Malta makes tax avoidance pledge in EU recovery plan

The Maltese government has pledged to robustly tackle tax avoidance in a bid to receive EU funding for its post-COVID recovery and resilience plan (RRP).

In its plan, government committed itself to adopt specific transfer pricing legislation to avoid losing public revenues through international tax arbitrage.

The reality is that local rules on transfer pricing are long overdue. Due to OECD and EU regulations, Malta has indirectly introduced transfer pricing rules so as to abide by international conventions and directives. However, Malta is yet to formally adopt the OECD Transfer Pricing Guidelines, but could reasonably do so under the recovery plan.

Tthe government also pledges to undertake a study for laws on dividends, interest and royalty payments between Malta-based companies and related companies established in zero-tax or low-tax jurisdictions.

The post-COVID RRP was put forward to Parliament on Wednesday 30 June, one week after Malta was placed under increased monitoring by the Financial Action Task Force to address money laundering deficiencies, colloquially known as the grey list.

Current FATF President Marcus Pleyer had clarified that Malta’s deficiencies lie in the area of beneficial ownership transparency and financial intelligence, especially with regards to tax crimes.

Tax evasion and money laundering

Lax and low-taxing jurisdictions are a prime location for those looking to launder ill-gotten profits while evading taxes in one’s home country. When a Sicilian mafia clan set their minds on evading taxes in their home country, they used Malta to set up a sports betting site called RaiseBet24. By having criminal associates collect cash bets in Malta, and having this cash paid into various Maltese companies, this concealed the fact that these funds were generated through organised crime in Italy.

Additionally, Malta’s generous rebate for tax-resident companies with foreign sharehodling means very few of the funds are actually lost in tax collection.

But not all avoiders of tax are laundering criminal proceeds. Multinational companies exploit legal loopholes and loose tax treaties to maximise after-tax profits, often through transfer pricing or other aggressive tax planning measures.

Transfer pricing is when one company branch sells goods or services internally to another branch or sister company, allowing company funds to move freely and legally between jurisdictions, and often to the lowest-taxing jurisdiction.

Apart from efforts to combat aggressive tax planning, government outlined that it will be engaging in spontaneous exchange of information with tax authorities relating to individuals that gain Maltese citizenship through the golden passports scheme.

This will see Maltese authorities share tax-related information to authorities in relevant countries for administration and enforcement purposes.

Climate mainstreaming and digitalisation

Malta’s RRP will grant government €345 million to be spent on areas of their choosing. Between the country-specific recommendations and other priority areas, government identified six components to be covered by the recovery plan.

These include climate neutrality, carbon neutrality, digitalisation, health, education, and the institutional framework.

Almost half of the funds will contribute to climate mainstreaming, with the environmental retrofitting of public hospitals and schools. Government also hopes to construct a pilot near-carbon-neutral school with the funds allocated, for a total €78 million climate investment.

The second component centres around sustainable transport and the reduction of traffic congestion. This will see a new ferry landing facility at St Paul’s Bay or Buġibba as a means of promoting alternative modes of transport.

A large aspect of this component is the promoting of electric vehicles. One proposed investment involves enhancing the uptake of electric vehicles in the private sector, and decarbonising the public service fleet. This is estimated to cost €111 million.

The third component centres on the digital transition, and will see the digitalisation of the Merchant Shipping Directorate within Transport Malta, as well as the further digitalisation of the public administration, including data sharing and digital tools for remote-working solutions.

This is set to cost €55 million.

Component Four relates to the resilience of the health system, and will see the establishment of a Blood, Tissue and Cell Centre for Malta.

Together with digitalisation and the introduction of new technologies, component 4 is set to cost €50 million.

Heavier on the reform aspect, component five concerns ESLs and the gap between educational provision and labour market needs.

However, it will see the setting up of a Centre for Vocational Education Excellence at the ITS Campus, with an estimated cost of €41 million.

Component six sees government focus more robustly on crime, corruption, and money laundering.