Sunday, July 21, 2024

Malta has characteristics of a tax haven, European Parliament says

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The European Parliament on Tuesday voted in favour of a resolution labelling Malta as having the characteristics of a tax haven.

A report by the EP’s Tax3 committee named and shamed seven countries, including Malta, as having levels of foreign direct investment (FDI) that could only be explained to a limited extent by real economic activities taking place within these countries.

The Tax3 report on financial crimes, tax evasion and tax avoidance received majority support from the EP, with 505 MEPs voting in favour and 63 against.

Malta has long been criticised for allowing foreign-owned companies to shift their profits to the island to benefit from lower taxes.

The report highlights how the high share of FDI in Malta, Luxembourg, Cyprus, the Netherlands and Ireland in particular is usually attributable to special purpose entities.

Tuesday’s vote calls on the European Commission to carry out “fitness checks” of relevant laws and policy initiatives aimed at addressing the use of letterbox companies in the context of tax fraud, tax evasion, aggressive tax planning and money laundering.

The vote agrees with calls by the European Commission to introduce a common corporate tax base across the EU.

Read: Malta a fiscal black hole, says Oxfam

Reacting to Tuesday’s vote, Oxfam said it was good to see the EP recognise the role such countries play in helping corporations shift profits and dodge profits.

“The EU is part of the problem. It must put its own house in order by clamping down on tax havens in Europe,” Oxfam said.

Successive PN and Labour administrations have shunned the tax haven label. Finance Minister Edward Scicluna has repeatedly insisted that Malta is a cooperative jurisdiction that exchanges tax information with its foreign counterparts.

MEPs also approved calls to remove the veto on tax issues, instead moving to a system where votes in Council on tax matters are taken by qualified majority.

The European Commission said in January that unanimity often could not be achieved on crucial tax initiatives, leading to costly delays and sub-optimal policies.

During a debate about the Tax3 report on Monday, MEPs Alfred Sant and David Casa both spoke against harmonisation. Dr Sant argued that pushing towards tax harmonisation disregarded the fact that tax flexibility was the only remaining competitive tool for small peripheral economics in the single market. Mr Casa said he could not accept proposals that would limit national sovereignty on taxation.

What does this mean for Malta? Apart from the bad publicity, Tuesday’s vote will probably not have many consequences for Malta in the short term.

The European Parliament’s and European Commission’s mandates come to an end in May. It remains to be seen whether the momentum for tax reforms will carry over into the next legislature.

Removing the veto on tax matters would require the unanimous approval of all EU countries.

In the longer run, the vote continues to add pressure on Malta to voluntarily bring its corporate tax system in line with accepted EU norms.

The high rate of foreign financial flows into Malta identified in the Tax3 report has knock-on implications for the country’s fight against money laundering.

A national money-laundering risk assessment found that Malta’s large financial sector was one of the biggest drivers of the island’s high threat from the laundering of foreign proceeds of crime.

The Sunday Times of Malta reported that Malta’s anti-money laundering regime received a poor grade in a draft Moneyval evaluation.

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