Property will be used to pay off massive amounts of tax arrears in unprecedented barter deals to be signed between the government and leading developers, The Sunday Times of Malta can reveal.

“Such deals have never happened in the history of Malta and are treading on much unregulated territory,” a senior government source told this newspaper.

The first of these tax arrangements is being made through audit firm Nexia BT, the company used by minister Konrad Mizzi and the Prime Minister’s chief of staff, Keith Schembri, to set up secret companies in Panama.

An investigation carried out by this newspaper over the last few weeks has revealed that this agreement will be with Birkirkara-based construction magnates Tal-Ħerba Construction Group.

The group, whose auditors are Nexia BT, has agreed to hand over a number of unsold apartments to the Housing Authority for social housing. In exchange, the government will wipe off hundreds of thousands of euros the group owes to the Inland Revenue and VAT departments, among others.

Tal-Ħerba generates millions in turnover every year, according to its accounts. However, among its liabilities are unsold apartments and hundreds of thousands in unpaid taxes.

This apartments-for-tax-arrears swap is awaiting the green light from Finance Minister Edward Scicluna and the signature of his Permanent Secretary.

This is all legal and above board, as there is nothing in the law which precludes it

However, senior government sources said Prof. Scicluna has received internal advice to drop the deal, as it would create a very bad precedent and similar arrangements would be open to abuse.

“The day the Finance Ministry starts accepting exchanges in kind for tax arrears, it will open the floodgates.

“The ministry will be inundated with businessmen and companies who have dodged their tax dues for years and think they can instead settle their bills with all sorts of unsold possessions,” one source told this newspaper.

“Who is going to decide on the value of these apartments and according to which rules, if nothing exists? Didn’t the government learn anything from the Premier and Gaffarena scandals?”

Questions sent to the Inland Revenue Department and the Finance Ministry two weeks ago over this arrangment remained unanswered by the time of writing.

Brian Tonna, the managing partner of Nexia BT, has refused to comment, asking this newspaper to refer any questions to the government. “We are bound by client confidentiality,” Mr Tonna said.

On the other hand, Social Policy Minister Michael Farrugia, whose remit includes the Housing Autho-rity, admitted talks were taking place but said that all was above board.“Yes, we are negotiating with contractors who owe money to the government in order to swap apartments for social housing for tax arrears”, he said.

When asked to justify this unprecedented scheme, Dr Farrugia boasted that “this is an innovative government and the fact that it has not been done before does not mean it cannot be done now”.

Pressed to state under which laws or rules the government is negotiating, Dr Farrugia said: “This is all legal and above board, as there is nothing in the law which precludes it.”

According to the Social Policy Minister, the scheme forms part of a Housing Authority request for proposals issued in 2014 that asked contractors to offer apartments for the use by the authority.

He said the scheme was taking long to conclude, as the government wanted everything to be done in a proper way, particularly regarding valuations of the properties, which are being carried out by two audit firms.

According to a copy of the 2014 request for proposals provided by the government – which in the meantime has been taken off the Housing Authority’s website – the call was for built apartments.

However, no reference was made to the fact that payment could be made through a tax arrears barter.

Dr Farrugia told The Sunday Times of Malta the government had not yet concluded a deal but “in the coming weeks, if nothing crops up, we will be signing the first of such deals with a contractor”.

“We are already negotiating with other contractors,” he said.

This newspaper asked the Social Policy Ministry how many offers have been made so far and by whom, and for a copy of the valuations made by the auditing firms engaged by the government. No replies have as yet been received.

In brief: the first flats-for-tax-arrears swap

In 2014, through the Housing Authority, the government issued a Request for Proposals titled ‘Invitation to submit proposals for the provision of apartments to meet the demand for social housing’.

The call closed in February 2014, and an unannounced number of contractors applied.

The government started negotiations with a number of contractors and commissioned two private audit firms to prepare valuations of the units offered.

A few weeks ago, a first draft agreement was negotiated with Tal-Ħerba Construction Group, under which the contractors are to release a number of still unsold apartments to the Housing Authority in exchange for a waiver of undisclosed tax arrears.

The deal is awaiting the signature of the Permanent Secretary in the Finance Ministry.

There appears to be no legal framework to regulate such an agreement. Panama Papers advisory firm Nexia BT was involved in the negotiations with the government on behalf of Tal-Ħerba Construction Group.