An MBB impact assessment on the Commission proposal for a Council Directive on a CCTB

Table of Contents Executive Summary ................................................................................................................................................... 2 Glossary of Terms ....................................................................................................................................................... 3 Our understanding and scope of work .................................................................................................................. 4 Chapter 1 ....................................................................................................................................................................... 5

1. Background ......................................................................................................................................................... 5 2. European Treaties and ECJ case law developments .......................................................................................... 7 3. High level technical analysis of the Directive ..................................................................................................... 9 4. Political landscape – the Barroso II Commission and Europe 2020 ............................................................... 14 Chapter 2..................................................................................................................................................................... 18

1. Inclusion of revenues in the tax base................................................................................................................ 18 2. Deductibility of expenses.................................................................................................................................. 19 3. Other key differences........................................................................................................................................ 19 Chapter 3..................................................................................................................................................................... 23

1. Methodology adopted ....................................................................................................................................... 23 2. Selection of participants .................................................................................................................................... 24 3. Limitations of this study ................................................................................................................................... 24 4. Data collected from participants....................................................................................................................... 25 5. Results and findings of computations .............................................................................................................. 26 Chapter 4..................................................................................................................................................................... 30

1. General comments on the anticipated effects of CCCTB on business ............................................................ 30 2. General comments on the anticipated effects of CCCTB on inbound investment ......................................... 37 3. General comments on the anticipated effects of CCCTB on outbound

investment ................................. 40

4. General comments on the anticipated effects of CCCTB on Maltese tax incentive legislation ...................... 44 5. Impact on tax administration............................................................................................................................ 44 Chapter 5..................................................................................................................................................................... 46

Executive Summary The Malta Business Bureau (the MBB) engaged PwC to conduct a study on the European Commission’s proposal for a Common Consolidated Corporate Tax Base (hereinafter CCCTB) Directive which would take place on the basis of financial and tax figures of groups operating in Malta across different industries which accept to furnish such information for this purpose.

Thus, this report sets out the results and conclusions of an income tax modelling exercise, which involved a review of the financial statements of a number of businesses operating in Malta (hereinafter “participants�) in a variety of industries. The participants include groups that are exclusively based in Maltagroups which are foreign owned (i.e. representing inbound investment into Malta) and Malteseowned businesses which have invested outside of Malta.

A strong effort was made by PwC and the MBB to ensure that key sectors of the Maltese economy are well represented in the study. However, this was impacted by the fact that a number of groups were, for one reason or another, not in a position to provide the requisite information.

For confidentiality reasons, the actual identity of the participants has not been disclosed. However, a profile of each participant has been provided in this report in order to enable the user to better understand the results of this study.

For the purposes of the modelling exercise, the existing tax computations of these businesses were recomputed according to the rules set out in the proposed Directive, and the direct tax liability under CCCTB was then compared with the current direct tax liability calculated in accordance with the Maltese Income Tax Acts for the corresponding years under review. Differences in the tax results are explained in this report.

The methodology adopted for the purposes of this exercise is further set out in Chapter 3.1 and Chapter 3.2 of this report, and the outcome of this exercise is then presented in Chapter 3.3 of this report.

Whilst it would not be possible to determine conclusively whether it is desirable to introduce the CCCTB, either on a compulsory or optional basis, it is possible, on the basis of our findings, to anticipate some of the effects that the introduction of CCCTB might have on the level of corporate taxation in Malta. These views are set out in detail in Chapter 4.

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Glossary of Terms CCCTB – Common Consolidated Corporate Tax Base CFC – Controlled Foreign Company or Companies ECJ – European Court of Justice or Court of Justice of the European Union EU – European Union FIA – Foreign Income Account FRFTC – Flat Rate Foreign Tax Credit ITA – Income Tax Act (Chapter 123 of the Laws of Malta) ITCRs – Investment Tax Credits MBB – Malta Business Bureau MS – Member States OECD – Organisation for Economic Co-operation and Development PE – Permanent Establishment/s TFEU – Treaty on the Functioning of the European Union

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PwC’s understanding and scope of work To the Malta Business Bureau and Bank of Valletta plc: Our work was conducted and this report was prepared under the terms and conditions set out in the letter of engagement dated 27 July 2011. The letter of engagement was signed following the submission of our proposal to the MBB in response to a public request issued by the MBB and further discussions with the MBB on the scope and nature of the study. Further minor changes to the methodology and the scope were agreed between us and the MBB in regular update meetings that were held as the engagement progressed.

This report was to the MBB as presented. The MBB are authorised by us to use the report and disclose the contents thereof to third parties, provided that this does not prejudice us, our clients, any of the participants in this report and any third parties. To this end, we do not accept any third party liability.

On a general basis, our comments relate exclusively to the impact of CCCTB on Maltese income tax and no consideration has been given to any foreign tax or foreign legal implications that might arise from the proposed introduction of CCCTB. Any opinion in this report is restricted to the proposed CCCTB Directive, and its possible application.

We have relied on data provided to us or that was publically available, without verifying its accuracy in all instances. Due to the limited information provided to us, it has been necessary in several cases to make certain assumptions. Whilst we have endeavoured to ensure that the assumptions that have been made in the course of our modelling of the CCCTB are reaonsable and realistic, it is possible that a change in those assumptions may give rise to different results which may in turn have an impact on our findings and comments. Accordingly, this essentially places a restriction on our comments hereunder in that such comments do not reflect a complete picture of the impact of the CCCTB. Further limitations and assumptions set out in the models are listed in Chapter 3.3.

Unless otherwise indicated, comments herein reflect our views and not necessarily those of any Court or authority, and it is not necessarily the case that our said views would be agreed to by any such Court or authority.

167 Merchants Street Valletta Malta 2 April 2012

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Chapter 1 Introduction to the proposed Directive 1. Background The proposed CCCTB Directive is by no means the first political effort in the domain of direct corporate taxation, to approximate fiscal regimes amongst the Member States of the European Union.. A number of similar pan-European projects have been attempted in the past, some of which have been implemented with mixed results.

One of the main priorities of the common market, following the signing of the Treaty of Rome in 1957, was the removal of obstacles to cross border trade within, what was to become, the European Union.

Company taxation, or rather, the different systems of company taxation employed by each of the Member States was identified as constituting one such obstacle. Indeed, the existence of different systems of taxation by each of the Member States, results in several potential restrictions or impediments to encouraging cross border trade, including:    

Prohibitive withholding taxes on cross-border payments, e.g. dividends, interest and royalties; Inability to offset cross-border tax losses arising in one Member State with profits arising in another Member State; The imposition of taxation by different Member States on the same income (i.e. double taxation); High compliance costs due to having to deal with different tax laws and tax authorities across different Member States.

Unlike most indirect taxes (e.g. Value Added Tax and Customs Duties), the European Union has, to date, not managed to harmonise corporate income tax. Part of the reason for the lack of agreement in this area is due to the fact that any harmonising measure proposed by the Commission requires unanimous agreement between all Member States.

In fact, the CCCTB proposal is merely the latest in a string of unsuccessful attempts to bridge the variant calculations of the tax base on which the due corporate tax should be levied, particularly for cross-border business operations in the European Single Market.

In 1962, the Neumark report, proposed a split-rate system based on the system existing in Germany at that time, as a method for reducing economic double taxation on dividends paid out by EU companies.

This was followed by the Van den Tempel report in 1971 on the possibility of implementing a classical system for the reduction of the overall effective tax rate on distributed company profits.

In 1975, the Commission published a draft Directive for the harmonisation of corporation tax across the European Community which included the introduction of an imputation system for the avoidance of

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economic double taxation, containing characteristics similar to the one that is currently employed in Malta.

In 1984 and 1985, the Commission proposed two further Directives which both dealt with the use of losses and in particular the possible application of cross-border loss relief.

Due to a lack of agreement on the introduction of any all-encompassing direct tax harmonisation measures, towards the end of the 1980s the Commission adopted a different approach in order to bring about a degree of direct tax harmonisation between Member States.

Under this alternative approach, the Commission proposed Directives that aimed to harmonise Member States’ tax systems in specific areas.

In this regard, since 1990 a number of ‘scaled down’ direct corporate tax Directives have in fact been implemented, which Directives are commonly used in everyday dealings by EU companies involved in cross-border activities between Member States. The main direct corporate tax Directives currently in force include: 1.

The Parent Subsidiary Directive, which removes withholding tax on dividends paid by companies to

corporate shareholders subject to a minimum shareholding requirement. The Directive also imposes a requirement on the Member State of residence of the corporate shareholder to grant double tax relief for corporate tax suffered by the company on the profits so distributed; 2.

The Interest and Royalties Directive, which removes withholding tax on royalties and interest paid between

3.

The (Tax) Mergers Directive, which ensures that certain transactions that involve cross-border

related EU companies subject to certain conditions; and,

restructuring (e.g. cross-border mergers of companies) do not trigger a tax charge for the stakeholders involved in the restructuring. Instead, Member States are obliged to defer tax on gains/losses arising on the restructuring until future periods.

These Directives have gone some way towards removing some of the obstacles resulting from the differences between Member States’ tax systems.

In addition to the above mentioned Directives, other Directives have been introduced which are aimed at increasing the level of cooperation between tax authorities of the Member States. Moreover, other instruments of harmonisation have also been introduced within the context of the EU Treaty1 as well as alongside it, that function as inter-governmental agreements entered into by all the Member States and some third countries2.

However, none of the Directives currently in force, or indeed the other instruments of harmonisation, are as far-reaching as the proposed CCCTB Directive.

The proposed Directive aims to harmonise the rules on how a company which is resident or has a taxable presence in the EU calculates its taxable profits and tax losses.

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These include, inter alia, a number of non-legally agreements such as the 1997 Code of Conduct for Business Taxation and various recommendations published by the Commission.

2 An example of such agreement is Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (the Arbitration Convention).

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Furthermore, the proposed Directive also seeks to allow such companies that belong to the same group to consolidate their taxable profits and tax losses into one single tax computation. If the aggregation results in a consolidated taxable profit, such profit would then be allocated between Member States according to a pre-determined formula.

It has been stated by various commentators, academics and professionals that the current proposal represents the most ambitious direct tax-related initiative that the Commission has ever sought to introduce. Indeed, the proposal has generated a significant amount of discussion and has been treated as a high level priority by both the Commission and successive presidencies of the EU over the past ten years.

The Commission and supporters of the CCCTB have argued that if implemented, the CCCTB Directive will reduce the compliance costs of groups seeking to engage in cross-border activities and boost the competitiveness of the Single Market as a region in which to do business.

According to the Commission’s estimate, every year, the CCCTB will save businesses across the EU €700 million in reduced compliance costs, and €1.3 billion through consolidation. In addition, businesses looking to expand cross-border will benefit from up to €1 billion in savings3.

However, critics of the Directive have argued that the proposal takes away too much power from Member States and restricts them from determining the manner in which they choose to impose and collect tax on corporate profits. It is argued that in turn, this would have a direct impact on the ability of a Member State to adopt a fiscal policy that is suited to its own particular circumstances.

The extent to which the Commission will be able to convince all the relevant parties on the desirability of introducing the CCCTB and if so, what final form it will take, remains to be seen.

2. European Treaties and ECJ case law developments As noted above, one of the reasons why harmonising measures have proved to be so difficult to introduce in the EU is due to the unanimity requirement. In terms of the Treaty of the European Union, in order for an EU-wide tax measure to be introduced, all Member States have to agree on its implementation4.

This requirement has proved to be a stumbling block in respect of various initiatives that had been taken to introduce direct tax harmonisation measures.

In the absence of significant proactive harmonisation measures, a degree of harmonisation (referred to as “secondary harmonisation”) has nonetheless occurred through the intervention of the Courts of Justice (“ECJ”). Secondary harmonisation is the process by which the laws in different Member States are harmonised not via positive legislative efforts, but via the ECJ reviewing the legality of existing direct tax laws contained in the domestic law of Member States and assessing whether such rules are compliant with the principles set out in the EU Treaties and other EU legislation.

Various direct tax cases are brought before the ECJ every year. The vast majority of these cases are referred to the ECJ by domestic courts in the different Member States requesting the ECJ to provide an interpretation on a point of European law. Alternatively, cases are instituted by the European

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Commission Press Release IP/11/319 of 16 March 2011 Article 115 of the Treaty on the Functioning of the European Union (“TFEU”)

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Commission if it is of the view that tax measures of particular Member States breach any of the principles laid down in the EU Treaties/EU legislation.

Most of the direct tax cases that have been considered by the ECJ concern domestic tax measures that allegedly restrict an EU national (including a company) from exercising its right to the four fundamental freedoms that are enshrined in the EU Treaties, in particular the free movement of persons (including the right to establishment), the free movement of capital and the freedom to provide services.

