Malta told to phase out "harmful" tax breaks

Malta is one of three EU acceding countries which have not done enough to phase out harmful tax schemes, according to a report drawn up by the European Commission.

The Commission has identified no fewer than seven harmful tax measures in Malta, according to the report, parts of which were reproduced in yesterday's FT.

Such schemes are widespread throughout the 10 countries due to join the EU, though the Commission singled out in particular Poland, Lithuania and Malta.

In a report to EU governments, the Commission argues that all the new members, except Estonia and Latvia, have corporate tax breaks that could frustrate the EU's internal market.

The report, dated June 5, highlights an alleged lack of transparency in Poland and Lithuania's low tax "special economic zones", and schemes in Malta that could be used by companies avoiding tax elsewhere.

The Commission has asked EU governments to draw up a definitive "list of harmful measures of each acceding state to enable the respective countries to take the appropriate steps to roll back their harmful measures, at the latest, upon accession."

The FT says that the EU has lost its chief source of leverage to ensure its new members speedily comply, since it reached a binding deal with the 10 new entrants last December.

Current member states have established a voluntary code against unfair business taxation targeting "harmful" practices.

The Commission identified one harmful tax measure in the Czech Republic, nine in Cyprus, two in Hungary, three in Lithuania, seven in Malta, two in Poland, five in Slovakia and one in Slovenia.

Many countries have agreed to phase out special deals for offshore companies or to clear up rules for investment promotion schemes.

The Financial Times said the Commission was also particularly concerned about an investment promotion scheme in Lithuania, and programmes in Malta offering tax breaks for "international" companies. When contacted, Malta Financial Services Authority chairman Joe Bannister said the only stumbling blocks were in connection with the international trading company regime.

Prof. Bannister said the EU considered this to be discriminatory because it gave tax benefits to non-residents rather than residents, even if the government had explained that this code of conduct dealt only with business taxation.

But in the spirit of cooperation between Malta and the EU, discussions have been held between the international tax unit, the MFSA and the operators, and a proposal has since been submitted to the EU.

Most of the "seven harmful tax measures" outlined by the report were in connection with the offshore business, and these had been ironed out.

"By accession date we will have sorted out all these pending issues," Prof. Bannister said.