Issue link: https://maltatoday.uberflip.com/i/771708
maltatoday, WEDNESDAY, 11 JANUARY 2017 News 6 Greens fear slow progress on tax reform CONTINUES FROM PAGE 1 Malta took its tax regime "onshore" in 1994 as it embarked on the path towards EU membership. Malta in- troduced in 2007 its generous refundable tax credit system, which has attracted many inter- national companies, and bolstered its compa- ny register to over 74,000 entities within less than 10 years. In January 2016 the European Commission published a "Study on Aggressive Tax Plan- ning and Indicators", identifying Malta as the fourth worst offender with 14 indicators out of 33 (behind Netherlands, 17, Belgium, 16, and Cyprus, 15), while Latvia, Luxembourg and Hungary share fifth place with 13 indicators each. Specifically, the Greens' report outlined the following points on Malta's tax planning sys- tem: 1. A very generous refund system for divi- dends: A tax refund of six-sevenths of tax paid in Malta. When dividends are distrib- uted to individuals/companies out of taxed profits, they carry an imputation credit on the 35% tax that has already been paid by the company; and after refund to share- holders, the tax burden decreases to 5%, or 0% in certain circumstances. 2. Low taxation of intellectual property ("IP") income: Malta has closed its patent and copyright box regime, which levied) tax on royalties and similar income derived from patented activities in Malta (in respect of inventions and copyrights. But if royalties are considered active – part of the compa- nies' business of licensing patents – these royalty payments will be subject to the six- sevenths refund; if these royalties are not part of the IP companies' trade business, or have already been taxed elsewhere at least 5%, they will be subject to a five-sevenths refund, providing an effective taxation of around 10% only. 3. Tax with Flat Rate Foreign Tax Credit (FRFTC): A 25% credit tax deemed to have been paid outside Malta, on the net foreign income received by the company in Malta. In practice, it often reduces the effective corporate tax rate on passive royalties from 10% to 6.25%. This is a very convenient scheme for companies which do not pay any tax abroad on these foreign incomes or which do not wish to disclose from which country these foreign incomes come. Malta does not request any proof that such in- come has been taxed before (to receive the tax credit), it only requires a proof that the income is a foreign source income. 4. Lack of efficient anti-tax avoidance rules: Malta does not have thin-capitalization or interest-deduction-limitation rules, which limit how much companies can claim as tax deduction on interest they pay on loans. Without limits, company subsidiaries can loan each other money, shifting profits to low-tax jurisdictions. 5. No Controlled Foreign Companies ("CF- Cs") rules: Many countries do not tax shareholders on companies' income until this income is distributed as dividends. Therefore, many large companies stash their income in foreign subsidiaries in tax havens, where they are low taxed or escape taxation at all. "Whilst Malta is clearly benefitting from the local presence of multinationals, it is clear that it comes at a cost to other countries which are subject to profit shifting to Maltese entities. "MaltaToday estimates that between 2012 and 2015, close to €14 billion in tax could have been paid in other countries but was wiped clean thanks to Malta's full imputation tax system. "Malta is known to have a strong economic system and has not implemented many aus- terity policies while other European countries such as Spain, Portugal and Greece have been dragged into severe fiscal adjustment meas- ures, at a strong cost for their citizens," the Greens said referring to this newspaper's pre- vious reports on taxation. EU tax haven blacklist The Council of the European Union is draw- ing up a blacklist of non-EU tax havens in a clampdown on tax evasion, which is based on the criteria of transparency, fair taxation rates, and implementation of anti-BEPS measures. In an application of the same test for Malta, the Greens' report suggests that with all EU countries committing to introduce Automatic Exchange of Information in 2017, Malta is likely to be considered compliant from a tax transparency perspective. And since Malta was part of the OECD negotiations on base erosion profit-shifting measures, it is also likely it would be compli- ant with the third criterion. But on the question of fair taxation – whether preferential tax measures could be regarded as harmful and whether a jurisdiction facilitates offshore structures to attract profits which do not reflect real economic activity – the Greens have their reservations. "It is clear from our analysis that it is not nec- essary for Maltese subsidiaries or branches or foreign