Panama – a rotten apple in the harvest

The current controversy about the revelation by a PN party blogger that the Labour Party deputy leader for party affairs and the Chief of Staff at Castille had both engaged Nexia BT as consultants to advise them on family affairs planning, with the shocking news of a Panama holding, has sent negative reverberations in local adherents of a thriving financial services sector.

The advice given by the consultants was later described by the prime minister as “naive and politically insensitive”. The hullabaloo was followed by a declaration from both persons that they are clean and offered to be audited by the Commissioner of Inland Revenue. Dr Mizzi said he would be liquidating the shell company in Panama.

But with hindsight did the duo have to go all the way to Central America for obtaining a cozy tax shelter to protect family fortunes? The answer is simply no. Brussels is an easier alternative, closer albeit more sophisticated.

Two months ago came the revelation that the EU is investigating Belgium for the cosy tax secret deals it signed with dozens of multinationals. A recent EU ruling forces Belgium to reclaim millions of undercover deals on tax avoidance signed with mega business in many other countries. The European Commission has concluded that selective tax advantages granted by Belgium for the past 15 years under its “excess profit” tax scheme are illegal under EU state aid rules.

The scheme has benefitted at least 35 multinationals, mainly from the EU, who must now return €700 million in unpaid taxes to Belgium. The hybrid scheme made use of a twisted logic to assume that a taxpayer being a multinational generates an “excess profit” so it redeems this factor by slashing its tax charge.

Critics of the scheme argue that even if in fact a multinational does have a Midas touch, then the benefits should be shared between its group companies in a way that reflects economic reality. Back home, we may stop to reflect how the Gafferena episode concerning alleged illicit property deals and collusion with officials in the Lands department and the EneMalta oil procurement scandal can act as a harbinger of the difficult times which SME’s face in vying for public tenders – particularly for professional services.

The government took cognizance of a damning NAO investigation and has blocked the property transfer and is suing Gafferena in court to reclaim the excess monies paid and property swaps that underpinned the illicit deals. A reference to a call by the president of the Chamber of Commerce for improved good governance rules in public services did not come a moment too soon and acted as a precursor to the conclusion of the NAO investigative report on Gaffarena illicit property deals.

So perhaps amid this wave of uncertainty, one cannot be surprised to notice how last year saw a number of established consultancy and audit firms feel the temperature being too hot in the kitchen. They faced a dilemma and after some deliberation engaged brokers to find them a larger partner to merge their business, thereby hoping to consolidate their position in the market.

This is not a trend that is unique to Malta since we read about a number of takeovers in the EU among smaller firms, which due to the complexity of the market bite the bullet to merge with mega firms – with the intention of not losing their identity and at best, retain market share. A number of mergers come to mind particularly in the ICT, audit, legal and advisory services.

Definitely this merger activity warrants a business environment complemented with a better understanding of the basic rules of good governance and transparency. Here one notes how Alert Communications, a respected SME in the ICT market, has relocated to join a Big Four audit firm. Leading consultancy firm EMCS, previously headed by Adrian Said (now chairman of Projects Malta) merged with audit firm Grant Thornton. Last November the established accountancy firm Spiteri Bailey & Co indicated it would merge with the member firm of RSM and Ecubed Limited, a specialist consultancy firm managed by the well-known economist Dr Gordon Cordina (who inter alia conducted the Gozo subsea tunnel feasibility) joined the accountancy firm Nexia (a firm allegedly having a foothold in Castille).

Dr Cordina has recently resigned as partner of NexiaBT, quoting difficulties of credibility arising out of the Panama affair.  Other regroupings and mergers among law firms will continue during 2016 as tougher EU directives and dispositions will be transposed in the domestic law.

Natural justice leads us to believe that transparency needs to be manifested and be seen to be applied in public procurement for all types of services. Readers may ask how SME’s can fare under blatant abuse of rules and regulations where property barons with unstoppable clout clinch favourable deals with the government.

Ubiquitously, this article will reveal an example how SME’s try hard to gain access to winning government tenders and even after they fail they toil to remain competitive and technically competent to be eligible for the next opportunity. It goes without saying that prejudice against newcomers on the market is ingrained in the establishment, which is traditionally cornered by established forms / consultancies in many sectors.

This reigns supreme (particularly for professional services) and many SME’s wait in the eternally re-generating queue to enter the Pearly Gates of accredited firms. In this context, one reads about never ending directives at EU level, which aim to overhaul the public procurement rules and set out common standards on contracts to boost fair competition, reduce distortion in the market and ensure best value for money by introducing new award criteria.

It is hoped that the said rules will also make it easier for small and medium-sized firms to bid. A typical case of incorrect procedure in public procurement occurred two years ago concerning an invitation to tender by WasteServ for the selection of an external auditor to provide audit services for five years.

The author applying on behalf of PKF tendered and was the cheapest among five bidders (criteria for selection was exclusively on price). The evaluation committee wrote to PKF on the 1st of December, 2014 (some nine months later) informing it that the tender had been cancelled on the grounds that quote: The economic or technical parameters of the project have been fundamentally altered. Unquote.

This is weird. WasteServ is a limited liability company and it is bound to put to tender calls for engaging an auditor to fulfill its statutory audit requirements. PKF appealed to the Public Contracts Review Board (PCRB) and the chairman made reference to a direct order having been awarded by WasteServ to RSM as one of the other bidders in the original public call. The PCRB acquiesced with WasteServ’s decision to award by direct order at a time when the appellant had not yet even been notified of the said cancellation let alone had their opportunity to present their objection.

WasteServ claimed that ‘the economic or technical parameters of the project’ of their tender requirement changed in nature and quoted this as a reason upon which it cancelled the tender. Taken to its logical conclusion one finds that in its totality this excuse lacks any empirical, statutory or other basis that following defensible logic could ever render cancellation of such a tender justified. So the only solution for redress to SME’s is the tortuous and unchartered road in court litigation.

In conclusion, while the island is making respectable economic progress on a number of important sectors (having achieved the highest GDP growth in the Eurozone this year) it needs to fine tune its rules of governance and in the process trim the garden from unbridled bureaucracy. 

George Mangion is a senior partner of an audit and consultancy firm, and has over 25 experience in accounting, taxation, financial and consultancy services. His efforts have seen that PKF has been instrumental in establishing many companies in Malta and placed PKF in the forefront as professional financial service providers on the Island...