Taxploration

taxploration Issue 1 - October 2019

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Editorial This is the first edition of Taxploration which is the first publication of its kind in Malta. As the industry continues to mature and refine itself, more education and technical updates channels are required. This Publication comes also with the launch of the Malta Academy for Taxation Studies which is also a new initiative in order to ensure that Malta excels in this Profession Internationally.

Indeed both the Academy and this Publication bring a pool of local and international experts blending worldwide experts with upcoming talents. These initiatives are under the auspices of the Malta Institute of Management (MIM), and are a natural development for the Institute since MIM has been highly investing in this area since 2006. MIM introduced to the sector various internationally recognised speakers, publications, conferences and qualifications. The Council of MIM felt that it is now the time to set this new organisation to build even further on the excellent work done over the last 13 years. Council is honoured to note that MIM students have excelled locally and internationally as many of the participants in its qualifications are now present in international academic organisations and also in highly reputable professional organisations.

Co- Editors

We have populated these initiatives with as many professionals as possible. We remain open to suggestions and recommendations and invite all those interested in Taxation to approach the Academy and to actively participate in its endeavours.

This publications is also intended as a fora for discussion on tax matters meaning that suggestions and opinions towards tax legislation and procedures are welcome and add value to the quality of the end product. We gladly note and proudly announce that the relevant authorities are positively open to this publication and its concept.

Hector Spiteri

As one may note, the publication comes also with the contribution of University of Malta Students‘ Organisations such as GÄŚSL and ELSA and we welcome these on board as their participation may be of a two fold nature in that of bringing up new ideas and talent and in giving them the opportunity to keep themselves abreast and interact with the industry. In other words this is a publication for all those interested in tax.

We also take the opportunity to thank all those who have been actively working towards the launch of these two benchmarks for Malta and look forward to seeing them flourish.

Reuben Buttigieg

Hector and Reuben

www.taxploration.com info@taxploration.com facebook | Taxploration

Printing & Design: Union Print Ltd | Distribution: Maltapost Plc.

Issue 1 - October 2019

The Malta Academy for Taxation Studies (MATS) has taken all reasonable steps to ensure that the content in this publication is accurate.

Nevertheless, the MATS does not assume any responsibility on the contents of these articles.

These articles are not to be considered in any way as advise or legal opinion. Readers should take professional advice for their specific circumstances.

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The 14th International TAXATION CONFERENCE Friday 3rd April 2020

For bookings and further details contact us on:

58, Triq Mons. Mikielang Mifsud, MST 2362, Mosta, Malta

(+356) 2145 6818 info@taxacademy.mt taxacademymalta

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Contents 6

The Launch of the Malta Academy for Taxation Studies

7

Message from the Minister for Finance - Prof. Edward Scicluna

8

From Westphalia to Cyberspace: Territoriality and Tax Jurisdiction in a Digitalised Economy

9

Country by Country Reporting and its importance:

10 - 11

Recent EU anti-abuse rules: Too much, too soon?

12 - 13

BUDGET 2020

14 - 15

The Consolidated Group (Income Tax) Rules

16 = 17

The EU VAT Reform Where is it Heading?

18 - 19

Notional Interest Deduction (NID) Rules

20

Scenario from the local courts with respect to failure to abide with VAT Rules

21

Scenario from the local tribunal with respect to property valuation under Stamp Duty/Duty on Documents and Transfers Rules

21

Fiscal incentives for Family Business under the Family Business Act

23

OECD Update: Status of tax transparency initiatives

23

OECD Update: Plan for resolving tax challenges of digital economy

24 - 25

Taxpayer protection: Improving tax dispute resolution mechanisms

27 - 29

Remittance basis of taxation for individuals (Interview)

30 - 31

The von der Leyen Commission a quantum leap in the field of direct taxation?

33

Tax on Campus European Law Students’ Association

35

GHSL’s Perspective of Taxation and Tax Law

36 - 39

The Importance of Tax Data

40 -41

VAT Quick Fixes 2020

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BEPS and the new Patent Box Regime

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The Launch of the Malta Academy for Taxation Studies The Malta Academy for Taxation Studies has submitted itself to a portfolio of academic activities ranging from seminars on topical ever-changing tax issues, to specialised and intensive educational programmes targeted at different levels of understanding. The Academy endeavours to uphold the highest of academic standards by inviting speakers of a specialised nature in tax related dealings.

Recognising the importance of ongoing professional education for advisors and practitioners, the Academy aims to keep tax practitioners informed about developments in the field of taxation. This is achieved through periodical news and updates by way of a quarterly published educational magazine, together with seminars and workshops on a variety of tax topics both on direct and indirect tax matters. We welcome suggestions from you, our participants and members on topics to be included in our agenda.

The Academy that operates under the auspices of the Malta Institute of Management offers a number of tax courses. These range from introductory courses on tax principles and practice, designed for individuals entering the profession and those wishing to further their education; to more advanced courses on specialised tax topics, which are designed for professionals requiring a decisive and interactive approach to specific aspects of local and international tax issues.

The three main educational programmes offered by the Academy are: • Certificate in Tax Advisory • The Advanced Diploma in International Taxation • The Diploma in VAT Compliance

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The Advanced Diploma in International Taxation is a programme of the Chartered Institute of Taxation in the UK, and The Malta Academy for Taxation Studies provides lectures and study material in preparation for the examination held in Malta including a Maltese variant.

Similarly, the Diploma in VAT Compliance is a programme of the Association of Tax Technicians in the UK and the Malta Academy for Taxation Studies also provides a preparation course for this Diploma. On the other hand, the Certificate in Tax Advisory is a Programme designed by the Academy and accredited by the NCFHE. The academy will be utilising various means of communication in order to ensure that tax professionals and students are continuously kept abreast and have facilitated access to continuous professional education.

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Message from the Minister for Finance

Prof. Edward Scicluna

Taxation has a very long and jagged history in many countries. Besides raising revenue modern taxation aims to redistribute wealth and regulate economic behaviour. The Malta Income Tax Act has constantly evolved since its first enactment in 1948 in order to achieve aims.

The level of complexity found today within tax legislation in most jurisdictions is the result of various enactments of the legislation that were introduced, along the years, to address the evolution of our economic activities.

Since simplicity is an important attribute for a tax system, there have been a number of attempts at simplification in different countries.

However, it is fair to say that these attempts have not been very successful. The main reason is that there are important factors that cause tax systems to be complex.

Furthermore, while it is generally agreed that simplification of tax systems is something to aim for, it is not always clear what is meant by tax simplification. It is a fact that despite the best intentions, it is not always possible to achieve simplicity and a Issue 1 - October 2019

simple tax system may not necessarily be the best one. A flat tax rate income tax system is typical of such simplicity which comes at a social cost.

What is needed is a strategy for simplification through which it may be possible to determine, on a continuous basis, what exactly can be simplified and where attempts at simplification may be futile if not outright detrimental.

Through such a strategy, the right balance between simplicity and complexity may be found.

we go along. We are indeed working in earnest to come up with a plan B for our taxation regime, which plan will have to carefully consider where the pitfalls lie and the likelihood of its success.

Our aim is to have in place an alternative, suitable back-up plan, only to be used, however, should the need arise.

I am honoured to deliver these few thoughts in the first edition of this new magazine dedicated to taxation related issues. This magazine could play a role in the quest to seek alternative taxation systems to our existing one.

Having been approved by the EU in 2007, Malta’s tax regime, is a legitimate regime that has proved to be to this day a resilient one.

I augur success to this specialised magazine’s editorial board and its contributors.

Countries are sovereign when it comes to taxation and we want to continue to attract investment through the present regime. Those who criticise our taxation regime, do so either from a lack of understanding of our imputation system or else from some other ulterior motive. Such criticism will not detract us from our purpose. Having said that, we are conscious of the fact that times do change. We are therefore open to exploring possible alternatives to this regime, making contingency plans as

Prof. Edward Scicluna Minister for Finance

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From Westphalia to Cyberspace:

Territoriality and Tax Jurisdiction in a Digitalised Economy

by Aldo Farrugia

The OECD/G20 BEPS Project effectively ushered in a new outlook for international taxation. However, despite the fact that the reforms were quite extensive, this project did not depart from the traditional concept of tax jurisdiction based on territoriality.

Jurisdiction to tax remained with the state where value is created1. In the meantime, developments relating to the digitilisation of the economy have become the focus of discussions in international tax fora as these developments are increasingly seen as posing challenges to the territoriality basis of tax jurisdiction.

As a follow-up to the Action 1 BEPS Report, the Inclusive Framework for BEPS (Inclusive Framework) has been working on solutions to these challenges. The outcome of this work lies in the future, but as Kierkegaard said, while life must be lived forwards, it can only be understood backwards2.

Territorially-based economic governance finds its origin in the Peace of Westphalia (1648) which effectively marks the beginning of the international system of states. It assumes that a clear geographical location can be attributed to events, transactions and business entities and that it is possible to determine the laws of which state apply in relation thereto. Tax sovereignty is established on the basis of this principle. In a very traditional sense, tax sovereignty meant the full and exclusive exercise of taxing rights of a state within its borders. Eventually, particularly during the post-war period when the reconstruction of war-torn

countries provided the need to collect more tax revenues, states opted to use other connecting factors in order to legitimise an expansion of tax sovereignty.

Over the last few decades, with the advent of the internet, related information technologies and the proliferation of digital goods and services, states encountered problems in relation to the enforcement of tax laws. These problems may persist in the future as the digitilisation of the economy continues to develop in a rapid manner. It is possible for example that artificial intelligence may eventually take over certain levels of control concerning key aspects of an entity’s functions. This will make it difficult to establish which country ought to tax the value that such intelligence creates. It should come as no surprise therefore that questions are raised as to whether there should be departures from territorial jurisdiction for taxation in an increasingly digitilised economy.

In the post-BEPS period, a number of proposals have been made with a view to address these developments.

They include international formulary apportionment, withholding taxes on payments and quantitative economic presence tests. In view of the issue that they seek to address, such proposals inevitably include elements of extraterritoriality. They also give rise to scepticism3 as well as concerns related to the creation of tax uncertainty, inconsistency of implementation and complexity, particularly if they are not implemented on a global level4.

Within this context, a multilateral approach provides the best path for agreement on a possible solution.

States, however, very reluctantly relinquish tax sovereignty and therefore they will need to be persuaded either that a change in the current basis of tax jurisdiction will be to their benefit, that they will not be net losers as a result of adopted changes or that they

may ultimately be negatively affected if the current situation persists. Karl Polanyi contended that a market cannot survive unless it is embedded in a social and political order5 and that society will take measures to protect itself from the perceived negative effects of self-regulation. This also applies, by analogy, to markets that operate in cyberspace. Measures are in fact already being taken on the taxation of the digitilised economy and the pace has now gathered the necessary momentum that will enable the Inclusive Framework to carry this task through, notwithstanding the difficulties that lay ahead.

An equitable solution, however, will inevitably take far longer to achieve where proposals embracing extraterritorial concepts work only in the interests of some and against those of the rest or where proposed solutions are not considered to be legitimate by all stakeholders involved. It is only by working as a global dialogic community, addressing these concerns, that the Inclusive Framework may avoid such delays. It has been argued that the whole of history has been a history of distorted communication6. The Inclusive Framework’s level of success will ultimately depend on lessons learned from that history.

Aldo Farrugia Aldo Farrugia is Director General, Legal and International within the office of the Commission for Revenue.

The views, thoughts and opinions expressed in this article belong solely to the author and not necessarily to the author`s employer.

1 OECD/G20 Base Erosion and Profit Shifting Project Explanatory Statement to the 2015 Final Reports, paragraph 1.

2 Soren Kierkegaard’s Journals and Papers (Howard V. Hong & Edna Hong eds. 1967).

3 Deutsche Bank Research: Taxing the digital economy. Good reasons for scepticism. 2019 4 Dancey Kevin: Three Imperatives for Taxing the Digital Economy. 2019 5 Polanyi Karl. 1957. The Great Transformation. Boston, MA: Beacon Press.

