Brexit Britain may become another tax haven

Following the sudden resignation of the Brexit leaders and that of Cameron, this has left a political vacuum which needs to be filled by a snap election within the Tory party to elect a leader.

All this turmoil has undoubtedly fired a feeling of anger and social unrest as the Leavers may feel short changed by political leaders who run over their swords in shame. It is a process that fomented a state of panic after Cameron refused to take part in any negotiation regarding the exit conditions eventually to be triggered by Article 50 of the Lisbon Treaty.

He has repeatedly said he would roll out the red carpet for the very rich immigrants, but otherwise existing migrants are not welcome even if they have a legitimate right to be resident. So far nobody has taken the lead to address mounting social inequalities and offer relief for emotions other than threats, anger and fear.

These symptoms make parts of the population feel like scapegoats – blamed for Brexit detritus. According to Professor Ruth Wodak, author of The Politics of Fear, and a specialist in linguistics and national identity, he notices signs of intolerance, xenophobia and discrimination. Perhaps such happenings may be of a short-term nature until the dust settles and a new prime minister is elected in September.

Quoting Paul Johnson, director of the Institute for Fiscal Studies, he said that having voted for Brexit, the economy is clearly going to go into a down swing, that might be a full-blown recession, or at best just very low growth. In the meantime, Chancellor of the Exchequer George Osborne is planning to slash corporation tax to less than 15 per cent in an effort to attract business deterred from investing in Britain as part of his new five-point plan to replace the doom and gloom of Brexit.

This move makes Britain more competitive with Ireland, which charges 12.5%, and Malta 35%. It is a brave move which places Malta at a disadvantage having its own corporation tax set at 35%; and of course there may be tweaking of VAT rules in the near future that will favour an exemption to financial services relocating to Britain[DG1] .

In March, the Chancellor at budget said corporation tax would fall to 17% by 2020 and was recently quoted by the FT saying it was important for Britain to “get on with it” to prove to investors that the country was still “open for business”.

Osborne lost no time to regain some political popularity after a disastrous Brexit result, saying Britain is to become a super competitive economy with low business taxes and a global focus. This is a clarion call for local practitioners led by their national association IFSP to start clearing the decks of our own arcane tax code and start in earnest discussions with Charles Mangion as chairman of the think tank (on payroll jointly from the MFSA/Ministry of Finance).

The committee members in IFSP were reported in the media and national TV to have recently discussed the future of the financial services sector with the leader of the Opposition who in turn expressed his opinion that the industry is facing difficult times.

Back to Britain, Osborne wants to take this gamble sensing that already investors are flowing out from the UK, and he wants to provide them with some sort of premium that would make them think twice before they leave. A tax rate below 15% makes the UK the lowest corporation tax country of any major economy. Equally helpful will be a move by the Bank of England to lower the amount of capital banks have to hold in case of unexpected risks. This may encourage foreign banks like HSBC, Wells Fargo and others like JP Morgan Chase to rethink their announcement of staff layoffs.

Cynics said that it was “not constructive” to be “offering up Britain as a tax haven” to Europe as a future Panama (without its two major canals) in the heart of Europe. Obviously there will have to be higher direct taxes to balance any shortfall in the medium term.

Can Malta rest on its laurels and wait for the exodus of gaming companies and pharmaceutical factories to pack up and to use Malta only as a holding company status? It is a dichotomy that the tourism industry is feeling snug about, claiming that contracts for this season at fixed euro/sterling prices were signed last year with major tour operators.

But what will be the situation next year once sterling devaluates? One of the suggestions is to offer better tax incentives. Let us jettison the archaic refund mechanism which is historically linked to the umbilical cord of a full imputation system, now found only in Malta. The oblique method of the full imputation system that reduces the tax from a high of 35% to 5% is available to investors [DG2] only after registering taxable profits and paying a full 35% tax.

Later they may claim a refund of 6/7ths triggered when profits are distributed. Refunds are paid theoretically within two weeks but this is not always happening, particularly in summer due to pressure of work by the tax inspectors.

With a coterie of flat tax regulations Malta can bravely do as Britain is doing and reduce its corporate tax below 12.5%. It is pertinent to mention that our tax code already embraces instances of flat tax levelled at 15% on certain category of non-domiciled residents on income remitted to Malta by the main applicant and certain dependents and can claim double taxation relief.

In addition:

• Any realised capital gain on transfers of immovable property situated in Malta are subject to a final withholding tax ranging from 2% to 10% on the transfer value;
• Any realised capital gain arising outside of Malta falls outside the scope of Malta income tax in view of non-Malta domicile of individual and irrespective of whether remitted to Malta or not. Our present hybrid system of high corporate tax on taxable gains for companies may be allocated to any of five distinct tax accounts and includes a subset of flat tax system. All this is the result of a jungle of amendments passed during the past 25 years which has made understanding of our tax code not an easy read for any investor. Some are advocating emulating the success of the Estonia flat tax system, hailed to be the most transparent in Europe. Some of its advantages include:
• Estonian resident companies do not pay tax on their profits until they are distributed to shareholders.
• There is no separate capital gains tax. Gains derived by resident companies or branches of foreign companies are exempt until a distribution is made.
• Foreign tax is mostly relieved by exemption by virtue of the provisions of the double tax agreements with most overseas jurisdictions.
• Withholding taxes apply only to interest, royalties and dividends paid to non-resident corporate shareholders. However, withholding tax only applies to interest to the extent that it exceeds the open market rate.
• Income tax applies to individuals at a single, flat rate and corporate tax is not levied when the company makes profits but when those profits are distributed to the company’s shareholders. The rate is 20% on the gross profits distributed or 20/80 on the net amount of the dividend distributed to the shareholders.
• Under Estonia’s double tax treaties, foreign tax is mostly relieved by exemption. Dividends received from resident companies and interest received from EU credit institutions are tax-free.

Now that Britain is busy doing its best to attract new business by offering exemptions which it is free to offer as a future non-EU member can we sit idle and not run our plan B. Only then can we hope to maintain our status quo.