When the ECJ determines that a specific direct tax measure of a Member State is unlawful, then such Member State is bound by its obligations under the EU Treaties to amend its legislation so as to remove the restriction. At the same time, it is also expected that other Member States which have the same or similar rules amend their legislation to reflect the ECJ decision.

Over the years, the ECJ has considered various direct tax measures and assessed their compliance with EU law. Amongst those that have been considered are the following measures where the ECJ has held that in certain cases those measures were contrary to EU law (in particular the fundamental freedoms), and therefore unlawful:       

Withholding taxes that are applied in a discriminatory fashion or which restrict the free movement,

where those withholding taxes are not justified and are disproportionate 5; A domestic Group (loss) relief regime that does not allow for the cross border relief of final losses6; Exit taxes, which are levied when a taxpayer transfers assets or tax residence from one Member State to another Member State7; Rules which tax the income attributed to genuinely established subsidiaries that are resident in other Member States, such as controlled foreign company rules and Offshore Funds rules8; Rules that prevent the relief of currency losses in certain cases9; Rules limiting interest deductions in certain cases10; and Rules that adjust the pricing between related companies that represents either an arm’s length price or a commercially sustainable price11.

In several instances, this process has led to the ECJ striking down various direct tax measures on which Member States have relied in order to collect tax revenues without it being clear which EU-complaint measures may be used as alternatives.

This, in turn, has led to a form of piece-meal harmonisation, in what has been termed “harmonisation through the back-door” and does not involve formal coordination at EU level.

Many commentators view this form of harmonisation as causing, in general terms, a perceived increased willingness by legislators to harmonise by agreement (i.e. through proactive harmonisation), rather than allow the ECJ to determine the lawfulness of existing rules. Indeed, the role of the ECJ is restricted to interpreting EU law and it is unable to actively propose or approve legislation for Member States to adopt in lieu of those domestic tax measures which are in conflict with EU law.

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ECJ decision in Denkavit Internaational (C-170/05) ECJ decision in Marks and Spencer (C-446/03) and X Holding BV (C-337/08) 7 ECJ decision in National Grid Indus B.V. (C-371/10) 8 ECJ decision in Cadbury Schweppes (C-196/04) 9 ECJ decision in Deutsche Shell (C-293/06) 10 ECJ decision in Lankhorst-Hohorst (C-324/00) 11 ECJ decision in SGI (C-311/08) 6

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To a certain extent, the proposed CCCTB Directive attempts to provide the Member States with an EU compliant corporate tax system. Whilst by itself it may not completely remove the risk of an ECJ challenge, the proposed Directive seeks to address those areas of Member States’ corporate tax system that have been held to be in breach of EU law by removing obstacles that distort free movement of capital, services and persons.

Therefore, if introduced, one of the effects of the CCCTB Directive would be to materially reduce the risk of litigation between the taxpayer or the Commission and individual Member States before the ECJ, and thus arguably provides greater certainty to Member States that the mechanism through which they impose and collect tax on corporate profits is in line with EU law.

3. High level technical analysis of the Directive As stated in the previous section, the proposed Directive was drafted with the intention of removing tax obstacles that stand in the way of cross border trade and movement as protected by the Treaty.

From a technical perspective, this is reflected by the absence, in an EU context, of several measures which generally result in impediments to engaging in cross-border activities such as withholding taxes, thin capitalisation rules and Controlled Foreign Company (“CFC�) rules that discriminate or are restrictive, often without justification. The proposed Directive also seeks to eliminate the risk of not being able to offset losses incurred in one Member State against profits generated in another Member State.

Furthermore, the proposed system envisages an environment that removes the requirement to adhere to the existing complex transfer pricing rules for the pricing of transactions between EU related companies .

From a practical perspective, the system does away with some of the existing administrative burdens, as the taxpayer will only be required to prepare one tax return and deal with one tax authority in one Member State. Currently, if a group of companies is established in a number of Member States (whether via tax residence or just by having a taxable presence therein), the group may have to deal with a number of tax authorities, comply with the different rules imposed by the respective Member States, and risk double taxation from any mismatches that may result.

How does the system work?

The proposed Directive introduces one set of rules for a company to calculate its taxable profits or tax losses. Accordingly, irrespective of the Member State in which a company operates, that company will have the possibility of calculating its taxable profit or loss in the same manner.

Furthermore, the proposed Directive allows companies that belong to the same group to consolidate their taxable profits and tax losses into one single tax computation. The resulting consolidated taxable profit would then be allocated between Member States according to a pre-determined formula.

The tax rate at which the profits are taxed remains the prerogative of the individual Member States to which those profits have been allocated under the pre-determined formula.

Calculation of profits and losses The taxable profit of a company or group would be equal to all revenues (with certain exceptions) less deductible expenses and other deductible items. Taxable profit is to be calculated on an annual basis.

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Deductible expenses include all costs of sales and expenses incurred by a company with a view to obtaining and securing income. In addition to this, deductible expenses also include the cost of research and development and costs incurred in raising equity or debt for the purposes of the business.

The Directive also allows a company (or group) to deduct depreciation incurred on fixed assets, which depreciation is calculated by reference to specific rules.

That having been said, the Directive includes a list of expenses which are specifically treated as nondeductible. This list includes inter alia profit distributions and repayments of debt or equity, 50% of entertainment costs, capital expenditure on fixed assets, fines and penalties payable to a public authority as well as expenses incurred for the purposes of deriving exempt revenues.

With regard to exempt revenues, these are also listed in the Directive and include the following:   

Profit distributions receivable (e.g. dividends received from other companies); Income attributed to a permanent establishment situated in a third country; and Proceeds from the disposal of shares.

In view of the above, the Directive introduces a quasi-territorial system of taxation, whereby profits of the group that are generated within the EU are taxable, whilst those generated outside of the EU (subject to certain exceptions) are not to be included in the consolidated tax base.

Recognition of revenues and expenditure The proposed Directive states that as a general principle profits and losses should only be recognised for tax purposes when they are realised. Furthermore, revenues, expenses and all other deductible items would be recognised in the tax year in which they accrue or are incurred.

With regard to revenues, the Directive states that these should be regarded as accruing when the right to receive them arises and they can be quantified with reasonable accuracy, regardless of whether or not the actual payment is deferred.

With regard to expenses, these are regarded as incurred when (a) the obligation to make the payment has arisen and (b) the amount of the obligation can be quantified with reasonable accuracy.

The Directive then contains certain specific rules for particular types of revenues/expenses. For example, where a financial instrument is held for trading, then any movements in the fair value of such instrument are regarded as taxable /deductible in the year in which they arise.

Furthermore, the deductibility rule for expenses is relaxed in the case of the recognition of provisions (with the exception of provisions for bad debts). In this regard, the Directive allows a company to claim a deduction in respect of provisions as long as it is probable that a future obligation will arise which will result in a deductible expense and the said obligation can be reliably estimated.

Depreciation of fixed assets Fixed assets are depreciable for tax purposes, subject to certain exceptions.

The Directive classifies fixed assets into one of two types: (i) long-life assets and (ii) pool assets.

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Long-life assets consist of:   

buildings (which can be depreciated on a straight-line basis over 40 years); other long-life tangible assets (being assets which have a useful life of 15 years or more – these can be depreciated on a straight-lines basis over 15 years); and intangible assets (being assets that were not internally generated – these can be depreciated over their life or if that period cannot be determined, over 15 years)

Profits or losses derived from the disposal of such assets are taxable/deductible.

All other fixed tangible assets that are subject to wear and tear and obsolescence are pooled together and collectively depreciated at a rate of 25% per annum on a reducing balance basis.

All additions of such assets are added to the pool whilst all proceeds from the sale of such pooled assets are not taxable but are deductible directly against the balance of the pool.

Consolidation As noted above, companies which form part of the CCCTB group are able to consolidate their taxable profits and losses.

A CCCTB group (hereinafter a “group”) broadly consists of a parent company, its permanent establishments situated in the EU, its EU resident qualifying subsidiaries and the EU permanent establishments of non-EU resident qualifying subsidiaries. Certain additional rules also potentially apply in this case.

A subsidiary is a qualifying subsidiary if the parent has (i) the right to exercise more than 50% of the voting rights and (ii) holds more than 75% of the subsidiary’s equity or more than 75% of rights giving entitlement to profit. In respect of lower-tier subsidiaries the 75% threshold must be satisfied on an “effective holding” basis12.

The two thresholds (i.e. voting and capital/profit entitlement) should be met throughout the tax year.

There is also a nine-month minimum requirement for group membership.

Those companies that are regarded as forming part of the same group will prepare one consolidated tax computation. For the purposes of preparing the consolidated tax computation, all transactions between members of the group are ignored.

Furthermore, the Directive also requires that no withholding taxes or other source taxation may be charged on transactions between members of a group.

Formulary apportionment Where a company or a group operates in more than one Member State, the Directive requires that the computed taxable profits of the company/group are apportioned between the relevant Member States in which the company/group operates on the basis of a pre-determined formula.

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In this context, “effective holding” is taken to mean a situation wherein the right to profit and ownership of capital in an indirect subsidiary is calculated by multiplying the interest of the parent held in intermediate subsidiaries at each tier above the indirect subsidiary.

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This system differs from the current generally accepted principle of “arm’s length” dealings between companies of the same group. What the arm’s length principle requires is that companies in the same group should transact with each other as though they are transacting with unrelated parties.

The proposed CCCTB Directive departs from this principle for intra-CCCTB group transactions, and profits are allocated on the set formula and not on an arm’s length basis.

The formula for apportioning the consolidated tax base is based on three equally weighted factors: labour, assets and sales.

In this regard, the Directive sets out that the percentage of the tax base attributable to a Member State is the percentage obtained by the application of the following formula: 1 ݈ܵܽ݁‫ݏ‬஺ 1 ‫ݏݐ݁ݏݏܣ‬஺ 1 1 ܲܽ‫݈​݈݋ݎݕ‬஺ 1 ‫ݏ݁​݁ݕ݋݈݌ ݉ܧ‬஺ ቇ ቆ ቇ ቊ ቆ ቇ ቆ ቇቋ % ݁݊‫ = ܣ ݂݋ ݐ݊݁ ݈݉݁ݐ݅ݐ‬ቆ + + + 3 ݈ܵܽ݁‫ீݏ‬௥௢௨௣ 3 ‫ீݏݐ݁ݏݏܣ‬௥௢௨௣ 3 2 ܲܽ‫ீ݈​݈݋ݎݕ‬௥௢௨௣ 2 ‫ீݏ݁​݁ݕ݋݈݌ ݉ܧ‬௥௢௨௣

Sales

The sales factor represents sales made to third parties by a company operating in Member State A as a fraction of total third party sales made by the group.

Sales are regarded as taking place in a Member State in accordance with the destination principle.

Accordingly, when the sales consist of goods, these are attributable to Member State A only insofar as the transport of the goods ends in that Member State. When the sales consist of services, it is necessary to determine where the services are physically carried out.

If there is no group member in the Member State where goods are delivered or services are carried out, or if goods are delivered or services are carried out in a third country, the sales shall be included in the sales factor of all group members in proportion to their labour and asset factors.

Assets The asset factor consists of all fixed tangible assets owned, rented or leased by a company in a Member State expressed as a percentage of the assets owned, rented or leased by the whole group.

Generally, intangibles and financial assets are excluded from the formula although banks, insurance undertakings and certain financial institutions are entitled to take 10% of their financial assets into account in respect of calculating the asset factor.

Assets are valued according to their average value for the year save in the case of certain rented/leased assets which are valued at eight times the annual rent/lease charge.

Labour The labour factor is computed by taking account of payroll and the number of employees (each item counting for half).

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The definition of “employee” is determined by the national law of the Member State in which employment is exercised. The number of employees is measured at year end.

Employees are included in the labour factor of the group company from which they receive remuneration. However, in certain cases, where the employees are under the control and direction of another group company, such individuals may be treated as employees of the other group company.

Taxation of profits Once the tax base is apportioned, the apportioned profits are taxed by the Member State at a tax rate set by the Member State.

Tax compliance The Directive provides that groups of companies will be able to deal with a single tax administration (‘principal tax authority’), which should be that of the Member State in which the parent company of the group (‘principal taxpayer’) is resident for tax purposes.

The proposal also provides for an advance ruling mechanism.

Furthermore, audits will be initiated and coordinated by the principal tax authority, but the authorities of any Member State in which a group member is subject to tax may request the initiation of an audit.

In the event that disputes between taxpayers and tax authorities arise, these will be dealt with by an administrative body which is competent to hear appeals at first instance according to the law of the Member State of the principal tax authority.