6 A. Wellmer, in J.M. Bernstein. 1995, Recovering Ethical Life: Jurgen Habermas and the Future of Critical Theory. London: Routledge

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Country by Country

Reporting and its importance:

by Janica Aquilina

The amount of transfer pricing disputes leading to tax evasion and profit shifting has increased and therefore, the need for automatic exchange of information between Member States has become more crucial.

On 12th February 2013, the OECD issued its initial report regarding Base Erosion and Profit Shifting (BEPS), together with a 15-point Action Plan.

Action Point 13 was issued specifically as guidance for transfer pricing documentation and Country-byCountry reporting (CbCR).

It is obligatory for the competent authority to share the information with all Member States in which any constituent entity of the MNE Group is resident or has a permanent establishment. The information must be shared within 15 months from the end of the fiscal year of the MNE Group.

What is CbCR? CbCR is mandatory for Multinational Enterprises (MNEs) whose annual consolidated group revenue exceeds a EUR 750 million threshold. There is no requirement to file the CbCR if the total consolidated group revenue is less than EUR 750 million during the fiscal year immediately preceding the reporting fiscal year.

The constituent entity is then required to file a notification form in its country of residence in order to notify its competent authority that the constituent entity is not the UPE of the MNE Group.

The scope of the CbCR is to facilitate the automatic exchange of information between Member States in which one or more entities are either resident for tax purposes or have a permanent establishment.

The Action Plan was directed for MNEs to provide all the necessary information to all relevant governments on their global allocation of the income, economic activity and taxes paid among countries.

On 5th October 2015, the OECD published its final report on BEPS Action Point 13. The OECD proposed a three-tier approach to transfer pricing documentation that would require MNEs to prepare a: • Master file; • Local file; • CbC report.

The Ultimate Parent Entity (UPE) of the MNE Group is prescribed to file the CbCR to its competent authority in its country of residence within 12 months from the end of the fiscal year.

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In Malta, the notification form must be submitted to the Commissioner for Revenue within 9 months from the end of the fiscal year of the constituent entity.

What type of information shall be reported for CbCR? The OECD has issued a template to be used as a standard form for the CbCR. The following information shall invariably be included for each report: • Amount of revenue; • Profit before income tax; • Income tax paid and accrued; • Number of employees; • Stated capital; • Retained earnings; • Tangible assets; • Identification of each entity within the group doing business in a particular jurisdiction; • Indication of business activities each entity engages in.

The notification form prepared by the constituent entity must include the following details about the UPE: • Name of reporting entity; • Tax Registration number; • Country of reisdence for tax purposes; • Registered address.

Currently there are over 80 jurisdictions which have incorporated CbCR filing obligations within their legislation and over 2,200 relationships are in place for the exchange of CbC reports between jurisdictions.

The outcome of Action Point 13 was therefore very positive and substantially every MNE with consolidated group revenue of at least EUR 750 million is already required to file a CbCR. This will make it easier for tax authorities to perform transfer pricing assessments and audits which will lower the possibility of tax avoidance.

Janica Aquilina Janica Aquilina graduated with a Master in Accountancy from the University of Malta in 2015 and in 2018 she has graduated in London with a distinction in the Advanced Diploma in International Taxation.

Janica is a Senior in the Tax Department at EY in Malta and has 4 years’ experience working in direct taxation. The client base which Janica has worked on is usually local and international companies in a number of diverse industries such as the manufacturing industry, the banking industry and the hospitality industry.

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Recent EU anti-abuse rules:

Too much, too soon?

by Christiana Panayi

I have long argued1 that some of the provisions of the Anti Tax Avoidance Directive (ATAD) may in fact be incompatible with established principles of the jurisprudence of the Court of Justice, such as those derived from the Cadbury Schweppes case2.

Under the transactional approach3 (option B) of the Controlled Foreign Corporation (CFC) provision, the taxpayer’s Member State must include in its tax base ‘the non-distributed income of the entity or permanent establishment arising from nongenuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage’.

It is questionable whether this provision is fully aligned with the wholly artificial arrangements test of the Cadbury Schweppes case. Are the nongenuine arrangements to which ATAD refers the same as the ‘wholly artificial arrangements’ test established under Cadbury Schweppes?

Furthermore, is an arrangement wholly artificial if, following ATAD, Article 7(2)(b), ‘the entity or permanent establishment would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it were not controlled

was controlled by shareholders in third states. A similar conclusion was reached in the Diester Holding case.5

by a company where the significant people functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company’s income?’ One could argue that the two are not the same. In the Cadbury Schweppes test, the threshold for finding that national CFC rules were compatible with freedom of establishment was set very high. Only wholly artificial arrangements could justify such rules. Here, it would appear that the threshold is not as high and non-genuine arrangements seem to be assimilated with arrangements where the parent company carries out ‘significant people functions’, relevant to the assets and risks generating the CFC income.

Very importantly, the new European Union (EU) instruments evince a bold shift of emphasis since Cadbury Schweppes was decided. At the time the case was decided, the emphasis of the EU, as furthered by the European Commission - was on scrutiny of CFC regimes over their compatibility with the fundamental freedoms rather than blanket permissiveness. CFC regimes were seen as restricting the freedom of establishment. Cadbury Schweppes and the wholly artificial arrangements test were for a long time considered to be the main precedent in this area.

The open-ended General AntiAvoidance Rule (GAAR) of the ATAD and of the Parent-Subsidiary Directive are also technically problematic. In recent cases dealing with the (old version of the) general anti-abuse provisions of the Parent-Subsidiary Directive, it was reiterated that such provisions should still be targeted against wholly artificial arrangements and should not be too broadly phrased. In the Eqiom & Enka case4, it was emphasised that there cannot be an initial presumption of abuse where an EU parent company

Whilst the Cadbury Schweppes case has not been overruled – and in fact the Court of Justice has recently reaffirmed it in the Eqiom & Enka and the Diester Holding cases – the European Commission’s current emphasis seems to be on ensuring that all Member States have minimum rules against CFCs and other selected anti-abuse rules. This has forced several Member States, including Malta, to introduce CFC rules, rather than to amend their legislation to ensure compatibility with EU law which was the usual pattern of

1 See commentary in chapter 6, Christiana HJI Panayi, Advanced Issues in International and European Tax Law (Hart Publishing 2015). Also see “The Compatibility of the OECD/G20 Base Erosion and Profit Shifting Proposals with EU Law”, 70 [2016] 1/2 Bulletin for International Taxation pp.95-112.

2 Case C-196/04 Cadbury Schweppes and Cadbury Schweppes Overseas [2006] ECR I-7995 3 ATAD, Art 7(2)(b).

4 Case C-6/16 Eqiom & Enka, ECLI:EU:C:2017:641 5 See Joined Cases C-504/16 Deister Holding and C-613/16 Juhler Holding, ECLI:EU:C:2017:1009

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interaction between the Commission, the Court of Justice and Member States in this context. Conceptually, for some Member States such as Malta, this marked a huge normative shift the impact of which is not yet fully felt, as the rules have just been introduced into national law. This also raises concerns for lack of EU competence, as well as questions as to the EU’s ability to transpose Base Erosion and Profit Shifting (BEPS) measures into Member State legal systems in a coherent and coordinated fashion.

The above analysis suggests that the ATAD rules may lack coherence with long-standing principles of the Court of Justice in this area. Not only that, but one could argue that the minimum anti-abuse rules introduced through the ATAD go beyond the demands of the Organisation for Economic Cooperation and Development (OECD)/ G20 BEPS project, whereby only a few recommendations were considered as (non-binding) minimum standards. At a more abstract level, it is disconcerting that EU law was the medium used to transpose into national legislation BEPS-related measures, which were quite extrinsic to the EU legal system up to that point.

The recent advent of powerful soft law instruments such as the EU’s list of non-cooperative tax jurisdictions

is equally disconcerting. As I have argued elsewhere,6 more transparency is needed as regards the workings of the Code of Conduct Group in preparing and updating this list. What kind of negotiations have taken place between the Group and third countries to be taken off the list? Have some third countries benefitted in not being blacklisted by being close allies (or overseas territories) of some Member States? Is there any authority to force Member States to impose sanctions against listed jurisdictions? The European Commission and the Code of Conduct Group should be careful not to act as colonial powers enforcing their version of tax fairness and good tax governance vis-à-vis (mostly) less powerful countries.

An overall concern is that in this area too many developments occurred and too soon. The full impact is yet to be absorbed. Arguably, the administrative burden of all these EU instruments on smaller economies could hinder the proper functioning of tax administrations. It could also affect the competitiveness of the Member State and the ease of doing business therein, raising budgetary concerns.

It should not be forgotten that the EU is a mixture of Member States of different sizes, economies, social policy needs and very importantly, of different philosophies of public finances.

6 See Christiana HJI Panayi, “The Europeanisation of Good Tax Governance”, 36 (2018) 1 Yearbook of European Law 442-495 and “The Peripatetic Nature of EU Corporate Tax Law”, (2019) Deakin Law Review.

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Christiana Panayi Christiana HJI Panayi is a Professor in Tax Law at Queen Mary University of London. She lectures and published in European Community Law, European Tax Law, International Tax Law both in the UK and abroad.

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BUDGET 2020

by Bernard Bonnici

On 14th October 2019, the Minister for Finance presented the Budget for 2020. The Budget Speech did not refer to major changes to the Maltese tax system. Unlike Budget Speeches for previous years, the Budget Speech for 2020 contemplated very few new tax measures. The tax measures that the Minister referred to include the following:

Income Tax • With effect from 1 January 2020, a final tax of 15% will apply on the first €100,000 of gains or profits derived from the transfer of a promise of sale. Any gains or profits over and above the €100,000 will remain taxed at 35% in terms of Property Transfers Tax. • A reduction in tax on over-time employment income paid in respect of the first 100 annual hours of overtime work derived by persons whose base salary does not exceed €20,000 per annum and who are not in a management grade to 15%.

• Individuals whose income is less than €60,000 will continue to benefit from a refund of tax. Individuals whose income falls within the tax free bracket will also benefit from such refund.

• Pension income of less than €13,799, will not be subject to tax.

• Other income exempt from tax received by couples with a single pension will be increased to €2,000, i.e. total income exempt from tax will amount to €15,798.

• Certain pensioners will be exempted from paying provisional tax payments.

• Tax Refunds will be provided within 6 months.

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Duty on Documents and Transfers • The following existing schemes will be extended for another year: »» the Scheme originally contemplated in Legal Notice 59 of 2016 providing for a reduced rate of duty of 2.5% on the higher of the amount or value of the consideration paid upon the acquisition of vacant immovable property situated within an Urban Conservation Area. »» the Scheme originally contemplated in Legal Notice 384 of 2016 providing for a reduced rate of duty of 2% on the higher of the amount or value of the consideration paid upon the purchase of residential immovable property situated in Gozo. »» the Scheme originally contemplated in Legal Notice 131 of 2017 providing for a reduced rate of duty of 1.5% on the real value of shares held in a family business or immovable property used in a family business donated to close family members. »» the Scheme originally contemplated in Legal Notice 39 of 2018 providing for a refund of a portion of the duty paid by second-time buyers upon the acquisition of their second immovable property situated in Malta.

• The first time buyers scheme providing for an exemption from duty on the first part of the consideration introduced by Legal Notice 393 of 2013 has been extended. In addition, the exempt portion has been increased from €150,000 to €175,000.

• Those individuals acquiring property for the purpose of establishing their own residence who are either acquiring it by inheritance or are not first time buyers will now be subject to duty at the reduced rate of 3.5% on the first €175,000 instead of €150,000.

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VAT • The VAT exemption on the provision of education provided for in Item 12 of Part 2 of the Fifth Schedule to the Maltese VAT Act, Cap. 406 of the Laws of Malta, will be extended to cover a wider range of services including vocational training and other educational services.

• The VAT refund scheme associated with the acquisition of Bicycles and Pedelec Bicycles as per Government Notice No. 1,231 dated 15 December 2015 published in Government Gazette No. 19,512 will be extended for another year.

Malta Enterprise • Operators involved in the construction industry which scrap their machinery and replace it with new machinery with low emission standards will now benefit from assistance up to €200,000. Those who will be acquiring additional machinery (except vehicles) having similar attributes will be eligible as well.

