Reflections on a cryptic 'Malta Files' story

We all agree that now that the election fever has subsided and the perpetrators of the critical Malta Files are slowly retreating into the woodwork, both political parties need to forget their partisan views and pull the same rope to buttress the financial services industry

PKF Malta is of the opinion that the entire Malta Files accusations on our tax transparency need to be fought and any innuendos fiercely rebutted in a non-partisan fashion.  Malta, like other EU states, supports the fight against harmful tax competition, and insists on full transparency and exchange of information. But it retains its sovereign rights over domestic tax rules.

This in the past was a non-partisan battle fought collectively in a solidarity approach by Maltese politicians. Then finance minister Edward Scicluna has told European counterparts to focus on “blatant cases of tax evasion and not interfere with domestic issues with little or no effect on BEPS”, but even he fears that Base Erosion and Profit Shifting (BEPS) will go beyond what is necessary to prevent abuse.

Looking back it was three years ago when the OECD embarked on intensive work which recently culminated in 13 reports laying down new or reinforced international standards as well as concrete measures to help countries tackle BEPS.  Both OECD/G20 members are committed to this comprehensive package and pledge to have it fully implemented.

This is no breaking news as practitioners have long grasped the shocking revelations of the Swiss Leaks concerning HSBC branch and later on Luxleaks involving secret tax rulings awarded to multinationals signed by the finance ministry in Luxembourg.  Other shocks came with the cosy tax shelters afforded for 15 years in Brussels in a scheme attracting holding companies of multinational companies, saving the lot about €750 million in taxes. Naturally the hacking of 11.5 million documents of Mossack Fonteca, a law firm based in Panama, has fanned the fire against secret dealings by various international business owners (including 42 local yet not revealed account owners).

All this has strengthened the resolve of the G20 and the OECD as well as protestations from the European Parliament, several Member States, businesses and civil society, and certain international partners to implement a stronger and more coherent approach against corporate tax abuse.  No smoke without a fire yet such practices have been going on unhindered for decades and there is a lucrative legal consultancy industry which advises its clients in tax avoidance – they are constantly on the look-out for loopholes.

Feet on the ground – no one expects offshore havens to disappear anytime soon. The industry is massive, starting with Swiss banks that according to Gabriel Zucman, an economics professor at the University of California at Berkeley, hold about $1.9 trillion in assets not reported by account holders in their home countries. One similar location which provides secrecy is Reno, Nevada in the United States of America.

It may come as a surprise to readers that the US is one of the few places left where advisers are actively promoting accounts that will remain secret from overseas authorities. Typically, one reads how a wealthy Turkish family is using Rothschild’s trust company in Reno to move assets from the Bahamas to the US, while a family from Asia, is moving assets from Bermuda to Nevada.

The argument goes that there is nothing illegal about banks like Rothschild luring foreigners to place money in the US with promises of confidentiality as long as they are not intentionally helping to evade taxes abroad. The Rothschild trust company was set up in 2013 to cater for international families, particularly those with a mix of assets and relatives in the US and abroad.

The sales pitch adds that it caters for customers attracted to the “stable, regulated environment” of the US. That may not be so easy if the bank is found to be helping its clients to evade tax. In 2007, UBS Group AG banker Bradley Birkenfeld in Switzerland, blew the whistle on his firm helping US clients evade taxes with undeclared accounts offshore. Swiss bank Rothschild Bank AG entered into a non-prosecution agreement with the US Department of Justice. The bank admitted helping US clients hide income offshore from the Internal Revenue Service and agreed to pay an $11.5 million penalty and shut down nearly 300 accounts belonging to US taxpayers, totalling $794 million in assets.

In 2010, this led to the promulgation of FATCA (Foreign Account Tax Compliance Act) that requires financial firms to disclose foreign accounts held by US citizens and report them to the IRS or face steep penalties. Furthermore, in other parts of the world there is no rush for tax havens to give up their secrecy and scare away the goose that lays the golden egg. Even in biblical times we read in the New Testament how wealthy Jews were always spartan in their wealth declaration in order to save paying high tributes to Caesar in Rome.

In modern times, the classic approach is for taxpayers to reduce their tax bill by moving their tax residence and/or assets to a low-tax jurisdiction. The mandarins in Brussels object to this, claiming that such practices distort the market because they erode the tax base of the State of departure and shift future profits to be subject to tax in the low-tax jurisdiction of destination. Naturally, given the lack of corporate tax harmonization in the Union one cannot blame consultants to study ways how their rich clients move their tax residence out of a high tax Member State.

But the noose is tightening for tax evaders. A recent EU directive calls for tighter controls. This directive, the Anti-Tax Avoidance Directive versions one and two, lays down rules against tax avoidance practices that directly affect the functioning of the internal market.  It is one of the constituent parts of the Commission’s Anti-Tax Avoidance Package, which addresses a number of important new developments and political priorities in corporate taxation (such as hybrid schemes).

The concept includes mandatory use of country by country tax reporting (CBCR).  This initiative requires disclosure of CBCR information to tax authorities only with the aim to ensure further compliance of multinational enterprises (MNE) with national tax laws.

This reporting will be mandatory to be prepared by all EU and non-EU MNEs with activities in the EU having a consolidated turnover above €750 million. The information should be broken down by EU Member States and aggregated for the rest of the world. The type of information to be disclosed would include income tax paid and accrued as well as other contextual information: the nature of the activities, turnover, number of employees, profit before tax. The measure targets only MNEs that are the best equipped to engage in tax planning activities, that is enterprises whose consolidated turnover exceeds €750 million.

In conclusion, Opposition MP Claudio Grech (currently touted to replace Simon Busuttil as PN leader) told an inter-parliamentary committee convened by the Committee on Economic and Monetary Affairs at the European Parliament that Malta wants to retain its fiscal sovereignty. We all agree that now that the election fever has subsided and the perpetrators of the critical Malta Files are slowly retreating into the woodwork, both political parties need to forget their partisan views and pull the same rope to buttress the financial services industry, which has fallen victim to a barrage of an unsympathetic press in Brussels. Unfortunately the spirit is willing but the political body is weak. As can be expected the landslide victory by Labour will leave its heavy toll on the Opposition’s ego and this takes time to heal.

George Mangion is a senior partner of audit and consultancy firm PKF. He can be contacted at [email protected] or on +356 21493041.