Opting in and out of the CCCTB As currently envisaged, the proposed Directive will not automatically apply to all companies. Indeed, in order to apply the provisions of the proposed Directive, companies or groups acting through the principal taxpayer would have to opt-into the CCCTB for a minimum of five years.

Furthermore, when opting into the CCCTB, such opt-in must be followed by all companies falling within the group (i.e. ‘all-in’ or ‘all-out’).

Following the expiry of that initial term, the company/ group would continue to apply the system for successive terms of three tax years, unless they give notice of termination.

As a result, this should mean that a company/group may be able to assess which option suits it the most and elect accordingly. The Directive also contains detailed rules relating to when a company/group chooses to elect into the CCCTB or chooses to elect out of the CCCTB after having been in it.

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Other aspects Business reorganisations The Directive provides that a business reorganisation within a group, or the transfer of the legal seat of a taxpayer which is a member of a group, should not give rise to profits or losses for the purposes of determining the consolidated tax base.

Transactions between associated enterprises Transactions between a company/group within the CCCTB and an associated enterprise, which is not a member of the same group, are subject to pricing adjustments in line with the “arm’s length” principle.

Furthermore, interest and royalties paid by the company/group to a recipient outside the group may be subject to a withholding tax in the taxpayer’s Member State according to the applicable rules of national law and any applicable double tax convention.

Anti-abuse rules The proposed Directive also includes a general anti-abuse rule, which states that artificial transactions carried out for the sole purpose of avoiding taxation shall be ignored for the purposes of calculating the tax base.

This general anti-abuse rule is supplemented by additional measures designed to curb specific types of abusive practices.

Amongst these measures are:  

limitations on the deductibility of interest paid to associated enterprises resident, for tax purposes, in a low-tax country outside the EU which does not exchange information with the Member State of the payer; and anti-CFC rules whose effect is to attribute profits of an entity resident in a third country, to the EU company/group where such entity is subject to a low-rate of tax and is in receipt of certain types of income from relatively mobile sources.

4. Political landscape – the Barroso II Commission and Europe 2020 The official publication of the proposed directive represented a significant step for the Commission after several years of negotiations and discussions on this matter.

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Since at least 2001, improvements in the approximation of corporate taxation has been regularly recommended as a means to strengthen the Single Market. The issue is strongly taken up as one of the recommendations contained in the Single Market Act for Europe. From a political perspective, the CCCTB has been assigned heightened priority in the annual Commission Work Programmes chartering the legislative work being undertaken by the European Commission under President Barroso's second mandate.. Various references are also made to a harmonised company tax system in the EU 2020 vision.

Debating whether this in fact would or could go ahead would largely be an exercise in speculation, particularly given the recent escalation of the sovereign debt and Euro crises.

An orientation debate on CCCTB among Member States in the Council will be held toward the end of the Danish EU Presidency, i.e. likely in June 2012, and currently, formal opinions are being developed by the European Parliament, the European Econonomic and Social Committee and the Committee of the Regions on the CCCTB. As noted above, one must bear in mind that for CCCTB to go through, in the format in which it is being proposed, all Member States are required to agree to it. At this stage, this remains a highly unlikely outcome, for a number of reasons.

Member States which are less likely to support the CCCTB argue that a harmonised tax system removes the competitive edge, both of the individual Member States that use their corporate tax system to attract investment, and of the EU as a whole, which could possibly witness an exodus of mobile business looking for better fiscal treatment.

In addition to this, some Member States oppose such extensive harmonisation on the basis of principle, in the sense that in their view determination of fiscal policy is a matter that is reserved exclusively for each Member State and that no part of that sovereignty should be delegated to the EU. Member States that have expressed support of the CCCTB, as well as the Commission, argue that tax harmonisation represents the next natural step towards closer integration of European nations. However, despite agreement on the principle, there is also an element of division amongst these Member States on the form that CCCTB should take.

Some of the countries in favour of CCCTB are not in favour of certain aspects of the proposed Directive.

By way of example, some States are arguing in favour of compulsory CCCTB, applicable across the board to all corporates, whether as part of wider groups or otherwise. Other Member States and the Commission, on the other hand, are in favour of the introduction of optional CCCTB, whereby groups can opt in and out of the CCCTB regime (as the Directive is currently drafted).

In fact, the optional application of the CCCTB represents one of the sticking points in discussions between Member States on the introduction of CCCTB. It is not within the scope of this report to analyse whether the introduction of optional or compulsory CCCTB is desirable, if at all. However, aside from the results of the modelling exercise, the policy decision on whether to introduce CCCTB on a compulsory or optional basis will depend on a multitude of political, practical and revenue factors.

If CCCTB is introduced on an optional basis, this requires that every Member State will have two corporate tax systems applicable – CCCTB and the current domestic corporate tax system. Corporate taxpayers then have a choice on which of the systems they will follow, with some rules on crossovers.

15

At first sight, the optional application of CCCTB may appear to present a positive development for taxpayers because taxpayers who will benefit from its introduction would opt in, whilst those who will not view CCCTB as positively impacting their tax obligations are likely to opt out.

The downside of this is that national tax authorities could potentially be placed in a lose-lose situation, given that taxpayers are only likely to choose CCCTB if it is likely to result in an element of tax saving.

If, on the other hand, CCCTB is introduced across the board, with no option for taxpayers to opt out, this will represent a major change in the mindset and method in which corporate taxpayers manage their tax affairs. It should also mean however that taxpayers will not be able to choose CCCTB only if it benefits them which thus reduces the risk of revenue loss for Member States.

At the same time, the obligatory application of the CCCTB would also mean that case law, official guidance and current practices relating to the interpretation and application of current domestic corporate tax law are likely to become obsolete and it is likely to take time until a broadly equivalent body of literature and authority is developed for CCCTB. In the intervening period there is likely to be a degree of divergence in the interpretation of the Directive, particularly in view of the fact that the Directive does not contain the level of detail that can be found in the national tax legislation of most Member States.

This in turn may bring into doubt the level of tax revenues which Member States are able to derive from CCCTB (at least in the short term) and create uncertainty for business in the level of tax that they have to pay.

Against this fluid backdrop, it appears unlikely that CCCTB (at least in its present proposed form) will be approved by all Member States.

Accordingly, another alternative to unanimity has been mooted, in the form of ‘enhanced cooperation’.

Enhanced cooperation involves a reduced number of Member States going ahead with an EU initiative in the situation where unanimity does not prove possible to achieve.

One of the main examples where enhanced cooperation is currently being used is the development of a common EU patent system within the context of intellectual property protection.

Recent changes to the EU Treaties mean that enhanced cooperation can go ahead between at least nine Member States, and at least from a strictly legal point of view, Member States that would not like to participate in the initiative should be unable to exercise a veto to prevent the initiative from moving ahead between those states which want to participate therein.

This works differently from unanimity in direct tax measures, which is still required if a tax measure is to be adopted on a pan-European basis.

Indeed, in a joint letter to the President of the European Council sent in August 2011, German Chancellor Merkel and French President Sarkozy have stated that they have instructed their governments to prepare a proposal to create a common corporate tax between France and Germany (which includes a harmonised tax base and rates), which system is aimed to be implemented by 2013.

If CCCTB is introduced by way of enhanced cooperation, Malta will have to decide whether or not to join this ‘reduced’ CCCTB zone and whether CCCTB should be optional or compulsory for taxpayers.

16

This option presents its own set of challenges, particularly since the concept of CCCTB would be watered down if it does not cover the entire Single Market. The present obstacles to free market movement would nevertheless continue to exist between CCCTB Member States and non-CCCTB Member States.

In determining whether CCCTB via enhanced cooperation is suitable for Malta, various factors need to be considered, including the implications surrounding the impact that CCCTB is likely to have on Malta’s tax revenues and fiscal competitiveness in encouraging local investment and attracting foreign investment.

In this regard, this study is aimed at contributing to the evaluation process that Malta must undertake in order to support or resist the introduction of CCCTB in its proposed form.

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Chapter 2 The Maltese tax base vs. CCCTB – a comparison A discussion on the anticipated impact of the CCCTB could not be possible without a comparison of the proposed system with the current corporate income tax system established in terms of the Maltese Income Tax Act (“ITA”)13.

In this respect, we set out below what in our view are some salient differences between the calculation of the tax base under the ITA and that proposed under the Directive.

1. Inclusion of revenues in the tax base In calculating the tax base, the CCCTB Directive starts from the premise that all revenues and receipts of a company should fall within the scope of the tax base. Indeed, the Directive defines “revenues” as meaning “proceeds of sales and of any other transactions...whether of a monetary or non-monetary nature, including proceeds from disposal of assets and rights, interest, dividends and other profits distributions, proceeds of liquidation, royalties, subsidies and grants, gifts received, compensation and ex-gratia payments. Revenues shall also include non-monetary gifts made by a taxpayer.”14.

As noted in Chapter 1, the Directive then contains an exhaustive list of items of revenue which are exempted from inclusion in the tax base which include inter alia dividends, gains from the transfer of holdings and subsidies, although to qualify to be treated as exempt, such revenue item in question must satisfy certain conditions listed in the Directive.

The ITA, on the other hand, is less far-reaching in the manner in which it determines the tax base.

Indeed, under the ITA, receipts are, in principle, only considered to fall within the tax base if they are regarded as “income”.

“Income” per se is not defined in the ITA save that it is deemed to include certain types of capital gains.

However, Article 4 of the ITA lists sources of income which are to be regarded as falling within the tax base (e.g. gains or profits derived from a trade, business, profession or vocation, gains or profits from any employment or office, etc.). Maltese and UK Court decisions as well as general practice and literature in turn provide further guidance on when a receipt is regarded as “income” or “capital”.

In 1993, the meaning of “income” in the ITA was expanded to include certain types of receipts of a capital gains (i.e. non-income) nature, which were hitherto not included in the tax base. That having been said, whilst the types of capital receipts that are deemed to fall within the meaning of “income” has expanded over time, generally speaking, the list remains limited to capital gains derived by a person on the

13 14

18

Chapter 123, Law of Malta Article 4(8) of the proposed Directive

transfer of certain assets listed in the ITA . Such list includes immovable property, securities satisfying certain conditions, trademarks or trade names as well as certain specified other assets.

As a result, despite including a rather wide range of receipts, the ITA remains narrower than the proposed CCCTB in defining the scope of the tax base since unless an item of revenue constitutes “income” or capital gains derived from the transfer of a chargeable asset, such revenue would be excluded from the ITA tax net.

The same cannot be said for the proposed Directive which brings within its scope any item of revenue that a company is in receipt of during the year. Accordingly, receipts of a capital nature, irrespective of the asset being transferred, including for example capital gains from the transfer of fixed-income securities (e.g. bonds), should also fall within the scope of the CCCTB tax net.

2. Deductibility of expenses The expanded tax net contemplated under the proposed Directive is somewhat mitigated by seemingly more flexible rules for claiming a deduction. In this regard, the conditions for claiming a deduction in respect of an expense or outgoing under the Directive appear to be less onerous than the conditions governing deductibility under the ITA. This difference is apparent from the general principle contained in the Directive regarding deductible expenses. In this regard, the Directive states that “[d]eductible expenses shall include all costs of sales and expenses...incurred by the taxpayer with a view to obtaining or securing income”15.

Under the ITA, in order for an expense to be deductible, such expense must (at least, as a general principle), have been “wholly and exclusively incurred in the production of the income”16. It would thus appear that the threshold in order to claim a deduction in respect of an expense under the CCCTB is lower than that contained in the ITA, since under CCCTB, the taxpayer is merely required to demonstrate that an expense was incurred “with a view to obtaining or securing income” as opposed to incurring the expense “wholly and exclusively” in the actual “production of the income”.

The condition contained in the Directive appears to emphasise the intent with which a taxpayer has incurred an expense in order for the said taxpayer to claim a deduction, regardless of whether or not such expense has actually been made in the production of any income. On the other hand, the condition contained in the ITA requires that the expense must have been incurred in producing the income.

3. Other key differences 1. The immediate offset of cross-border tax losses – currently, companies operating in more than one jurisdiction risk incurring tax losses that are not beneficially used for tax purposes in the year in which they arise, and potentially permanently lost. This is because to date, under Maltese tax law, foreign tax losses incurred by a foreign subsidiary cannot be offset against a Maltese company’s profits.

The CCCTB Directive removes this issue by consolidating the profits of all the EU companies of a group, providing for an immediate use of any tax losses. This could be particularly relevant in the situation of distressed companies and/or groups of whichever size, and for start-up endeavours which tend to produce, at least initially, tax losses in the start up jurisdiction.

15 16

Article 12 of the proposed Directive Article 14(1) of the ITA

19

2. System of capital allowances/tax depreciation – The CCCTB Directive allows companies to claim tax depreciation in respect of a wider range of assets than the assets contemplated in this respect under the ITA. These include all types of buildings used by the company/group in the course of its activities as well as intangible assets that have been acquired by the said company/group.

