Malta full imputation tax system would stay ‘intact’, although some technicalities over refunds might have to be revisited by Malta and other member states as there would be more restrictions and qualifications, Finance Minister Edward Scicluna said.
The confirmation that Malta’s full imputation system would not have to be dismantled or changed into a classical one is the result of discussions which started with the adoption of the Anti-Tax Avoidance Directive (ATAD) in June 2016, part of the European Commission’s efforts to show that it was taking the issue as seriously as the OECD and the G20.
The latter entities had recently started looking beyond the ‘harmful tax practices’ of the 1990s to the ‘aggressive tax planning’ by multinationals, resulting in the focus on Base Erosion and Profit Shifting, drawn up after every possible form of tax avoidance was identified, resulting in a 15-point action plan.
ATAD, however, had to be revisited after the UK raised the issue of hybrid mismatches, which only had a clause in the directive, compared to the reams in the OECD/G20s documents.
It’s going to be a long slog
The result was ATAD II, signed last October, which will potentially enter into force on January 1, 2019.
“We had been emphasising to the OECD and the presidency that we would not allow any legislation which would destroy overnight our full imputation system,” he said, stressing that Malta had been quite ready to use its veto.
“The perception of our imputation system is a bit of a caricature, as other countries with classical tax systems claim to have a high taxation rate. But the reality is that effectively they use tax rulings or complicated dealings which bring the real rate down to a few per cent.
“We do it the other way round, withholding slightly above five per cent and giving a refund to a company, but that company is liable to pay tax on that refund. Each country has its own way of tackling this so you would not know what the final tax rate paid is unless you asked that company...”
“ATAD I and ATAD II have addressed as many things as possible to close the possibility of tax avoidance,” he said.
“But there are still other issues like transfer pricing – where the Commission and the OECD do not share a common view. We are constantly attending international meetings on this.”
The OECD wants to curtail transfer pricing while the Commission wants a formula which would calculate how to share out a group’s profits depending on where they were derived. However, which country got what under this so-called Common Consolidated Corporate Tax Base would depend on factors that are keenly disputed: would it depend on the headcount in a particular country, or on the value-added per employee, for example?
“Just this week, I was discussing what ‘sweeteners’ we could add, as a way to get this moving,” Prof. Scicluna said, referring to the presidency meetings.
“It’s going to be a long slog.”
He confirmed that the ministry was constantly running models to see how the several possible outcome scenarios would affect Malta.
“At any point, we need to know what we could be facing. Our attractive regime is still there and Malta, which has no other resources, will always consider tax as an instrument to keep the island competitive.”