Rock of Gibraltar. Marcos Moreno / AP

Spain is working to include a specific chapter on Gibraltar in the Brexit agreement. Britain’s planned departure from the European Union in March 2019 is being viewed by Spanish authorities as a good moment to make progress on long-standing claims involving taxes, environmental issues and smuggling in the British overseas territory, which is located in southern Spain.

The chief Brexit negotiator for the EU, Michel Barnier, is due to arrive in Madrid on Monday to meet with Spanish Prime Minister Pedro Sánchez to discuss these issues. For now, however, Spain will not bring up the matter of sovereignty over a territory that was ceded to Great Britain in 1713 under the Treaty of Utrecht.

I am a lot more worried about the situation in Campo de Gibraltar than about sovereignty

Foreign Minister Josep Borrell

“This is about working toward mutual benefit. We need a more balanced relationship,” said a source familiar with the matter. “And in future, it is inevitable that Gibraltar will come closer to Spain because that means coming closer to the EU.”

The Brexit negotiation guidelines drafted by Brussels in March 2017 awarded Spain power over whether Gibraltar may benefit from any advantages of the future relationship between the UK and the EU. A clause in that document states that once the UK leaves the bloc, “no agreement between the EU and the United Kingdom may apply to the territory of Gibraltar without agreement between the Kingdom of Spain and the United Kingdom.”

In the meantime, Madrid has begun a bilateral process with London that has just produced some progress in its sixth round of talks, said half a dozen sources consulted on the matter.

Chief demands Smuggling. Gibraltar is the biggest entry point for illegal tobacco products into Spain. Last year authorities seized more than 600,000 packs of cigarettes, a 158% rise from 2016, according to official data. Madrid wants the price of tobacco, which is much lower in Gibraltar, to be raised in order to make illegal trafficking less attractive. Taxes. There are 55,000 registered businesses in a territory of just over 30,000 residents. Madrid wants stricter tax residence criteria to prevent businesses that operate in Spain from registering in Gibraltar for tax-avoidance purposes. Workers. The Spanish executive wants more stable conditions for the 10,000 to 12,000 workers who cross from Campo de Gibraltar into the overseas territory each day.

Three sources familiar with the situation said that these initiatives are aimed at producing an annex to the Brexit deal listing specific measures to address the problems that Spain faces due to Gibraltar’s special status within the EU (it is not part of the customs union, it is exempted from the Common Agricultural Policy, and it does not apply sales tax (VAT), among other things).

The Spanish government, which is currently under a Socialist Party (PSOE) administration, is particularly interested in improving conditions for the area’s cross-border workers, reducing tobacco smuggling, and cracking down on tax abuses (see box).

Madrid also wants to address environmental concerns that include the dumping of pollutants around a territory of under seven square kilometers that shares its northern border with the Andalusian province of Cádiz. But the most controversial issue of all may be the airport, built in 1938 in an area that Spain considers to be illegally occupied because it falls outside the territorial limits set by the 1713 Utrecht Treaty. Madrid wants joint use of the facility.

No easy deal

But securing this protocol will not be easy. The last thing the European Commission wants is to add more conflict to an already complex Brexit deal that is not yet completely agreed on. Foreign Minister Josep Borrell of Spain has been in touch with UK Minister for the Cabinet Office David Lidington, and he has also contacted Foreign Secretary Jeremy Hunt to lay out a detailed explanation of Spain’s position on the matter.

Borrell has said in public that he is not planning to demand Spanish sovereignty over Gibraltar at the moment. “The issue of sovereignty is not on the table,” he said last week inside Spanish Congress. “I am a lot more worried about the situation in Campo de Gibraltar than about sovereignty.”

EU sources said it is likely that the final Brexit agreement will contain three separate protocols for Northern Ireland, Gibraltar and the British bases in Cyprus, which was part of the British Empire until 1960.