Every year Malta wipes out €2 billion in foreign tax by giving shareholders 85% rebates on their tax

Tough competition over the most favourable tax rates between EU countries has been ongoing for years. But for Malta, retaining its favourable tax regime for foreign companies has been a diplomatic tussle with the European Commission ever since Brussels got serious over tax avoidance.

An analysis by MaltaToday into Malta’s tax receipts sheds light on the reason why tax justice campaigners and MEPs from countries who suffer massive taxation drain, have often targeted the island’s tax system for foreign shareholders.

Every year, almost up to €2 billion that is taxed using Malta's highest rate on on profits generated outside of the island, are wiped clean off the slate by the Maltese taxman so that a ‘trickle’ of €200 million in tax receipts is retained in Malta.

Malta’s full imputation tax system allows a German multinational to set up its ‘tax residency’ company in Malta, perhaps manned by just one secretary and an accountant.

But when  it books its foreign income into its Maltese company, the ultimate beneficial owners – back in Germany – can claim an 85% refund on the Malta tax levied on their dividends. The result is an effective tax rate of 5%... instead of the standard corporate 35%.

In 2015, Malta’s international tax unit kept €247 million in revenues left over after the refunds paid out: estimated in total by a financial advisor who assisted MaltaToday, to be well some €1.7 billion.

“Malta’s tax refund scheme helps foreign companies and shareholders to avoid paying their fair share of tax where they do business,” said Oxfam’s tax expert Susanna Ruiz, one of many analysts contacted about Malta’s tax system and shown the figures.

“These types of aggressive tax planning schemes deprive other countries of valuable tax revenues which they need to pay for vital public services such as healthcare and education,” she said.

In 2012, Malta booked a total of €166 million in international tax; the following year, it grew massively to €211 million. And as Malta’s status as a tax-friendly country gained momentum, it generated €227 million in 2014 and almost €248 million in 2015.

It means close to €9.7 billion in tax that could have been paid in other countries, was wiped off clean over less than 10 years.

Oxfam affirmed that the data did not come as a surprise.

Malta and many countries across the globe are engaged in a damaging competition on corporate tax... for the benefit of no one but a handful of shareholders Susanna Ruiz, Oxfam

“Recent Oxfam analysis [PDF] revealed that when it comes to helping corporate tax dodgers, Malta has some of the most harmful tax practices in Europe,” Susanna Ruiz said.

“Malta and many countries across the globe are engaged in a damaging competition on corporate tax. In a misguided attempt to attract corporate investment they will decimate their countries’ corporate tax base – for the benefit of no one but a handful of shareholders. It must stop now.”

Malta’s tax trickery is certainly different to other countries and does not negotiate unique tax rates with companies, as happened in the case of Apple in Ireland, or other multinationals in Luxembourg – even though its tax refund system was widely used for branches of the companies that featured in the Luxleaks scandal.

Malta voted in favour of the EU Anti Avoidance Tax Directive (ATAD) which includes measures that go beyond the current standard on BEPS (base erosion, profit-shifting). “In view of the above, the comments quoted are incorrect and give a misguided view of the situation,” finance minister Edward Scicluna (right) seen here with European Commissioner Pierre Moscovici says

In theory, companies pay a 35% tax rate in Malta, but a ‘rebate’ system brings that tax down to effectively 5%.

If the company is domiciled outside Malta, but the tax residency is in Malta, the company will only be taxed on income arising in Malta but not foreign-sourced income.

The most common tax refund is 6/7th of the Malta tax suffered, resulting in a net effective tax charge of 5%. Company shareholders can expect their refund to be paid back within two months.

‘Malta is a tax haven’

A recent Oxfam analysis of European countries corporate tax practices conducted in May 2016 revealed that Malta has some of the most harmful tax practices in Europe. “14 of the 33 indicators of harmful tax practices identified by the European Commission as allowing multinational companies to avoid tax are evident in Malta’s tax system. Of the 28 European member states only the Netherlands (17 indicators), Belgium (16 indicators) and Cyprus (15 indicators) performed worst,” Ruiz said.

A separate comment was solicited from tax expert Prof. Omri Marian, of the University of California, Irvine school of law, who was shown the figures and how Malta’s imputation tax system works.

“If Malta corporate tax rate is 35% and foreign dividends get a 6/7 refund on the tax paid, then Malta’s ‘real’ corporate tax rate on foreign earnings is 5%.

“So any corporate income in Malta, attributable to foreign shareholders is statutorily taxed at a very low rate. If lawyers can act as nominees for company directors, this creates secrecy,” Prof. Marian says, referring to the fact that the real owners of a company can have their beneficial ownership hidden by a nominee.

“In addition, it seems that there is no real requirement for substantive presence in Malta. The combination of such factors makes Malta look very much like a tax haven.

“The only reason I can think of for having a 35% nominal corporate tax rate on the books, but hiding a 6/7 refund in the detail, is so Malta won’t lose face.”

“Malta is not only a tax haven,” German MEP Fabio de Masi says. “But experience tells us that the imputation scheme with a generous tax refund is the perfect tool to also launder criminal money.”

The vice-chair of the European Parliament’s Panama Papers committee, Fabio de Masi, was categorical in his description of Malta as a tax haven.

“I do think that Malta plays a significant role in aggressive tax planning as Malta’s imputation tax ‘fits nicely’ with artificial interest or royalty payments. While Malta is undoubtedly a beautiful spot under the sun, the sheer amount of financial flows passing through Malta does not correspond to its genuine economic substance,” De Masi, a German MEP for the Left Party, said.

