US-Malta double taxation agreement re-established

The long-awaited double taxation avoidance agreement between the USA and Malta was signed this morning after having been ratified by the US Senate and signed by President Obama earlier this month.

The agreement, intended to eliminate barriers to trade and investment while preventing offshore tax evasion, will come into force as from 1 January 2011.

Speaking during the singing, US Ambassador Douglas Kmiec said the agreement is designed to ensure that US and Maltese citizens are taxed only once on their profits and income, and to limit the withholding of payments on dividends, royalties and other unearned income.

Kmiec explained that the process started in 2005, and the agreement represents “a step forward in the relationship both countries enjoy,” as well as an opportunity for Maltese and Americans alike to benefit from both markets.

According to the agreement, countries cannot tax a resident of the other country at a higher rate than they would have taxed their own citizens under the same circumstances.

It also contains strong provisions to prevent businesses or individuals from third countries from setting up a “shell” entity in either Malta or the US which is used to pass income through – thereby avoiding taxation – but does not have any other substantial business or activity in the country.

Kmiec affirmed that Malta is considerably attractive to US investors due to its accessibility in terms of shipping and airport, its geographic location at the centre of the Mediterranean, and also in view of its EU membership.

In his own address, Finance Minister Tonio Fenech said the agreement reflects a milestone in the relationship between the two countries, and “goes a long way towards re-establishing Malta’s credentials of a transparent taxation system” following the previous development that was dropped in 1995.

The double taxation agreement replaces an earlier agreement which was terminated in 1997 by the US. Originally signed in 1980 under a Labour administration, the US took the formal decision to terminate the tax treaty on November 1995, under a Nationalist administration.

According to PL shadow minister for Foreign Affairs Leo Brincat, one of the unofficial reasons brought up then was that there was a lot of treaty shopping in the financial services sector, particularly by companies that had Libyan connections.

Fenech also welcomed the fact that US President Barack Obama was also able to find the time to sign the agreement at a very busy time. He thanked the Ambassador, his office, the US Treasury, and the local team for being able to finalise the agreement.

Asked why the agreement was delayed as long as it was, Kmiec said that “senate deliberation was what took longest.”

He pointed to the way the US constitution is set up, affirming that it was created with “careful deliberation” in mind, and not speediness.

Describing Senate as the ‘saucer’ within which debate might be allowed to cool for proper deliberation, Kmiec explained how the agreement had to be properly considered before being approved.

People should be reminded that the previous double taxation agreement was made by the Labour Government.