmful Tax Competition”, wherein, rather than attempting to define the undefinable, it aimed to characterize it. The report lists four key factors that are individually indicative, and collectively constitutive, of tax haven behavior, namely non-, or only nominal, taxation; lack of effective exchange of information; lack of substantive and procedural transparency; and the absence of economic substance requirements.
The OECD’s report concludes that tax havens serve three location-based purposes: a “money box” wherefrom to hold passive investments; a place whereto and wherein “paper profits” are shifted and booked, respectively; and a location shielding from foreign tax authorities’ audits.
Tax Havens as Small Island Economies
Described as the “flotsam and jetsam” of the British Empire, Small Island Economies (“SIEs”), such as the British Virgin Islands or the Channel Islands, are portrayed as remnants of colonialism offering nothing but tax advantages; judicial and regulatory independence; banking and political secrecy; and, most importantly, an inward-looking society. The latter not only suppresses any form of dissent, but also chastises whistleblowing with ostracism.
Contrary to popular belief, the features of SIEs are, either in part or in full, also characteristic of long-established and well-respected European onshore, as opposed to offshore, tax havens, such as Liechtenstein, Luxembourg and Switzerland. Therefore, the term SIE should be favored, since it avoids the negative connotation that has gradually become attached to the term tax haven, and it also strays from the literal and, consequently, superficial interpretation of the latter.
Andorra: the Downfall of a Pyrenean SIE
The key to the success of Andorra’s financial system was “[an economic environment that operated] without any monetary authority acting as a central bank, doing so with the free movement of currency, self-regulated banking secrecy […] and without taxes.”
This state of affairs, coupled with the Principality’s resoluteness to “dedicate ever more resources to foreign opportunities” and to “keep up with new trends in the international financial system”, constituted the driving force behind a seemingly inexorable financialisation that transformed Andorra from a subsistence economy into a leading offshore financial center (“OFC”) in Continental Europe. Even if only in the eyes of the Franco-Hispanic bourgeoisie, the Principality gave the impression of “a tax haven as solid as Liechtenstein and Switzerland.”
Small, affluent and with high-quality governance institutions, Andorra was destined to become a tax haven, and, given its “parasitic” nature, nobody could have envisioned a paradoxical scenario where capital would flee from the Principality back to Spain. However, Andorra’s transition from tax opacity to tax transparency during the early 2010s radically changed its prospects in the OFC arena. As a result of the “small tax haven [identity] crisis” it underwent, the Principality was hit by an unprecedented wave of capital flight.
Nowadays, Spain describes its intergovernmental relationship with Andorra as “excellent,” noting that “both countries make use of the collaboration mechanisms necessary to prevent or solve the problems that may arise between neighbors.” In alignment with Spain’s perspective, the OECD has reached the conclusion that the Principality is, in terms of the implementation of the international standards on tax transparency, “Largely Compliant.”
Read between the lines, Spain’s pronouncement, as well as the acknowledgement of the OECD and the recently elected coalition government’s declaration of intent to discontinue its bet on the financial sector, represent an epitaph stating “Andorra is hereby no longer a tax haven.”
Gibraltar: a British SIE Stronghold
To the untrained eye, the Rock was little more than a popular cruise ship destination. With a standard 30% income tax rate and a flat 35% corporate tax rate for resident companies, Gibraltar was attractive only to tax planning connoisseurs mindful that the taxation of resident companies was intended to divert attention away from the existence and nominal taxation of non-resident, exempt and qualifying companies.
Providing an escape route from corporate taxation, an exemption from corporate taxes and estate duties, and a questionable corporate tax certificate for skeptical home jurisdictions, respectively, each tax-avoidance-facilitating platform catered to the needs and wants of different individuals.
Notwithstanding, all good things must come to an end. Following the turn of the century, the EU, and particularly Spain, underwent a gradual change of attitude towards Gibraltar’s capitalization on what the Court of Justice of the European Union would eventually adjudge as a corporate tax system constitutive of state aid. Hence, the Rock was impelled to abandon the regimes targeting exempt and qualifying companies alike.
No matter how self-destructive the idea of a reformed corporate tax system may have sounded to Gibraltar and its stakeholders back in the early 2000s, neither the Rock’s enactment of the Income Tax Act in 2010, nor the decree of the Companies Act in 2014, seem to have negatively impacted the economy of this British Overseas Territory.
Quite the opposite, in fact. In addition to maintaining an attractive tax system, Gibraltar has continued to exploit the Anglo-Saxon legal arrangement of the offshore trust, which “can be used to shield assets and income from tax authorities” and “[to] create amazingly complex layers of secrecy.”