Eurodad – the European Network on Debt and Development – was also critical of Malta’s tax system.

“The Maltese tax trick identified here causes us great concern. It is highly problematic that there is apparently no transparency around how this rule is being used or abused,” Tove Maria Ryding, Eurodad’s tax justice coordinator said.

“We have called for the European Union to do much more to expose and close tax loopholes, but during recent negotiations about new tax avoidance rules, many Member States seemed much more focused on protecting their own harmful practices than actually solving the problem.

“The result is a very sad race to the bottom, where countries are earning extra income by creating loopholes for multinational corporations that want to avoid taxes. In the overall picture, ordinary citizens and small national companies in all countries are losing much more when the world’s largest companies are protected from taxation.”

Celebrity ‘tax planners’

This tax system is arguably the main reason why Malta, with its company register of over 74,000 companies, keeps attracting foreign players and multinationals to its shores.

Supporters of the system say that tax ‘planning’ or optimization is a lawful activity that allows multinationals and individuals to minimise their tax exposure by setting up tax residency where it benefits them the most.

But the result is that tax that should be paid in the place where profit and trading occur, never gets paid in that country.

Malta has served as a tax base for countless multinationals which channel their profits into Maltese subsidiaries: examples include Azerbaijani state oil company, SOCAR’s Swiss trading hub, and Nando’s chicken restaurant. Africa’s richest woman, Isabel dos Santos, the daughter of Angolan dictator José dos Santos, has also set up shop in Malta with various companies related to the Angolan state’s national electricity company and national diamond mining company.

For example, the subsidiaries of the beleaguered Brazilian giant Odebrecht SA have posted millions in profits in Malta. Odebrecht SA is the 99% owner of Odebrecht Construction Malta (OCM), which ran operations in Libya however.

In 2008 and 2009, OCM registered sales of over €250 million and declared gross profits of €13 million and €22 million respectively. Under the imputation system, it would have paid a 35% tax of €4.6 million and €7.8 million respectively for those two years, before benefiting from anything between 66% to 85% in tax refunds.

Another case is Azerbaijan’s state oil company (SOCAR), whose Socar Trading Holding Ltd (STHL) is hosted in Ta’ Xbiex, acting as a back-office to the real companies where the money is made: its subsidiary SOCAR Trading SA trades in crude oil from its Geneva offices.

SOCAR itself has rebutted accusations of secrecy by the Nobel-nominated Global Witness NGO, by explaining that Malta was used as “an investment platform to benefit shareholders of the holding company from tax advantages provided under the Maltese participation exemption system.”

“This is the hallmark of Malta as a jurisdiction,” auditor Noel Buttigieg Scicluna had told MaltaToday in February 2015 when questioned on his client Isabel dos Santos’s holding companies in Malta. “The companies pay the taxes they are obliged to pay and file their financial statements that are also professionally audited, all as required by law.”

Sovereign right

Supporters of Malta’s ‘full imputation’ tax – devised after World War II when the island was still a British colony – say the system is not just an important source of tax revenue. It sustains a substantial part of the accounting sector in the form of jobs and back-office support: tax services alone account for tens of millions of euros in receipts for top-tier audit firms.

When back in March, this newspaper filed a Freedom of Information request to the Malta Financial Services Authority for data on the 85% refunds on tax on foreign dividends, the request was leaked to the Institute of Financial Services Practitioners. Then, PricewaterhouseCoopers senior partner Kevin Valenzia and former Deloitte partner Andrew Manduca contacted MaltaToday (as well as PKF partner George Mangion separately) requesting that no ‘damaging’ information be published due to Maltese efforts to convince the European Commission not to come down heavy on its tax system.

But when contacted this week by both email and mobile phone, Valenzia was not forthcoming with any comment on the scale of criticism that Malta is facing over its tax system.

MaltaToday’s FoI request has since been refused, but this newspaper obtained the tax data from other publicly available reports.

Since then finance minister Edward Scicluna said the full imputation system would survive efforts by the EU to clamp down on tax avoidance – with only some changes to close loopholes.

Scicluna insisted with MaltaToday that a sovereign state is entitled to its own tax system.

“Our system is totally transparent, as confirmed by the Global Forum peer review, and approved by the EU Code of Conduct Group/DG Competition. We have operated this system that is in line with the applicable international standards and in the light of such assessment and approval.

Malta is not only a tax haven. But experience tells us that the imputation scheme with a generous tax refund is the perfect tool to also launder criminal money Fabio de Masi, MEP

“It is pertinent to note that Malta continues to follow international standards in this area as attested by its recent joining of the International Framework on BEPS. Malta voted in favour of the EU Anti Avoidance Tax Directive (ATAD) which includes measures that go beyond the current standard on BEPS (base erosion, profit-shifting). In view of the above, the comments quoted are incorrect and give a misguided view of the situation.”

Despite Scicluna’s assurances however, Malta’s induction into the Panama Papers hall of shame will surely mean that its imputation system will fall under the limelight of the European Parliament’s investigation into tax avoidance practices.

“Malta is not only a tax haven,” German MEP Fabio de Masi says. “But experience tells us that the imputation scheme with a generous tax refund is the perfect tool to also launder criminal money.

“If member states do not agree to tackle tax dodging by corporations and wealthy shareholders we should move to punitive source taxation for cross-border flows.”