• Schemes administered by Malta Enterprise for the assistance of SMEs will remain available. These Schemes include MicroInvest, Business Start, Startup Finance and Fondazzjoni Start-Up Malta.

General Compliance Obligations • Couples will be allowed to submit separate tax returns and the new system will provide for separate assessments for couples.

• As from January 2020, a new online system will improve existing processes relating to VAT and PE deregistration.

• More efficient tax compliance procedures will be introduced, certain taxpayers will be exempt from submitting an income tax return if they validate a provisional assessment.

• The Grant on the Purchase of Special Equipment for use by Persons with Disability originally introduced

by Government Notice number 951, published in Government Gazette number 19,587 of the 1st September, 2017 will be increased by €400 with the maximum capping increasing to €1,000.

The introduction of new taxes has been excluded.

Ernst & Young Limited Regional Business Centre, Achille Ferris Street, Msida MSD1751, Malta Office: +356 2134 2134 | bernard.bonnici@mt.ey.com Website: http://www.ey.com

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The Consolidated Group (Income Tax) Rules

by Josef Mercieca and Milena Palikarova

The Consolidated Group (Income Tax) Rules, Legal Notice 110 of 2019, introduced into Maltese tax law for the first time the concept of a consolidated income tax return for related entities.

The new rules intend to simplify the income tax calculations and tax reporting for groups of companies with effect from financial periods commencing on or after 1st January 2019.

The election to form part of a consolidated group of companies (the “fiscal unit”) is optional and if the companies are eligible it will become effective as from the year of assessment in which the election is made. The fiscal unit consists of a principal taxpayer and all its direct and indirect transparent subsidiaries, (the “transparent subsidiaries”).

The rules define the term principal taxpayer, which is the reporting entity for the group as the parent company, and which must be registered in Malta.

The principal taxpayer must hold shares in another company, satisfying at least two of the following conditions: • holds at least 95 % or more of the voting rights in the transparent subsidiary; • holds at least 95 % or more of the rights to profits available for distribution; • holds at least 95 % or more of the rights to any assets available for distribution on winding up.

Where such subsidiary is a 95% subsidiary but not a 100% subsidiary, the election to form part of a fiscal unit will be subject to the approval of the minority shareholders of the transparent subsidiary.

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It is to be noted that a company is not allowed to form part of more than one fiscal unit at any time. Once the fiscal unit is registered the principal taxpayer will assume the rights, duties and obligations under the Income Tax Acts relative to that fiscal unit, and any rights, duties and obligations of the transparent subsidiaries will be suspended.

Joining and leaving a fiscal unit The Rules provide guidelines as to the implications of joining and leaving a fiscal unit. Once a transparent subsidiary decides to join a fiscal unit, any previous balances, tax credits allowed to be carried forward, and balances of any profits (with certain exceptions) will be considered to be balances of the principal taxpayer.

Where any of the transparent subsidiaries no longer satisfies the conditions prescribed under these rules it will be deemed to no longer be part of the fiscal unit with effect from the basis year in which it ceased to satisfy those conditions. In the latter circumstances, or when the parent company decides to revoke the election, a transparent subsidiary owning one or more subsidiaries can opt to form a separate fiscal unit and become the principal taxpayer thereof.

However, any balances of trading losses, unabsorbed deductions, other losses and allowances, and profits (with certain exceptions) will continue to be deemed as balances of the principal company.

Chargeable income The chargeable income of all transparent subsidiaries will be deemed to be derived by the principal taxpayer and will be subject to tax at the applicable tax rate. This applies also to expenditure incurred by, and capital allowances available to, the transparent subsidiaries.

The Rules provide that, where the principal taxpayer is a person who is neither ordinarily resident in Malta nor domiciled in Malta, the following income or gains shall be attributed to the principal taxpayer: • the income and gains derived by any transparent subsidiary resident in Malta which income and gains shall be deemed to arise in Malta; • the income or gains derived in Malta by a transparent subsidiary resident in Malta; Any income or gains derived by a foreign transparent subsidiary will be deemed to be attributable to a permanent establishment of the principal taxpayer.

With the exception of certain transactions, any transactions between two or more companies forming part of the fiscal unit shall be ignored for tax purposes. Moreover, if the principal taxpayer makes payments to its subsidiaries for any allowance, deduction or loss that is transferred to the principal taxpayer, such payments will be disregarded for tax purposes in the hands of the subsidiaries and will not be allowed as a deduction at the level of the principal taxpayer.

In the case of shareholders of the

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principal entity or if the fiscal unit comprises shareholders entitled to tax refunds in terms of Article 48(4) or 48(4A) of the Income Tax Management Act, rather than paying tax and claiming a tax refund, the tax refund is taken into account in determining the applicable tax rate of the fiscal unit by deducting it from the tax rate applicable to the chargeable income of the fiscal unit. This achieves the same effective tax rate but avoids the payment of tax and subsequent claim for a tax refund.

Any income derived by a transparent subsidiary which suffers tax overseas will be deemed to be the principal taxpayer’s income and for this reason the principal taxpayer will have the right to claim a relief from double taxation.

Compliance The principal taxpayer has the obligation to prepare a consolidated profit and loss account and a consolidated balance sheet for all companies in the fiscal unit for each fiscal year. Therefore, the obligation to file a tax return for the fiscal unit stays with the principal taxpayer and all subsidiaries will not be required to file their own tax returns.

In addition, the principal taxpayer and its wholly owned subsidiaries shall be jointly and severally liable for the payment of tax, additional tax and interest due by the fiscal unit. The tax due may be apportioned between the principal taxpayer and its 95% or 100% transparent subsidiaries, however, the responsibility to pay the tax rests with the principal taxpayer.

Issue 1 - October 2019

Josef Mercieca

Milena Palikarova

Josef Mercieca is a Tax and Fintech Partner BDO. Josef holds a first degree in Accounting and has worked with one of the Big Audit firms in Malta for four years, three years of which heading the indirect tax section of the firm. He also acted as the Tax Director for one of the longest established small audit firms for nearly six years where he headed both the direct and indirect tax department.

Milena Palikarova is a Tax Consultant forming part of the Tax Team within BDO Malta. Milena has successfully graduated from the University of National and World Economics, Bulgaria, where she was awarded a Bachelor of Commerce (Hons) degree, majoring in Economy of Commerce, and presently she is pursuing a Master’s Degree in Business Administration (M.B.A.).

After graduation, Milena launched her career in Malta, where she began her specialization in the Financial Services Industry. Focusing on the provisions of the Income Tax Act, general taxation issues and advising on financial and tax related matters, Milena has the experience and expertise to assist clients throughout the whole process of setting up tax-efficient structures.

Josef is a member of the Malta Institute of Accountants (MIA) and the Malta Institute of Management and has lectured and delivered seminars and training on topics relating to VAT, local and international tax on various occasions, both in Malta and abroad.

Josef was one of the contributing authors in “Principles of VAT Law” the first-ever local publication on VAT in Malta and regularly authors articles on taxation. Josef was an ACCA lecturer with Richard Clarke Academy where he lectured both Taxation (F6) and Advanced Taxation (P6) for nine years. Josef has a broad experience in advising local and foreign clients in the setup of tax-efficient structures, in particular, involving international tax, capital gains tax, property transfer taxed and duty on documents and transfers.

Josef is also a VFA designate person with BDO where he heads the firm’s VFA service line.

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THE

EU VAT REFORM

WHERE IS IT HEADING?

by Antoinette Muscat

Since the European Commission (EC) presented the 2016 VAT Action Plan, a lot has happened. What has been described as the biggest reform of EU VAT rules is underway, with the main objectives of combating VAT fraud and transitioning to a definitive destinationbased taxation system.

It may take years for the definitive VAT regime to be fully implemented, however, as shall be seen below, the message is clear – the EC and Member States are committed to work towards a definitive VAT system that supports a deeper and fairer Single Market.

Background The current VAT system was set up in 1993, at a time when the extent of today’s global, digital and mobile markets could not have been predicted.

Despite the various attempts, the VAT framework has been unable to keep pace with the challenges of today’s economic realities. It is based on transitional VAT arrangements, applying an origin-based taxation system, which runs counter to the fundamental principle of taxing goods and services in the country in which they are consumed. It is generally found to be complex and presents several shortcomings, including room for VAT fraud. In this respect, the EC estimates an annual loss in VAT revenue of €150 billion, a third of which is a result of cross-border VAT fraud. The need for simplifying, improving and modernizing the VAT system became evident.

The EC’s Reform Plans In preparation for such a major overhaul, the EC released a series of key measures to be implemented in the short and longer term, as outlined below. These build upon the changes already adopted to the VAT system, in particular the VAT e-Commerce Package as part of the EC’s Digital Single Market Strategy, which rules shall be fully active by 2021.

2016 VAT Action Plan

2019 Digital Single Market Strategy: e-Commerce Package

2020

Quick Fixes & Administrative Cooperation

2021 Digital Single Market Strategy: e-Commerce Package

2022 New VAT Definitive System?

VAT Rates?

2027

Evaluation of System?

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taxploration • The ‘Quick Fixes’ The Quick Fixes consist of four short term measures aimed at simplifying and standardizing the current rules in relation to calloff stock arrangements, chain transactions and the evidence required for the application of the VAT exemption to intracommunity supplies. These measures have been adopted by the European Council and shall come into force in all Member States with effect from 1st January 2020.

• Administrative Cooperation between Member States In an effort to combat cross-border VAT fraud in the short term, Member States have agreed on a set of provisions to improve the exchange of information and strengthen trust between national tax administrations. Most of the provisions will be applicable as from 1st January 2020.

• New Definitive VAT System – ‘Cornerstones’ and the notion of ‘Certified Taxable Person’ (CTP) The ‘Cornerstones’ and the notion of CTP represent the fundamental principles for the operation of the definitive taxation system. The technical provisions, issued in May 2018, are currently under the scrutiny of the relevant stakeholders.

Under the proposed rules, domestic and cross-border Businessto-Business (B2B) transactions are in principle envisaged to attract the same VAT treatment, thus enabling the proper functioning of the Single Market. The supplier is liable to charge and collect VAT at the rate of the Member State of destination of the goods, which serves as a confirmation that as a general rule, the liability for VAT lies on the supplier. To avoid multiple registrations in different Member States, such process shall be facilitated via a one-stop-shop mechanism, similar to the online portal currently in place in respect of electronically supplied services. The concept of CTP is introduced, which allows trusted businesses to benefit from simplified procedures. Subject to the unanimous agreement by the European Council, these rules are envisaged to come into effect in 2022.

• Proposal on VAT Rates The present framework restricts the application of VAT rates by Member States as a means of avoiding cross-border shopping and distortion of competition. Under the destination-based arrangements, such restrictions will no longer be required. The proposed rules intend to give autonomy and flexibility to Member States in setting different VAT rates. These will become effective only when the shift to the definitive regime is implemented.

• P roposal for Small and Medium-sized Enterprises (SMEs) SMEs are generally faced with disproportionate VAT compliance costs. The proposal as regards to the special scheme for SMEs aims at creating a more level playing field for entities operating across the EU and allows them to benefit from simplified measures that ease their VAT burdens. The date of application of such rules is not yet determined.

Five years after the entry into force of the definitive regime for goods, the EC intends to evaluate the implementation of the new system in terms of its resistance to VAT fraud, compliance costs and administration by tax authorities. At that point, the VAT reform should be extended to cross-border supply of services as a second step towards a definitive EU VAT system.

Issue 1 - October 2019

Final Thoughts The EC’s initiatives are a positive step forward towards a definitive VAT regime.

Through the operation of the proposed measures, businesses will be able to operate within the EU in the same way as they would within a single country, thus preserving the spirit and aim of the Internal Market.

Businesses and national tax administrators need to prepare themselves for the upcoming 2020 changes. On the other hand, the adoption of the 2022 definitive VAT system is still subject to the unanimous agreement by all Member States, which in itself is no mean feat. Stakeholders have voiced their concerns on several provisions which need to be addressed. At the same time, stalling on the VAT Reform is costing billions in VAT fraud – funds that could be invested in public services instead. These factors underline the need to find a solution as soon as possible. Businesses and practitioners are now to take a wait-andsee approach until further developments occur.