Interestingly, in 2017, the Rock also spearheaded the wave of enactments of private foundation laws across common law jurisdictions, implementing this fiscally beneficial civil law institution before jurisdictions the likes of the Cayman Islands, the Abu Dhabi Global Market and the American state of New Hampshire.
Spanish Tax Haven Myths Debunked or Rediscovered?
Although their pasts may have been similar, their realities and prospects in this realm could not be further apart. Whereas Andorra has decided to shed the tax haven status that it once upheld in the form of a Badge of Honor, Gibraltar has resolved to bet all-in on the offshore services market.
Only time will tell whichever approach is going to hit the nail on the head in the new-found age of tax transparency, an era supposedly characterized by tax cooperation, rather than tax competition.
Alfonso Brandín Clastre is a Dual LL.B. Graduate & Dual LL.M. and LPC Candidate at IE Law School. The article is an excerpt of his TFG: “Past, Present and Future of Spanish Tax Haven Myths: Andorra & Gibraltar”
Luis Leis is Professor of tax law at IE Law School and Managing Partner of GV LEGAL CONTROL, a prestigious consulting firm in Madrid.
Note: The views expressed by the author of this paper are completely personal and do not represent the position of any affiliated institution
 See OECD [(1998)].
 See Orlov, M. [(2004)], particularly p. 96, where it is emphasized that “almost every work dealing with tax havens begins with the author acknowledging the practical impossibility of clearly defining a tax haven.”
 OECD [(1998)], p. 23.
 Infra, p. 167.
 Christensen, J. and Hampton, M. [(1999)], particularly pp. 166–175.
 Supra, p. 168.
 For a detailed discussion on the interrelation between “onshore states,” such as the United Kingdom, and “offshore territories,” the likes of the Crown Dependencies and the British Overseas Territories, see Hampton, M. [(1996)], Chapter III.
 Irrespective of people’s (pre/mis)conceptions about the named countries, much of their notoriety as European tax havens is attributable to the following tax-centered scandals: the Liechtenstein Connection in 2008, the Luxembourg Leaks in 2014 and the Swiss Leaks in 2015, respectively.
 Orlov, M. [(2004)], p. 97.
 Galabert, M. [(2017)], p. 36.
 Associació de Bancs Andorrans [(2004)], Preface.
 Supra, p. 14.
 Galabert, M. [(2014)], p. 3.
 See Hernández, J. [(2008)].
 Dharmapala, D. and Hines, J. [(2009)], p. 1065.
 A tax haven is deemed to be “parasitic” if it induces non-tax havens, such as Spain and France, “to expend real resources in defending their revenue base and in the process reducing the welfare of their residents” (Slemrod, J. and Wilson, J. [(2009)], p. 1261).
 See Shaxson, N. [(2015)].
 Prompted by the Spanish tax amnesty of 2012, €4 billion were repatriated from Andorra to Spain, and, ever since the Principality embarked on the adventure of shedding its tax haven status, the repatriation of capital therefrom to Spain has persisted over the years (Garcia, G. and Iglesias, M. [(2016)], p. 6).
 Oficina de Información Diplomática (Ministerio de Asuntos Exteriores, Unión Europea y Cooperación) [(2019)], p. 3. –as translated by the Authors–
 OECD [(2019)], p. 11.
 See Demòcrates per Andorra [(2019)]. The majority party’s electoral programme scarcely refers to financial services, giving the impression that they will no longer constitute an artery of Andorra’s economy.
 Starchild, A. [(1994)], p. 68.
 Supra, pp. 68-69.
 See, most notably, the following cases: Government of Gibraltar v. Commission (2002); Government of Gibraltar and United Kingdom v. Commission (2008); and Commission and Spain v. Government of Gibraltar and United Kingdom (2011).
 Act No. 2010-21, of November 1, 2010.
 Act No. 2014-19, of June 11, 2014.
 Gibraltar is “growing constantly”, and it does not mince words when boasting that it has a “higher [recurrent] revenue than ever before” (see HM Government of Gibraltar [(2019)]).
 According to Cristóbal Montoro, the former Finance Minister of Spain, the “opaqueness of Gibraltar’s tax regime” causes Spain to lose out on approximately €1 billion in tax revenues each year (Congreso de los Diputados [(2014)], p. 5). –as translated by the Authors–
 Shaxson, N. [(2018)], pp. 400 and 406, respectively.
 Panico, P. [(2018)], pp. 511-518.