The ITA, on the other hand, restricts the claiming of capital allowances to “plant and machinery” and “industrial buildings and structures”17. In the case of intangible assets, the ITA allows for a deduction only in respect of expenditure incurred on scientific research, patents or other intellectual property rights.

Furthermore, it would appear that, on average, the rate at which most types of assets can be written down for tax purposes is faster, at least during the first few years from when an asset is purchased, under the Directive compared to the ITA. By way of example, tangible assets whose lifetime is less than 15 years (e.g. furniture and fittings) can be written down at a rate of 25% on a reducing balance basis. Under the ITA, the same furniture and fittings can only be written down on the straight line method (thus a difference also exists between the CCCTB Directive and the ITA even in respect of the write-down method) over a minimum period of 10 years.

In the case of this example, this would mean that in the first 5 years, under the ITA it would be possible to write-down the asset by 50%, whilst under the CCCTB it would be possible to write down the asset by around 75%. In later periods, the situation should reverse itself, whereby the ITA should catch-up with the CCCTB. However, it is likely that if one were to calculate the present value of the deductions, then we anticipate that the present value of the deductions obtained under CCCTB should generally be higher.

3. Transfer pricing based on the arm’s length principle – Whilst the ITA does not contain sophisticated transfer pricing rules and therefore an element of flexibility exists in the determining the pricing between related companies, several of Malta’s trading partners have in place transfer pricing regimes, which means that Maltese companies generally are still required to apply an arm’s length price to transactions with other non-Maltese related parties.

Adherence to transfer pricing rules (in particular the onerous documentary requirements) may potentially be very complex, time consuming and costly and, in turn, could potentially dissuade businesses from engaging in cross border activity.

By allowing a group of companies to prepare one consolidated tax computation, the Commission argues that this will make it easier for groups of companies to engage in cross-border activities within the EU since it should drive down the cost of adhering to these complex tax rules.

That having been said, the CCCTB Directive requires that an arm’s length price is nevertheless charged between the CCCTB group and related companies falling outside the group (e.g. a commonly held company which is not resident in the EU). As a result, in terms of certain transactions, Maltese companies that elect into the CCCTB would be required to ensure, at least for tax purposes, that the prices charged to such related companies would be priced at arm’s length.

4. Tax treatment of foreign profits –When certain foreign-source income is received by a Maltese company, such income is generally taxable in Malta. In certain cases, a credit may be claimed by the company against foreign tax incurred on the income. If the foreign tax paid is lower than the Maltese tax chargeable on the income, the taxpayer may generally be required to pay the difference between the

17

20

The definition of “industrial buildings and structures” contained in Article 2 of the ITA also includes hotels

Maltese tax rate and the foreign tax charge on foreign sourced profits, in line with the capital export neutrality principle18.

The CCCTB Directive is based on the principle of capital import neutrality19. In terms of this principle, a Maltese company that receives foreign income should not generally be required to pay further tax in Malta on those profits. Accordingly, this may result in an advantage for Maltese companies deriving profits from certain foreign sources, particularly if the rate of tax in the foreign territories is lower than the Maltese corporate tax rate, since the benefit obtained from such lower foreign tax rate should be preserved even after the profits are repatriated to Malta.

5. Anti-abuse rules –The proposed Directive includes additional anti-abuse rules to those that exist under the ITA. In this regard, the two main anti-abuse rules that the Directive contains, which are not found in the ITA, (1) seek to prevent a taxpayer from claiming a deduction in respect of interest payments made to related companies resident in certain tax haven jurisdictions20 and (2) anti-CFC rules21.

The interest disallowances rule is intended to deny a tax deduction in respect of interest payments, when such interest payments are made to a related party of the group that is resident in a third country, which third country fails certain tests. Those tests require that the said third country has an exchange of information agreement in place or that the interest is not subject to a substantially lower level of taxation in that third country22 in order to allow the deductibility of the interest in such circumstances.

With regard to the anti-CFC rule, the proposed Directive requires that where a Maltese company holds an interest, directly or indirectly, in an entity which is resident in a third country, the undistributed portion of such entity’s profits should, in certain situations, be included within the CCCTB tax base. Typically, the rule should only be triggered when (i) the entity is controlled by the Maltese company or the CCCTB group, (ii) the entity is in receipt of particular types of income and (iii) the entity is subject, in the third country, to a substantially lower level of taxation.

In certain cases, the proposed Directive considers that a substantially lower rate of taxation is deemed to be a rate which is less than 40% of the average statutory corporate tax rate applicable in the Member States. Such a rate is to be published by the Commission annually, however, according to our estimates such a rate stood at around 9.2% in 2010.

Given that equivalent rules do not exist under the ITA (save in particular cases of interest deductions23), these rules may bring in an added level of complexity for Maltese taxpayers compared to the situation currently in existence under the ITA. 18

Capital Export Neutrality is an economic concept that renders the decision on whether to invest funds domestically or overseas neutral from a tax perspective. The general feature of this concept in practice is the charging of domestic companies a standard rate of tax, whether the profits are domestic or foreign sourced.

19 Capital Import Neutrality is an economic concept that renders the decisions on whether to repatriate foreign profits or reinvest the profits overseas neutral from a tax perspective. The general feature of this concept in practice is the exemption of foreign profits from domestic tax, thus achieving competitive conditions for the domestic company investing abroad by preserving the tax conditions overseas, whether the profits are repatriated or otherwise.

20 Article 81 of the proposed Directive 21 Article 82 of the proposed Directive 22 A deduction for the interest may nonetheless be claimed in certain instances and subject to the satisfaction of certain conditions for that element of the interest that is considered to be on arm’s length terms.

23 Article 26(h) of the ITA prescribes that when a person incurs interest in respect of borrowings used to finance, directly or indirectly, the acquisition, development, construction, refurbishment, renovation, etc. of immovable property situated in

21

6. Tax compliance –Where a Maltese company forms part of a CCCTB group but has not been appointed as the principal taxpayer of the group, such Maltese company should not be required to file a separate tax return in Malta. Rather, its tax results shall form part of the consolidated tax return that is filed by the principal taxpayer on behalf of the entire group with the tax authority in which the principal taxpayer in resident.

This difference should also result in consequential compliance-related implications, including that the Maltese company may be subject to investigations/tax audits coordinated by the principal tax authority.

That having been said, the Directive provides that the tax audit is to be conducted in accordance with the national legislation of the Member State in which the audit is carried out and therefore domestic rules in this context should continue to apply.

The opposite scenario will occur where a Maltese company has been designated as the principal taxpayer, wherein under CCCTB, such Maltese company would be required to file a consolidated tax return with the Maltese Inland Revenue in respect of the entire group. In such cases, any tax audit of the group must be initiated and coordinated by the Maltese Inland Revenue.

Malta, the lender is a related person of the borrower and the lender is not resident in Malta, the borrower is denied a deduction in respect of such interest when the interest is exempt from tax in Malta.

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Chapter 3 Presentation of study findings In light of recent political and economic developments, the introduction of a common EU-wide corporate tax base is now a priority for the Commission and for some of the Member States.

In summary, the European Commission argues that the CCCTB is needed to tackle some major fiscal impediments to growth in the Single Market. In the absence of common corporate tax rules, it is argued that the interaction of national tax systems often leads to over-taxation or non-taxation, thus creating an uneven playing field.

For this reason, the Commission argues that businesses may face heavy administrative burdens and high tax compliance costs. From an EU point of view, this situation creates disincentives for cross-border investment in the EU and, as a result, runs counter to the priorities set in the Europe 2020 Strategy. On the other hand, reservations have been expressed about the manner in which the CCCTB, as proposed, would operate and the fiscal implications that the system could have on the national budgets of Member States.

In view of this, the MBB has commissioned us to carry out the study through which we have sought to model the manner in which the introduction of the CCCTB could impact the tax position of a number of groups of companies that operate in key sectors of the economy. The purpose of this study is to provide an indication of the financial impact that the CCCTB could have on the tax position of companies that would elect into it/ on which it would be imposed if CCCTB were to be introduced on a compulsory basis.

From these findings, we then seek to extrapolate the possible effects that the CCCTB might have on the fiscal revenues that the Maltese government derives from the taxation of corporate profits and the fiscal competitiveness of Malta as a jurisdiction in which to carry on business operations.

1. Methodology adopted The methodology that has been adopted for the purposes of this study has been that of computing the taxable profits of a select number of groups of companies (“the participants�) in accordance with the provisions of the Directive.

The computation has been restricted to the computation of taxable profits under the CCCTB for one financial year. Participants could choose the financial year in respect of which they could provide data.

However, in the vast majority of cases, the financial year that was used for the purposes of the CCCTB computation was the financial year ended before 30 June 2011 (typically financial year ended 31 December 2010).

The data for each of the participants was obtained through a series of interviews that were carried out with representatives of each of the participants over the course of 5 months as well as through various

23

follow-up queries where necessary. In a number of cases, certain assumptions needed to be made in respect of certain data.

Whilst some of the information provided by each of the participants is publicly available (e.g. information contained in published financial statements), a significant portion of the data is confidential and has been provided to us by each of the participants on condition of anonymity. Accordingly, the participants’ identity is not disclosed in the study.

However, in order to aid the reader of this report and provide context to the findings of our study, a basic profile of each of the participants has been included in the findings below.

2. Selection of participants MBB and PwC identified 22 potential groups of companies operating in and from Malta for the purpose of participating in this study.

The groups that were identified were chosen from key industries of the Maltese economy and include the following: -

Financial services (encompassing banking groups, insurance groups and other groups involved in the provision of related financial services) Tourism Manufacturing Information Technology (including companies involved in online gaming) Education, and Construction

-

Together these industries account for a significant percentage of Malta’s GDP and employ approximately 60% of the gainfully occupied population24.

In identifying the potential groups of companies to participate in the study, account was also taken of: (i) (ii) (iii)

the size of the groups (including assets and turnover); the jurisdictions in which those groups operate (in particular whether those groups have operations in the EU or outside of the EU); and, whether the ultimate owners of the group are Maltese residents or the group is foreign owned.

From the 22 groups that were identified, 11 accepted to participate in the study. The participants are involved in each of the key industries that were identified. Furthermore, the participants consist of a mix of companies that are Maltese-owned and foreign-owned and have interests in varying degrees situated in both the EU as well as outside the EU.

3. Limitations of this study This study does not purport to be an exhaustive exercise in modelling the impact of CCCTB on the tax affairs of the participants. Indeed, the methodology that has been employed is not intended to provide a complete picture on the impact of CCCTB. Rather it is designed to provide some preliminary indications

24

24

Source of data: Economic Survey, November 2011

and insights on the potential effects that the introduction of the CCCTB (as currently proposed) could have on a diverse set of groups of companies that could be eligible to elect into the CCCTB. In this regard, the study is restricted to modelling the CCCTB in respect of approximate results obtained by each participant in one financial year and accordingly, does not consider the economic fluctuations to which the participants may be exposed in the medium and long term.

The study assumes that all the companies consolidated within the CCCTB formed part of that group throughout the entire financial year that has been analysed. Accordingly, it does not take into account situations involving the transfer of companies or the termination of groups that may have occurred during or subsequent to the financial year that has been used for the purposes of the model.

The study also does not take into account the provisions of the proposed Directive that deal with the use of losses and other tax attributes created under domestic tax law prior to the group falling within the purport of the CCCTB. Accordingly, it has been assumed that none of the participants have any unutilised tax losses or other tax attributes available to it under domestic law that were generated in prior periods.

It has also been assumed that the opening tax written down value of assets falling within the asset pool for the purposes of tax depreciation is equal to the accounting net book value of those assets as per the financial statements made available to us.

Additionally, the computations do not take account of the anti-abuse rules contained in the Directive and assumed that any such anti-abuse provisions including, in particular, the application of the interest disallowance rule and anti-CFC rules should not be triggered by any of the participants.

Moreover and unless otherwise indicated, it has been assumed, for the purposes of applying the formula relating to the attribution of the tax base, that participants which provide services are deemed to provide those services in the jurisdiction of the customer. Furthermore, it has been assumed, unless otherwise indicated, that the participants do not incur material lease charges in respect of assets in the jurisdictions in which they operate.

The Directive contains a significant number of general provisions and we are not aware of any official guidance or authoritative literature regarding how these provisions should be interpreted.

Accordingly, the application of the proposed Directive for the purposes of this study is based exclusively on our own interpretation thereof and does not reflect the interpretation of any court, authority or institution. Indeed, it is not necessarily the case that a court, authority or institution would agree with our interpretation of the relative provisions.