Antoinette Muscat Antoinette is the manager responsible for indirect tax matters at E&S Group. She joined the accounts team at E&S Group in 2014 after graduating with a Master Degree in Accountancy from the University of Malta. Her interest in the area of indirect taxation led to her current position of VAT Manager where, in addition to maintaining the accounts of a portfolio of companies, she is responsible for overseeing the VAT compliance obligations of all clients. In addition, she assists clients in identifying potential VAT optimization opportunities and provides advisory on the VAT treatment of transactions undertaken in different business areas, including gaming, blockchain and the financial sector.

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Notional Interest Deduction (NID) Rules

by Shanice Finch

What is NID? NID is an innovative way for companies to reduce their tax liabilities. This notion is mostly beneficial to companies with large equity balances. This new regulation was introduced in October 2017 but it came into force on 1st January 2018.

The main purpose of NID is; “for the purpose of ascertaining the total income of any person there shall be deducted all outgoings and expenses… including.. such sums in respect of risk capital as are aimed at approximating neutrality between debt and equity financing, as the Minister may prescribe.”

NID allows companies to deduct a notional interest amount based on the “risk” capital of a company.

The companies will be able to claim a deductible expense against their chargeable income for the NID dement to be incurred on their equity capital. Before the introduction of NID, debt interest has been an allowable deduction but dividends on equity were not. “Risk capital” is defined as related to share capital, share

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premiums, positive retained earnings, interest free debt, dividends declared but not paid part of the liabilities of the company (even from unrelated parties) and any other positive balances under equity in the financial statements.

With the previous scenario, the cost of capital of debt was generally cheaper compared to equity. As a result, companies used to be more inclined to get financing through debt rather than from equity.

The introduction of NID in the Maltese rules neutralizes this effect while the shareholder or partner of the company will be deemed to have received a corresponding amount of interest for the interest that the undertaking claims as a deduction.

The claim of NID by an undertaking is only an option and can be claimed by either; a company, a partnership resident in Malta or any other company or partnership that is not resident in Malta that derives income that is effectively connected with a Permanent Establishment (PE) of the company or partnership situated in Malta.

Calculating the NID NID = (Reference rate) X (Risk Capital) With respect to a non-Maltese resident company with a PE in Malta, the risk capital is taken to be the capital attributable to the PE. An undertaking is required to determine the “reference rate” for the purpose of calculating the NID by reference to the risk-free rate published by the Central Bank of Malta for the last day of the accounting period quarter in question. The “riskfree rate” is the yield to maturity on Malta Government Stocks with a remaining term of approximately 20 years plus a premium of 5% as per the definition of the reference rate. These rates are published every quarter on the Central Bank of Malta website for reference basis.

In the case of having an accounting period which does not match the issued rates by the Central Bank, one shall make reference to the rate of the quarter immediately preceding the end of the accounting period for which NID is claimed.

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As long as the risk capital is employed in trade or business and it is not being used to product exempt income, than NID can be calculated. While in the case of no income, no NID can be worked out or carried forward.

NID can only be taken as a deduction if all shareholders of the company approve it. The reason being that since NID claimed by the company shows “deemed income” for a shareholder, even in the case of interest free shareholders loans with the company. The deemed income can potentially be taxable income in the hands of the shareholder.

Limitation When NID exceeds 90% of the undertakings chargeable income prior to taking into account the allowable deduction, the amount of such excess shall not be available for deduction against the profits for the said year.

Therefore maximum NID deductions which can be claimed are capped at 90% of chargeable income. But, the excess of the 90% shall be carried forward for deductions due for the following year.

NID shall only apply to income which is to be allocated to the company`s Foreign income Account (FIA) or Malta Tax Account (MTA) tax accounts.

When profits of a company are relieved from tax through the NID, an amount corresponding of 110% of the amount of profits relieved from tax, shall be allocated to the company`s Final Tax Account (FTA) account. The allocation shall be as per the below:

• S econd stage allocation – take 10% of the relieved profits, out of the tax accounts from which this profit would have been allocated to, if the deduction would not have been taken (second allocation may be taken from the FIA or MTA account). If the balance in the deducting tax account is less than the 10% of NID, the total amount in the tax account shall be taken (cannot leave a negative balance) and the difference is ignored. The amount in question is the chargeable income after tax.

The NID 90% limitation is calculated excluding Flat Rate Foreign Tax Credit (FRFTC) on the 100% chargeable income. Therefore, in the case of a company which elects to apply the FRFTC as well as NID deductions, FRFTC deduction shall not be taken into account for the 90% check. Therefore in this case, NID would be worked out not taking into account the foreign tax charged, and the FRFTC deduction or deduction of tax paid abroad shall only be deducted subsequent to NID calculation and charging the remaining chargeable income to Maltese tax.

NID income for the shareholder Where NID is claimed, the shareholder will be considered to receive the same amount of notional interest income for Maltese tax purposes proportionately to their shareholding. If the shareholder is not resident in Malta, the deemed interest income will be exempt from tax in Malta.

• F irst stage allocation – 100% of the profits relieved from tax shall be immediately allocated to the FTA account (NID Amount) Issue 1 - October 2019

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Scenario from the local courts with respect to failure to abide with VAT Rules

by Shanice Finch Appeal Court of Criminal Justice Honor. Judge Consuelo Scerri Herrera, LL.D., Dip Matr., (Can) Appeal No. 73 / 2016 Police vs Noel (Emanuel) Mifsud 4th June, 2019 Noel (Emanuel) Mifsud on behalf of Wonka Company Limited (C44106) was brought to court as he failed to abide with the sentence from the Court of Magistrate delivered on the 6th of December 2012. He failed to pay within 3 months the liable fine imposed by Court order. In this regard, he was to become liable to a daily fine of EUR 15 to be revised to EUR 5 daily fine as per amendment of Articles 4 and 6 of Act XIV of 2013 from the elapse of eligible payment term of the three months until the payment date.

The period for which Mr. Mifsud was in infringement to the received sentence on 2012 was between 7th March 2013 and 30th April 2014 when he finally regularized his position with the VAT Department. On 4th February 2016, the Court of Magistrates had heard this case and found Mr. Mifsud liable to the fine in question amounting to EUR 2,100 made up of the revised EUR 5 fine for 420 days. Mr. Mifsud appealed to the court and asked for the revocation of this fine.

Mr. Mifsud claimed that on 4th February 2016, he was sentenced twice on the same fact, against the principle of ne bis in idem, and given the fine of EUR 2,100 twice with respect to the same period of default. He claimed to the court that from the court records of the 4th February 2016, it is clear that the same sentence was given twice and no one should be judged twice on the same offence. He made reference to the European Union Law against the Infringement of Human Rights mainly to Article 527 of Chapter 9 of the laws of Malta claiming that in a criminal case;

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“Where in a trial, judgment is given acquitting the person charged or accused, it shall not be lawful to subject such person to another trial for the same fact.�

In this light, Mr. Mifsud claimed that on this basis, this case for further liability of penalties is null. He also explained that during the period when he was liable to make payment of the received fine, he was receiving psychiatric assistance due to mental health issues which was the reason for the delayed payments submission of the pending documents to the VAT department as per the courts first judgement.

In its judgement delivered by Judge Consuelo-Pilar Scerri Herrera, the court concluded that the claims made

by Mr. Mifsud should be denied and the decision taken by the Court on the 4th February 2016 with regards to a revised penalty of EUR 5 for 420 days amounting to EUR 2,100 was confirmed.

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Scenario from the local tribunal with respect to property valuation under Stamp Duty/ Duty on Documents and Transfers Rules

by Shanice Finch Tribunal to Revise Administrative cases – Magistrate Dr. Gabriella Vella B.A., LL.D. Appeal No. 160/11VG C H Formosa Company Limited Vs Direttur Ġenerali (Taxxi Interni) 27th May 2019 On the 20th March 2008, C H Formosa Company Limited had acquired a hotel with the name of “Springfield” and declared the acquisition price of the said property as EUR 628,930.81 with additional annual ground rent of EUR 1,747.03. The Commissioner for Revenue appointed Architect Edward Scerri to value the property in question and the value established by the said Architect was that of EUR 980,000.

Pursuant to such valuation, the company was asked to pay additional stamp duty amounting to EUR 17,550 on the difference in property value amounting to EUR 351,000 than the declared acquisition price. Also, the company was requested to pay a further EUR 17,550 in additional penalties.

The company did not accept the valuation by the Commissioner for Revenue`s Architect and sent two letters to the Commissioner for Revenue requesting the revocation of the decision. The Commissioner for Revenue reconfirmed to the plaintiff the owed amount in total of EUR 35,100.

The company decided to institute legal proceedings defending its position on the basis that the price of the property in the deed of acquisition was reflective of the real value at the time of acquisition and that the stamp duty was paid calculated in relation to the declared acquisition price.

This application to the Tribunal was presented by C H Formosa Company Limited on the 17th May 2011 requesting the revocation of the decision taken by Issue 1 - October 2019

the Commissioner for Revenue with reference number IV2008/02999; IR(S) 2008/6358 issued on the 9th May 2011. The company claimed that no stamp duty or stamp duty additional penalties were due by the company to the Commissioner.

The company brought up the fact that the vendors of the hotel in question had financial difficulties in order to continue with the repayment of a loan they had with the bank. The bank had negotiated with the owners that a waiver of part of the loan will only be applicable if they settle in full the amount of EUR 1,024,924. It was at this stage that the vendors concluded the deal with C H Formosa Company Limited and the company made the payment requested by the bank against the sellers’ loan.

The tribunal took into account this as evidence by a representative of the bank, which evidence put in doubt the declared property price of EUR 628,930.

Another red alert in the deed of acquisition was the fact that the declared price of the property was that of EUR 628,930 while that of the movable property, furniture and fittings that were acquired was of EUR 564,873. The difference between these two prices is that of EUR 64,057 but the state of the hotel and its internal movable property were described as in a very bad shape and compared to two plots in shell form.

Taking into account these observations, the tribunal established that the declared value of the property does not reflect the actual transfer value of the property and the aim of the buyers and sellers was to avoid paying the due amount in stamp duty.

On the 27th May 2019, the Tribunal did not accept the claim of C H Formosa Company Limited and furthermore increased the taxable sales price difference from EUR 351,000 to EUR 564,900 resulting in a stamp duty due of EUR 28,245 on this amount and additional taxes and penalties amounting to the same amount. As a result, C H Formosa Company Limited was ordered to pay EUR 56,490 to the Commissioner for Revenue together with applicable fees.

Fiscal incentives for Family Business under the Family Business Act

by Shanice Finch

The introduction of key fiscal incentives under the Family Business Act include, reduced stamp duty on the value of the immovable property – the first EUR 500,000 will be charged at the reduced rate of EUR 3.50 per EUR 100.

Exemptions of stamp duty on a capped value of shares or interests transferred in a partnership, trust or foundation – the first EUR 150,000 will not be taken into account.

The key governance incentives are: 1. Micro Loan guarantee – Enhanced capping of up to EUR 500,000 per business for the purpose of acquiring the business or parts therof; 2. Micro Invest – Enhanced tax credit of up to EUR 70,000 over a three year period; 3. Lease renewal Positive consideration of lease renewal of industrial government leased premises on lease or emphyteusis, the Regulator shall recommend the renewal of the contract to ensure the continuity of the family business; 4. Education and training – funds of EUR 1,000 annually for family business owners and their employees; 5. Advisory Services – Funding of up EUR 2,500 for legal, notarial and accountancy advice annually over 5 years up to a maximum of EUR 12,500 for the assistance of succession and business transfer; 6. Mediation through arbitration – Funding of five sittings up to a value of EUR 2,500 for the establishment of the fair value of the family business; 7. Investment Aid 2014-2020 – Waivering of the condition that assets are to be bought by unrelated third parties – now applicable to family businesses, allowing them greater access to investment aid.

