Malta’s opaque financial system

(Phillip Ingham, CC BY-ND 2.0)

OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) was founded in 2000. It consists OECD member states and other jurisdictions (160 jurisdictions in total) that have agreed to implement tax related transparency standards and to increase the exchange of vital information for tax collection purposes. The main purpose of the body is to tackle offshore tax evasion. It does so through the implementation of two complementary, international standards, both of which provide for closer co-operation between tax authorities worldwide, so that they can obtain information necessary to ensure tax compliance, such as on cross-border investments.

The first standard agreed and implemented provides for the international exchange of information on request (EOIR), where a tax authority can request a particular piece of information to progress a tax investigation. The second provides for the international automatic exchange of information (AEOI), where a pre-defined set of information on financial accounts held by non-residents is automatically exchanged each year.

The Global Forum monitors the worldwide implementation of these standards and conducts peer reviews to ensure they are implemented effectively. In 2000, the Forum published a blacklist of 35 tax havens, which by 2009 had shrunk to zero. It has since focused on increasing the standard for exchange of information.

According to a 2019 IMF report, the global phenomenon of tax evasion costs governments between USD500bn-USD600bn a year. “Of that lost revenue, low-income economies account for some USD200bn—a larger hit as a percentage of GDP than advanced economies and more than the USD150bn or so they receive each year in foreign development assistance,” the report reads.

Malta — EU’s ugly duckling

In September 2020, the Global Forum published nine new peer review reports assessing compliance with the international standard on transparency and exchange of information on request. The only country deemed as non-compliant was Anguilla. Papua New Guinea, Chile, China, Gibraltar, Greece, Korea and Uruguay were rated Largely Compliant. Malta was issued a Partially Compliant rating.

The latest rating made Malta the only EU member state with a Partially Compliant rating, making it the weakest link in the EU’s efforts to tackle tax evasion. The island country was downgraded from Largely Compliant, a review it received in 2013.

According to the nearly 130-pages report on Malta, the country’s legal and regulatory framework was fully in place “to ensure the availability and access to information on legal ownership and accounting information” during the first review in 2013. However, since the first review, “Malta has not taken sufficient measures to appropriately and fully address these recommendations in relation to the enforcement and supervision of the Co-operation regulations,” the latest report says.

“One of the key recommendations given to Malta in this report relates to the lack of monitoring and supervision on the implementation of the Co-operation Regulations (requirements to relevant entities to ensure the availability of ownership, accounting and banking information),” the report reads.

Authors of the report also stressed that the annual filing rates of companies and partnerships and the tax filings rates of taxpayers in Malta are very low, and “no sufficient enforcement measures have been taken by the Maltese authorities to address those issues.”

Equally problematic, in the view of the Global Forum, is that there were over 10,000 inactive companies registered with the Malta Business Registry (MBR). “Malta confirmed actions have been taken to strike off those inactive companies, but since some of the actions were recently taken in 2020, their effectiveness is not able to be tested,” the report reads. “In addition, there are over 12,000 inactive companies registered with the tax authorities. Those inactive companies not only caused concerns regarding the availability ownership information and accounting information on those companies, but also actually caused failures to practice for Malta to provide the related information for its partners,” the report says.

The island country has also been criticized for the untimeliness of its responses to requests for information, which has been blamed on the shortages in staff resources.

Holes in budgets

According to a 2019 European Commission report on international tax evasion, Malta loses 2.39 per cent of its GDP to international tax evasion. The rate is the highest in Europe by a wide margin, with the country coming in second on the list, Cyprus, losing only 0.72 per cent of its GDP to the international evasion of tax. According to the report, the majority of the losses were attributed to tax evasion on original income — EUR180m. This was the highest amount since 2004.

According to the same report, the largest European countries have also the largest estimated offshore wealth, with Germany leading the pack (EUR331bn), followed by France (EUR277bn), United Kingdom (EUR218bn), Italy (EUR142bion), and Spain (EUR102bn).

However, in terms of shares of GDP, the ranking is markedly different. Member States with the largest offshore wealth in GDP terms are Cyprus, Malta, Portugal and Greece, which are consistently above the EU-28 mean in each year of the study period and above 20 per cent of GDP on average. A third group of countries include Member States with estimated offshore wealth below 5 per cent of GDP. In 2016 these include Denmark, Finland, Sweden and Slovakia and, on average over the period, Poland, Slovenia, Romania and Lithuania.

(Phillip Ingham, CC BY-ND 2.0)

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