Banks and investment service providers will now have to identify the investors from whom it has deducted final withholding tax, a provision that was introduced two decades ago.
The 1994 measures introduced a 15 per cent withholding tax on bank investments and bonds. Banks and investment service providers were only required to forward to the Inland Revenue Department the tax collected without identifying the investor, whether in their monthly or annual returns.
But new legislation related to the 2018 Budget means that all investment income by way of bank and bond interest earned as of this year and taxed at 15 per cent will have to be reported in a manner that also identifies the investor.
Financial practitioners, including banks, must inform the tax authorities about the names, addresses, income tax number and amount of investment income paid every year.
The changes, which some investors and stockbrokers said were introduced by stealth and without any prior notice, resulted in numerous objections and complaints to the Finance Ministry.
Financial practitioners who spoke to the Times of Malta expressed their “surprise” at the move, particularly in view of promises made by various past administrations on investment registration schemes. These offered taxpayers incentives to repatriate foreign investments that had been undeclared for tax purposes.
“We are surprised because there was no reference to these changes in the Budget speech, nor are market participants aware of any discussion or consultation with the government in respect to this measure,” a top financial investment practitioner said.
Stockbrokers said the new provisions would have a “devastating” effect on the credibility of Malta’s tax systems, since those who repatriated their investments were assured there would be no need to report to the tax authorities if they paid the final withholding tax.
“The investment registration schemes rightly made investors expect the public authorities to respect their commitment and they never thought that, one fine day, the government would pull the carpet from under their feet and start resorting to indirectly identifying who the investors were,” another financial practitioner said.
Contacted by the Times of Malta, Paul Bonello, managing partner of Finco Trust, admitted he had only become aware of the “significant” changes last week, pointing out he was also surprised by the move.
“I do not believe these changes were introduced to curb any possible abuse that could have existed on the part of the investment services providers in not handing over the tax collected,” he said.
“However, the measure reneges on the implied and, possibly, express pledges of the government that it would not resort to identifying [which investors were paying] final tax on investment income. I fear that this reporting might now give rise to unnecessary tax investigations and wild chases, where the capital would be covered by investment registration schemes,” he said.
Questions sent to the Finance Ministry on the changes and why the government appeared to have made them hush-hush remained unanswered at the time of writing.
Government sources said Finance Minister Edward Scicluna gave the green light to the changes, which, the sources insisted, were aimed at ensuring the tax authorities had all the necessary information on taxpayers.
“The government already had a right to ask for all the necessary information. We are just making this an obligatory requirement. No changes to the amount of taxation was introduced,” the sources said.
Finance Ministry statement
In a statement on Tuesday, the Finance Ministry the amendments to the Income Tax Act were passed in 2008. These give power to the Inland Revenue Department to get full access to data on investment income of any particular tax payer, from banks and investment service providers.
As from next year, the current legal requirement for banks and investment service providers to pass on information to the tax authorities on investment income whose tax was not deducted at source was to be extended to investment income taxed at source.
Recent EU regulatory obligations, such as Markets in Financial Instruments Directive (MiFID); the Savings Directive; Anti-Money Laundering directive (AMLD4); the Foreign Account Tax Compliance Act (FATCA); together with a number of exchange of information agreements, signed and ratified, between Malta and other jurisdictions, have committed the Inland Revenue Authorities to automatic exchange of information on investment income.
Tax authorities had an obligation to ensure that all tax withheld by banks and investment service providers was fully passed on to the authorities.
The implementation of these changes, the ministry said, had been discussed with financial operators.
Malta, it said, could maintain and enhance its international reputation in the area of combatting tax evasion and money laundering through effective actions as delineated in its AML and action plan.
These changes, it said, were not done by stealth and were the result of directives and commitments that the ministry had been discussing and working on at various levels both in Brussels and Valletta.
"The Times of Malta seems to be criticising Malta for taking a strong approach towards greater transparency and implementing European directives on anti-money laundering and other financial crimes," the ministry said.