European Greens accuse Malta of being tax haven as it takes EU helm

The European Greens have taken aim at Malta’s jealously guarded taxation refunds, with a 31-page report published the day that Malta takes on the EU presidency, showing Malta as a tax haven that could end up in a future EU list of non-cooperative jurisdictions.

Malta receives some €200 million in tax revenues from foreign companies attracted to the island for its full imputation system, which doles out up to 85% in rebates on the tax paid to bring it down to an effective 5% rate.

A MaltaToday analysis of the last decade of tax receipts suggests that up to €4 billion annually in taxes charged to foreign companies booking profits to their Malta-based holding companies, is “wiped out” thanks to Malta’s generous six-sevenths refund system.

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READ IT HERE How Malta wipes out €4 billion in tax that could be paid elsewhere

The study - written by Italian-British academic Tommaso Faccio – said that tax avoidance cost EU countries up to €70 billion a year in lost revenues, and pointed out that Malta’s lack of enthusiasm on tax reforms that could harm its revenues would slow down progress on the EU agenda.

“Our analysis of the Maltese tax system shows the presence of preferential tax measures that could be regarded as harmful and facilitating offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the country”.

The report makes reference to minister Konrad Mizzi and the PM's chief of staff Keith Schembri's implication in the Panama Papers, but stops short of making a political comment and instead focuses on Malta's role as a tax haven for owners of Panama companies.

The Greens said Malta should start a thorough and independent analysis of the spillover effects of the Maltese tax legislation on other European countries and possibly non-EU countries. “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. Greater European solidarity is expected from the country currently holding the Presidency of the European Union.”

“This study shows that Malta is a tax haven, according to the very criteria set out by the European Commission,” Green MEP Sven Giegold, a member on the Panama Papers committee, said.

Green MEP Sven Giegold: "This study shows that Malta is a tax haven, according to the very criteria set out by the European Commission.”

“The tax system in Malta is generous to say the least, with large companies routinely paying as little as five percent tax on their profits. This is completely unacceptable and raises serious questions for the forthcoming EU presidency; we note with some concern that tax legislation is not included in the Maltese programme.”

Green tax spokesperson Molly Scott Cato added that with Konrad Mizzi and Keith Schembri involved in the Panama Papers scandal, Malta was expected to “examine these cases properly and ensure that the European money laundering directive is fully implemented in its own country. Failure to keep their own house in order will not reflect well on their intentions for the coming six months.”

Shortcomings

Malta took its tax regime “onshore” in 1994 as it embarked on the path towards EU membership. In 2007, it introduced its generous refundable tax credit system, which has attracted many international companies, and bolstered its company register to over 74,000 entities within less than 10 years.

In January 2016, a European Commission “Study on Aggressive Tax Planning and Indicators”, identified Malta as the fourth worst offender with 14 indicators out of 33 (behind Netherlands, 17, Belgium, 16, and Cyprus, 15).

Specifically, the Greens’ report outlined the following points on Malta’s tax planning system:

1. A very generous refund system for dividends: A tax refund of six-sevenths of tax paid in Malta. When dividends are distributed 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 shareholders, 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 companies’ 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 income 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 (“CFCs”) 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.

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“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 austerity policies while other European countries such as Spain, Portugal and Greece have been dragged into severe fiscal adjustment measures, at a strong cost for their citizens,” the Greens said referring to this newspaper’s previous reports on taxation.

EU tax haven blacklist

The Council of the European Union is now drawing up a blacklist of non-EU tax havens in a clampdown on tax evasion, which is based on the three 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 compliant 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 necessary 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 incentives, 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 jurisdiction, as it provides financial services to non-residents on a scale that is incommensurate 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 minority 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 reforms 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 Parliament, 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 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 Directive 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 important 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.”