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A Special International Report Prepared byThe Washington Times Advertising Department
Published on May 28, 1999
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Advertisers (1) Associated Banks
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Shaping a fiscal paradise to fit the times
Minister of Foreign Affairs Albert Pintat, said the government had been aware of the potential for trouble in the country's unusual status. "We anticipated that. For many years, Andorra has refused to become an "off-shore" community -until recently no more than 33 percent of foreign capital was allowed into Andorran companies. Our banking system has very strict self-imposed regulations and self-limitation rules." He pointed out that Andorra's banking system has never been linked with a financial scandal, a record few more regulated European countries could lay claim to. One of Andorra's greatest points of difference with its neighbors, and the rest of the EU, is its approach to taxation. Suspicion falls on it mainly because it has no direct taxes comparable with other European countries' -none is levied either on corporate or personal income. However, certain indirect taxes do exist, providing an average of 13 percent of the country's GDP. Around 85 percent of these taxes are on imports, which are sold mainly to tourists. At present, the commercial and banking sectors are the two areas indirectly contributing the most to state finances. Custom duties used to be the main source of government income, but after the EU's Customs Agreement of 1991 the government had to act to eliminate obstacles to imports -since commerce is the livelihood of large percentage of the population. It introduced an indirect goods tax on imported merchandise ranging from 1 to 12 percent, according to the products involved. Andorra's banking system also contributes indirectly to state finances -around 2.5 billion pesetas ($16.7 million) of its profits going to the state from 1995 to 1997. According to Manuel Cerqueda, president of Banc Agricol i Comercial, the amount accounts for about 15 percent of overall profit. Not a tax, the contribution is the result of an agreement that contemplates several mechanisms of collaboration between banks and government to finance the national budget. With the banking system agreement up for renewal, the government is considering indirectly taxing the sector. Representatives of Andorra's seven banking institutions all agree a new system for contributions must be found. Bankers are leaning towards a direct tax on profits, with Andorra advancing towards a clear, transparent, more direct fiscal regime, more compatible with the EU model. "There is a feeling that if Andorra does not consider carefully, it will make a serious error", Josep Segura, General Secretary of the Andorran Banking Association (ABA), said.
Community contribution
The diversity of views is the result both of foreign pressures from within the EU and of local concerns over the interplay of Andorra's economic growth with reform and development in almost every area. Business leaders generally agree on the need for fiscal reform, although not on the speed at which it must be enforced. Such advocates of change say the state's income must be guaranteed in the medium term or the country will find itself unable to function. Most believe investment in infrastructure, for instance, to be essential. Such investments are for the benefit of the community, and as such it is being suggested that the community should contribute. "Regardless of international pressure, Andorrans have to realize that sooner or later they will have to contribute for the continuity of the country's fiscal stability," said Santiago Guillen, ABA's president. For Jordi Marquet, President of the Andorran Chamber of Commerce, Industry and Services, organization is the necessary adjunct to economic advance: "Through fiscal organization the country could reach a previously unimaginable level of prosperity. We are a small territory, which can be administered inexpensively, but which has important immediate necessities." The issue of European respect and understanding is central to Andorra's future success: "With credibility within Europe, we will be able to gain undreamed-of advantages," he said. "Andorrans must understand that paying taxes will allow us to accede to the European arena." Minister of Finance Susagna Arasanz said that the state's low budget deficit is another reason Andorra has a future as a part of Europe's economy. While many states struggle to lower deficits, raise GNP and meet European Monetary Union requirements, Andorra has a strong base from which to begin wider reforms. Arasanz explained that the Government favors a gradual advance towards a more transparent and equal tax system. At the moment, Andorra's new constitution states each citizen must contribute to state coffers according to their capacities. "Some people would prefer to change the whole system at once, but we believe we need to do it more smoothly," she said. The potential and need for change in Andorra's fiscal regime has been a subject of heated debate for some time. It will take a brave politician to take on such a weighted and emotional issue, in a country whose citizens have never been taxed at a general rate. "In Andorra, direct taxation is taboo," Segura said. "It is a decision that must be taken by consensus, by all Andorrans -it will certainly take courage and strong leadership." |
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Table of Contents (1) A young country with an ancient history |
Nowadays few European countries
still see the Principality of Andorra as a fiscal paradise, which is exactly how the Andorran
government likes it. The principality has been fighting European Union (EU) prejudice against
countries classified as tax heavens, suspecting them of money laundering and fiscal evasion during
the general movement towards economic harmony prompted by the introduction of the euro. Josep
Peralba, Chief Executive Officer of Credit Andorra, the country's leading bank, said, "the concept
of Andorra as an international financial center has been misinterpreted."