Date: 12^th June 2000

Trading through the Internet or e-commerce is already big business. Though initially concentrated in the United States, the growth in electronic trading in Europe has been significant in the last few years and promises to develop at an accelerating pace. It is estimated that the current number of Internet users is in the order of 150 million world-wide. That figure is likely to grow to over a billion in the next five years. This massive growth in Internet access and greater consumer confidence in the reliability in the services promoted will undoubtedly result in an enormous amount of further commercial traffic.

These developments challenge many of the concepts that have dominated commerce historically. A global market will be possible in a huge number of areas with consequent dangers and opportunities. Costs will be radically affected. The supply line for goods and services of all descriptions will be altered. The much greater availability of information is likely to produce an even more discerning and knowledgeable consumer.

The Government of Gibraltar believes there are significant opportunities for e-commerce businesses operating from the Rock. The Internet allows access to customers located in every corner of the globe and we should be well placed to serve this international clientele. There are however a number of important issues that must be addressed in order to exploit fully this potential in an intensely competitive environment. This paper sets out the Government view on some of these issues and invites comment from interested parties. In particular, the Government is keen to receive any representations on the proposed legislation (annexed), which it believes is one of the priorities.

This section does not purport to be an extensive report on the action taken globally in the area of e-commerce. It seeks only to highlight some developments that are considered relevant to Gibraltar and from which we may be able to draw. The moves and initiatives on this front are constant and evolving at a very fast pace. Due to the fragmented nature of some of these developments it is likely that we will see greater international attempts to co-ordinate the access and regulation of this new method of commercial exchange.

The United Kingdom published its White Paper on electronic commerce in December 1998. (Copies may be obtained from the DTI at Suite 771 Europort.) The paper focuses on the needs of the "knowledge driven" economy. It identifies in particular the vital role of technology and an appropriate skills base. The aim is stated to be to make the UK a "competitive and profitable base for business". Innovation and enterprise are regarded as the key components of the changes that must be introduced.

The position in territories similar to Gibraltar is worth highlighting. Legislation has already been passed in Bermuda and the Isle of Man. Both these jurisdictions have opted to deal in the legislation with the issue of the legal validity and enforceability of contracts transacted through electronic means. In the case of Bermuda they have also introduced a web-site virtual ' office facility which deems transactions undertaken by resident Bermuda companies through a Bermuda web-site as having been completed within Bermuda for legal purposes. It is also clear that various jurisdictions have recognised the need for investment in this area and the benefit of a focused approach. Jersey has established an Information Society Commission using a £10 million grant from its Government. The new body is reportedly charged with the responsibility to oversee and support the development of e-commerce on the island.

The EU directive on E-Commerce was approved on 4^th May 2000 (copies may be obtained from the DTI at Suite 771, Europort). It seeks to establish some pan-European rules on validation, service providers and encryption. It also provides that Member States must provide in their legislation for contracts to be concluded electronically. As anticipated the directive specifically excludes taxation even though this is recognised as an issue of concern to the Commission and to various Member States. It stresses that legislation should be enacted in a clear and simple manner to facilitate the business opportunities available.

The proposed Gibraltar legislation draws on the models that have been adopted elsewhere and on the EU Directive. The Government (as in the case of the Isle of Man and Bermuda) is proposing to legislate to make provision for the legal effect that should be given to contracts transacted electronically. The legislation does not seek to affect or amend any regulatory or other licensing requirement that may be applicable to any commercial activity. In particular it does not remove any requirement for licensing arising from the Financial Services Ordinance, any other legislation dealing with financial services, banking or insurance or the Trade Licensing Ordinance.

(a) Telecommunications and the liberalisation of the telecoms market

The Government acknowledges the need for a competitive, responsive and technologically first-rate telecommunications infrastructure. Without this basic foundation the development of the sector is impossible. Furthermore, the ability to grow with projected demand will require significant new investment. The two most important areas are likely to be the need for readily available bandwidth at competitive pricing and the desirability of establishing further routing options for international traffic to and from Gibraltar. The Government is committed to pursuing a link to a cable operating from Morocco.

Inevitably linked to this issue is the requirement, arising from EU directives, to liberalise the Gibraltar telecoms market. The Government is committed to introduce the legislation to give effect to the directives in the very near future and to create at the same time a regulatory authority to oversee the new arrangements. At that stage exclusivity rights afforded to current operators will end and liberalisation of the market will be commenced. It should be noted that certain aspects of liberalisation will be delayed for reasons outside the control of Gibraltar (e.g. the difficulties Spain is creating in blocking the expansion of our numbering plan). However, the Government does not envisage insurmountable obstacles to e-commerce development since this is not necessarily "number dependent".

In line with the position taken by other jurisdictions, the Government does not intend to amend or in any way affect the regulatory or licensing requirements of any commercial activity.

