Malta responsible for almost 2% of global corporate tax abuse risks

Malta has been ranked 21st in Tax Justice Network’s Corporate Tax Haven Index, making the island’s financial services centre responsible for 1.72% of the world’s corporate tax abuse risks.

The tax haven index, in which governments siupply TJN with answers on their international tax rules, is a measure of any jurisdiction’s tax systems allowabce for corporate tax abuses.

An index result of zero means that there is absolutely no scope for such abuse, while 100 signals that there is unrestrained scope.

Malta’s haven score stands at 79.1.

The Corporate Tax Haven Index is published every two years. Back in 2019, Malta registered a 73.5 haven score and was ranked 23rd place, making Malta responsible for 1.37% of the world’s corporate tax abuse risks. Now it has increased its ranking.

A notable increase was seen in the Public Company Accounts indicator, which assesses whether a country requires all companies to keep accounts with a government authority.

While plenty of legal requirements are in place governing the availability of accounting information, TJN said in Malta “no systematic monitoring and supervision activities carry out by the Commissioner for Revenue since the last round review”.

“Moreover, according to the Global Forum, there is a large number of inactive companies (around 14% of the companies registered with the Registry), which are not sufficiently monitored on their obligation to keep accounting records and underlying documentation.”

The same report found that only 50% of companies comply with the obligation to submit annual accounts to a government authority. “The average annual filing rates of accounts (financial statements) was about 50%, which is low, and may cause concerns on the availability of the accounting information of companies and partnerships by the Malta Business Registry, as illustrated during the current review period.”

On the other hand, Malta saw advancements in its reporting of tax avoidance schemes. The 2019 Corporate Tax Haven Index report noted how Malta did not require tax advisors to report on tax avoidance schemes they sold or marketed throughout the year. The same applied for taxpayers, as they were not required to report on uncertain tax positions for which reserves have been created in their annual accounts.

In 2021, after transposing an EU Directive on the matter, intermediaries are now obliged to file information on reportable cross-border arrangements. “The obligation is shifted to the taxpayer only when there is no intermediary, or alternatively where the filing of information by the intermediary would constitute a breach of professional secrecy,” the report reads, quoting a paragraph from the Deloitte website.

Any tax avoidance schemes adopted are only reported to the tax administration – not published. However, there are is still duty for taxpayers or advisers to report on uncertain tax positions.

Malta remained with a high 100 score in the Foreign Investment Income indicator, which assesses whether a country includes worldwide capital income in its corporate tax base.

This is largely due to features in the tax regime that alleviate situations when corporate or individual income is taxable in more than one country.

With regards to dividends, Malta offers a participation exemption allowing a shareholder in a company to avoid paying tax on dividends received. This is offered given that certain conditions are met.

For royalty income, Malta formally provides a tax credit as unilateral relief for double taxation, but Tax Justice Network argued that this tax credit can in effect result in a tax exemption.

The Ministry for Finance countered this argument, explaining that companies may claim an actual credit amount they paid or a fixed 25% tax credit on the net foreign sourced income. “Unilateral relief is not available unless the taxpayer has proved to the satisfaction of the Commissioner for Revenue that the income has suffered foreign tax and has proved the amount of that tax,” the government explained.

But TJN poured cold water over their claim, highlighting in their report that they were unable to verify the claim that the 25% fixed credit on the foreign net royalty payment would never result in full exemption. “Depending on the situation, the rules appear to even potentially result in more than one exemption, i.e. a subsidy and net pay-out of tax credit on received royalty income.”

Malta also scored highly in the Capital Gains Taxation indicator, again at 100. This indicator assesses the lowest available tax levied on corporate capital gains, applicable for large for-profit corporations which are tax resident in the jurisdiction, irrespective of whether the capital gains are taxed as part of corporate income tax or as part of another type of tax, such as wealth tax or an independent capital gains tax.

This high score is down to the tax exemption on capital gains derived from a participating holding or from the disposal of such holding. This makes the lowest available tax 0%.

Another 100 was scored for Malta’s notional interest deduction scheme, allowing high equity companies to deduct fictitious financial costs from its tax base.

In February 2020, Malta’s score in another TJN ranking, the Financial Secrecy Index, deteriorated to push the island further up its top-20 ranking for the world’s most secretive financial jurisdictions. It climbed from 20th in 2018 to 18th in the 2020 index where the higher the ranking, the more secretive a country’s tax practices are.

Although accounting for just 0.66% of the global market for offshore financial services according to TJN, Malta remains a small player compared to other secrecy jurisdictions.