Following recent media scandals, the OECD has intensified its recent work to lay down new international standards to tackle tax evasion and tax avoidance amongst others. The OECD has estimated that €90 to €210 billion Euros are being lost every year through tax avoidance. There are currently 15 base erosion and profit sharing (BEPS) actions that are looking to be implemented by the OECD/G20.
One of the proposals being made is to come up with one instrument to amend all the existing bilateral tax treaties. The idea is not to harmonize them but to create a standard terminology and to bring them in line with the BEPS minimum standards. For a country like Malta, which has over 67 double taxation agreements, it can have diverse impacts on the economy. From a perception point of view having a standard agreement may be positive, on the other hand, the current benefits in place may be lost.
“We do have concerns on the appropriateness of a single set of rules for all within the EU,” Minister Scicluna told Commissioner Moscovici. “In our view, a one-size-fits-all approach is not desirable. It is in this spirit that we insisted on the inclusion of a reference to ‘flexibility’ in the Council Conclusions in December, meaning that the Member States have officially endorsed Malta’s position.”
It must be pointed out that fiscal matters have sovereignty issues, as each country chooses its tax system depending on its political ideology and economic stability. Although Malta’s full imputation system which offers the possibility of refunds may be perceived to be abusive it was approved by the EU under its 1997 Code of Conduct as well as under state aid rules. Implementing BEPS recommendations could throw Malta into an abyss as it would remove its competitive edge. Being a small island with limited resources puts us at a natural disadvantage over other countries as the recommendations puts everyone on the same playing field.
Having said that, implementing the recommendations cautiously could place Malta in an advantageous position. Malta’s tax system is already a transparent one and has had general anti-avoidance rules in place for a number of years. The government must seek to implement the BEPS proposals as an opportunity to enhance its attractiveness for foreign direct investment.
The objective of Action 12 of the BEPS is to necessitate taxpayers to disclose their aggressive tax planning arrangements. This will be done through a number of recommendations regarding the enforcement of mandatory disclosure regulations for aggressive or abusive transactions or structures.
Malta has always shown that it is committed to transparency and it has always fought not to be labeled as a tax haven. Although our imputed tax system should not be affected it is imperative that this perception to foreign investors is not lost.
Speaking at a meeting of EU Finance Ministers (ECOFIN Council) in Luxembourg on 17 June 2016, Minister for Finance Edward Scicluna stated that Malta can accept the new measures which will be implemented by the OECD. “The full imputation tax system is Malta`s general system of taxation, affecting all taxpayers, whether individuals, pensioners or corporate, the design of which has been in place since the very beginning in our country. We have sought and obtained the reassurance we needed in this regard,” Minister Scicluna said in the margins of ECOFIN.
In conclusion, one can say that the war against tax evasion and tax avoidance has been ongoing for years. The impact that these proposals will have on Malta will highly depend on whether investors foresee that tax administrations could start asking questions and cause hurdles to their businesses and investments. The fact that Malta has managed to retain its tax system by claiming that European counterparts should focus on blatant cases of tax evasion means that our competitive edge will not be lost