8. Bank Financing – loan debt financing

by BOV and Malta Development Bank up to EUR 750,000

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Malta

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T: (+356) 2123 5064 - E: robert@reandamalta.com www.reandamalta.com

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An International Tax Update: OECD Update: Status of tax transparency initiatives

by Shanice Finch

The OECD issued an update that through the participation of more than 90 jurisdictions part of the Common Reporting Standard (CRS), information on 47 million offshore accounts has been transferred with a total value of approximately EUR 4.9 trillion.

This was possible due to the Automatic Exchange of Information (AEOI) initiative which resulted in the activation of more than 4,500 bilateral agreement between states agreeing to exchange tax information. The voluntary disclosure of offshore accounts, financial assets and income as part of the implementation of AEOI initiative led to more than EUR 95 billion in additional revenue which could be brought to tax while interest and penalties may also become applicable.

The analysis also shows that in the last 10 years, deposits in offshore banks have decreased by 34% showing a decrease of more than EUR 487 billion as countries comply with tighter transparency standards.

by Shanice Finch The OECD announced in May 2019 that there is an agreement for a “road map” with the aim to resolve the tax challenges from the digitalization of the economy. The OECD committed itself towards a consensus-based long-term solution by the end of 2020.

The said plan is part of a “Programme of Work” adopted by Base Erosion and Profit Shifting (BEPS) which 129 states are taking part of. The plan aims to explore two pillars which are the below: • The analysis on potential solutions for determining where tax is to be paid and on what basis (“nexus”). Also there is the need to determine what portion of profits could or should be allocation to the jurisdiction where clients or users are located.

• The second analysis point is to design a system to determine that multinational enterprises in the digital economy shall pay a minimum level of tax. The aim is to provide countries with a new tool to protect their tax base from profit shifting to low or no-tax jurisdictions.

This framework shall also analyse the effect of this proposal on the governments` revenue, growth and investment.

If you would like further assistance on any tax matters both on individual or company level, kindly contact us on sfinch@erremme.com.mt or call on 21661273.

12 a, a.

m m

OECD Update: Plan for resolving tax challenges of digital economy

Issue 1 - October 2019

Shanice Finch Shanice Finch graduated with a Bachelors in Accountancy and Marketing and consequently successfully completed her Masters in Accountancy at the University of Malta in 2017. Ms. Finch joined Erremme Business Advisors in 2013 as an audit trainee, and was subsequently promoted to working in accountancy and taxation, on several local and international assignments. She is a member of the Malta Institute of Management and an AIA of the Malta Institute of Accountants. Ms. Finch is currently majoring in taxation by furthering her studies with the Chartered Institute of Taxation (CIOT), reading an Advanced Diploma in International Taxation. Ms. Finch showed interest in the Distributed Ledger Technology (DLT) inspiring her to specialise in the VAT implications and treatment of tokens received in exchange for investment in Initial Coin Offerings. Her analysis extends to Vat treatment throughout the EU, impacting cross-border transfers and redemption of rights tied to tokens.

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Taxpayer protection: improving tax dispute resolution mechanisms Following the OECD BEPS project, tax administrations are generally improving their capabilities to spot instances of cross-border tax avoidance and evasion due to greater transparency and sharing of information. Tax administrations are increasingly able to assess taxpayers in terms of a greater variety of anti-abuse measures.

Collectively, this may result in ‘unnecessary uncertainty for compliant taxpayers and to unintended double taxation’ (OECD, 2015). The OECD determined that this is not conducive to trade and investment and is therefore undesirable. Accordingly, one of the minimum standards of the OECD’s Inclusive Framework on BEPS, Action 14, aims to improve taxpayer protection by making dispute resolution mechanisms more effective.

What are dispute resolution mechanisms?

Article 25 of the OECD’s Model Tax Convention puts forward the mutual agreement procedure (MAP), a mechanism via which the Competent Authorities of Contracting States may enter into discussions with a view to resolve international tax disputes.

The MAP is an intra-governmental discussion in which the respective states may seek to: • eliminate double taxation arising for a particular taxpayer which is not in line with the relative double tax agreement (DTA); • resolve any difficulties or doubts arising as to the interpretation or application of the DTA; or • consult together for the elimination of double taxation in cases not provided in the DTA.

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Internationally, access to MAP is commonly sought with respect to cases of dual tax residence, as well as disagreements on withholding tax, transfer pricing and attribution of profits to permanent establishments.

The MAP article in DTAs may generally also be applied by taxpayers seeking a bilateral Advance Pricing Arrangement (APA).

Taxpayers in the European Union are also able to seek resolution of double taxation, occurring as a result of an upward transfer pricing adjustment in cross-border cases involving two Member States, in terms of the EU Arbitration Convention.

Perhaps the most significant limitation to MAP is that the earlier version of the article included in previous OEDC Model Tax Convention (MTC) publications (on which the majority of applicable DTAs in Malta are based), did not impose a binding obligation on the Contracting States to eliminate instances of double taxation, but merely required them to ‘endeavour’ to do so. The advantage of applying the EU Arbitration Convention is that it requires the Contracting States to seek the opinion of an independent advisory body where they cannot agree on the manner via which double taxation is to be eliminated. This ascertains that the taxpayer is provided with a solution for the elimination of double taxation, but only in the cases falling within the narrow scope of the EU Arbitration Convention.

by Miraine Falzon

by Miraine Falzon

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Track-record for Malta To date, Maltese taxpayers and the Competent Authority in Malta appear to have limited practical experience in relation to the application of cross-border tax disputes resolution mechanisms. Malta’s MAP Peer Review Report, published by the OECD on 30 August 2018, indicates that during the two-year period covering 1st January 2016 to 31st December 2017, neither of the two pending cases at the start of the period were resolved. Additionally, during the said period, the Competent Authority in Malta did not receive any fresh requests for MAPs. Notwithstanding this apparent lack of practical experience, the MAP Peer Review Report concludes that Malta is generally well placed to be able to resolve MAP cases satisfactorily. The MAP Peer Review Report indicates that: • Malta’s policy is to provide access to MAP in all eligible cases, including with a view to obtain bilateral or multilateral APAs; • the Guidelines issued by the Competent Authority in Malta on MAP availability and procedural process are clear and comprehensive; • in order to improve taxpayer protection, Malta has in place a bilateral consultation or notification process for situations where the Competent Authority in Malta considers a request for MAP not to be justified; and • foreign Competent Authorities have noted that communication with Malta’s Competent Authority is easy and timely.

Issue 1 - October 2019

Going forward – the Multilateral Instrument and the Tax Dispute Resolution Mechanisms Directive Malta’s tool-kit for cross-border tax disputes resolution mechanisms has recently been significantly updated.

The updates comprise: • changes to Malta’s DTAs pursuant to the transposition of the OECD’s Multilateral Instrument (MLI); and • the introduction of a completely new instrument through the transposition of the EU’s Tax Dispute Resolution Mechanisms Directive (TDR Directive).

Malta has opted for part VI of the Multilateral Instrument (MLI), via which a mandatory and binding arbitration provision is included in Malta’s DTAs MAP articles, to the extent that the other signatory to the DTA has opted for this too. This change addresses the previous limitation where Contracting States were not obliged by the MAP article to eliminate instances of double taxation. Other changes brought about by the transposition of the MLI seek to update Malta’s DTAs with the Action 14 BEPS minimum standard.

The transposition of the EU’s TDR Directive introduces an alternative instrument for cross-border tax dispute resolution. This new instrument is applicable for complaints submitted after 1st July 2019 which relate to income and capital earned in or after the year immediately preceding year of assessment 2019. The TDR Directive, as transposed, binds Competent Authorities by specific deadlines to decide on cases of cross-border double

taxation, with a scope much wider than that provided by the EU Arbitration Convention. If agreement is not reached by the prescribed deadlines, the TDR Directive mandates the launch of a binding arbitration procedure to find a solution on the outstanding disagreements.

It is hoped that these recent legislative changes bear the desired fruits by offering taxpayers in Malta with solutions to cross-border tax disputes.

Perhaps the Maltese legislators should also seek to ensure that domestic provisions are optimised to offer a high level of taxpayer protection, especially given that increased international scrutiny of taxpayers’ affairs is expected in a post-BEPS environment.

Miraine Falzon Miraine is a senior consultant in EY’s Business Tax Advisory team and a casual lecturer at the University of Malta. She graduated with a Master of Accountancy in 2016.

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taxploration

Remittance basis of taxation for individuals Interview with

Dr Louella Grech and Dr Silvio Cilia

1. Recently the Commissioner of Inland Revenue issued new guidelines on remittance basis of taxation for individuals. Why were these guidelines necessary?

The remittance basis of taxation has been inherited from British colonial times and has been part of our legal system since the first Income Tax Act of 1948. Post-independence, these rules have been used with considerable success to attract expats to reside in Malta and to boost the local economy. More recently, several valid residency schemes combining the remittance basis of taxation with a flat minimum tax.

This having been said, whereas the equivalent rules applicable in the UK have been subject to considerable evolution and definition, the Maltese rules surrounding the remittance basis of taxation have remained exceptionally laconic and subject to very limited statutory definition. The Guidelines are a welcome effort by the Commissioner for Revenue to add some publicly available clarity and guidance on the interpretation and application of the rules concerning the remittance basis of taxation applicable to individuals.

The Guidelines provide a practical general overview of the concepts used in the Income Tax Act mostly derived from UK law and jurisprudence and provide an indication of how the Commissioner for Revenue interprets and applies these in practice.

Albeit, not ground-breaking or comprehensive, the Guidelines do provide greater insight into the interpretation of the rules by the Commissioner. The Guidelines are also useful for lay people and expatriate taxpayers to better understand the application the remittance basis of taxation and be able to ask the right questions.

2. Are there any exceptions from the remittance basis in terms of individuals?

The remittance basis of taxation is only available to individuals who are either resident but not domiciled in Malta or are domiciled in Malta but not ordinarily resident in Malta, and, under certain conditions, to returned migrants. Everybody else is taxable on a world-wide basis (persons who are resident and domiciled in Malta) or on the basis of having a source of income in Malta (persons who are neither resident nor domiciled in Malta.

Persons who hold the status of long-term residents or are in possession of a permanent residence certificate or a permanent residence card (as defined in the Status of Long-Term Residents (Third Country Nationals) Regulations and the Free Movement of European Union Nationals and their Family Members Order) also may not benefit from the remittance basis of taxation even if domiciled in another country. The same treatment applies to a non-domiciled spouse of a person that is ordinarily resident and domiciled in Malta. In this case, the guidelines clarify that the couple must be living together for the exclusion to apply, something which is not evident in the law.

3. Did the concept of domicile change through these guidelines since it seems that the individual may change simply by stating what he considers as his main home?

Absolutely not! The concept of domicile is not defined in the Income Tax Act but is borrowed from Anglo-Saxon private international law. As a result, our understanding thereof is based on centuries of common law jurisprudence as well as a number of local decisions. The Guidelines provide a useful summary of the main principles and practice on the concept of domicile and no changes are noted to what has been our understanding so far. Amongst other things, the Guidelines point out that domicile is a unitary concept and is separate concept from nationality, which is determined by statute. The guidelines also remind us that a person’s domicile of origin is acquired at birth but can be changed by choosing to have one’s permanent home in another country or tax jurisdiction.

One does not change domicile by considering a place as his main home but only if that country or tax jurisdiction becomes or is intended to become the place of his permanent home.

There is a significant difference between the concept of one’s main home and one’s permanent home. The latter signifies the intention never to revert to one’s country of origin or to another country.

Whilst the Guidelines do not expressly state this, they do provide that even in the case that a person takes up residence in another country for a long or indefinite period, that person does not, in the eyes of the Commissioner, acquire a domicile in that country if the person has the intention of returning someday to his country of domicile, or even to a different country. The matter of establishing domicile therefore remains, as it always has been, a matter of intention, based on facts and circumstances.

Issue 1 - October 2019

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taxploration

Interview - Continued

4. Are resident and non-domiciled individuals treated differently than resident and domiciled individuals and is there a minimum liability?

Yes, resident and domiciled individuals are subject to tax on a worldwide basis whereas resident non-domiciled individuals are, with some exceptions, taxed on a source and remittance basis only, as discussed above.

