GIBRALTAR FINANCE SPEECH IN LONDON- OCTOBER 2006

Ladies and gentlemen thank you very much for joining me once again this year on our Gibraltar Day in London, it gives us an opportunity to explain to you, to bring up-to-date some of the more recent developments and we thought that it didn't drag for too long for those of you that have busy offices to go back to that I will speak to you whilst you ate so, please do carry on eating and I find the clanging of the cutlery very reassuring (laughter).

Well, this last year as indeed the years before it have been very good for Gibraltar and they have been very good for Gibraltar economically as well as politically. Just so that I can get to those of you who perhaps are not as familiar with Gibraltar as others, it is a small economy, it employs 16.5 thousand people, it has a GDP of 600 million a year obviously, so that is roughly a size and it is roughly equally split between the public sector, financial services, tourism, shipping and now as you all know some on-line gaming too.

Just to give you a very broad brush macro-economic picture the Government of Gibraltar is currently producing record budget surpluses and we are operating record levels of public reserves and our borrowings, our public borrowings also stand at record low levels. So, the economic prosperity to which so many of you in this room are so profitably for yourselves and to the community at large contributing has our economy in wonderful equilibrium and Gibraltar I think is one of the few economies in Europe where the Government can increase public spending, operate public surpluses, cut taxes, increase reserves and fund an increasing capital investment programme at the same time. If he asks I will tell Gordon how it is done. (laughter) The GDP continues to grow at rates of between 5 and 7% net per annum and just to give you a final glimpse of that picture the size of the economy has doubled, exactly doubled, in the last ten years.

The number of jobs in the economy has increased by a factor of a quarter, 25%, it also during the last ten years, it actually stood, an economy as small as ours and a territory as small as ours I think is an incredible achievement. And of course, it is an economic model based on, historically based on, low tax for non-resident visitors and very high tax for resident visitors and that is an equilibrium that we are currently working hard to rebalance and convert Gibraltar in direct, I'll talk to you a little bit more about this in just a moment, but the Government's policy direction is very much to drive taxes down and eliminate the distinction between resident and non-resident. And on the back of this picture of economic success that I am painting for you and elections are not even near at hand (laughter) there is a huge amount of interest in Gibraltar from the point of view of inward investments and this year we have for the first time in our midst representation of the property investment fraternity in Gibraltar and they know that they are operating in a hugely prosperous and successful environment for them, very successful in real estate investment product in Gibraltar. So, economic picture, macro-economic picture as those of you who live and work there continues to be good. Politically it has been a particularly good year for Gibraltar on more than one front and I would just want to talk to you about two of those.

On the Constitutional front we had cemented our enduring constitutional links with the United Kingdom but now on the basis of a modern non-colonial relationship. In two years negotiated a new constitutional relationship with the United Kingdom, one of course, that preserves our British sovereignty, and our constitutional links with the United Kingdom, but one which completes the process of the transfer of self-government rights to the Parliament and Government and thus to the people of Gibraltar. In a nutshell as the Government of Gibraltar becomes legislatively, administratively, and politically, that is from a policy point of view, responsible for all aspects of life in Gibraltar except external affairs and defence and that is really almost as far as you could hope to go, probably eliminate the almost, I think it is as far as you could hope to go without opting for independence which is something for which we in Gibraltar do not hanker. So, this on the basis that relationships that remain stagnant eventually become unviable, we are very pleased in Gibraltar to have established a new modern constitutional relationship with the United Kingdom which leaves us completely in control of all our affairs and for the benefit of you in this room, your particular interests, most especially in control of our tax regimes, our economy and our financial services industry, is a very important piece of housekeeping that has been overdue in Gibraltar for many decades now and which we can now put to one side on the basis that we have this new constitutional relationship with the United Kingdom for indefinite period into the future.