multinationals to have real economic activity and substantial economic presence within Malta to benefit from Malta's tax in- centives, particularly with respect to royalty income and the tax refunds system… "Malta with its de facto 5% corporate tax rate could be qualified as a low corporate income tax country." The Greens also added that with some 581 funds domiciled in Malta, a large offshore banking sector whose assets account for 789% of GDP, a financial services industry employing 10,000, "it would appear Malta would struggle to meet the fair taxation test and it could be categorised as an offshore ju- risdiction, as it provides financial services to non-residents on a scale that is incom- mensurate with the size and financing of its domestic economy." Greens fear slow progress The Maltese government has defended its policies: Finance Minister Edward Scicluna insisted that a sovereign state is entitled to its own tax system; Labour MEP Alfred Sant has said Malta's control of taxation policy was the only real tool left by which small EU member states could retain flexibility for competitive purposes. But the Greens say Malta was among a mi- nority of member states criticising the legal base of the European Commission's proposal for public country-by-country reporting in December 2016. "This repeated lack of ambition for tax re- forms from Malta is especially worrying now that Malta will hold the Presidency for six months and has a huge tax agenda ahead," the Greens said. "The so-called public country-by-country reporting is a long-standing request of the European Greens and of the European Parlia- ment, especially after its investigations into the Luxleaks scandal… Malta is one of the countries contesting the legal base chosen by the European Commission for this important tax reform." Another important tax reform which Malta will have to start discussing with the other 27 Member States is the issue of a common and consolidated corporate tax base, which Malta opposes. Malta will also be in charge of finalising the discussion on the Anti-Tax Avoidance Direc- tive 2, where negotiations progressed during the Slovak Presidency to have some anti- avoidance measures in place for this case. But member states didn't unanimously agree on possibly exempting the financial sector from implementing this rule. "The fight against tax evasion and tax avoidance is among the top priorities of European citizens, who expect their elected leaders to deliver on crucial reforms. Member States – and the Council Presidency – therefore have an im- portant role to play to deliver on long-awaited promises. The Maltese Presidency simply cannot adopt a wait-and-see position in the next six months." mvella@mediatoday.com.mt Greens: how Panama illustrates the opportunity of Malta's tax refund The data and the work carried out by the International Consortium of Investigative Journalists has provided an interesting insight into the role of Maltese entities, which were identified in the Panama Papers as facilitating offshore business. In their report, the European Greens said the Panama Papers offered an insight into how the island's low-tax regime complimented offshore companies. In one example, the Malta company Engineering Concept Ltd (ECL) was revealed to own a UK company, Maplevale International Limited. But ECL is owned by a company resident in Luxembourg, Alteus Holding S.A. Income received by ECL from Maplevale was likely subject to full taxation in Malta, but through Malta's tax refund system, when dividends are distributed by ECL to Alteus out of the taxed profits, it is possible that they could carry an imputation credit on the tax. After refund to shareholders, the tax burden could be as low as 5%. "This data shows how individuals and multinationals do not use Malta in isolation to avoid taxation or to achieve anonymity, but often they use Malta in combination with a number of other secrecy jurisdictions or tax havens in order to achieve these goals." While the European Greens' report delved into a chronology of events detailing Malta's 'Panamagate' experience, the party did not venture a political opinion on the role of an EU minister tarnished by the Panama Papers revelations. "Malta's beneficial ownership rules are very lax. The identity of the beneficial owners of a Maltese company may remain confidential if a trustee company authorised by the Malta Financial Services Authority is engaged to act as shareholder on behalf of the underlying beneficial shareholders. "This confidentiality is maintained as long as the company and its beneficial owners are not involved in any money laundering activity. Nominee services, which allow the identity of the beneficial owners to be kept off public record, are also available so that real owners of a company can have their beneficial ownership hidden by a nominee."