By way of the Budget Implementation Act 2018, a minimum tax liability for resident non-domiciled individuals has been set at EUR 5,000 per annum with effect from year of assessment 2019 for effective basis year 2018. Individuals benefitting from a particular tax scheme may have higher minimum tax liability. The minimum tax liability for resident non-domiciled individuals does not apply to individuals whose foreign income amounts to less than EUR 35,000. In the case of a married couple, the EUR 35,000 threshold is calculated by reference to the total income of the couple and the minimum tax of EUR 5,000 is applicable to the couple. An individual may also opt to be taxed on a worldwide basis, instead of the remittance basis, if his tax liability on a worldwide basis is less than the minimum tax.

The guidelines clarify that this amount includes any Maltese tax withheld at source but does not include any tax payable upon the transfer of immovable property situated in Malta in terms of Article 5A of the Income Tax Act. The latter would therefore be treated separately for Maltese income tax purposes. This minimum tax may be reduced by any double taxation relief due to the individual. However, double tax relief can only be claimed on income that is actually remitted to Malta, and on which tax has been paid abroad.

The minimum tax liability for non-domiciled individuals as described herein does not apply to individuals who are beneficiaries of any of the following schemes: a) The returned migrants scheme b) The residents scheme c) The scheme for high net worth individuals (EU/EEA/ Swiss nationals) d) The scheme for high net worth individuals (non-EU/ EEA/Swiss nationals) e) The Residence Programme f) The Global Residence Programme g) The Malta Retirement Programme.

5. Are we to expect guidelines with respect to legal persons?

Malta is one of the few countries where the remittance basis of taxation applies to companies that are domiciled (by way of being incorporated and having their legal seat outside Malta) but are resident in Malta (by having their management and control on the island). Admittedly, although the place of domicile of companies is rather more straightforward than that of individuals, further guidelines on the concepts of management and control, remittance and what income is to be considered as locally sourced would certainly be useful.

This having been said, the application of the remittance basis of taxation to companies may be controversial in the current international tax climate. We note in this sense the recent competent authority agreement between Malta and Ireland concerning the tax residence of companies incorporated but managed and controlled in Malta (the so-called single-malt structures) within the context of the Multilateral Instrument (MLI), effectively ending the use of such structures.

Accordingly, some guidelines in respect of the application of the remittance basis of taxation with respect to legal entities in the context of the latest international tax developments would be welcome by the industry.

Dr Louella Grech

Dr Silvio Cilia

Louella Grech is a Senior Associate at Corrieri Cilia. She is a Maltese warranted lawyer and holds a Master of Arts degree in Financial Services (University of Malta), a certificate in Trust Law and Management together with a certificate in Taxation on Trusts, and a Diploma in Taxation (Malta Institute of Taxation).

Silvio Cilia is a founding partner at Corrieri Cilia, a boutique international tax and business law firm. Silvio holds an LL.D from the University of Malta and an Advanced LL.M from The International Tax Centre – Leiden University in the Netherlands. He also holds a certificate in Trust Law and Management with a certificate in Taxation on Trusts.

Louella specializes in corporate, international tax and financial services. She advises clients on international tax aspects and assists with corporate legal and regulatory matters.

Silvio is a specialist in international and indirect taxation. His areas of expertise include advising international corporate clients and high net worth individuals on Maltese and international taxation as well as Value Added Tax and Customs Law.

Louella is a member of the Chamber of Advocates (Malta), IFSP, the Malta Institute of Taxation and STEP.

Issue 1 - October 2019

Silvio is a member of IFA, IBA, AIJA the IFSP, the Chamber of Advocates of Malta and STEP.

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The von der Leyen Commission a quantum leap in the field of direct taxation?

1. Introduction The 16th of July of this year marked a pivotal moment for the future of the European Union as Ursula von der Leyen was marginally backed by the European Parliament to be elected as the next President of the European Commission.

The former German Defence Minister was proposed by the European Council on the 2nd of July following a deadlock in negotiations to appoint the head of the EU’s executive branch. Von der Leyen’s team of 26 Commissionersdesignate from each of the Member States (except the United Kingdom due to Brexit and Germany, being von der Leyen’s Member State) is set to enter office on the 1st of November of this year following public hearings in the Parliament to examine each Commissioner’s suitability between the 30th September and 8th October.

The European Commission’s role is that of promoting the general interest of the EU and taking the appropriate initiatives to accomplish this goal by ensuring the application of the EU Treaties, amongst others1. One of the main objectives of the EU has been the creation of an internal market between all 28 Member States. The EU’s internal market comprises an area without internal frontiers consisting of the free movement of goods, persons, services and capital2. Over the years, direct taxation has gained increasing relevance in the Commission’s resolve to eliminate the distortion of competition within the internal market by means of different instruments.

Whilst the Court of Justice of the European Union (‘CJEU’) has played an

2. The Commission’s role in the field of direct taxation The EU Treaties provide for different levels of competences to create EU law sources and the EU may only act within the limits of these competences set by the Treaties to attain the related objectives. This is known as the principle of conferral and is governed by the principles of subsidiarity and proportionality. Where the relevant area is not within its exclusive competence, the EU may only act where the action can be better achieved at EU level.

Furthermore, the content and form of EU action must not exceed what is necessary to achieve the objectives of the Treaties3. Taxation has long been synonymous with national sovereignty and one can even argue that direct taxation was not even envisaged as a barrier to free competition within the EU’s internal market due to the EU treaties’ silence in its regard.

However, one cannot dispute that the Commission’s role in the field of direct taxation has grown throughout the past years.

making in most EU policy areas, decision-making in the area of taxation is based on unanimity. On one side, QMV is reached where 55% of the Member States are in favour and where the proposed measure is approved by Member States representing 65% of the total EU population. On the other hand, unanimity gifts Member States an effective veto to block legislation which would disadvantage the particular Member State. In the Commission’s view, this is problematic due to the modern challenges facing the EU and the need to take efficient action which is being hindered by the lack of coordination in the area of taxation.

This move, albeit not surprising, seems to be fuelled by the EU’s inability to enact proposed legislation such as the Common Corporate Tax Base (‘CCTB’), the Common Consolidated Corporate Tax Base (‘CCCTB’) and the Financial Transaction Tax (‘FTT’). The current procedure entails a unanimous decision by the Council following a proposal from the Commission and consultation with the European Parliament. The proposal pushes for a move to QMV without any major changes to the EU competences in taxation or a shift towards complete harmonisation of taxation across Member States.

Earlier this year, the Commission issued a Communication to the European Parliament, the European Council and the Council of the European Union to promote a way forward towards more efficient and democratic decisionmaking in EU tax policy4. It is worth noting that whilst qualified majority voting (‘QMV’) is used for decision-

Generally speaking, EU taxation measures find their basis in Article 113 and 115 of the Treaty on the Functionality of the European Union (TFEU) by means of unanimity under a special legislative procedure. Article 115 is the provision dealing with the issuance of legislation directly affecting the establishment or functioning of the

important role in establishing a number of standards for direct taxation, this article focuses on the role being played by the Commission.

1 Treaty on European Union, Article 17.

2 Treaty on the Functioning of the European Union, Article 26 (2).

3 Treaty on European Union, Article 5.

4 ‘Towards a more efficient and democratic decision making in EU tax policy’, European Commission COM(2019) 8 final, 15.1.2019.

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by Ian Zahra

taxploration internal market. The treaties provide for other options such as enhanced cooperation procedure whereby at least 9 Member States agree to forge ahead with an initiative in a scenario where the chances of achieving unanimity seem bleak5.

The Communication elaborates on the current alternative options under the treaties and points out that Article 116 and Article 325 of the TFEU allow for the possibility of using QMV in the specific scenarios of failure to reach an agreement to eliminate distortion of competition in the internal market and the fight against fraud. It is noteworthy that to date, these provisions have not yet been applied in the field of direct taxation.

Due to the specific nature of these articles, the Commission proposes a move to QMV using “passerelle” clauses6. These clauses provide for flexibility by allowing the European Council to adopt a decision authorising the Council to act by QMV in an area where the treaties provide that the Council should act by unanimity.

Essentially, unanimity would still be required to put a “passerelle” clause into effect and Member States are yet to reach an agreement on the way forward in this regard.

3. The Juncker Commission Keeping in mind the current role of the Commission in the field of direct taxation and its limited powers, the outgoing Juncker Commission (201419) set out to achieve a number of goals affecting Member States’ taxation rights. Jean-Claude Juncker’s political guidelines in 2014 included efforts to combat tax evasion and tax fraud, the adoption of the CCCTB and a FTT as part of the work towards a deeper and fairer internal market7.

Although the Commission struggled to reach an agreement amongst all Member States on the CCCTB and the FTT, it did manage to successfully implement significant measures

including: • Increased administrative cooperation in direct taxation in the EU through various efficient exchange of information tools, • The implementation of recommended anti-base erosion and profit shifting (‘BEPS’) measures through the Anti-Tax Avoidance package (‘ATAD’), and • The investigation of a number of state aid practices by Member States resulting in the recovery of illegal state aid given to a number of multinationals.

4. The von der Leyen Commission Ursula von der Leyen’s political guidelines focus on 6 headline ambitions for Europe and direct taxation plays a vital role in the plans for an economy that works for people.

Von der Leyen aims at achieving fair taxation by highlighting a number of measures that are set to be high on the agenda over the next 5 years: • Focusing on the taxation of big tech companies by ensuring that the EU acts in the event that there is no global solution for a fair digital tax by the end of 2020, • Working on proposals to improve business taxation in the single market, • Yet another attempt at implementing the longstanding CCCTB, and • Increasing the fight against tax fraud and harmful tax regimes in third countries.

In addition, von der Leyen addresses the Juncker Commission’s Communication discussed in section 2 by proposing that the Commission will make use of the clauses in the treaties that allow for the adoption of taxation proposals by means of QMV in the Council, in an effort to make the Commission more efficient and equipped to act if required. This mantra was reiterated in von der Leyen’s mission letter to Paolo

5 Treaty on the Functioning of the European Union, Article 326-334.

6 Such as the following: Treaty on European Union, Article 48(7).

7 ‘A New Start for Europe: My Agenda for Jobs, Growth, Fairness and Democratic Change’, Jean-Claude Juncker, Strasbourg, 15 July 2014.

Issue 1 - October 2019

Gentiloni, the Italian Commissionerdesignate for the Economy on the 10th of September 2019. If successful, this move can prove to be the Commission’s most significant achievement in the field of direct taxation.

5. Conclusion The move towards QMV would result in a higher chance of edging towards a more harmonised European taxation system at the expense of individual state sovereignty. At a time where the future of the European Union lies at a crossroads, Ursula von der Leyen and her new Commission’s efforts may culminate in significant clashes with a number of Member States (in particular, the smallest members) who are adamant in their position due to the close link between taxation and national revenues, budgets and policy choices.

Ian Zahra Ian is a lawyer by profession and has a keen interest in international tax law.

Following the completion of his studies in law at the University of Malta, he recently graduated from the University of Leiden in the Netherlands, where he read an Advanced LL.M. in International Tax Law. He currently works as a Teaching Assistant at the International Tax Centre (ITC Leiden) and helps out with the teaching and training of new students.

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taxploration

Tax on Campus European Law Students’ Association

ELSA Malta (European Law Students’ Association) is a voluntary organisation run by students and for students and which forms part of a larger international network which is made up of more than 50,000 students represented through well over 450 law faculties all across and outside Europe; in 44 different countries. The core message that ELSA aims to get across is “A just world in which there is respect for human dignity and cultural diversity.“ ELSA Malta was founded in 1986 and is recognised as a student organisation by the Senate of the University of Malta. Thus, ELSA Malta’s main objective is the representation of all law students in the University of Malta.

Our organisation boasts various opportunities for students on campus. Throughout the scholastic year, ELSA Malta organises many different events for students of all ages to expand their legal knowledge about all different topics in the Law Course, with some events even being of good use to students of other faculties. This is mainly dealt with by our Seminars & Conferences section alongside our Academic Affairs section.