4. Data collected from participants In order to compute the tax base of a group under the CCCTB, it was necessary to obtain certain information pertaining to the group. The data that was sought to be obtained included: 

An up-to-date Group Structure chart, showing all EU group companies and permanent establishments of non-EU group companies situated in the EU (“EU branches”);



The accounting profit and loss of all EU Companies and EU branches for the financial year being analysed;

25



The opening and closing balance sheets of all EU companies and EU branches relative to the financial year being analysed;



Details of transactions that occurred between EU companies and EU branches during the financial year being analysed;



Revenues received by EU companies and EU branches consisting of: - subsidies linked to the acquisition, construction and improvement of fixed assets; - proceeds from the disposal of fixed assets; - dividends or other profit distributions; - proceeds from the disposal of shares; and, - revenues of EU group companies’ branches that are situated outside the EU;



Capital costs relating to research and development incurred during the year;



Expenditure consisting of entertainment expenses, fines and penalties and benefits granted to shareholders (or family members thereof) and other associated companies;



List of tangible and intangible fixed assets of which EU companies and EU branches are economic owners (i.e. where the EU company/EU branch carries substantially all the economic risks and rewards) including original cost and year of acquisition;



Any withholding taxes paid in the EU on dividend, interest and royalty payments;



Corporate tax charge of EU companies/EU branches incurred in the year reviewed;



Number of employees and payroll costs of each EU company and EU branch including bonuses, social security contributions, etc;



Tangible fixed assets rented or leased by each individual EU company and EU branch (of which assets the EU company/branch are not the economic owners) as well as the amount of annual rent or lease charge;



Total revenues derived from sales of goods and services made by each EU company and EU branch in the ordinary course of business.

Data collected served as a basis for computing the taxable profits or losses of each participant in line with the provisions of the CCCTB Directive. The computations were carried out through the use of a customised software model which was developed for the purposes of this study.

The results obtained in respect of each participant are set out in the following sections.

5. Results and findings of computations Participant #1 This group of companies is primarily involved in the education sector and runs educational establishments located in various jurisdictions around the world. The group is parented by a Maltese company and the main shareholders are Maltese.

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Participant #2 This participant is a banking group with operations located in Malta. The group however also has representative offices situated in various other jurisdictions. The group is parented by a Maltese company and the shareholders consist of a mix of Maltese-resident and non-Maltese-resident persons.

Participant #3 This participant consists of a group of companies which includes an insurance company and operating subsidiaries thereof, which are all resident in Malta. In the year reviewed, the group’s shareholders consisted of a mix of Maltese-resident and non-resident shareholders.

Participant #4 Participant#4 is primarily involved in the online gaming sector. The group is parented by a company that is tax resident in the EU (although not in Malta), and most of the ultimate shareholders of the group are not resident for tax purposes in Malta.

Participant #5 This participant is a group of companies that are primarily involved in the provision of financial and investment services in Malta. The group is owned by Maltese-resident shareholders.

Participant #6 This participant consists of a Maltese parented group that is engaged in various industries which primarily consist of tourism, construction and retail operations. The group is ultimately owned by Maltese-resident shareholders.

Participant #7 This group of companies is a developer and manufacturer of electronic components and products. The group is parented by a non-EU company and its ultimate shareholders are not resident in Malta.

Participant #8 The group’s main business is connected with the ownership, development and operation of hotels, leisure facilities, and other activities related to the tourism industry and commercial centres. The group is owned by a mix of Maltese resident individuals and non-Maltese institutional investors.

Participant #9 Participant #9 is a group involved in the provision of information technology solutions. During the year for which the computation was carried out, the group’s shareholders consisted of a mix of Malteseresident and non-Maltese shareholders.

Participant #10 This participant is a Maltese parented group involved in the provision of online gaming services. The group is owned by persons who are not resident in Malta.

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Participant #11 This participant is a financial services group with banking and other ancillary operations situated in Malta and in another Member State. The shareholders of the group consist of a mix of Maltese resident and non-Maltese resident persons.

Summary of findings

Participants

#1

% change in Malta Tax Charge

+5.4%

Comments

Higher proportion of group's profits taxable in Malta due to sharing mechanism Higher tax depreciation under CCCTB compared to capital allowances under ITA Positive fair value movement treated as taxable under CCCTB

#2

+3.6%

Deduction for provisions recognised during the year Higher tax depreciation compared to capital allowances FRFTC not claimed under CCCTB model Tax losses brought forward not taken into account for CCCTB purposes

#3

+78.0%

Positive fair value movement treated as taxable Non-applicability of 12% final withholding on sale of immovable property Higher tax depreciation under CCCTB compared to capital allowances under ITA Tax refunds are not being taken into consideration to determine change in tax charge

#4

#5 #6

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-50.9%

Re-allocation of profits reduces Malta tax base by almost 50% Tax losses brought forward not taken into account for CCCTB purposes Higher tax depreciation under CCCTB compared to capital allowances under ITA

+/+ + + + + + + + -

+69.2%

Non-applicability of investment income provisions allowing for 15% final withholding tax Higher tax depreciation under CCCTB compared to capital allowances under ITA

+

-100.0%

Losses incurred by European companies were absorbed by Maltese company Higher tax depreciation under CCCTB compared to capital allowances under ITA

-

-

Participants

% change in Malta Tax Charge

#7

+2791.6%

#8

-100.0%

#9

-72.6%

Comments

ITCRs not taken into account for purposes of CCCTB Higher tax depreciation under CCCTB compared to capital allowances under ITA Losses incurred by companies in other Member States were absorbed by Maltese company Higher tax depreciation under CCCTB compared to capital allowances under ITA Use of losses incurred by non-Maltese company against tax base Greater apportionment of profits to other Member States ITCRs not taken into account for purposes of CCCTB model Tax refunds are not being taken into consideration to determine change in tax charge

#10

#11

-52.4%

+630.4%

Significantly lower proportion of group's profits taxable in Malta due to sharing mechanism More flexible deduction rules under CCCTB for holding company expenses Write-off of a loan to a subsidiary was treated as nondeductible under CCCTB Tax losses brought forward not taken into account for CCCTB purposes No maintenace allowance on rental income under CCCTB Lower tax depreciation under CCCTB compared to capital allowances under ITA

+/+ + + + + + +

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Chapter 4 Interpretation of findings In this following section, we set out our views and comments on some of the effects which we anticipate that the introduction of the CCCTB Directive is likely to have on the Maltese tax system as well as other possible implications for business.

Our comments are based on the findings set out in the previous section, our interpretation of the Directive as well as on our experience in general. All views and comments expressed below are entirely our own and it is not necessarily the case that our views and comments would be agreed to by other stakeholders, authorities and others involved in the ongoing debate surrounding the possible introduction of the CCCTB. In addition, as noted above, the findings and comments set out in the previous section do not and should not be construed as constituting an exhaustive analysis of the potential impact that the CCCTB could have on the level of Maltese income tax incurred by companies. The findings are merely intended to provide some insight into understanding some of the possible and potential repercussions that could result from the introduction of CCCTB. Furthermore, some of our comments are based on assumptions which we have been required to make in the course of computing the Maltese tax charge of the participants under a CCCTB scenario. Whilst every effort has been taken to ensure that the assumptions that we have made are reasonable, it is possible that if some of these assumptions do not faithfully reflect reality, then this could consequently affect the views and comments set out below.

1. General comments on the anticipated effects of CCCTB on business In this section, we set out some of the anticipated effects that the introduction of CCCTB could have on Maltese business in general. The effects listed hereunder are likely to apply irrespective of the industry in which businesses operate as well as regardless of whether the business is resulting from inbound investment into Malta or is owned by Maltese resident individuals.

Calculation of the tax base Inclusion of revenues in the tax base

As noted in Chapter 2, the CCCTB Directive starts from the premise that all revenues and receipts received by a company should fall within the tax base, unless such revenues fall within one of the types of exempt revenues listed in the Directive.

As a result, when seen from this perspective, the tax base of a company/group calculated under the CCCTB could potentially be higher than that which is calculated under the ITA. That having been said, despite the seemingly wider tax net proposed under CCCTB, from the analysis carried out in respect of each of the participants, it does not appear that this difference is likely to give

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rise to a significant increase in the tax base of companies that fall within the purport of the CCCTB. This result appears to be reasonable on the basis that capital receipts are not likely to constitute a significant part of a company’s profits in the normal course of business.

However, it is possible that if a significant level of capital receipts do arise, due to for example the occurrence of an event that falls outside the normal operations of a business (e.g. waivers of debt arising in connection with the restructuring of a business), then such capital receipts would be included in the CCCTB tax base which could in turn result in increased tax for those businesses in the years in which such capital receipts occur.

Deductibility of expenses

As outlined in Chapter 2, the inclusion of a wider scope of revenues in the CCCTB tax base, is somewhat mitigated by seemingly more flexible rules for claiming a deduction.

The greater ease with which it appears possible to claim a tax deduction under the CCCTB Directive compared to the ITA is reflected in the general rule dealing with deductibility of expenses. In this regard, the general rule under CCCTB states that expenses should be deductible insofar as they are “incurred...with a view to obtaining or securing income”25.

This general approach is also apparent from various other provisions of the Directive when viewed against their equivalent counterpart under the ITA, as reflected in the following examples: a) The CCCTB Directive allows companies to deduct provisions that are not connected to bad debts, subject to the satisfaction of certain conditions, in the period in which they recognise those provisions. The ITA, on the other hand, denies a deduction for provisions outright.

This dissimilarity between the CCCTB and ITA was one of the main contributing factors giving rise to a difference in the tax base (and resulting tax charge) for Participant #2.

That having been said, the benefit of claiming a deduction for a provision could merely result in a timing advantage for the taxpayer. This view is based on the fact that if the provision is crystallised and the loss is actually incurred, then generally it should be possible to claim a deduction for that loss under the ITA in the year in which it is crystallised. On the other hand, the reversal of a provision should be treated as taxable under the CCCTB. b) As outlined above, the scope of assets in respect of which a taxpayer is able to claim tax depreciation under the CCCTB is wider than that allowed under the ITA. Indeed, our findings indicate that the increased availability of tax depreciation under CCCTB compared to capital allowances allowed under the ITA contributed to a reduced tax base of at least seven of the 11 participants26.

Furthermore, in line with expectations, it appears that this difference could be greater in those participants which own immovable property that they use for the purposes of their business and which property does not consist of an industrial building or a hotel.

25 26

Article 12 of the proposed Directive According to our findings, tax depreciation resulted in a lower tax base for Participants #1, #2, #3, #4, #5, #6 and #8.

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This is due to the fact that the value of buildings typically represents a material portion of the total assets of the company/group. Accordingly, the resulting tax depreciation that may be claimed on such assets is likely to be significant.

The advantage obtained through claiming tax depreciation in respect of buildings could potentially be a temporary one. In this respect, if the company/group had to dispose of the building at some point in the future, the chargeable gain under the CCCTB computation should be calculated by reference to the proceeds received for the building, less the depreciated cost. As a result, the gain that could potentially result from the disposal of building is likely to be larger under a CCCTB scenario27. c) Under the ITA, chargeable income is calculated in respect of each source of income derived by a company.

With the exception of losses incurred in connection with a trade or business, if it results that the expenditure connected to the production of a particular source of (typically passive) income exceeds the receipts therefrom, the company is unable to offset the resulting loss against other sources of income.

Under the CCCTB, given that all income and expenses are grouped together, it does not appear, from our interpretation of the Directive, that such limitation exists.

Accordingly, if the same company incurred an excess of expenditure against its rental income, then such excess should be grouped with income and expenses from other sources and may therefore be offset against profits obtained from other sources, as long as all the expenses are regarded as having been “incurred...with a view to obtaining or securing income”.

It does not appear, from our findings, that this difference between the CCCTB and the ITA has had a significant effect on the calculation of the tax base of the participants. However, the potential implication of this difference may be illustrated by the results of some of the participants, particularly those whose structure includes a Maltese holding company.

For example, in the case of Participants #1, #4 and #9, the Maltese holding company incurred a material level of expenses during the year under review. Typically, such expenses are not deductible under the ITA, since such expenses were not incurred in the production of income received by the holding company. Indeed, we understand that such expenses were incurred by the respective Maltese holding companies in connection with their holding activity.

Under the CCCTB, given that the results of the holding company are grouped with those of its subsidiaries, those expenses were taken as deductible on the basis that they were incurred by the holding company “with a view to obtaining or securing” the income of the group, and thus contributed to a reduced CCCTB tax base.

The trend noted above, was somewhat reversed in the results for Participant #11. In fact, this participant experienced a significant increase in its Maltese tax charge in part due to the unavailability of the 20% statutory deduction that the ITA provides against rental income as well as due to lower tax depreciation under the CCCTB compared to capital allowances under the ITA.