The other thing that I would like to bring you up-to-date with which has contributed to what I have described as a hugely successful year for Gibraltar is the change in the nature of the conduct, I have to chosen all those words carefully because of course, none of the parties have changed their position on any of the fundamental issues in dispute so, changing the nature of the management of the relationship between Gibraltar and Spain and those of you that have been following our policy for more than a few years now will know that we have always said to them "..put sovereignty to one side you haven't got a hope, let's get engaged on day to day issues non- sovereignty issues, things that we can both benefit from, let's establish relationships, let's establish a dialogue and let us behave like grown up democratic, civilised, European neighbours with one another." It took us ten years but eventually we succeeded in persuading them and London for that matter that that was the sensible way to proceed and in December 2004 we established what we called the tri-lateral process which was a process of dialogue between the United Kingdom, Spain, and for the first time Gibraltar at the table in it's own right with a right to veto any agreements, good discussions on an open agenda not focused or dealing with our sovereignty. And the first year's work as many of you will know has produced a crop of agreements which in a broad brush stroke eliminates what I call the last vestiges of abnormalities of life in Gibraltar, and those of you that work there, and those of you that visit there when you are visiting your organisations there or your business networks will have wondered why we had in Europe in the 21st century limited number of telephones and mobile phones that don't work across the border, why there is so much border queue and why there isn't a red and green channel across the border, why we have an airport sitting there with flights only to and from to the United Kingdom and not around the rest of Europe and around the rest of the world and the fourth element which will interest you less is, it shouldn't interest those of you that are from Gibraltar that is because it has huge potential to cause economic difficulties for us was a longstanding problem with Spain over the pension rights of its former workers in Gibraltar. All of those agreements which those of you that are familiar with the politics of Gibraltar/Spain will know have been emblematic of the mismanagement of the political relationship between Gibraltar and Spain over the last 40 or 50 years have been resolved and this will create, I believe, a further economic boom for Gibraltar. How we are going to service that further economic boom in terms of space and labour and all of that that is your problem. I like to say that my job is to create the business environment and your job to do the business. Anyway, it is hugely important in an economic sense. I am much more excited about also what it means in a political sense of a community moving forward and not stuck in the back ages, middle ages of modern European history in a stale, constitutional, sovereignty dispute with Spain, that problem is still there that problem has not been resolved but all the manifestations of that political problem had been swept away and once more the parties are now committed to a relationship and a dialogue which is much more European and much less, I do not want to offend anybody, much less from a different place than Europe in its appearance and in its management.

I know that there are a lot of you here who would like to hear me say one or two things about our tax regime and all is said that Gibraltar is committed to low and very competitive tax environment. Our whole ethos, our whole socio-economic model, particularly our whole economic model is based on Gibraltar as a competitive tax environment and that is not going to change. We may get away and we will get away from this business of high tax for some and no tax for others but certainly it will be a tax regime which is designed to challenge the interests of non of the constituents that presently find Gibraltar an attractive distance location many of whom are in this room today.

In the Azores case on which the European Court of Justice has recently ruled, the European Court of Justice has established principles from the European Union on the application of state aid rules to fiscal tax systems but clearly establish Gibraltar's rights to have its own tax system separate from that in the United Kingdom and therefore we are very, very, confident that we will be likely to be able to further reform our corporate tax system which you know has been pending the outcome of the European Union tax case during the course of next year and the principles which will underlie that tax reform is very much in units of that said system. In other words a system that will not make a distinction between a resident and a non-resident economy, in other words an elimination of the ring-fencing of offshore businesses. Gibraltar has a long track record of understanding what business needs from a tax system, I mean, historically we have had no capital gains tax, in the last 3 or 4 years, 5 or 6 perhaps certainly in the last 7 years we have abolished death duties, we have abolished tax on investment income, we have abolished tax on income from occupational pensions when the recipient is over the age of 60, we have abolished stamp duty on all transaction except local, that is Gibraltar real estate transactions and we are reducing the resident individuals tax burden too the top rate of tax for example, has fallen from 50% to 42% in the last 5 or 6 years and will continue to fall that form is certainly because there is a general election in the next 18 months (laughter). So, the next stage, I will introduce this next year, the next stage is a tax scheme which offers a dual option. In other words, at the moment we have very high, and I say this because I know there are lots of you in this room that have difficulty recruiting people to come to Gibraltar because of the very high personal tax regimes that they become exposed to, by this time next year we expect to have in Gibraltar a system and the reason why by the way you suffer that problem, is that although we have very high headline rates of taxation we also have very, very, generous deductions and allowances rules but of course, that is all very well provided that you have the things that attract the deductions and the allowances if you've not all you are left with is the very high headline rates which is what happens to people for example, that do not buy a home, do not have a mortgage, don't buy life insurance in Gibraltar and things like that. So, what we are working on is a scheme that will allow you to choose between paying tax under the current system or pay tax under a new system whichever is the lower for you from one year to the next. The effect for those of you with ex-pat employees in Gibraltar will be that you will be able to attract them to Gibraltar with a much, much, lower effective rate of taxation for them than they've presently, in fact, a hugely innovative scheme but we think it will work and we think it will be in operation before very much longer. Now of course, a huge contributor to this economic picture that I am painting for you is the finance centre because despite the threats and the challenges that it has faced from multi-lateral international organisations and indeed from some problems particular to Gibraltar for example, the tax issue, the state aid tax issue that I was referring to earlier it has continued to grow and to prosper in the way that we want it to grow and prosper. Away from the old fashioned offshore tax haven environment and in the direction of a much onshore like high value added mainstream international financial services centre. Now much less concerned with screw-in brass plates onto the walls of lawyers offices and much more, much more, into establishing experience investor funds of which we now have ten following the introduction of our new legislation and our very strong pipeline to come.