One of our most prominent events of the year includes ‘From Freshers to Lawyers’ during which law students will have the opportunity to interact with recently graduated lawyers to learn about their personal journeys from law students to lawyers and notaries.

On Wednesday 16th October, ELSA Malta hosted ‘How to Sessions | Session 1: Assignment Writing & Legal Research’ during which speakers shared several tips on how to conduct research and what sources may be of aid, as well as how to structure all the relevant information into a proper assignment.

In October, ELSA Malta will be hosting its annual live-in once again, ‘Inception | The Law Live-In’ which will feature a criminal theme that will be highlighted through both academic and social events.

Issue 1 - October 2019

Apart from this, ELSA Malta will also be organising their annual trip in November, which this time will be to Amsterdam. In November ELSA Malta shall be organising a Moot Court Competition based on GDPR Law. These are only a few of the upcoming events by ELSA Malta.

Apart from events, ELSA Malta also makes sure to publish a number of policy papers on various pertinent topics, and has its own publications such as ‘Project Jurisprudence’, the ‘ELSA Malta Law of Obligations Flashcards’ and the ‘ELSA Malta Law Review’. As an organisation, ELSA Malta strives to make each student’s university experience a much better one holistically and this is seen by the multitude of events, projects and initiatives taken on by ELSA Malta.

Moreover, ELSA offers a variety of international opportunities to law students such as international Moot Court Competitions, international Negotiating Competitions, ELSA Delegations, the Student Trainee Exchange Programme and various international publications such as the Legal Research Group and the ELSA Law Review, amongst others.

In relation to tax-related events and initiatives taken by ELSA Malta, towards the end of the scholastic year, ELSA Malta also hosts an annual series of Tax Seminars which cover the ‘Tax Law Fundamentals’, thus appealing to all students who wish to learn the basics, as well as serving as an excellent revision and learning opportunity for second year law students who would be sitting for the exam on Tax Law in June.

Moreover, ELSA Malta will be featuring a number of articles on tax implications arising from the digitalisation of our economy in newsletters. This coincides with our aim to inform students about ongoing legal discussions, and thus aids them to enhance their knowledge.

ELSA Malta can easily be contacted on website mt.elsa.org, on Facebook page or on Instagram.

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taxploration

GSHL’s PERSPECTIVE of Taxation and Tax Law Whilst calculating one’s tax may turn out to be an especially tedious scenario, many undermine the complication in understanding and mastering the local legislative tax framework. Working as a lawyer can sometimes be an ungrateful profession and when it comes to tax law, it’s even worse.

While most professionals in the legal field are not used to receiving thank-you-notes or gratitude on a regular basis, trying to explain tax law can sometimes be an intricate operation. On the one hand, the general population will hurriedly request professional advice as soon as they face a problem related to their personal or corporate tax structure; on the other hand, most people who would greatly benefit from being knowledgeable about the laws regulating our tax structure are deterred automatically as soon as complexities are touched upon.

It’s only recently that local law students began taking notice of our country’s tax system, thanks to the introduction of the subject as part of the compulsory law curriculum. Different Governments throughout the years have recognised Malta’s asset of using its taxation system as a tool to incentivise and attract foreign investment.

Malta’s taxation system, which includes a full-imputation system and a refundable tax system, reduces the combined overall effective tax rate otherwise applicable in respect of qualifying income or gains derived by a Malta company. As a member of the European Union, as well as a member of the Commonwealth, Malta has currently no less than 70 double tax treaties in force. This combination, among many other factors, ensure that Malta remains a favourable choice for many foreign entrepreneurs and investors when it comes to their tax planning.

Of course, there are clouds on the horizon: Earlier this year, former European Commission Vice-President Jyrki Katainen ruled out any concrete actions on tax harmonisation in the near future, stating that such a decision “must be based on the unanimous agreement amongst all member states, therefore chances of said measures coming into effect are really slim”. This has in no way, shape or form killed any progress in the sector. In fact, EU tax legislation has worked more on ensuring tax transparency, and to this end, multiple new legislative instruments have been created.

In her Political Guidelines for the following Commission, European Commission president-elect Ursula von der Leyen stated that “the EU and international corporate tax systems are in urgent need of reform… they are not fit for the realities of the modern global economy, and do not capture the new business models in the digital world.” von der Leyen has Issue 1 - October 2019

listed down among her top priorities the taxing of big tech companies, even going as far as suggesting “if by the end of 2020 there is still no global solution for a fair digital tax, the EU should act alone.”

With this in mind, a loud signal has been sent. While the piecemeal approach taken has resulted in significant progress (case in point: the digital services tax, as well as the work done with regards to the EU Financial Transaction Tax and a Common Corporate Tax Base) the road towards full harmonisation looks set to be filled with different trials and tribulations.

Such legislative changes however, have done little to dampen the fierce tax competition that currently exists between EU member states, even though said competition is exercised within the regulations stipulated by the EU legal acquis.

One must also recognise the fact that Foreign Direct Investment is not solely tax driven - in reality, other factors contribute, to varying extent: Political and economic stability, access to foreign markets, the climate found within the governing bodies, as well as the rest of the entrepreneurial community.

With all this in mind, further awareness on the subject is not necessarily important: it’s integral to many professions, least of all the legal one. GħSL has recognised the topsy-turvy future that both Malta, as well as the rest of the European Union, faces in the short, medium and long-term. While the organisation prides itself constantly in its academic output on different subjects, we as an organisation have realised that the time is ripe for a further examination.

GħSL’s yearly annual publication “Id-Dritt,” as well as its online counterpart, the GħSL Online Law Journal, have for years provided academics a space for the latest contributions, on various topics and legal matters. With the 30th Edition of “IdDritt” currently in the works, GħSL would like to extend an invite to all interested parties to submit their contributions on their topic of choice. With Taxation still forming a substantial part of the political and economic discourse at this highest echelons of the European Union, the time for academic contributions on this topic is nigh.

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The Importance of

by Ksenija Cipek and Sean Brizendine

All tax administrations have a huge amount of data they collect from various sources. Tax administrations are obliged to collect data for the purpose of determining taxpayers’ tax liabilities, planning tax audits, risk analysis etc, but also improving services to taxpayers.

A rule that the tax administration should not forget is that all data is collected for a specific purpose. Solely collecting and storing data for no specific purpose is not acceptable for a number of reasons.

DATA COLLECTION Different sources of data are used in collecting tax administration data. Also, the methods of data collection are different and regulated by laws and regulations.

Diagram 1: Sources of data

That rule must become the standard of every tax administration. The consequences of collecting and storing data include, among other things, unreasonable administrative burdens on taxpayers, huge, unnecessary costs for tax administrations, and unstructured and nontransparent data in storage.

In the data warehouse, the importance of data quality is of particular importance. If the data is not of good quality, the purpose of its collection is seriously jeopardized (trash in, trash out). Considering that tax information is collected from different sources, the system of input controls, in order to ensure the quality of the data, must also be of good quality and systematically built.

Managing and controlling of data is the next step to take into account. Tax administrations, as a rule, set up separate departments dealing with data management and control.

Particular attention should be paid to privacy protection when managing data. Within tax administrations, this is, as a rule, not crucial, given that information is available under authorization, to all officials, depending on their scope of work. However, data within tax administrations can be used in accordance with the laws and tasks of the institution, meaning that any breach of data privacy, a serious omission, is subject to sanctions. The system of internal risks must act in the direction of prevention of breach of data privacy by tax administration officials, and the system of internal controls should take concrete measures in accordance with the laws.

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International Tax Administrations and other Institutions

Data Scraping

Other Institutions (in the country)

Internal Data Tax Administrations DWH

Third Party Data

Other Future New Sources

Taxpayer Declarations

The largest amount of data will be collected from taxpayerreported data.

It is important to collect information from other institutions in the country that are relevant to tax administrations.

The rule that must be applied is that tax administrations, for taxation purposes, must collect data from other institutions, if those institutions have such data. It is not acceptable to request data from taxpayers (administrative burden and costs!) if the data is available to the institutions, and to do so requires online connection of institutions.

taxploration

The same is in the case of collecting or exchanging data from international tax authorities and institutions. Requesting information from taxpayers is only acceptable if the tax administration has no way to collect the data or the obligation to provide the data is solely from the taxpayer prescribed by law.

the system of input controls that is necessary to be set by the tax administration. The control system is very complex, depending on the legislative framework and all types of taxes and the mandatory contributions. These are hundreds of controls that are activated when data is entered, especially data from taxpayer declarations.

A large amount of data is also collected from other (international) tax administrations and other institutions, in accordance with European legislation, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and Double Tax Treaties. This is about exchange of information on request, spontaneous exchange, and automatic exchange of information.

Data Quality plays a crucial role in the success of a data warehouse.

A great source of data can also be data scraping. Data scraping is a technique in which a computer program extracts data from human-readable output coming from another program. Such information can be particularly valuable in detecting tax fraud.

Internal data does indeed have value, especially in risk analysis.

For example, data collected through audit procedures, internal control procedures, enforcement procedures .... is stored in the data warehouse and is used for taxpayer profiling by risk level.

Of course, there are always new sources of information, which the tax administrations should keep in mind and pay due attention to.

DATA QUALITY There must be quality data in the data warehouse. The quality of the data collected will depend, in the first place, on Issue 1 - October 2019

What do we want to achieve with the input controls? By ensuring the quality of the input data, the quality of the output is also ensured, which is especially important for taxpayers. Take pre-filing in the personal income tax system, for example. If the input data is not full quality, the taxpayer may receive a tax difference for payment or refund that is not accurately determined.

The input data must be: • in accordance with the facts of the (business) event relevant to taxation, as evidenced by the documentation • the data must be submitted as required by the tax administration’s online, IT solution • data must be provided in a timely manner in accordance with the regulations If the taxpayers do not submit the data in the manner prescribed by law and in accordance with the IT solution of the Tax Administration, the input controls will detect errors and the data will not be received in data warehouse but returned to the taxpayer for correction, with the always existing possibility of payment of penalties, in accordance with the regulations.

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POSSIBILITIES OF USING NEW TECHNOLOGIES: BLOCKCHAIN Tax administrations are part of the influence of new technologies that are developing within The Fourth Industrial Revolution. Their reactions and actions must be timely. The primary purposes of tax administration are to collect tax revenues in accordance with the laws, but also to service taxpayers. Taxpayers must, amongst other things, have a simple, fast, secure and cost-effective way of exchanging information with tax administrations and vice versa; tax administrations with taxpayers. In addition, in the same efficient way, tax administrations must ensure the exchange of data, in accordance with laws and international agreements, and with other institutions at national and international level, as well as internally.

USE OF DATA Data from the data warehouse is used for different purposes: • determination of taxpayers’ tax liabilities (such as tax advances, final tax liability or annual tax) • improvement of service to taxpayers (for example, insight into the state of tax liabilities) • risk analysis • predictive analysis • other Data quality is particularly useful for analyzing the degree of riskiness of taxpayers. Established tax risks through composite models effectively classify taxpayers as fully compliant, less compliant or high-risk taxpayers. Depending on the level of riskiness of the taxpayer, the tax administration has elaborated business processes. In the case of a highrisk taxpayer, the audit process can be started quickly and purposefully and the tax audit instrument is optimally used.

On the contrary, in the case of fully compliant taxpayers, the tax administration will determine tax liabilities or refund the tax, usually automatically, and optimally provide time for those taxpayers who are less compliant for various reasons (often due to a lack of understanding of complex tax regulations).

For predictive analysis data quality is also very important.

Predictive analysis based on the data collected can identify occurrences of taxpayer behavior even before the risk occurs.

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Blockchain means digital information (the “block”) stored in a public database (the “chain”). “Blocks” on the blockchain are made up of digital pieces of information. Specifically, they have three parts: 1. Blocks store information about transactions (date, time, amount etc) 2. Blocks store information about who is participating in transactions 3. Blocks store information that distinguishes them from other blocks. Each block stores a unique code called a “hash” that allows us to tell it apart from every other block.