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Article 38 of the proposed Directive provides for the possibility of roll-over relief when an asset in respect of which tax depreciation has been claimed is sold and replaced by another asset. This should defer part or all of the gain which the taxpayer may otherwise have recognised on the disposal of the said asset.

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This fact pattern shows that the increased deductibility of expenses that is seemingly available under CCCTB needs to be analysed in the particular circumstances of the group. As a result, it will not necessarily be the case that in terms of the CCCTB a group would necessarily be entitled to greater tax deductions compared to the deductions allowable under the ITA.

Applicability of rules allowing for final withholding tax The ITA contains various rules that provide for the charging of a final withholding tax on specific types of income. Two such rules are found in the investment income provisions and in Article 5A of the ITA (i.e. the property transfer tax).

The investment income provisions allow most taxpayers to suffer a final withholding tax of 15% on defined types of investment income. The tax is withheld at source by the payor of the income and taxpayers, in turn, do not suffer any further tax on such income.

The property transfer tax generally consists of a final withholding tax of 12% that applies on transfers of immovable property situated in Malta. The withholding tax is usually charged on the higher of the consideration and the market value of the property being transferred, although some exceptions to this rule may apply.

Given that both taxes are withheld at source and represent final taxes28 there is some doubt whether they may be applied to a company/group that elects into the CCCTB. This doubt stems from the fact that the income that has been subject to the final tax is effectively excluded from the tax base of the company, when such company prepares its self-assessment, since such income would not be subject to any further tax. It is debatable whether within a CCCTB system it would be possible for Malta to apply such a system which imposes tax at a specific rate on a specific source of income.

The situation is complicated further in a scenario involving the apportionment of the tax base between Malta and other Member States. In such a situation, the application of the final withholding tax may result in Malta charging to tax part of the tax base that would be allocated to another Member State under the sharing mechanism, which would run counter to the provisions of the Directive29.

Our findings indicate that if the said final withholding tax rates cannot be maintained in a CCCTB context, this is likely to have an impact on the tax charge of the particular company.

Indeed, in the case of Participant #5, the disapplication of the investment income provisions was the main factor contributing to the increase in such participant’s tax charge, since income that was previously subject to a final withholding tax of 15%, was included in the tax base and taxed at the standard rate of 35%.

An increase in the tax charge levied on a CCCTB tax base was also observed for those participants which during the year under review transferred property which, under the ITA, was subject to a final withholding tax of 12%. In this regard, Participants #3 and #6 would have suffered a greater tax charge

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A final withholding tax should be distinguished from a provisional withholding tax. In the case of the latter, the tax withheld merely represents an advance payment by the taxpayer in respect of his actual tax liability. Accordingly, if the actual tax liability of the taxpayer is higher than the provisional tax payment, then the taxpayer should be required to settle the difference by a further payment of tax. In the reverse situation, the excess payment should generally be refundable to the taxpayer.

29 Such a scenario may arise if operations situated in the other Member State result in losses, and therefore the consolidated tax base is likely to be reduce the tax base of the Maltese company.

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under CCCTB due to the fact that a 35% tax charge on the profit that was earned on the transfer of property would have been higher than 12% final tax that was levied on the consideration.

However, this result should not be regarded as suggesting that the disapplication of the property transfer tax should necessarily result in an increase in the tax charge when a company falling within the purport of the CCCTB. Indeed, if the profit on the transfer of property is low, the 35% tax charge on the profit may result in a lower tax burden than the 12% final tax chargeable on the consideration.

Comments on the interpretation of the Directive and possible consequences thereof on business Comments regarding the interpretation of the Directive

In our view, one of the difficulties which we anticipate could arise from the introduction of the CCCTB as currently proposed is the interpretation of the proposed Directive itself.

The substantive part of the proposed Directive consists of around 135 Articles spread over approximately 50 pages and drafted in a relatively straightforward manner. That having been said, allowance must be made for the fact that under the proposed Directive, the Commission would be delegated with powers to introduce more detailed rules regarding parts of the said Directive, even if such powers of delegation have been limited to specific areas of the proposed Directive (e.g. tax depreciation, types of companies eligible to elect for the CCCTB and other minor areas).

Interpretation issues

The relatively simple language may in itself bring with it certain advantages, including making the proposed Directive more accessible to taxpayers and tax authorities, especially when compared to existing tax legislation which has over the years arguably become more complicated and harder to comprehend.

However, this could, in our view, also be one of the Directive’s significant drawbacks. Tax law, by its very nature is usually sophisticated since it generally reflects the complexity of business and different business transactions. Indeed, tax legislation needs to encompass an entire spectrum of business activities ranging from the straightforward activities of a passive holding company to the more complex activities associated with for example the financial services industry.

It is uncertain, in our view, whether the proposed Directive, as currently drafted, is sufficiently detailed to provide tax authorities and taxpayers with clear rules on how the system will work in certain complex situations.

That having been said, one of the reasons for this apparent lack of detail could be due to the fact that in terms of general European Law, Directives are meant to be binding on Member States only with respect to the result that is required to be achieved. As a result, the Directive does not dictate the form or methods to be applied to achieve those goals since these are left to the Member States to decide.

Therefore, the way in which a Directive is implemented into domestic law is a Member State’s prerogative and accordingly left out of the Directive.

However, if the 27 Member States are left to implement the Directive in their own manner this could to an extent undermine the principal aim of the Directive, that of achieving harmonisation in corporate tax matters within the internal market. This is particularly so if there are substantial divergences in the interpretation of particular provisions of the Directive, particularly when those provisions are rather generic.

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It may be argued that such divergences should not affect individual groups, given that by its very nature the proposed Directive introduces a one-stop-shop concept whereby the group would only be required to file a return with the principal tax authority. Accordingly, it should be the implementation of the Directive by the Member State of that principal tax authority that is relevant for the particular group.

This however has wider implications, whereby the different implementation of the Directive and interpretations from different tax authorities within the EU could distort competition, and possibly fall foul of fiscal State Aid rules in the EU Treaties.30 In the future, this could also unduly influence operators on how and where business is located within the European Union, in favour of those Member States that have implemented the Directive in a more flexible manner.

This may also create a perceived vacuum until the existing the body of literature is replenished. In the meantime, this may cause significant uncertainty on the manner in which the tax base is calculated as well a heightened risk of tax abuse which could ultimately impact the tax charge of a company or groups, and presents a budgetary risk for Member States in general.

Tax Treaties

The Directive also provides little guidance on how the existing network of double tax treaties, particularly those treaties which Member States have concluded with third states, will fit into the framework of the CCCTB. In this regard, certain provisions of the Directive imply that bilateral Tax Treaties with third countries will still apply. It is not entirely clear however, how the arm’s length principle in Article 9 of the OECD Model will interact with the formulary apportionment in the proposed Directive, particularly in triangular situations.

Further, the definition of a permanent establishment in such treaties may differ from the definition of a permanent establishment in the proposed Directive. This could therefore result in a situation where the EU Member State in question would be apportioned an amount of income under CCCTB for taxation, but such taxation may be in breach of that Member State’s treaty obligations.

Furthermore, it is uncertain how third countries that have concluded bilateral tax treaties with Member States, will interpret any Limitation of Benefits clauses that they have introduced into the double tax treaties, particularly if the income arising in the third country is to be apportioned between Member States that might not have concluded a bilateral tax treaty with said third country.

As a result, the introduction of the CCCTB may require the renegotiation of certain treaties concluded with third countries which could take several years.

Transferring of legislative powers to EU institutions

Another challenging aspect that may in turn give rise to its own implications is the speed at which the proposed Directive can be amended. Tax law is by its very nature, ever-changing since it reacts and adapts to the environment for which it caters. Moreover, in our view, it is highly likely that there are always going to be areas of tax law which result in an unintended tax consequence, whether in favour of the taxpayer or in favour of the tax authority, which would therefore also require a change in the legislation.

30

Article 107 of the Treaty on the functioning of the European Union

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In terms of the proposed Directive, the Commission is to be delegated with authority for the detailed implementation of specific parts of the Directive, which therefore means that the Commission together with the assistance of a specialist committee should be entitled to amend and alter such implementing regulations in much the same way that the government of a Member State is able to amend and alter parts of its own domestic tax system.

However, these areas of delegated authority are very narrowly defined and therefore any amendments to those parts of the Directive which have not been delegated to the Commission would depend on all 27 Member States (or fewer if the CCCTB Directive is implemented by way of enhanced co-operation) consenting to the amendment.

Experience shows that it is extremely difficult for all 27 Member States to agree on matters of tax law and therefore, unless the Directive can be updated and amended with sufficient regularity, there is a risk that the Directive may quickly become archaic and difficult to interpret in future years, which would in turn impact those businesses that have elected into the CCCTB. A possible solution to this issue would be to make the Commission responsible for the detailed implementation of additional parts of the Directive than those currently proposed. However, this could also mean that Member States would be giving up more and more of their sovereignty in deciding matters of a fiscal nature.

Concluding remark on the impact on business in general On the basis of the results obtained from this study, it is naturally not possible to determine on the basis of information made available to us whether the differences between the calculation of the tax base under CCCTB and the ITA would result in a higher or lower tax burden for Maltese companies in general.

This will depend on the consideration of certain other factors, including whether certain aspects of the Maltese tax system (e.g. the final withholding taxes on transfers of immovable property situated in Malta and investment income, the tax refund provisions etc) can be reconciled with the provisions of the CCCTB, more detailed rules which may eventually be published clarified aspects of the CCCTB, more detailed information on the particular company/ group’s precise financial and tax circumstances, etc.

That having been said, what is certain from our findings is that there will be some winners and some losers depending on the specific facts and circumstances of each company or group that decide to adopt CCCTB. Indeed, it is also very possible that a company or group may switch from an advantageous position to a disadvantageous position or vice-versa over the course of different tax years.

By way of example, companies or groups may find that they have a lower tax base under the CCCTB due to the ability of that company or group to claim tax depreciation in respect of buildings that they own, only to find the situation reversed in later years where circumstances might change leading them to dispose of capital assets that do not fall within the scope of the ITA’s capital gains rules but are included in the CCCTB tax base.

In view of the above, it would be misleading to draw any wide-ranging conclusions at this point, except that CCCTB will result in changes in the manner in which a company or group calculates its tax base and that those changes will depend primarily on the specific circumstances of the company or group in each year.

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2. General comments on the anticipated effects of CCCTB on inbound investment A significant part of Malta’s economic growth over the past 40 years has been fuelled primarily by the level of investment that Malta has been able attract from overseas. With Malta’s accession into the European Union in 2004, the level of inbound investment into Malta (particularly in the area of financial services) has grown significantly.

In order to attract the investment, Malta must be able to offer foreign investors an environment in which business activities can be carried out competitively and profitably. Several factors contribute to the creation of such an environment including political and economic stability, market size, geographic location, availability of a skilled work force, legislative and tax framework, etc.

Whilst some of the factors contributing to a competitive business environment cannot be controlled (e.g. geographic location and market size), others, like the tax system, can be changed in order to counterbalance the disadvantages of some of the uncontrollable factors and give a competitive edge over other jurisdictions that are competing to attract the investment.

In this respect, successive Maltese governments have chosen to develop and maintain a flexible system of taxation as one of several factors that contributes towards making Malta a competitive place for investment. Indeed, this has been done in order to counter some of the disadvantages which Malta has which could otherwise significantly impair its ability to attract the said investment.

In view of the above, it is imperative to understand the precise effect (if any) that the introduction of the CCCTB may have on Malta’s ability to maintain a competitive business environment.

In this respect, around half of the participants in this study consist of groups that are foreign owned and have invested into Malta in order to locate part of their business operations in Malta. We therefore set out below our comments on some of the anticipated implications of the introduction of CCCTB based on the findings obtained from the analysis of such participants’ tax calculations.

Possible impact on the system of tax refunds Malta’s tax system provides that subject to certain conditions, a person in receipt of a dividend from a company registered in Malta may be entitled to claim a full or partial refund on the corporate income tax suffered by the company on the profits so distributed. The quantum of the tax refunds depends on the nature and source of the taxed profits being distributed.

Indeed, the refund system is highly dependent on the system of tax accounts that Maltese registered companies are required to maintain. The tax accounts serve to ensure that the company keeps a record of the source and nature of the taxable profits that it has earned. These in turn are necessary to assist the shareholder in determining whether or not it is entitled to claim a refund in respect of profits distributed to it and if so the quantum of such refund.

As noted in the analysis to our findings in respect of Participants #4 and #10, some detailed considerations would need to be made in order to reconcile the application of the CCCTB with the tax refund regime.

