Malta’s company tax refund scheme has been under renewed scrutiny of late. Answering the question of whether the island is a tax haven depends very much on which side of the fence you are sitting on, Jacob Borg discovers.

Former prime minister Lawrence Gonzi, who saw through the EU’s approval of the current tax system, rubbishes the labelling of Malta as a tax haven.

“A tax haven is a country that refuses to share information, has a lack of governance and loopholes to avoid accountability,” Dr Gonzi told The Sunday Times of Malta.

A spokesman for Transparency Inter­national on the other hand says Malta’s label as a tax haven is not unwarranted.

“Malta has certain characteristics of a tax haven. It lacks transparency when it comes to trust and company ownership. Malta was given a score of 50 per cent in the Financial Secrecy Index.

“The key aspects highlighted in the index are the lack of information when it comes to trusts and foundations, as well as information about company ownership,” the spokesman said.

The Financial Secrecy Index says Malta is relatively small fry in the global market for offshore financial services.

So why all the attention from other EU countries?

On paper, a company is subject to income tax in Malta at a flat rate of 35 per cent.

A complex tax refund system allows shareholders to claim back refunds of up to 85 per cent on the tax levied on their dividends. This means a foreign-owned company can legally avoid paying tax in its home country by basing itself in Malta.

Greens MEP Sven Giegold told this paper that analysis of the Maltese tax system showed the presence of preferential tax measures that could be regarded as harmful and facilitating offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the country.

Stockbroker Paul Bonello argues that Malta is adhering in letter and spirit to the obligations of a good sovereign country. The country, he insists, respects its international obligations in a way which is altogether distanced from the behaviour of a tax haven.

Leaked e-mails from the Panama law firm Mossack Fonseca show how Malta was sold as a tax efficient destination for companies.

A Mossack Fonseca fact sheet on Malta says the refund system may reduce the effective tax rate paid by a company domiciled in Malta to “0 per cent to 10 per cent”.

Mossack Fonseca also highlighted in its fact sheet that there is no need to disclose who the real owner of a Malta-based firm is to the company registrar.

A leading tax expert, who preferred not to be named, told this paper that company owners had a right to privacy just like everyone else.

“Access to sensitive information should be restricted to those having a legitimate purpose to access such information. In recent judgments such as Brito Ferrinho Bexiga Villa-Nova v. Portugal, the ECHR has been quite clear; access to information must be in accordance with the law, must pursue a legitimate aim and, more importantly, must be necessary in a democratic society. In addition, it must be accompanied by sufficient procedural safeguards,” the tax expert said.

EU governments recently agreed to create centralised company registers detailing who the real owners of companies are but stopped short of making the registers public following a compromise deal with the European Parliament.

The registers will be accessible to members of the public who can prove they have a legitimate interest in accessing them.

Transparency International told The Sunday Times of Malta that there was nothing stopping individual countries from going beyond this by making their individual registers fully available to the public, as the UK had already done.

Is Malta a reputable jurisdiction?

Former prime minister Lawrence Gonzi says that, even under the present administration, Malta has opened up to making the system more transparent and more effective in combatting money laundering and shutting out unwanted business.

Asked if recent scandals had harmed the island’s standing as a reputable financial centre, Dr Gonzi said overall, when comparing Malta to other jurisdictions considered to be major competitors, Malta still enjoyed a good reputation in financial services.

“Our regulatory authorities are still considered to be effective,” Dr Gonzi said.

He expressed his hope that everybody would continue to defend the good reputation Malta built over a long period of years.

“It took blood and tears to achieve,” Dr Gonzi said.

MEP Sven Giegold takes a dimmer view of Malta’s regulatory framework.

He says Malta’s tax system lacks national anti-tax avoidance measures such as interest-deduction-limitation rules, controlled foreign companies rules or rule to counter a mismatch in tax qualification of domestic partnership or company.

These shortcomings were highlighted as missing elements by the European Commission itself, when screening the EU Member States’ tax system for a study on aggressive tax planning, he said.

“Tax havens share three broad characteristics: financial secrecy, which allows companies to hide their income and assets from those who might wish to tax them; loose tax rules and low tax rates, which provide incentives for companies to shift profits to the haven; and loose financial regulations, which provide mechanisms facilitating the laundering of funds.

“While Malta seems fine for characteristic one and three, we have concerns on characteristic number two,” Mr Giegold said.

Where they stand:

Is Malta a tax haven?
Former prime minister Lawrence Gonzi – No
Stockbroker Paul Bonello – No
Greens MEP Sven Giegold – Yes
Transparency International - Yes

Is Malta compliant with international rules?
Former Prime Minister Lawrence Gonzi – Yes
Stockbroker Paul Bonello – Yes
Greens MEP Sven Giegold – Partially
Transparency International - Partially