Malta and tax: high profile and dwindling reputation attracted EU scrutiny

As Malta’s financial services look set to face greater pressure in the coming months with the country having just barely avoided being added to an official EU blacklist of tax havens, there is still disagreement on the system’s shortcomings – if any – and how to rebuild the country’s reputation

Malta has raised too high a profile and has been in the international news far too often – and for the wrong reasons – for its reputation not to be negatively affected and its financial services not to come under scrutiny, a leading stockbroker has claimed.

Paul Bonello, of Finco Group, told MaltaToday that Malta’s perceived reputation abroad had been steadily deteriorating in the last years, but especially so in in 2017.

“Although this perception may not match the technical reality of the state of affairs when considered holistically, perception in matters of reputation is as important as reality,” he said.

Bonello, who had formed part of a three-men advisory committee set up to advise the Government on the transition from the offshore to the onshore financial services regime, said that had the European Parliament on Wednesday voted to add Malta to a blacklist of tax havens, the effect on the entire gamut of international financial services, including gaming companies, would have been disastrous.  It would also have had a spill-over adverse multiplier effect on other industries, including property and hospitality.

A motion debated in the European Parliament on Wednesday – calling for Malta and three other countries to be added to a tax haven blacklist – was only defeated because of the abstentions.

The vote ended in a dead impasse, with 327 votes in favour and 327 against. The 24 abstentions were what tipped the scales against the motion presented by the Socialist and Democrat Group, of which the Labour Party forms part.

“Government’s failure to harness support amongst its own Socialist family within the European Parliament is proof of its failure in its diplomatic efforts,” Bonello said.

“There is no Plan B in the event Malta is declared a tax haven and if that happened, our economy would suffer enormously, [since] there is no magic wand to unwind such damage, whoever is in government.”

Kenneth Farrugia, chairman of Finance Malta agreed that had Malta been branded as a “tax haven” – alongside Netherlands, Luxembourg, and Ireland – the repercussions would have been negative for Europe as well as at respective individual country level.

“It must be remembered that Luxembourg and Ireland are two highly established financial centres in Europe that service significant non-EU business,” he told MaltaToday. “Equally so, Malta has – post-EU membership – also experienced significant international-led growth traction in a number of financial sectors.”

Farrugia, however, said he was perplexed as to why the tax haven label was still being banded about by domestic and international media.

He noted that in March and November 2006, the Maltese tax system had been discussed with both the European Commission and with the Member States within the Code of Conduct Group which reviews tax measures to enable a determination as to whether they are harmful in terms of the Code of Conduct for Business Taxation.

In its report to ECOFIN of November 2006, the Code of Conduct Group expounded on the Maltese tax system, which had been agreed upon by the same Group, and also provided numerical examples to assist in the analysis.

“From the outset, Malta was and has always been transparent about its tax system,” Farrugia said.

“Malta’s aim was always to have an attractive tax system, one that relied on statutory law and legal certainty and not one which relies on the discretion of the tax authorities, through tailor-made deals with taxpayers.”


Standing up to pressure

Bonello said Malta was unwittingly playing into the hands of countries like Germany and France who would prefer to see Malta’s role in the EU as a place in the sun and a holiday playground for its population rather than a credible centre for serious international business.

France and Germany have been consistently calling for tax harmonisation across all European Union member states in recent months, spurred by the Panama Papers and Paradise scandals and growing concerns about austerity measures.

Farrugia said that the discussion within the EU revolving around a “tax reform across the bloc” and its implications on all EU member states needed to be carefully evaluated as it could end up being advantageous to some countries but not to others.

“Malta remains committed to contribute to the process,” he said. “In fact, Malta is a BEPS associate country and is fully co-operative in the international initiative against tax evasion.”

Bonello said that there were also parties within the European Parliament – “notably the Greens” - who would not let any occasion slip by them if it could serve their declared mission against small EU member states like Malta, Switzerland and Ireland that have successfully managed to harness the EU fundamental freedom of movement of capital and provision of services across the entire EU.

Carmel Cacopardo, chairman of Alternattiva Demokratika, said that the fiscal rules permitting the refund of a substantial amount of tax paid by foreign owned companies based in Malta is the reason for the current spotlight.

