Author: George Mangion
Published on Malta Today, 14 July 2016
Due to Brexit, so far nobody has taken the lead to address mounting social inequalities and offer relief for emotions other than threats, anger and fear.
The Guardian reported the FTSE 100 index rallying after Theresa May emerged as successor to David Cameron, providing a further boost to surging equity. A bull market seems to be slowly gathering pace as listed companies gained more than 20% since their fall at the start of the year. More positive news is the possibility of a small cut in interest rates by the Bank of England to smoothen a Brexit crisis as it took steps to release up to £150bn worth of lending to households and businesses by relaxing regulatory requirements on the banking sector.
Sadly, sterling has hit a 31 year low and exports will benefit. The governor of the Bank of England remarked the UK has entered a period of uncertainty and significant economic adjustment. The governor was speaking as George Osborne, the chancellor of the exchequer, met with the heads of major banks; in a joint statement with the chancellor the banks agreed to keep lending.
“While we are realistic about the economic challenge facing the country after the referendum result, we are reassured that collectively we can rise to it.” Commentators said that “during a prolonged period of heightened uncertainty there is a risk that overseas investors could continue to be deterred from investing in the United Kingdom”.
So far nobody has taken the lead to address mounting social inequalities and offer relief for emotions other than threats, anger and fear. These symptoms make parts of the population feel like scapegoats – blamed for Brexit detritus. According to Prof. Ruth Wodak, author of The Politics of Fear, and a specialist in linguistics and national identity, he notices signs of intolerance, xenophobia and discrimination. Quoting Paul Johnson, director of the Institute for Fiscal Studies, he said that having voted for Brexit, the economy is clearly going to go into a down swing, that might be a full-blown recession, or at best just very, very low growth.
In the meantime, the chancellor of exchequer is planning to slash corporation tax to less than 15 per cent in an effort to attract business, deterred from investing in Britain, as part of his new five-point plan to replace the doom and gloom of Brexit. This move makes Britain more competitive with Ireland, which charges 12.5%, and Malta, 35%. It is a brave move which places Malta at a disadvantage, having its own corporation tax set at 35% and of course there may be tweaking of Vat rules in the near future that will exempt any financial services business relocating to Britain.
Mr Osborne lost no time to regain some political popularity after the Brexit result, saying Britain is to become a super competitive economy with low business taxes and a global focus. This is a clarion call for local practitioners headed by their national association IFSP to start clearing the decks of our own arcane tax code. A tough task for Hon Charles Mangion as chairman of the Think Tank which plots the course for the sector. The committee members in IFSP were reported in the media and on national TV to have recently discussed the future of financial services sector with leader of the Opposition who in turn expressed his opinion that the industry is facing difficult times. Back to Britain, Osborne wants to take this gamble sensing that already investors are flowing out from the UK, and he wants to provide them with some sort of premium that would make them think twice before they leave the United Kingdom. A tax rate below 15% makes the UK the lowest corporation tax of any major economy. Equally helpful will be a move by the Bank of England to lower the amount of capital banks have to hold in case of unexpected risks. This may encourage foreign banks like HSBC, Wells Fargo and others like JP Morgan Chase to rethink their announcement of staff layoffs.
Cynics said that it was “not constructive” to be “offering up Britain as a tax haven” to Europe as Panama Lite (without its two major canals) in the heart of Europe. Obviously there will have to be higher direct taxes to balance any shortfall in the medium term.
Can Malta rest on its laurels and wait for the exodus of gaming companies and pharmaceutical factories which would possibly use Malta only as a holding company. It is a dichotomy that the tourism industry is feeling snug, claiming that contracts for this season at fixed euro/sterling prices were signed last year with major tour operators but what will be the situation next year once sterling devaluates? One of the suggestions is for Malta to offer smarter tax incentives. Let us jettison the archaic refund mechanism which is historically linked to the umbilical cord of a full imputation system now found only in Malta.
The oblique method of reducing tax from a high of 35% to 5% is available to investors only after registering taxable profits and paying a full 35% tax. Later they may claim a refund of 6/7ths triggered when profits are distributed. Pressure is mounting from BEPs that the refund is to be further taxed in the country of the ultimate shareholder. With a coterie of flat tax regulations Malta can bravely do as Britain is doing and reduce its corporate tax below 12.5%. It is pertinent to mention some instances of flat tax levelled at 15% on certain category of non-domiciled residents on income remitted to Malta and on bank interest.
• Any realized capital gain on the transfer of immovable property situated in Malta is subject to a final tax ranging from 2% to 10% of the transfer value;
• Any realized capital gain arising outside of Malta falls outside the scope of Malta income tax in view of non-Malta domicile of individual and irrespective of whether remitted to Malta or not. Our present hybrid system of high corporate tax on taxable gains is allocated to any of five distinct accounts (subject to a possibility of refunds) and it resides alongside a subset of flat tax regime.
All this is the result of a cacophony of amendments passed during the past 25 years, which has made understanding our tax code not an easy read for any investor. Some are advocating emulating the success of Estonia’s flat tax system, hailed to be the most transparent in Europe. Some of its advantages include:
• Estonian resident companies do not pay tax on their profits until they are distributed to shareholders.
• There is no separate capital gains tax. Gains derived by resident companies or branches of foreign companies are exempt until a distribution is made.
• Foreign tax is mostly relieved by exemption by virtue of the provisions of the double tax agreements with most overseas jurisdictions.
• Withholding taxes applies only to interest, royalties and dividends paid to non-resident corporate shareholders. However, withholding tax only applies to interest to the extent that it exceeds the open market rate.
• Income tax applies to individuals at a single, flat rate and corporate tax is not levied when the company makes profits but when those profits are distributed to the company’s shareholders. The rate is 20% on the gross profits distributed or 20/80 on the net amount of the dividend distributed to the shareholders.
Author: George Mangion
Published on Malta Today, 14 July 2016
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