While blockchain is not the cure all for the tax system, it could be applied in a number of areas to reduce the administrative burden and collect tax at a lower cost, helping to narrow the tax gap. Blockchain’s core attributes mean that it has significant potential for use in tax: • Transparency: blockchain provides provenance, traceability and transparency of transactions • Control: access to permissioned networks is restricted to identified users • Security: the digital ledger cannot be altered or tampered with once the data is entered. Fraud is less likely and easier to spot • Real-time information: when information is updated, it’s updated for everyone in the network at the same time

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Potential for Using Blockchain Technology Storing data on certain transaction (e.g., taxpayers, register of landowners, other property etc.)

Secure method for registering taxpayers and verifying the authenticity of taxpayers

Increase compliance

Other

VAT transactions

Ksenija Cipek Ksenija Cipek is an International Tax Expert, lawmaker, project Leader at Ministry of Finance in Croatia and studied at the Universisty of Zagreb.

Employment tax

Transfer pricing

Decrease tax fraud (especially VAT fraud)

INSTEAD OF CONCLUSIONS The quality of tax data is the basis of the work of tax administrations. In the digital evolution, the ways of collecting, controlling, and using them have changed, although the underlying purpose has remained the same.

New technologies allow tax administrations to be faster and more efficient. Blockchain becomes an integral part of the analysis of almost all tax administrations and is used in certain tax areas. Tax administrations have no choice but to keep up with the new digital age. Otherwise, their task and effective functioning will be significantly impaired. Without a quality data warehouse, every move is questionable, so this question is the basis for the quality work of tax administrations.

Issue 1 - October 2019

Sean Brizendine Sean Brizendine has over 8 years of experience researching bitcoin and blockchain technology. He was rated 5+ POD (Proof of Developer) by CryptoAsian in 2014 and is a Certified IIB Council Blockchain Professional & EC Council Online University Lecturer covering Blockchain in their Cyber Talk Webinar Series. He has been involved in over 50 Blockchain Related Projects over the years and Advised some of the most successful Token Sales in Blockchain history such as the historic $52 Million TraDove Project ICO.

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VAT

Quick Fixes

2020

by Saviour Bezzina

With effect from 1 January 2020 a number of adjustments to the EU VAT rules will come into force pertaining to the VAT treatment of EU Cross Border Trade in goods.

Such changes form part of the European Commission’s Action Plan on VAT are intended to be shortterm changes pending the introduction of a new VAT system.

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These are commonly referred to as the four VAT Quick Fixes and are intended to tackle the following four specific issues: • VAT Treatment of call-off stock • Mandatory valid VAT identification number to exempt Intra Community Supplies • Proof of transport to exempt Intra Community Supplies • Attribution of transport in Chain transactions 1. VAT Treatment of Call-Off Stock In terms of Article 17 of Council Directive 2006/112/EC European Vat Directive (EUVD) (transposed in the Maltese VAT Act Cap.406 of the Laws of Malta ‘VATA’ as Item 17 of the Second Schedule) the transfer of goods by a supplier from one EU Member State ‘MS’ to the warehouse/premises of a customer in another MS under ‘call-off stock’ arrangements triggers a deemed Intra Community Supply ‘ICS’ by the supplier in its own MS of dispatch and a deemed Intra Community Acquisition ‘ICA’ in the MS of arrival (in terms of Article 21 EUVD, Item 18 Schedule 2 VATA).

When the customer utilizes the goods of the call-off stock, the supplier would be considered to perform a domestic supply in the MS where goods are located (MS of arrival). In various MS this deemed ICA followed by the subsequent domestic sale triggers a VAT registration obligation for the supplier in the other MS. Currently, most EU MSs have VAT simplification arrangements allowing for call-off stock arrangements without requiring the supplier to VAT register in the MS of arrival of the goods. However, the application of the simplification arrangements differs throughout the EU. The VATA does not specify any such simplification provisions in a call-off stock scenarios and the Maltese VAT Registration scenarios would need to be discussed with the Maltese VAT authorities on a case by case basis depending on the details of each specific case.

The introduction of a new Article 17a to the EUVD is aimed at streamlining the VAT interpretation across the EU by specifically providing that the transfer of goods to a warehouse/premises of a customer in another MS (under a call-of stock arrangement) no longer qualify as a deemed ICS/ICA (for a maximum period of 12 months). Hence when the customer takes the goods out of the stock, the supplier makes an ICS to the customer. The supplier will have to declare the ICS (in his own MS of dispatch) in its VAT return and include the transaction in the respective Recapitulative Statement by indicating the customer in the other MS as the person acquiring the goods as well as the value of the goods.

In this way the supplier will avoid having to register for VAT purposes in the MS of arrival. This simplification measure will be subject to certain conditions including that the supplier and customer in question must keep a goods register that complies with specific conditions. Failure to comply with the stipulated conditions will automatically trigger a VAT Registration obligation for the supplier in the MS of arrival.

taxploration

2. Mandatory valid VAT identification number to exempt ICS A formal (not material) requirement for exempting an ICS is the customer’s valid VAT Identification number ‘ID No’. However, recent ECJ case law established the principle that a taxable person is only required to comply with the material conditions in order to exempt ICSs. Therefore, an ICS to a taxable person where the goods moved from one MS to another MS can qualify for the VAT exemption notwithstanding the fact that the supplier did not receive a valid VAT ID No from its customer. Under the amended wording of Article 138 EUVD which exempts ICSs, the obligation of the supplier to obtain a valid VAT number from this customer to exempt the ICS will start being regarded as a material requirement. It follows that if the supplier fails to include the customer’s VAT number on the exempt ICSs invoices and fails to include the said exempt ICS in the respective Recapitulative Statement (which necessitates the inclusion of the customer’s valid VAT ID No) the VAT exemption no longer applies. It would be interesting to see what amendments will be effected to the wording of Item 3 Part 1 Schedule 5 VATA (which transposes Article 138 EUVD) in view of the fact that the customer’s VAT ID No requirement is already included therein.

3. Proof of transport to exempt ICSs Apart from the customer’s valid VAT ID No, in order for an ICS to qualify for an exemption, the supplier must be in a position to provide evidence that the goods were dispatched from one MS to another MS. It is at the discretion of the respective MS of dispatch to determine the evidence that is required to prove that the goods were transported, which can lead to uncertainty/additional costs for businesses with EU crossborder trade. A new Article 45a to Council Implementing Regulation 282/2011 will be introduced wherein it will be presumed that goods were transported to another EU Member State if the supplier can provide at least two independent, noncontradictory documents evidencing the transport of the goods such as a bill of lading or an airfreight invoice.

4. Attribution of transport in Chain transactions EU cross border chain transactions entail situations where goods are supplied successively between various parties but dispatched/transported only once directly from the first supplier’s MS to the last customer’s MS in the chain (such as the triangulation simplification scenario). To date, the determination to which invoice this single transportation of goods is to be attributed was not specifically provided in the EUVD and was primarily based on case law established by the CJEU. Due to the lack of specific provisions, in situations where the middle party arranges for transportation, there still remains uncertainty and different interpretations between VAT authorities as to which supply the cross-border movement of the goods should be allocated to.

A new Article 36a to the EUVD will introduce a specific regulation for such chain transactions which will only deal with the scenario of a middle party in the chain arranging for the transportation (referred to as “intermediary operator”).

As a general rule, the transport shall be attributed only to the supply made to the intermediary operator (A to B).

As an exception to this general rule, the transport shall only be attributed to the supply of goods by the intermediary operator (B to C) where he (B) has communicated to his supplier the VAT identification number issued to him by the Member State from which the goods are dispatched or transported.

In view of the above, whilst awaiting the transposition of these amendments in the local VAT legislation/guidelines, taxable persons involved in EU cross border trade in goods should establish the respective implications on the VAT treatment of the transactions they are involved in, in order to make sure that they are compliant with the new obligations/provisions, and identify any opportunities that might be created by such quick fixes.

Saviour Bezzina Saviour Bezzina is a Senior Manager responsible for indirect tax matters at the EY Malta office and forms part of EY’s Global Indirect Tax Network as a local knowledge contact.

He joined EY in July 2006 after obtaining the Bachelor of Accountancy (Hons.) from the University of Malta. He is a member of the Malta Institute of Accountants, holds a Diploma in VAT compliance and lectures regularly on VAT and indirect tax matters.

Issue 1 - October 2019

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BEPS and the new Patent Box Regime Preferential Intellectual Property (IP) regimes have been considered as potentially facilitating base erosion and profit shifting (BEPS) thus unfairly impacting the tax base of other jurisdictions. In the light of this, the OECD BEPS Action 5 Report placed an emphasis on the requirement of substantial activity for any preferential regime in the form of the “nexus approach”. In line with the principles underpinning the BEPS project, the nexus approach requires a link between the income benefiting from the IP regime in a particular jurisdiction and the extent to which the taxpayer has undertaken the underlying Research and Development (R&D) that generated the IP asset in that same jurisdiction. In other words, the nexus approach allows taxpayers to benefit from an IP regime where they can show that expenditure which gave rise to the IP income was incurred in that jurisdiction.

Although Malta is not a member of the OECD, it is against this backdrop that the recent patent box legislation introduced in Malta by virtue of the Patent Box Regime (Deduction) Rules, 2019, Legal Notice 208 of 2019 (the ‘Rules’) must be viewed. The Rules have been drafted so as to be compliant with the OECD Modified Nexus Approach for IP Regimes and have been confirmed to be so following the review of preferential tax regimes in connection with BEPS Action 5 by the OECD Forum on Harmful Tax Practices (FHTP).

The Rules lay down the terms and conditions under which taxpayers may claim a deduction against their chargeable income amounting to a percentage of “qualifying income” derived from “qualifying intellectual property”.

Qualifying IP Qualifying IP is defined in the Rules as: a. Patent(s) whether issued or applied for, excluding ab initio pending patents which have been applied for but which are eventually rejected; or b. Assets in respect of which protection rights are granted in terms of national, European or international legislation, utility models or software protected by copyright under national or international legislation; or c. With respect to a small entity (as defined), other IP assets which are non-obvious, useful, novel and having features similar to those of patents, to the satisfaction of Malta Enterprise.

Provided that, marketing-related intellectual property assets including brands, trademarks and trade-names shall not be deemed to constitute qualifying IP. Qualifying income Qualifying income includes income derived from the use, enjoyment and employment of the qualifying IP, royalties as well as other ancillary income.

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by Michelle de Maria and Dr Timothy Zammit

Entitlement to the Deduction The person claiming the deduction (“beneficiary”) shall be entitled to receive the deduction where the following conditions are cumulatively satisfied: a. the research, planning, processing, experimenting, testing, devising, designing, development or similar activity leading to the creation, development, improvement or protection of the qualifying IP, shall be carried out wholly or in part by the beneficiary, solely or together with any other person or persons or in terms of cost sharing arrangements with other persons, whether these are resident in Malta or otherwise: b. the beneficiary owns the qualifying IP or is the holder of an exclusive license in respect of the qualifying IP. c. the qualifying IP is granted legal protection in at least one jurisdiction; d. the beneficiary maintains sufficient substance in terms of physical presence, personnel, assets or other relevant indicators, as is commensurate with the type and extent of activity being carried out in Malta in respect of the qualifying IP; e. where the beneficiary is a body of persons, such beneficiary is specifically empowered to receive such income; and f. the beneficiary requests the Patent Box Regime deduction in computing his income or gains in his tax return; a.

Provided that a reversal through an adjustment in the tax return shall be made of any benefit obtained under these rules, where the benefit was granted in respect of a patent the application of which was still pending and such application was subsequently rejected.

The deduction is calculated by reference to a prescribed formula as follows where qualifying expenditure refers to expenditure predominantly related to the creation and development of the qualifying IP: Qualifying expenditure x Income or gains derived from qualifying IP

95% x

Total IP Expenditure

This regime is particularly attractive to entrepreneurs and businesses involved in the development of income generating intellectual property and is set to increase Malta’s competitiveness as an IP jurisdiction whilst at the same time encouraging activities which genuinely create value to be carried out in Malta.

Dr Timothy Zammit Partner - Tax & Corporate RSM Malta, Mdina Road, Zebbug, ZBG9015. Malta.

Tel: +356 2278 7000 | Web: www.rsm.com.mt

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