Visitor numbers will only continue to fall with the income tax in place seeing as the tax break was the country’s greatest tourism attraction.
Andorra is poised to introduce personal income tax, effectively putting an end to its status as a tax haven as it comes under increasing pressure from its European neighbours to tackle tax evasion.
Antoni Marti, the head of government of the tiny mountain nation, announced the move on Friday during a Paris meeting with French President Francois Hollande.
He said he would present a bill to the Andorran parliament by June 30 that would create a tax on personal income as part of an effort to “progressively bring its tax system in line with international standards”.
There is currently no income tax applied to individuals based in Andorra, but the country did introduce a modest corporate levy for the first time last year and a system of Value Added Tax from January 2013.
Nestled in the Pyrenees between Spain and France, Andorra, with its population of 85,000, has relied on banking secrecy, tourism and duty-free trade to become a financial and commercial success.
But after being hit by both the global economic crisis and a steep drop in the number of tourists visiting over the last five years, the country slipped into recession.
The reforms aim to modernize the economy with a view to “bringing recovery, in the European context and set it on the path to growth,” said the statement following the bi-lateral talks.
No details were given by Andorra’s government as to what rates of income tax on individuals might be set under the new directive.
EU nations have been pressing smaller European countries with reputations as tax havens – including Andorra, Liechtenstein, Monaco and Switzerland – to share banking information in an effort to thwart tax evasion.
Last month EU nation finance ministers met in Brussels and agreed to negotiate financial sharing accords with such countries “by year end”.
Andorra has already signed agreements with neighbouring France and Spain to collaborate in cross boarder fraud investigations, a move which saw it removed from the Organization for Economic Cooperation and Development (OECD) blacklist of “uncooperative tax havens”.