This view is based on the consideration that the profits attributable to Malta under the CCCTB model represent a formula-based percentage of the consolidated profits of the group as whole. As a result, in

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certain cases, it may not be evident what is the source or nature of the profits that have been attributed to Malta, since under a CCCTB scenario, this would merely represent a fraction of a consolidated whole.

Furthermore, the present system of refunds is significantly dependant on the distribution of a company’s taxed profits to its shareholder. Whether or not a company is able to distribute profits is established in accordance with rules contained in the Companies Act31, which rules generally limit a company to distributing its accumulated, realised profits32. A company’s accumulated, realised profits are generally calculated by reference to the company’s financial statements.

The starting point for calculating the taxable profits of a company (at least, insofar that they are derived from a trade or business) is generally the accounting profit contained in the company’s financial statements.

Under a CCCTB system, the profit attributable to Malta through the application of the formula may bear no resemblance to a company’s accumulated, realised profits. Therefore, if the taxable profit attributable to Malta is significantly higher than the profits which the Maltese company is able to distribute, the shareholder should be unable to claim the relative tax refund.

Naturally, there may be ways and means to alter the refunds system so as to allow it to reconciled to a CCCTB scenario but this is something that still needs to be considered in appropriate detail.

Disallowance of interest deduction As outlined above, the proposed Directive contains a rule that denies a taxpayer from claiming a deduction in respect of interest payments made by a company/group to a related person that is resident in a third country, where inter alia such related person would be taxed at a rate that is substantially lower than the average EU rate.

Under the ITA, interest is generally deductible as long as the interest represents sums that are payable on money borrowed by a taxpayer and the interest is payable in respect of capital employed in acquiring the income33. A deduction may be denied in respect of interest that is paid to non-residents, although this only applies when the interest is payable on borrowings that were directly or indirectly employed to acquire/develop immovable property situated in Malta34.

As a result, generally speaking, as long as the condition noted above is satisfied, a taxpayer should be entitled to claim a deduction in respect of interest payments, without the need to determine where the recipient of that interest is resident in Malta and the tax rate at which such interest is taxed in the other jurisdiction.

It has been assumed in the course of our workings that none of the participants paid interest which fell within the scope of the anti-abuse provision contained in the CCCTB. Accordingly, we have not quantified the impact that such an anti-abuse provision could have.

That having been said, the introduction of such an anti-abuse provision within a CCCTB scenario is likely to reduce the flexibility that a foreign investor currently has in terms of financing Maltese subsidiaries.

Indeed, if the interest would not be allowed as a deduction against the CCCTB tax base, the cost of debt for the foreign investor is likely to be significantly higher. Accordingly, if it would not be feasible for a 31

Chapter 364, Laws of Malta Article. 192, ibid 33 Article. 14(1)(a), ITA 34 Article 26(h), ITA 32

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foreign investor to finance its Maltese operations through equity, it is possible that the CCCTB may discourage inbound investment into Malta.

Anticipated impact of the sharing mechanism on profits attributable to Malta One of the more controversial aspects of the proposed Directive is the sharing mechanism of the tax base. As outlined in Chapter 2, the formula that has been proposed in the Directive relies on three factors: (a) tangible fixed assets situated in a Member State, (b) employees and cost of payroll incurred in a Member State and (c) third party sales effected to persons situated in a Member State.

Accordingly, the higher the tangible fixed assets, the number of employees (and associated payroll cost) and sales made to third parties in a Member State, the higher the percentage of the tax base that such Member State is likely to be allocated.

According to our estimates, most of the inbound participants that were analysed, in particular Participants #4, #9 and #10, are likely to have a smaller part of their tax base being attributed to Malta than is currently the case. Indeed, in the case of Participant #4, it has been estimated that Malta’s share of the profits under the CCCTB may amount to around 50% of the consolidated tax base, despite the fact that from an accounting perspective, the Maltese companies generate approximately 80% of the group’s profits.

In our view, if these findings are borne out by a sufficiently large number of companies operating in Malta, this would indicate that Malta is likely to be placed at a disadvantage in being attributed a share of the consolidated tax base, particularly in the context of inbound investment, due to the fact that the factors present within the formula are reliant on the existence of tangible fixed assets, employees with higher payroll costs and third party customers of the group being situated in Malta.

Indeed, with the possible exception of inbound investment involving manufacturing, due to its size, it is unlikely that the Maltese companies within a foreign-owned CCCTB group will have significant tangible fixed assets and employees situated in Malta. Moreover, it is also unlikely that a significant part of the sales made by the group shall be made to customers that are situated in Malta.

In fact, in many instances, the significant assets of Maltese subsidiaries of a foreign-owned group are more likely to be composed of financial assets or intangible assets rather than fixed tangible assets as such. However, these assets (with the exception of financial assets in the case of banks and other financial institutions) are ignored for the purposes of the formula.

In our view, the proposed sharing mechanism seems to be more adequate for more traditional goodsbased industries, where a large part of the value is derived from fixed tangible assets. However, this approach appears to be at odds with the general development of European economies over the past few decades with the move towards a more services-oriented economy.

Indeed, the proposed formula also appears to be inconsistent with the EU’s own Europe 2020 strategy, which considers innovation, research and development and development of intellectual property to be one of the main pillars that will drive growth in Europe over the next decade.

Notwithstanding the above, it could be argued that whilst Malta is likely to obtain a lower percentage of the consolidated tax base, that percentage represents a share of a larger tax base altogether. Accordingly, in absolute terms, the Maltese government may still increase its tax revenues under a CCCTB system.

Whilst that argument may be valid, we have been unable to find support for this assertion across a material percentage of the tax computations that were analysed.

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Concluding remark on impact on inbound investment As outlined above, the current domestic tax system has been one of the factors which contributes to Malta’s ability to attract foreign investment. By introducing and maintaining a flexible tax system, successive governments have foregone tax revenues in the short-term in order to attract foreign investment with the hope that such foreign investment would give rise to increased economic activity and greater tax revenues in the future.

Whilst the CCCTB Directive allows Member States to determine the tax rate at which they tax their share of the taxable profits of a group, if companies/groups elect into the CCCTB, it is unlikely that this would provide sufficient flexibility for Malta in terms of the tax regime that it can implement.

Indeed, the tax rate represents only one half of the equation towards calculating the tax charge, the other half being the tax base.

However, one impressive feature arising from the information collected during the course of this exercise is the potential impact of the CCCTB’s provisions also on aspects of the tax system that may traditionally have been considered as affecting exclusively the tax rate.

We have already referred to various key issues in these respects, including the CCCTB’s possible impact on final withholding tax provisions, the flat rate foreign tax credit, the tax refund regime, the Investment Tax Credits etc.

Thus although the Commission’s official position is that the CCCTB does not impact Member States’ powers to select their tax rates, it is felt that in the context of the Maltese tax system, due consideration needs to be given regarding the manner in which certain tax imposition provisions may be reconciled with the CCCTB. That having been said, the application of the CCCTB would be at the option of a group. Presumably, if a group is of the view that the application of the CCCTB is going to result in a higher tax charge for the group, it is unlikely that it would elect into the CCCTB. This in turn should mean that the group should remain subject to the domestic laws of Member States to calculate the tax base and tax charge.

In view of this, for as long as the application of the CCCTB remains optional, the impact which CCCTB could have on Malta’s ability to attract inbound investment through the flexibility of its tax system, should be limited to those taxpayers which are likely to obtain a tax saving from the application of CCCTB.

3. General comments on the anticipated effects of CCCTB on outbound investment Due to the limited size of Malta’s domestic market, the expansion into overseas markets is viewed by several businesses as a necessary step for growth.

In this regard, the introduction of CCCTB could give rise to some significant advantages for Maltese owned businesses that are looking to invest in other Member States or outside of the EU. In this regard, more than half of the participants in this study consist of groups that are Maltese owned and have invested overseas or are looking to invest overseas. We set out below the salient implications that the introduction of CCCTB could have on business with the aforementioned profile.

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Use of losses incurred outside of Malta One of the most attractive features of the CCCTB to taxpayers is the ability to offset losses incurred in other Member States with profits earned in others. As a result, a company or group’s tax base is likely to be more aligned to its commercial results where profits and losses have been incurred by different group companies that are resident in different jurisdictions.

Indeed, in our analysis, the ability to offset cross-border losses has resulted in a reduced tax base and tax charge for at least three participants, two of which are groups with Maltese parent companies (i.e.

Participants #6 and #9). In both cases, both groups derived profits from their Maltese operations and incurred significant losses in companies situated in other Member States. Under CCCTB, those losses could thus be consolidated against the profits generated in Malta, thus resulting in an overall decreased tax base.

Such a system is likely to be an attractive option for groups that are seeking to expand their operations overseas, particularly if it is envisaged that in the first few years, the overseas operations are likely to incur losses.

Under the ITA, the only way in which relief for such losses can be obtained was if the Maltese company had to establish its overseas operations through a branch of the Maltese company rather than through the establishment of a separate subsidiary. Given that under CCCTB, relief for losses would also be possible if a subsidiary was established, a group that is seeking to expand overseas has greater flexibility in choosing the legal form through which it wishes to effect such expansion.

Participation exemption Another aspect of the CCCTB that can prove to be advantageous for Maltese outbound investors is the availability of a participation exemption in respect of dividends derived by the CCCTB group from holdings in other companies and in respect of gains from the disposal thereof. The exemption applies subject to the satisfaction of various conditions, most notably that the profits at the level of the distributing company were subject to a level of taxation that is not substantially low.

Whilst Malta has in place a participation exemption regime, there may be additional tax considerations when such exemption is claimed by a Maltese company whose direct or indirect shareholders consist of individuals who are ordinarily resident and domiciled in Malta. Accordingly, in such cases, companies generally do not seek to apply the participation exemption.

As a result, dividends or gains received by such a Maltese company are generally taxable in Malta. That having been said, the company may be entitled to claim double tax relief in the form of a credit against the Maltese tax that is chargeable on the dividend or gain. Such relief is provided either in terms of a double tax treaty that Malta would have concluded with another state or in terms of the unilateral relief provisions35 contained in the ITA. The credit is provided in respect of foreign tax that was suffered on the profits distributed by the non-Maltese company or on the gain derived from the disposal of shares in the said company.

Accordingly, where foreign tax has been suffered on the profits being distributed by the non-Maltese company or on the gain derived from its disposal, the Maltese tax charge may be reduced by the amount of foreign tax suffered.

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Article 79 to 88 of the ITA

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Alternatively, a Maltese company may also claim the Flat Rate Foreign Tax Credit (“FRFTC”) in respect of dividends/gains derived from the foreign company instead of relief under a treaty or the unilateral relief provisions36. The FRFTC generally results in a reduction of the post-double taxation relief Maltese tax burden from the statutory 35% rate to a rate ranging between 7.5% and 18.75%.

Given that under the CCCTB, dividends/gains derived from holdings in other companies may be exempt, this could potentially represent a significant tax saving for Maltese companies that invest outside of Malta and which currently are directly or indirectly owned by Maltese-domiciled and ordinarily resident individuals.

Indeed, as noted above, Participants #1, #8 and #11 hold shares in several subsidiaries situated outside of Malta. Under the ITA, when profits from those subsidiaries are distributed to Malta, such profits should be subject to tax in Malta. Under the CCCTB, such profits should be eliminated from the tax base and accordingly, should be exempt from tax subject to the satisfaction of the relevant conditions.

However, given that in the years reviewed for these participants no dividends were received from their respective subsidiaries, it has not been possible to quantify the tax saving.

Exemption on non-EU permanent establishment profits The CCCTB Directive also provides for an exemption in respect of profits derived by a company from a permanent establishment (“PE”) that is situated in a third country.

Under the ITA, Maltese companies are taxed on a worldwide basis. As a result, such profits are taxed in the year in which they arise. However, as explained in the previous section, the Maltese company should be entitled to claim double tax relief in terms of a relevant double tax treaty, the unilateral relief provisions or through the application of the FRFTC. Indeed, the availability of the exemption in respect of a PE’s profits could provide an advantage to all Maltese companies, irrespective of the place of residence of such companies’ shareholders.

The downside to the exemption under CCCTB is that if the PE has incurred a tax loss, then such loss would not be deductible against the tax base calculated in accordance with the Directive. On the other hand, as noted above, such losses would be taken into account when calculating the tax base under the ITA. None of the participants in this study has a PE situated outside of the EU and therefore the impact of the exemption has not been illustrated in the study.

Application of CFC rules As outlined above, the CCCTB Directive contains anti-CFC rules which Maltese companies investing outside of Malta should be required to apply if they elect into the Directive.

This may mean that profits of a foreign subsidiary, which under the ITA would only be taxable when distributed to the Maltese shareholder, may need to be included in the tax base of the Maltese company.