Insurance companies, insurance companies have really known how to exploit not just our passporting rights into the European Union Single Market but indeed other regulatory aspects of which I will mention in passing in a moment, we now have 52 insurance companies established, 52 licencees plus another 30 in protected cell structures. Well, just to give you another idea of growth those 52 and 30 used to be 13 and 10 as recently as 2001 so it has been a huge growth and again a very strong pipeline of interest from international and UK insurance business that comes to Gibraltar in recognition that we have (a) this commitment to low tax but also a regulatory structure that works. And I just want to say a little bit about that because the growth of our finance centre is based on what? Well, you know some of the things as there is a pretty good professional infrastructure even though I gave up the practice of law myself 15 years ago there is a limited approach to products and legislation, we have a competitive tax environment, some of the obvious ones, we have a pretty good well educated labour force but the main reason I do not think are any of those, the main reasons are that industry and Government have what I call a partnership in repute. That is to say, Gibraltar is not open to business to all comers. Gibraltar doesn't wish to be a host of anybody and everybody that wants to do business in or with Gibraltar either as a service provider or as a customer. We want only financial institutions who will attach as much importance or rather who attach as much importance to their own corporate reputational risks as we attach to the reputation and image of our small jurisdiction and our small country. That way we help each other to protect and enhance each other's vital interests and I believe that that is actually the biggest contributor to our success over the years. The world is becoming a different and more dangerous place, it is a riskier place, not just financially, it's a riskier place in terms of things that undermine our corporate or our jurisdictional stability and we are fortunate enough to be in Gibraltar to be small enough to be able to be selective in who we go into business partnership with jurisdiction and organisation and you all know that we attach a huge amount of importance to this selective process the result is that Gibraltar's jurisdictional interests are safe and your corporate reputational interests are safer than they are in many other places and that, I think, is an underlined philosophy of the Government of Gibraltar in the growth and development of its financial services centre which has proved successful for us in the past and will I am almost certain continue to be a winning formula in the future.

There are developments as you all know and there are things with which we have to deal and things which we still have to take on board. Some of them bring benefits and some of them bring burdens, like all sophisticated mainstream rather finance centres we have to be able to take on board the challenges and convert them into opportunities. So, this year we have succeeded in negotiating with the United Kingdom an agreement to allow the passporting from Gibraltar into the United Kingdom of investment services, actually interestingly some of you may be interested to learn that is not an EU right because Gibraltar and the UK are not separate EU Member States and therefore this is not cross-border businesses between Gibraltar and the UK so we have to negotiate a bilateral agreement which we have successfully done and now Gibraltar established as licensed investment services organisations will be able to passport directly into the United Kingdom and that is a huge advantage, so many of them tell me. On the more challenging side we have to keep abreast with new EU financial services legislation, Basle II, Marketing Financial Instrument Directives, Reinsurance directive, whether you are talking about banking, fund management or insurance there is always this machinery in Europe throwing up new regulations which we have to take on board and one of the successes of Gibraltar has been that we have known how to convert that body of European regulation by the single market opportunities that come with it into an opportunity rather than a millstone around our neck. But perhaps, I think, the aspect of our approach to financial services that many of you value and which is certainly tell us that you value and that we certainly intend to continue is the approach that we have in Gibraltar to regulation.

