Is Malta a tax haven? This is the question that has been making the rounds for quite some time now. Really it does not matter a jot what one calls Malta, when one is discussing or examining the taxation issue.
Whether one looks at it from an international angle or from a purely local perspective, the Maltese taxation system will have to be improved and made fair. Whether we change and reduce our corporate tax rate ourselves, gradually and methodically, applying it without rebates or refunds to all companies operating or passively held in Malta, as one contributor suggested last Sunday or have it changed brutally by outside forces such as the EU through soon-to-be enacted legislation we had better be prepared.
Another correspondent last week indicated that, not only is our corporate tax unfair and too high, damaging our local industry, but both corporate and individual taxation is unfairly skewed in favour of foreigners. Foreigners who invest in Malta, who come here to reside as foreign residents or who buy a Maltese passport are all given unfair tax advantages while Maltese citizens and companies have to pay the full 30 to 35 per cent tax on all their worldwide incomes.
Yet these foreigners still benefit from the same social services, magnificent roads, clean streets and immaculate pavements of this paradise on earth. I am sure that, were these foreign residents to pay the same tax as Maltese citizens on their world incomes (still a much lower tax than they were previously paying in their home countries before coming to Malta) I am not sure they would consider Malta to be the paradise they pretend it is. If they were paying for the social services, infrastructure and other public services like roads and public health and cleanliness, they would not be so happy.
This too will have to change. When these unfair taxes are explained to all Maltese voters who are employed, in the public or private sector, and who have to pay full tax willy-nilly and without any rebates on their world income, from salary, rents or interests from investments while other Maltese only pay on a benchmarked level of income agreed between their professional body and the State, or foreigners coming here to retire only pay 15 per cent on what they remit to Malta leaving their global world income from whatever source untaxed in any jurisdiction, I expect the Maltese workforce to rise up. They would either vote out the government were there to be another alternative party promising to correct these unfair issues or they will, as most of the employed base being Labourites, as shown in the last two elections, turn on their ‘supposedly’ Socialist party in government demanding a change in the tax laws making them fair.
It is difficult to see yourself hardly making ends meet in spite of having one or two part-time jobs besides your main job, and your neighbour only declaring a benchmarked amount while obviously earning far more than that benchmarked amount. It is hard to see your other neighbour not taxing on the distributed earnings of his company to himself in spite of the fact that these dividends are actually in lieu of a salary, and as such normally subject to tax and to social security contributions like yourself.
Another very unfair aspect of our taxation system is the so-called imputation system of corporate taxation. This system, which most civilised countries have discarded since it violates most principles of law and equity, of common sense, fairness and logic, is still applied in Malta and is very much at the bottom of our internationally criticised system of corporate taxation. So much so, that many voices are now being raised claiming Malta to be a tax haven.
We can cry out and criticise our critics until we are blue in the face but our critics are growing in number and include the major EU larger countries and the European Commission and the Parliament. This, to me, spells the death knell of our imputation systems and systems of refunds of 85 per cent of tax paid when dividends are transmitted to parent companies located abroad.
Whatever name one gives to the drainage system in a town or city it makes no difference. Sewers or sanitation canals always serve to drain sewage. It is the same with the four major culprits and suspects in the taxation issue of Europe. The dirty four are Ireland, Luxembourg, The Netherlands and Malta. To these can be added Cyprus and the UK.
Since the UK is leaving the EU, and since the tax haven and money laundering activities in London and the British dependencies of Guernsey, Jersey, Isle of Man and British Virgin Islands will be dealt with as one of the conditions for the Brexit Trade Deal we can ignore the UK.
But the other four or five, if you so wish, have been serving as a sink economy on the fringes of the EU for several years. Basing themselves on clever and wily tax regulations and being endowed with several scheming and criminally inclined law firms and accountancy firms, banks and consultants, these countries have invented so many tax avoidance and tax evasion schemes, that listing their names would fill several pages and make very boring or very interesting reading.
The Maltese taxation system will have to be improved and made fair
In Malta’s case both our parties are to blame for the present state of affairs and that is why both of them stand up to defend the status quo. They do not want to change the present system and support our Finance Minister whenever he threatens to exercise Malta’s veto to any EU wide tax reform. We, the poor Maltese businessman or employee who has to pay tax on every penny earned, have nowhere to turn to for help. There seems to be no hope that our two parties will ever reform our system of taxation. Tax can be reduced for all and simplified, if tax on all income is paid by all residents and citizens of Malta, both corporate or individuals.
Suffice it to say that during the 1990s, as the Gini Index of Western economies grew, the wealth gap (measured by the Gini Index) widened in the US and Europe. Today one per cent of the population owns 90 per cent of the wealth. In Malta that would mean that, of the employable population of Malta of about 200,000, 90 per cent of all Malta’s wealth is owned by 2,000 persons. If Malta’s wealth is €20 billion, then 2,000 persons would own €18 billion or €9 million each while the remaining 198,000 citizens would own €2 billion or just over €10,000 each.
Looking around it seems that this estimation is quite true about Malta. It is certainly true about the US and the UK.
Companies and wealthy citizens residing in the US or the EU major economies began to look for ways to escape paying the relatively high taxes prevailing in the American or Scandinavian and continental larger economies of the EU.
The 1990s were also the time of the creation of the single market with free movement of goods, services, capital and people. It also was the time of growing globalisation with greater and greater possibilities to lower the cost of labour by moving to the emerging economies and the opening up of our markets to freer and freer trade.
The wealth thus generated should have served to help the economies of the older world to grow and to improve the status of citizens. All EU countries, both of the older EU of 15 and later after 2004 of the EU of 28 have benefited from these events and the standard of living did go up.
Yet so did unemployment. Poverty levels also grew, ironically at the same time as extreme wealth grew.
The group of five criminally inclined countries, of which my own country forms part, did not subscribe to the principles of the EU, especially to the principle of solidarity among club members. Malta, as did Ireland, did not say no to the solidarity coming downwards to them through the Structural and Regional Funds. In fact they welcomed these funds and show off with placards along motorways, built with part financing of the EU.
Yet their financial services authorities and inward investment agencies were secretly hatching reams of legislation that was all apparently above board but which, in reality, was only written to facilitate the way for companies and wealthy individuals, benefiting from globalisation and the EU single market, to channel away profits and capital from the major countries of the EU to tax havens on the other side of the globe.
The did this by not only lowering the tax level, which, in itself, if applied equally to everybody in the country, is a good thing, but by explicitly treating foreigners differently and by preferentially allowing foreign companies to place their subsidiaries there with the sole objective of passing the profits earned in the major markets across Europe away from these jurisdictions without paying taxes.
(Part 2 will be published next week.)
John Vassallo is a former Senior Counsel and Director for EU Affairs at General Electric, a former Vice President EU Affairs and Associate General Counsel Microsoft and a former Ambassador of Malta to the EU.