The position under the Trade Licensing Ordinance should be mentioned. Under Section 3 the requirement to license arises in respect of any trade or activity undertaken "in" Gibraltar. As is the case therefore of companies currently trading from but not in Gibraltar, an e-commerce operation targeting an exclusively international clientele will not be licensable under the Ordinance. This position should be contrasted with that prevailing under the various financial services Ordinances that cover activities undertaken either in or "from within" Gibraltar.

The Government will continue to monitor the moves that are likely to be taken by individual countries and on a supranational basis to tackle the taxation implications of e-commerce. This area is recognised to be potentially of immense significance to national budgets. Similarly it is widely acknowledged that the taxation of electronic business is not susceptible to the usual enforcement regime applicable to less mobile and geographically more permanent business activities.

The need to retain jurisdictional competitiveness should effect downward pressure on attempts to tax this sector by individual countries. There may be moves by multi-national organisations (particularly the OECD and the EU) to establish a common taxation policy to tackle this area. Whilst the danger of such moves must be recognised in the medium to longer term it is unlikely to become a major factor in the near future. Firstly the difficulties in agreeing any measure of harmonisation in the area of taxation has been continuously highlighted in the last few years. The sensitivities raised by this matter are likely to remain for some time yet. Furthermore, and more importantly, there would appear to be a very broad consensus that the development of e-commerce is an economic revolution with the potential to become a major contributor to greater levels of global prosperity. Given this prospect the immediate international priority is more likely to become the active encouragement of this sector rather than an early attempt to extract tax revenues.

The Government of Gibraltar will seek to continue to provide e-commerce operators with a fiscally attractive environment. The need to remain tax competitive in this area will be a factor taken into account in the tax review process on which the Government is embarked. The treaty exemption from VAT enjoyed by Gibraltar may become of increasing importance, especially in the provision of services and non-physical products.

Attached as an annex to this Paper is a draft of the proposed Gibraltar bill. The legislation is aimed at "facilitating the use of electronic means for transmitting and storing information" and affords legal recognition to transactions effected electronically. It also provides a framework for the accreditation of electronic signatures and determines the activities and liability of service providers.

In summary the main parts of the Bill provide as follows:

(i ) Part 1 - Preliminary

This part contains important definitions that are pivotal to the legislation. In particular definitions are provided for service provider", "commercial communication", "established service provider" and "information society services".

(ii) Part II

This part is drawn heavily from the EU Directive on E-Commerce and sets out the general requirements for service providers; commercial communications and provides that contracts can be concluded by electronic means.

Section 5 allows for various exclusions relating to wills and conveyances of land.

(iii) Part III

Part III is drawn heavily from the electronic signatures directive. This is inevitably a more complex and technical Part as it lays down the framework for the authorisation and recognition of certification of service providers. Applications for authorisation are to be made to the Minister for Trade, Industry and Telecommunications in the manner prescribed. The recognition of overseas providers or classes of such providers is dealt with through notice in the Gazette. The Minister will not recognise an overseas provider or class of such provider, unless it is established either within the EU and the body giving the authorisation is designated for that purpose in accordance with the relevant law of a Member State, or in a territory and by a body that for the time being are prescribed for the purposes of this Part. In determining whether to prescribe a territory or body regard will be had to whether they meet criteria equivalent to those prescribed in relation to the authorised certification service providers.

The civil liability of approved certification providers is also dealt with. Subject to certain qualifications, the section imposes a duty of care on approved certification providers in favour of any person who reasonably relies on the accuracy of the accreditation certificate and provides for an action in damages in respect of any loss or damage suffered by reason of a breach of this duty.

The Government is sponsoring a feasibility study into various aspects of e-commerce, in particular with regard to the prospects of developing further ties with Morocco. The study is being co-funded by the Government and the EU through the current Interreg Program between Gibraltar and Morocco. We have asked the consultants to look at all possible areas for co-operation including the use of Morocco as a storage base that might complement trading undertaken from Gibraltar. The prospects of developing further telecommunications links has already been noted. (See 3(a) above)

The Government would be glad to receive comments on any aspect of this Paper. Comments should be sent to Walter Prior, Principal Secretary, Ministry for Trade, Industry and Telecommunications, Suite 771, Europort, by the 7^th July 2000.

Requests for copies of any material referred to in this Paper should be directed to Mr Michael Cumming, Ministry for Trade, Industry and Telecommunications at Suite 771, Europort.

Once comments are received consideration will be given to such amendment as may be necessary.

Government would expect to present the necessary Bill to the House of Assembly at the earliest opportunity after this process is finalised.

The Government is conscious that it needs to work with the industry to create a climate of greater local awareness of the opportunities that arise for business from the internet and of the issues that needs to be tackled. It is also important to foster greater international awareness of the potential of Gibraltar as an e-business hub.

Government will be conducting a public awareness and marketing programme to that end.

It will also seek to enhance training opportunities to widen the skill base of those seeking to make use of the new opportunities.

A steering committee has been set up under the Chairmanship of the Minister with responsibility for Telecommunications to examine issues that arise in this area and how best to maximise business opportunities.