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 Let
me dwell on the subject of taxes and see how Malta has used this
financial tool to attract international business and generate
wealth. Many agree that the past 20 years have seen a measured yet
invigorating growth as a financial centre. A lot of water has passed
under the bridge.I remember clearly how 1988 ushered the birth of
MIBA as a new institution heralding the start of an offshore regime.
This opened the way for a regulatory framework aimed at attracting
reputable players in the international market while providing an
aura of secrecy on their business affairs. It gave birth to a unique
opportunity for lawyers and accounting firms acting as licensed
nominees to appear in their name on behalf of a number of
international investors.
The institution of ‘nominees’
rose to the occasion and within a short timeframe was able to
compete with other centres such as Dublin, Cyprus, Gibraltar, Dutch
Antilles, Isle of Man and Channel Islands. This period was the start
of our offshore regime which gave us a leading edge over other
centres even though we had taken every precaution at law to hold
nominee firms fully responsible to vet and be accountable for their
clients. Six years later in anticipation of EU membership the
regulations were revamped and in 1994 government introduced an
onshore structure. This followed general criticism on the merits of
tax havens associated with the offshore pattern of secrecy.
At the same time more than 20 new
financial laws were promulgated to upgrade our legislation with EU
directives. These were momentous times for lawyers and accountants
since there was a paradigm shift which forced practitioners to go
back to law books to study the changes. The effort was worth the
trouble and out of the ashes was born an efficient regime which
proved to be a welcome shelter to any overseas investor. Following
EU accession in 2004 and now Eurozone, it is without a shred of
doubt that Malta has made the grade and is currently reaping the
fruits of its cautious and steady approach as an onshore regime.
Another milestone was the agreement reached last year with the
Commission regarding our tax imputation system and fine tuning of
our holding company tax exemption rules. Such an incentive change is
reflected in an increasing number of wealthy individuals who now
live in or have retired here following the revision of the permanent
resident scheme.
 More
success can be manifest by our expanding list of tax treaty networks
exceeding 48 countries and lately the good news regarding the
signing of the US double tax treaty. Look around you and you will
find a quantum leap in all financial services sub-sectors although
more needs to be done to reach our optimum levels. All this is
evidenced by heightened activity in mergers and acquisition, in
formation of trusts and foundations, hundreds of collective
investment schemes, fund management and in attracting captives in
the international arena. Our legislation has been keeping pace with
the dynamism of a fast changing financial environment. Let us
examine the primary factors that have led to our success achieved in
sectors including funds, insurance, investment services and
banking.The crucial step was the negotiation and signing of tax
treaties .
Tax treaties provide benefits to
both taxpayers and governments by setting out clear ground rules
that will govern tax matters relating to trade and investment
between the two countries. A tax treaty is intended to focus the tax
systems of the two countries in such a way that there is little
potential for dispute regarding the amount of tax that should be
paid to each country. The objective is to ensure that taxpayers do
not end up caught in the middle between two governments, each of
which would like to tax the same income. Once a treaty relationship
is in place and working as it should, governments need spend little
additional resources negotiating to resolve individual cases because
the general principles for taxation of cross-border transactions and
activities will have been agreed in the treaty.
Over the years this drive to negotiate and sign cross-border
treaties has attracted inward investment. The reason is simply
because one of the crucial functions of tax treaties is to provide
certainty to a safe investment without the scare of double taxation.
Treaties solve this double
taxation question by establishing the minimum level of economic
activity that a resident of one country must engage in within the
other country before the latter country may tax any resulting
business profits.In simple words it defines where in the two
contracting states a taxpayer has established a permanent
establishment.In general terms, and without going into
technicalities tax treaties which follow the OECD model provide that
if the branch operations have sufficient substance and continuity,
the country where the activities occur will point to the primary
jurisdiction to tax.
In other cases, where the operations are relatively minor, the home
country retains the sole jurisdiction to tax its residents.
 This
allocation of profits usually takes several forms. First, the treaty
has a mechanism for determining the residence of a taxpayer that
otherwise would be a resident of both countries. Secondly, the
treaty provides rules for determining which country will be treated
as the source country for each category of income. Given that some
investors are tempted to indulge in abusing the treaties that is why
so much fuss is made in international waters to combat treaty
shopping.The reason is simple and a little legal background helps
explain the ongoing crusade against treaty shopping. It all started
in the early 1970s which saw a growth of tax avoidance strategies
involving third-country nationals’ use of tax-haven entities to gain
advantages typically under tax treaties involving claims by United
States nationals. This practice referred to earlier as “treaty
shopping” has irked many so called high tax countries both in EU and
the United States. One bold attempt to combat treaty shopping was
for the US to insist on inclusion of detailed “limitation on
benefits” (“LOB”) provisions in tax treaties; these LOB provisions
generally hamper treaty benefits. One notes that the issue of
combating treaty shopping is particularly important for policing
cross-border trade and minimising unfair tax competition.
Typically islands in the
Caribbean with little or no self regulation were branded as whipping
boys and black listed. Back to Malta, government was cautious to
keep up the good reputation and set stiff regulations in place that
discourage the setting up of ‘sham’ companies by owners of dubious
origins.
One of measures by MFSA to fight treaty abuse is enforce strict
rules that special vehicles or companies are not set up without
properly setting up and having substance and management control
there.At an EU level we find many states that impose CFC (controlled
foreign company) legislation to combat tax leakages principally
through passive income.
Another important aspect is the
provision addressing the exchange of information between the tax
authorities. Such information is exchanged but only as may be
necessary for the proper administration of that country’s tax laws,
subject to strict protections on the confidentiality of taxpayer
information.
As a member in the European Community Malta strives to eliminate
economic distortions and help guarantee the principle of neutrality
of taxation. It offers many advantages to investors such as the
elimination of withholding taxes and capital gains on non-residents.
It does not apply CFC  transfer pricing or thin capitalisation rules.
Needless
to say in the global slowdown due to the credit crunch it is
becoming more challenging to attract blue chip investors albeit
fly-by night operators are not welcome. Change in a globalised world
is inevitable and we are all called to account as Malta needs to
focus all its resources to match the needs of the discerning
investor.
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