Schrodinger’s tax haven

When is a tax haven not a tax haven? The question is not as facetious as it may appear. For one thing, hard and fast definitions of the term do not seem to be in overabundance. The generally accepted one, for instance, appears to be something along the lines of that provided by Wikipedia (which, as we all know, is always 100% accurate about everything that might be inaccurate): “a country that offers foreign individuals and businesses a minimal tax liability in a politically and economically stable environment, with little or no financial information shared with foreign tax authorities.”

You will notice it hinges on two basic pivots: one, ‘minimal tax liability’; two, ‘secrecy and a lack of transparency’.

On the basis of that definition, I fail to see how anyone can deny Malta is a tax haven. We offer an 85% corporate tax rebate to ‘high worth individuals and companies’; and we’ve all seen with our own eyes that there is an intolerably high level of secrecy associated with the operations of several financial institutions that were attracted here precisely by the tax regime we offer. Even under the most suspicious of circumstances, banks like Pilatus found their ‘confidentiality’ defended by the authorities that were supposed to be regulating the sector. Invariably, these authorities cited ‘commercial sensitivity’ (and the dozen or legal provisos that exist to protect it) as justification.

I won’t go into the legality of that argument: it seems we have all somehow accepted that ‘commercial sensitivity’ is good enough reason not to divulge crucial information about possible illegalities taking place in the background. In the days when I still worked as a newsroom reporter, it was the standard answer one would expect from any government department, especially when investigating any tax- or finance- related story. It was the reason the energy ministry never published its fuel-procurement data at the time this newspaper was investigating those public purchases, for instance. It was also the reason that details of that corruption scandal were eventually leaked to the press.

Some who now complain the loudest about the 'lack of transparency in our financial services sector', drew up most of the 'commercial sensitivity' clauses themselves

It is the same reason, of course, why those FIAU reports were similarly leaked. Not to mention the Panama papers, the Paradise papers, and whatever other imaginatively-named data leak might occur in future. The information these documents contain will have to be leaked, if it is ever going to get out at all... because invariably, it will be ‘protected’: not by some arcane, sinister underground organisation seeking to prevent its release; but by the law itself. Openly and in broad daylight, Maltese legislation (and not just ours; it’s the same everywhere) permits the government and the regulatory authorities to maintain a wall of silence when it comes to how they – and the people they do business with - operate behind the scenes.

Is it shady? It is suspicious? I’d certainly say so. It is, however, also how the game has always been played. And funnily enough, some of the people who now complain the loudest about the ‘lack of transparency in our financial services sector’, also drew up most of those ‘commercial sensitivity’ clauses themselves.  And I need hardly add that they were just as secretive in their own day, when the shoe was on the other foot.

But no matter: the point is we are still no closer to a clear answer on our status as a ‘tax haven’. When you raise the 85% rebate issue, you are told that this is a case of ‘tax sovereignty’; that it is perfectly legal; that every country is free to tweak their tax laws as they deem fit;  and that (somewhat bizarrely) ‘if we don’t do it, everyone else will’. And when you complain about the suspicious dearth of official information, you are always reminded how it is the law itself that actually stops that information from being released. It looks to me like we’ve got everything pretty much covered there. We can carry on fitting the Wikipedia definition of ‘tax haven’ to a T; yet still argue that legally, there’s nothing ‘tax haven-ish’ about us at all.

I guess that makes us Schrodinger’s tax haven. We all know we are one, but at the same time... we all know we’re not.

But then again, that in itself is hardly unique. Malta has always had a particular genius for somehow managing to be two totally contradictory, incompatible things at once. We are simultaneously the most Catholic and most pagan country in the EU, for instance. We are arguably the world’s most foul-mouthed and verbally aggressive nation... yet also the one that takes most mortal offence when insulted. 

The list is practically endless.

No, the real problems start when you suddenly discover that there are other definitions of the word you never knew about: and which, on scrutiny, start to look curiously tailored to fit some countries but not others. This week, for instance, the global NGO Oxfam came out saying that the EU should also include ‘Malta, Ireland, Luxembourg and the Netherlands’ on its forthcoming blacklist of international tax havens.  On one level, it’s nice to see at least one, single solitary international voice conceding that all the issues Malta is currently ‘under investigation’ for by the European Parliament, apply just as much to other EU member states which never get investigated at all.

The reference to Luxembourg is particularly poignant, for two reasons; one, the prime minister who oversaw that country’s secretive tax regime (so secretive that information about it had to be leaked, just as with Panama) went on to become the President of the European Commission. Two, because not only did the European Parliament fail to properly investigate ‘Luxleaks’... but it also overwhelming rejected a motion on censure against Jean Claude Juncker just after the scandal broke. Some leaks, I suppose, are more equal than others.

But there is another dimension to Oxfam’s accusation. Its stated reasons for wanting to include Malta, inter alia, is that: “Malta is used to as a base for foreign multinationals to set up holding companies on the island and claim an 85% rebate on corporate tax paid, usually 35% of profits booked in Malta, to end up with an effective tax rate of 5%.”

That only accounts for half the traditional definition, however. On the issue of secrecy, we are told that: “Malta is not a secrecy jurisdiction, but computational scientists from the University of Amsterdam, analysing over 98 million firms across the world, placed Malta in the top-10 list of countries dubbed ‘sink offshore financial centres’” – that is, a country which attracts way more wealth than its economy can produce.”

Oxfam adds that that is the criterion used by the EU to judge whether some 92 non-EU jurisdictions are ‘tax havens’; and it is the same criterion Oxfam itself used to conclude that the EU’s blacklist should also include the above four member states.

Sorry, but this new definition changes matters considerably. I have no doubt that Malta’s income from its taxation policies, as a percentage of its GDP, is wholly and entirely disproportionate to all its other sources of revenue put together. But that’s only because we don’t have very many other sources of revenue to speak of. Unless the international price of Globegerina Limestone has shot through the roof while I wasn’t looking, we don’t have much in the way of natural resources at all.  We are not manufacturing giants like Germany or France. We have, at most, a thriving tourism industry which pales to insignificance when compared to Italy or Greece... but which is adequate for our size. Then there are the ‘small, smaller, microscopic and more microscopic’ industries and enterprises that contribute as much as they can.

And that’s about it, really. So of course, if we’re going to accept this new definition of ‘tax haven’ as ‘a country which makes more money from overseas corporate tax than from other avenues’... yes, Malta is going to top the list, followed by all the other relatively small (and largely resource-less) countries: Ireland, Luxembourg, the Netherlands, etc.

You’re not going to find Germany, France, or the UK anywhere on that list... even though people like Roberto Saviano, author of Gomorrah, claims that they make untold billions through money laundering in all the jurisdictions they now complain so loudly about. Not because the basic ingredients of a traditional tax haven – the tax benefits, and even the secrecy – are not also in place there... but merely because those countries make more money from other areas, than they do from tax competition.

So to go back to the original question... when is a tax haven not a tax haven? The answer should be obvious by now. When the country concerned is rich and powerful enough to change the internationally-accepted definition of the word, that’s when!