Scientists have found a way of showing how Malta is a global top ten tax haven

Computational scientists from the University of Amsterdam, analysing over 98 million firms across the world connected through 71 million ownership relations, have located Malta’s place on the global tax map

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Matthew Vella
30 July 2017, 8:47am
Last updated on 31 July 2017, 7:42am
Don’t call us a tax haven. Maltese lawmakers may bicker over party lines, but you will be hard to find one voice of dissent when it comes to defending the island’s financial services industry.

But now, computational scientists from the University of Amsterdam, analysing over 98 million firms across the world connected through 71 million ownership relations, have located Malta’s place on the global tax map.

In a study published in the academic journal Scientific Reports, the analysts placed Malta in the top-10 countries dubbed “sink offshore financial centres” – that is, a country which attracts and retains the profits diverted from one country to another, in the case of Malta attracted by the effective 5% tax rate.

Multinationals use complex structures of parent and subsidiary companies, to pass their profits from one company to another. In the case of Malta, they can claim an 85% rebate on the tax charged to profits generated overseas.

ISO2Country nameS cISO2Country nameS cISO2Country nameS c
VGBritish Virgin Islands5235MHMarshall Islands100BZBelize38
TWTaiwan2278MTMalta100GIGibraltar34
JEJersey397MUMauritius75AIAnguilla27
BMBermuda374LULuxembourg71LRLiberia17
KYCayman Islands331NRNauru67VCSt. Vincent & Granadines14
WSSamoa277CYCyprus62GYGuyana14
LILichtenstein225SCSeychelles60HKHong Kong14
CWCuraƧao115BSBahamas40MCMonaco11

The sink-OFC number indicates roughly how much more value sinks in this country as compared to what should sink in it based on the size of its economy. For example, in the British Virgin Islands, over 5000 times too much value ends.

The scientists identified 24 sink OFCs, with Malta coming in at eighth place in terms of size, together with well-known tax havens such as Luxembourg, Hong Kong, the British Virgin Islands, Bermuda, and the Cayman Islands, but also Taiwan, until now an unnoticed tax haven.

By analysing the global network of money flowing from subsidiaries to shareholders, the scientists have come up with how much value sinks in the Maltese economy “as compared to what should sink in it based on the size of its economy.”

In the case of Malta, over 100 times too much value ends up in the island compared to the size of its economy. The top tax haven in the world, the British Virgin Islands, holds over 5,000 times the value of what its economy should hold.

The scientists call this value “sink centrality” – a mathematical calculation measuring the difference between investment coming in and flowing out, and then seeing how this tallies with Malta’s GDP.

“Our list of sink-OFCs is indeed associated with territories with low or zero corporate taxes, where capital accumulates,” the academics write in their report. “While Panama is well known as a tax haven, our approach does not identify it as a sink-OFC. Panama is mainly a tax haven for individuals and with relatively high corporate taxes (25%) is less attractive for corporate groups. In the notorious Panama Papers the large majority of the involved shell companies were actually domiciled in the British Virgin Islands.”

When seeing the list of the sink-OFCs, it is clear that these countries are small domestic economies with large values of foreign assets, which are attracted through low or zero corporate taxes.

It is this disparity, between the local economy and external assets they are holding, that makes them “offshore financial centres”.

And before those profits come to Malta where they are ultimately taxed, multinationals are also channelling their cash through “conduit OFCs”. This handful of big countries – the Netherlands, the UK, Switzerland, Singapore and Ireland – hold 47% of corporate offshore investment from tax havens. Conduit OFCs use their good reputations for enabling the quiet transfer of capital without taxation.

The study finds Malta tends to act as a sink-OFC for profits that mainly pass through the Netherlands and Luxembourg.

Authors Javier Garcia-Bernardo, Eelke Heemskerk, Frank Takes and Jan Fichtner argue that these findings debunk the myth of tax shelters as exotic far-flung islands that are difficult, if not impossible, to regulate.

“Many offshore financial centres are highly developed countries with strong regulatory environments. That means that targeting conduit OFCs rather than sinks could prove more effective in stemming tax avoidance. This realisation may help European Union and the OECD officials, who have increased pressure on cracking down on tax avoidance since the 2008-2009 financial crisis, to modest effect, by helping regulators better tailor their policies.”

An analysis by MaltaToday had found that some €250 million was retained by the Maltese taxman in 2015, after rebates were paid to foreign companies who set up their ‘tax residency’ company in Malta. This could correspond to a total tax charge of over €1.7 billion, that was otherwise wiped out thanks to the six-sevenths rebate.

 

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Matthew Vella is executive editor at MaltaToday.