“This refund effectively reduces the tax paid by such companies from 35% to 5 and is considered very attractive by a number of companies,” he said. “The basic question which requires a clear answer is as to how many of these companies are letter-box companies, that is companies which do not have any part of their operations on Maltese soil.”

It would be reasonable, he said, to entice companies to base part of their operations in Malta and as a result make use of fiscal advantages.

“But in respect of those companies which have not shifted to Malta any part of their operations, making use of the beneficial taxation arrangements is unreasonable and unjust,” Cacopardo insisted.

He said the system was allowing such companies to avoid paying tax in the countries where they created their profits and consequently avoiding their social responsibilities on paying taxes in the countries which were providing them with the very facilities which made it possible to create their wealth.

“In a nutshell Malta is providing these companies with the legal framework to avoid their tax responsibilities in the countries in which they operate through payment of a fraction of these taxes to the Maltese Exchequer,” Cacopardo said.


Tax avoidance

But Farrugia was emphatic when asked if Malta could be considered an accomplice in tax avoidance.

“Absolutely not the case,” he said. “Malta has in place a long-stated position that sees it strongly committed to the international standards of transparency and effective exchange information via a broad network of exchange of information instruments with a significant number of jurisdictions.”

He said that Malta’s public registry was open for scrutiny by anyone and any relevant data could be directly obtained from the Registry of Companies.

In 2013, the OECD had confirmed that the Maltese authorities have broad access to information for exchange of information purposes pursuant to income tax laws, including bank and accounting information, stressing that “adequate rights and safeguards are in place to guarantee an effective exchange of information”.

“It is also important to point out that Malta fully applies EU law and all OECD initiatives on combatting tax evasion including the directives on mutual assistance between tax authorities, automatic exchange of information, as well as the exchange of tax rulings and advance pricing arrangements in the transfer pricing field,” Farrugia said.

Bonello echoed this sentiment and said there was no doubt that Malta’s international fiscal regime was consistent with international standards of taxation and avoidance of harmful tax competition set by both the OECD as well as the EU.

“Malta cannot be considered a tax haven because [it] is not a nest of secrecy and abides by multilateral international conventions for exchange of information,” he said.

“Malta automatically, that is without even being requested, exchanges information relating to dividends and interest earned by non-residents in Malta with a large number of participating jurisdictions, including all EU States, in order to combat tax evasion.”

Cacopardo said hiding behind the EU unanimity rule on taxation issues would not get Malta anywhere, as Ireland had learnt in the Apple case.

“At the end of the day, the matter is not just one concerning taxation,” he said. “It will also involve competition rules and rules regulating state aid, as the legal infrastructure helping the avoidance of taxation is in effect a mechanism for state aid.”

And finally, he added, it was an issue of tax justice as a result of which tax should be paid where the profits are generated.


Tax harmonisation

Farrugia said that discussions on tax harmonisation within the EU still require an in-depth assessment and evaluation of the impact this would have on the attractiveness of the European Union to non-EU FDIs and equally so on the individual member states given their sheer economic diversity.

“To hypothesise [at this stage] is to sensationalise,” he said.

But Bonello still maintains that the country’s reputation had suffered because of the attention focused on its financial services, as well as other accentuating circumstances, for which both the government and the opposition are to blame.

He said the government was at fault for rubbing international partners the wrong way, both for what it did as well as for what it failed to do in other circumstances.

“One major cause of such damage is having a government minister and the Prime Minister’s Chief-of-Staff caught out with a Panama company and all over the globe trying to find a bank prepared to open a bank account for their secret company,” he said.

Bonello said that not only had the government retained the two in their positions instead of showing them the door, but they had then flatly refused to appear at a meeting of the Pana Committee as if they were not public officers.

“The Opposition is at fault when, sometimes overtly, and worse still on other occasions underhandedly, it badmouths Malta as a Mafia State, or a country where there is no rule of law or a centre for money laundering, none of which is the case,” he said.

He said the Opposition could not say Malta was a Mafia State or that there is no rule of law, and then expect to be taken seriously when it says it is defending Malta from being labelled a tax haven.

“The Opposition must realise that the failure of our international financial services will not result in improved fortunes for its dismal popularity,” Bonello said.

“And even if it should find itself in government it will have lost the goose that lays the golden egg.”

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