We in Gibraltar understand because of course, it is the main tool in protecting your and our reputational risk of managing our reputational risk in protecting our reputation, the main tool of course is the regulatory system. So, we, fully understand the importance of good, sound, and effective regulation, not just to protect the jurisdiction but also to protect peers of financial services providers who often expose not just by reference to jurisdictional association but many of you in banking and investment services and insurance are part of an investor compensation scheme or some sort of lifeboat scheme of some sort or another. You all have an interest in who comes into the market place to do business side by side with you. So, the regulatory system is essential but we do not loose sight of the fact that the purpose of life is not to regulate. The purpose of life is to do regulated business but to do the business and therefore the essence is to strike the proper balance between that regulation that I have been talking about and the reasons that I have been saying why it is important on the one hand but that the regulator should be approachable, that the regulator should be flexible, that the licensing process should not take longer than it needs to take in the name of some undefined bureaucratic objective, that the regulatory objectives should be achieved in the way that does least damage to the commercial interests of the business doer rather than most damage simply because it is the most convenient and easy way for the regulator to sleep comfortably at night. Regulation should be effective but it should also be effectively done in a way that encourages rather than discourages. And I know we are very fortunate in Gibraltar that we have a regulatory organisation which is independent of the Government, we provide them with their legislative infrastructure and its very, very, strategic policy objectives and then they are completely and utterly not just politically but legally autonomous of the Government but that which is particularly, is particularly satisfying that they should of their own conviction have found what I think is this excellent mix between good regulations, safe regulation on the one hand and on the other hand a regulatory touch just to use telegraphic language abbreviation which I think is very user friendly for the purposes of the new regulatory people because compliance does not need to come for example, at the expense of confidentiality. There are certainly countries around the world who for their own tax agendas really are trying to distinguish the line between making sure that finance centres are not used as havens for the proceeds of crime, which none of us want to be, but that does not mean that legitimate business can't enjoy that degree of confidentiality which historically legitimate businesses always thought to be entitled to. So, regulatory standards yes, light touch yes, but also a commitment in Gibraltar to confidentiality, legitimate levels of confidentiality for legitimate business and that also is an important aspect of our approach and just to finish one of the ways that we have always shown the world in a sense from our very small, very, very, small corner of it, that this is our approach to life is that we are always first. Sometimes I think a little bit over eager sort of like a new boy in class to volunteer for peer group review or for multi- lateral international organisation review but it has also paid huge dividends for us at a time when other competitive jurisdictions were nervously turning their eye and neck not to come and do their modules to inspection we were, "…..no you are perfectly welcome to come here and do us first…" and now we are on the second round. We got a very good report the first time round and I think we are going to get an even better report now the second time round and it's in draft and I think it will be published soon and I think that good reports from international organisations whatever their agendas might be but good assessments of a jurisdiction's compliance to the sort of things that your own boards of directors are interested in knowing when they are deciding whether to do business with the jurisdiction, whether to locate in the jurisdiction is a huge, huge, marketing tool for us and one of the things that I need the people in our finance centre and also why not also the Government you see now that I am not brash or overmodest is that we have known how to use these multilateral international reviews for our own protection as a jurisdiction that operates to the highest international standards whilst providing an environment in which business can be successfully done and prosper.

So, I am very glad for the opportunity to give you this sort of very political overview in the knowledge as I have said before that Government's role is to create an environment in which those with the expertise and they are all in this room should be able to do their stuff profitably and if things carry on as they are I have no doubt that Gibraltar, United Kingdom, Switzerland and other countries with the slight mind will continue to do financial services with a degree of prosperity that we are enjoying for many, many, years to come. Thank you very much for joining us, and thank you for your support for Gibraltar over the last 12 months.

Thank you.

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