Financial services - Keeping an eye on taxation developments abroad
There are a number of developments looming on the horizon in Europe which could have an impact on Malta's tax advantages, according to KPMG partner Pierre Portelli.Mr Portelli was one of the key speakers at the KPMG conference on financial services...
There are a number of developments looming on the horizon in Europe which could have an impact on Malta's tax advantages, according to KPMG partner Pierre Portelli.
Mr Portelli was one of the key speakers at the KPMG conference on financial services held last week at the Westin.
He said high tax countries are trying to stop the flight of companies to lower tax jurisdictions by enacting anti-avoidance legislation, known as Controlled Foreign Company Legislation, or CFC legislation, that specifically targets low tax rates.
"CFC legislation basically taxes shareholders of companies based in low tax jurisdictions as soon as those companies make the profits and not when they, as shareholders, receive the profits in the form of dividends. This legislation effectively removes the long established divide between a company and its shareholders and many times it makes the setting up of a company structure in a low tax jurisdiction useless," Mr Portelli explained.
Malta's system does not fall foul of most CFC legislation because, although it has a high headline tax rate, it is based on a system of refunds of company tax to shareholders.
Furthermore, the European Court of Justice recently ruled (in the Cadbury Schweppes case) that CFC legislation goes contrary to the fundamental freedom of establishment, unless it can be shown that setting up in the low tax jurisdiction was aimed solely at escaping national tax.
"However, there are still many uncertainties surrounding this issue and investors will prefer to have the certainty afforded by Malta for the time being," he said.
There are other initiatives to bring in tax harmonisation through the window rather than through the door. One that seems to be gaining in importance would be the Common Consolidated (Corporate) Tax Base or CCCTB, he explained. With CCCTB, the method of arriving at the income chargeable to tax for each member in a group of companies would be common across member states.
"The total group income would then be apportioned over the member states by means of a formula. The formula is not yet determined, but the smaller member states are likely to lose out as the larger member states vie for the lion's share of an EU multi-national group's profits," he said.
At the beginning of the year, Malta made changes to its taxation system to overcome objections made by the EU.
Tax neutrality, or effective zero tax, is achieved by an extensive system of reliefs for double taxation at company level, coupled with refunds of company tax to shareholders upon the distribution to them of dividends.
However, non-resident shareholders could until this year claim refunds of the Malta tax paid by the company upon the distribution to them of company profits. This made the effective Malta tax paid range between 0 per cent and 6.25 per cent. The EU's contention was that these tax refunds were selective because they were granted only in relation to profit generated from international business and as such they constituted prohibited state-aid.
In response to these objections, Malta recently amended its tax legislation to open the tax refund system to all shareholders and for all profits, other than profits derived from immovable property situated in Malta.
It is to be noted that, while the system of refunds of company tax to shareholders has been opened up to all shareholders, resident shareholders will be subject to tax on such refunds whereas non-resident shareholders will continue to be exempt, Mr Portelli said.
"We now have an enviable system of taxation that has the approval of the EU and we should not underestimate this. The uncertainties which could have affected this business very negatively have been removed and we can now move ahead with renewed vigour," he said.
"We are now in a delicate transition phase. On the one hand we need to market our taxation system as much as we possibly can. On the other hand we must be careful not to market Malta in the wrong way. All the players in the industry should understand their role in this marketing exercise and perform that role with professionalism and tact.
"Practitioners should know the tax and the regulatory rules well, and apply them diligently. It is dangerous to base advice on limited knowledge or to be too aggressive because this can cost the client dearly and it will surely damage our reputation. We also need to be vigilant who we accept to do business with.
"Perhaps it is useful at this juncture to point out that our system is not just about tax minimisation. It is not much use to have an excellent system of taxation if all the other essential ingredients for a successful financial services industry are not present.
"... Potential users of the system look for is stability, a well regulated environment that is flexible but not lax, a pool of skilled professionals, well educated workers with a good work ethic, a good communications and transport infrastructure and a generally user-friendly environment."
Mr Portelli was one of the key speakers at the KPMG conference on financial services held last week at the Westin.
He said high tax countries are trying to stop the flight of companies to lower tax jurisdictions by enacting anti-avoidance legislation, known as Controlled Foreign Company Legislation, or CFC legislation, that specifically targets low tax rates.
"CFC legislation basically taxes shareholders of companies based in low tax jurisdictions as soon as those companies make the profits and not when they, as shareholders, receive the profits in the form of dividends. This legislation effectively removes the long established divide between a company and its shareholders and many times it makes the setting up of a company structure in a low tax jurisdiction useless," Mr Portelli explained.
Malta's system does not fall foul of most CFC legislation because, although it has a high headline tax rate, it is based on a system of refunds of company tax to shareholders.
Furthermore, the European Court of Justice recently ruled (in the Cadbury Schweppes case) that CFC legislation goes contrary to the fundamental freedom of establishment, unless it can be shown that setting up in the low tax jurisdiction was aimed solely at escaping national tax.
"However, there are still many uncertainties surrounding this issue and investors will prefer to have the certainty afforded by Malta for the time being," he said.
There are other initiatives to bring in tax harmonisation through the window rather than through the door. One that seems to be gaining in importance would be the Common Consolidated (Corporate) Tax Base or CCCTB, he explained. With CCCTB, the method of arriving at the income chargeable to tax for each member in a group of companies would be common across member states.
"The total group income would then be apportioned over the member states by means of a formula. The formula is not yet determined, but the smaller member states are likely to lose out as the larger member states vie for the lion's share of an EU multi-national group's profits," he said.
At the beginning of the year, Malta made changes to its taxation system to overcome objections made by the EU.
Tax neutrality, or effective zero tax, is achieved by an extensive system of reliefs for double taxation at company level, coupled with refunds of company tax to shareholders upon the distribution to them of dividends.
However, non-resident shareholders could until this year claim refunds of the Malta tax paid by the company upon the distribution to them of company profits. This made the effective Malta tax paid range between 0 per cent and 6.25 per cent. The EU's contention was that these tax refunds were selective because they were granted only in relation to profit generated from international business and as such they constituted prohibited state-aid.
In response to these objections, Malta recently amended its tax legislation to open the tax refund system to all shareholders and for all profits, other than profits derived from immovable property situated in Malta.
It is to be noted that, while the system of refunds of company tax to shareholders has been opened up to all shareholders, resident shareholders will be subject to tax on such refunds whereas non-resident shareholders will continue to be exempt, Mr Portelli said.
"We now have an enviable system of taxation that has the approval of the EU and we should not underestimate this. The uncertainties which could have affected this business very negatively have been removed and we can now move ahead with renewed vigour," he said.
"We are now in a delicate transition phase. On the one hand we need to market our taxation system as much as we possibly can. On the other hand we must be careful not to market Malta in the wrong way. All the players in the industry should understand their role in this marketing exercise and perform that role with professionalism and tact.
"Practitioners should know the tax and the regulatory rules well, and apply them diligently. It is dangerous to base advice on limited knowledge or to be too aggressive because this can cost the client dearly and it will surely damage our reputation. We also need to be vigilant who we accept to do business with.
"Perhaps it is useful at this juncture to point out that our system is not just about tax minimisation. It is not much use to have an excellent system of taxation if all the other essential ingredients for a successful financial services industry are not present.
"... Potential users of the system look for is stability, a well regulated environment that is flexible but not lax, a pool of skilled professionals, well educated workers with a good work ethic, a good communications and transport infrastructure and a generally user-friendly environment."