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The FRFTC is a form of double tax relief (given by way of a tax credit) which is provided to companies registered in Malta, which deems that foreign tax equivalent to 25% of the income received by the company in Malta, has been incurred outside of Malta. The availability of the FRFTC is subject to satisfaction of certain conditions. The 25% credit is calculated on the income receivable by the company after deducting any foreign tax actually incurred, but before any deductions or payments are made from the said income. However, the quantum of the credit is capped such that the effective Maltese tax suffered on the foreign dividends/gains should generally range between 7.5% and 18.75%.

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It has been assumed, in the course of our workings, that none of the participants held shares in companies which fell within the scope of the anti-CFC rules. As a result, no profits derived by non-EU subsidiaries were attributed to the CCCTB group and thus our findings do not seek to quantify the impact that the introduction of the anti-abuse rule might have.

It is not clear from the Directive, whether relief would be given for any foreign tax paid by the foreign subsidiary on the profits which it derives and which are attributable to the tax base of the Maltese company. As a result, this may discourage the Maltese company from investing overseas, at least in those jurisdictions which are not within European Economic Area (which jurisdictions fall outside the scope of the anti-CFC rules).

The rule could also have the effect of discouraging foreign investors that seek to use Malta as a base for setting up a holding company of a group, from electing into the CCCTB.

Availability of the Flat Rate Foreign Tax Credit (“FRFTC”) As noted above, a Maltese company may be entitled to claim the FRFTC in respect of certain foreignsource income that it receives and subject to the satisfaction of the relevant conditions.

The FRFTC operates as a form of double tax relief and has the effect of reducing the post-double tax relief Maltese tax burden on foreign-source income that falls to be allocated to its Foreign Income Account to between 7.5% and 18.75%.

However, as outlined in our analysis of Participant #3, one would need to examine the manner in which the CCCTB provisions may be reconciled with those of the FRFTC (at least in its current form).

Although under a CCCTB scenario, Malta should remain able to determine the rate at which profits that are allocated to it are taxed, it is unable to change the manner in which the tax base is calculated. Given that the FRFTC operates in a manner which requires a grossing up of the tax base, one would need to examine whether the FRFTC could operate properly when a company elects into the CCCTB since under the Directive Malta would not be entitled to unilaterally alter the tax base.

Furthermore, the fact that the FRFTC is applied in respect of income allocated by a company to its Foreign Income Account, one would also need to examine how this feature can be reconciled with a CCCTB which allocates a group’s income to different Member States (including Malta) on the basis of a specific formula, rather than on the source of the particular income.

If it were not to be possible to reconcile the FRFTC with the CCCTB, unless the foreign-source income falls within the scope of CCCTB’s participation exemption or the exemption on non-EU permanent establishment profits, the effective level of tax chargeable on such income might be higher under CCCTB compared to the ITA. Indeed, in the case of Participant #3, the highest contributing factor to the increase in its tax charge modelled under CCCTB compared to that calculated under the ITA, was due to the fact that the FRFTC was not applied to certain foreign-source profits derived during the year under review.

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4. General comments on the anticipated effects of CCCTB on Maltese tax incentive legislation In terms of Maltese domestic tax law, a company that carries on a qualifying activity may be entitled to claim investment tax credits (“ITCRs”) against the Maltese tax that is chargeable on the profits that it derives from its qualifying activity.

A company is considered to carry on a qualifying activity if it is engaged inter alia in manufacturing, information and communication technology, research, development and innovation, waste treatment and environment solutions, and various other activities that are listed in the Investment Aid Regulations 37.

The ITCRs are calculated by reference to the level of investment that a company makes in respect of the qualifying activity. In this regard, the ITCRs that a company is entitled to claim is calculated as a percentage of the expenditure which that company incurs on tangible or intangible assets in connection with an investment project. Alternatively, the ITCRs could also be calculated by reference to the increased wage cost that a company incurs if the investment project results in newly created jobs.

Given that ITCRs are given as a credit against the tax charge of a company, it appears likely that it should be possible for the system of ITCRs to continue, albeit with certain amendments, even in a CCCTB context. This should be so since Malta would continue to provide the credit against the tax which it would otherwise collect from the company/group carrying on the qualifying activity. Furthermore, in our view, the quantum of such credits may still continue to be calculated according to the level of investment that the group carries out in Malta.

However, there may be some difficulty in ensuring that the credit is taken exclusively against profits generated by the qualifying activities carried on by the group in Malta. In particular, given that under CCCTB the profits attributable to Malta constitute a percentage of the entire consolidated tax base of group (which tax base could therefore include profits derived from non-qualifying activities carried on in and outside of Malta), it is likely not to be straightforward for a company/group to be able to determine the tax chargeable on profits generated by the qualifying activity.

As a result, in our view, whilst in principle it should be possible for the ITCRs system to work where a company/group elects into the CCCTB, it seems likely that the rules regulating the granting of the ITCRs may have to be adapted in order to continue ensuring that the use of the tax credits is linked to the tax chargeable on profits generated from the qualifying activities.

5. Impact on tax administration The Directive provides that groups of companies will be able to deal with a single tax administration (‘principal tax authority’). The principal tax authority, which is the competent authority of the Member State in which the principal taxpayer is resident, would administer this process, and this same Member State would be responsible for coordinating the appropriate checks and following up on the return (socalled “one-stop-shop” system).

In this respect, where a Maltese company forms part of a CCCTB group but has not been appointed as the principal taxpayer of the group, such Maltese company should not be required to file a separate tax return in Malta. Rather, its tax results shall form part of the consolidated tax return that is filed by the

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Legal Notice 68 of 2008, as amended, Laws of Malta

principal taxpayer on behalf of the entire group with the tax authority in which the said principal taxpayer in resident.

This difference should also result in consequential compliance-related implications, including that the Maltese company may be subject to investigations/tax audits carried out by persons of the tax authority in the principal taxpayer’s Member State albeit with the cooperation of the Maltese Inland Revenue.

The opposite scenario will occur where a Maltese company has been appointed as the principal taxpayer, wherein under CCCTB, such Maltese company would be required to file a consolidated tax return with the Maltese Inland Revenue in respect of the entire group. In such cases, any tax audit of the group must be initiated and co-ordinated by the Maltese Inland Revenue.

Information provided to the tax authorities from CCCTB Group companies will have to fulfil two purposes - the calculation of assessable profits, but also the provision of company specific data for the sharing mechanism, for example labour costs and asset details. The auditing of both may constitute separate exercises.

One questions whether the Inland Revenue Department has the sufficient resources to carry out such tax investigations. Overall, the envisaged tax savings for business may therefore be offset (at least partially) by increased costs for tax administrations.

Furthermore, as per the current CCCTB proposal, a corporate group would be allowed to opt for the CCCTB rather than it being mandatory. This should mean that Member States would be required to maintain two tax systems running parallel to each other, one for CCCTB groups who opts in and one for those outside the system, i.e. those remaining under the current tax system. Even in this instance, does the Maltese Inland Revenue have sufficient resources to maintain both systems in such event.?

Assuming that a number of Member States object to CCCTB, this could give rise to a situation where a group operating within the EU may have subsidiaries applying CCCTB in one Member State but not in another and therefore still finding itself dealing with different tax systems.

The burden of tax compliance costs may also increase for small and medium size enterprises, given that such enterprises may not have sufficient resources to determine which system suites them better.

Furthermore, even though presently SMEs have a higher proportion of administrative and compliance costs than larger enterprises, this may not necessarily support the introduction of CCCTB given that most enterprises in Malta operate within national borders only.

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Chapter 5 Concluding observations In this study, we have attempted to identify some of the implications which could arise if the CCCTB Directive, in its current proposed form, was to be introduced for businesses operating in and from Malta including, in particular, the potential result that this could have on the level of Maltese tax suffered by such businesses.

On the basis of the findings contained in this study and depending on the perspective from which one views them, the introduction of CCCTB is likely to give rise to a mix of positive and potentially negative consequences.

It would appear that from the perspective of Maltese owned businesses that are seeking to expand their operations into new markets, the introduction of the CCCTB could, on balance, be regarded as a positive development.

Particularly where the business that is seeking to expand is a small or medium enterprise with a relatively straightforward business model, the CCCTB Directive may provide such businesses with the possibility of remaining subject to a system of taxation that exists in their home state. As a result, businesses should feel less exposed to the undesirable effects resulting from disparities between different tax systems of the EU Member States.

Indeed, the potential benefit for business falling within such a profile should not be underestimated particularly given the fact that SMEs provide around 2/3rds of all jobs situated in the private sector in the EU and contribute to more than half of the total value-added created by businesses in the EU38.

That having been said, the introduction of CCCTB may give rise to a number of drawbacks. As discussed above, it appears that the proposed Directive is designed in a way which tends to favour larger Member States over smaller Member States particularly with respect to the manner in which it is proposed that the sharing mechanism would work.

The CCCTB Directive also departs from basic long-held principles of international tax law, and although adhering to such principles may at times be costly and laborious (such as establishing the arm’s length transfer price in respect of a complex transaction), these are principles which governments, businesses and taxpayers in general are now familiar and have come to accept as the international norm.

Although certain aspects of the CCCTB may therefore appear to be attractive on paper (such as the elimination of transfer pricing between companies of the CCCTB group), we anticipate that until the CCCTB becomes a tried and tested system of taxation, there is likely to be a significant degree of uncertainty and experimentation in the short to medium term.

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Statistics obtained from the European Commission’s European Small Business Portal http://ec.europa.eu/smallbusiness/index_en.htm

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The optional application of CCCTB, as currently envisaged in the proposed Directive, could be regarded as one way in which these concerns are addressed. In this sense, a group of companies would only elect into the CCCTB if it can reasonably anticipate the implications that such an election brings with it.

However, the optional application of CCCTB also raises other concerns for governments particularly from a budgetary perspective. In this regard, it is not unrealistic to assume that a company or a group of companies would only elect into the CCCTB if they are likely to derive some form of tax savings, whether in the form of tax actually incurred and in the costs of compliance. Whilst the Directive does place some limitations on the frequency with which a company or group can elect in or out of the system, it is likely that companies or groups will elect for what would be likely to be the cheaper option in the longer term.

As a result, governments may view this as granting too much flexibility to taxpayers to determine the system under which they would choose to calculate their tax base and to a certain extent the amount of tax that such taxpayers will pay, since ultimately governments may find themselves placed in a “lose-lose� situation.

Furthermore, an optional system would mean that national tax authorities would be required to administer another tax system in addition to their own. This in turn is likely to demand increased resources, at a time of fiscal belt-tightening.

The introduction of CCCTB could also trigger a re-think of some of the fundamental principles of Maltese income tax legislation. In particular, given that the CCCTB Directive is limited solely to the taxation of corporate profits, further thought must be given as to how that system could be integrated into the wider income tax system.

Furthermore, the introduction of the CCCTB could reduce the level of flexibility which Malta has in determining the manner in which it imposes tax on corporate profits where companies operating from or in Malta elect into the CCCTB. This in turn, is likely to result in some form of repercussions on the finances of the Maltese government.

In view of the above, one consideration would be to apply a middle-of-the-road approach in respect of the harmonisation of rules governing the calculation of the tax base. One possibility could be for Member States to agree to introduce measures which reflect those parts of the Directive that are less controversial and provide a clear advantage to business. Such measures would in our view include a framework for the offsetting of cross-border losses and possible other harmonisation measures on the definition of the tax base, but would fall short of allowing for outright consolidation.

Whilst such measures have been proposed in the past and were ultimately shelved, there is arguably broader acceptance thereof amongst Member States nowadays, which is in part driven by the implication resulting from judgements of the European Court of Justice in recent years, that the introduction of certain positive harmonisation measures is important to address the consequences of these judgements.

However, where one draws the line, in terms of the harmonisation measures to be adopted will ultimately depend on the political will of the Member States to continue on the process of integration and the economic rewards which each Member State anticipates that it would derive from such increased integration.

This study merely attempts to provide some insight to its readers of what some of those economic benefits are likely to be for Malta, as well as some potential drawbacks. Still, many of the effects of CCCTB are likely to remain uncertain and may only come to light if and when a Directive is approved

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and implemented, and possibly only after the passage of a certain number of years. On this basis, the results of this study and the views expressed therein should be viewed with the appropriate caution.

In conclusion it is important to bear in mind that the findings of this report have been compiled on the basis of information obtained from just 11 groups which have accepted to provide such information for this purpose.

This constitutes only a small percentage of the number of companies and groups operating in or through Malta. We are naturally not in a position to gauge whether these findings would be fully or at least mainly borne out by the circumstances of a larger number of companies and groups operating in or from Malta.

Consequently, this limited number of participants should be borne in mind when considering the comments and findings contained in this report.

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