Author: George Mangion
Published on The Malta Independent 15 September 2020

Ever since the launch of BEPS legislation, Malta has complied with all the changes introduced by such rules.

As regards transfer pricing rules pertaining to OECD guidelines there is no such legislation, as yet in Maltese law. Needless to say, we are not completely shielded from this rule because in accordance with Article 5(6) of the ITMA this gives the discretion to the Commissioner to determine the transfer price following the OECD guidelines. One finds reference to transfer pricing (TP) in the published Patent Box Regime (Deduction) Rules, 2019.

Here, there is a specific reference made to the fact that the determination of income or gains shall be made on the basis of a transfer pricing method in terms of OECD’s Transfer Pricing Guidelines. Baring this, taxpayers have so far been spared the rigours of transfer pricing exercises even though there are embedded in the law, general anti-avoidance provisions and brief references to transactions at arm’s length.

There is an unwritten rule that regulates transactions between residents and non-residents which as stated earlier must adhere to the arm’s-length principle. This means that prices quoted between parties ought to reflect the commercial rates usually charged by non-related parties. Having said that, so far there are no fixed rules to establish how such prices can be determined.

In this regard, the law provides that for the purposes of calculating the tax liability of a taxpayer, an arrangement or a series of arrangements can be ignored where it has been put into place for the main purpose of one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law.

One needs to assess whether prices are genuine having regard to all relevant facts and circumstances. The spirit of the law that regulates transfer pricing under OECD rules is therefore somewhat mimicked in our legislation. Effectively, it argues that any arrangement can be regarded as non-genuine to the extent that it is not put into place for valid commercial reasons that reflect economic reality.

In addition, it can be argued that Malta has indirectly introduced TP rules by adhering to international conventions and relevant EU directives and in particular in the following considering that Malta’s double tax treaties use the OECD Model Tax Convention.  Therefore, Article 9 “Associated Enterprises” of the OECD Model Tax Convention is included in Malta’s double tax treaties.

This article provides that any transactions between associated enterprises that are not at arm’s length shall be adjusted for tax purposes in accordance with the ALP. Reading of the Commentary of OECD this refers to the application of the ALP through the OECD TP Guidelines. Further, the majority of the countries following the ALP use as means of application and interpretation of ALP, the provisions of the OECD TP Guidelines. Moving on to other related rules, let us give some background on the journey that took us to adopt ATAD.

It was on 12 July 2016 that the Council of the EU unanimously adopted the Council Directive. Later, Malta transposed ATAD 2, which builds on the provisions of ATAD 1.  Another important rule requires Malta to apply the arm’s length principle in cross-border transfer pricing issues. This can be found in the Associated Enterprises Article of the OECD Model Tax Convention, which Malta accepted in its double taxation treaties.

One may venture to comment on how indirectly transfer pricing rules creep in our legislation. A typical case is the right of a country that is a party to a tax treaty to adjust the taxable profits arising from transactions between related parties and binds the other country to make corresponding adjustments to avoid double taxation. Here comes the rub. Such adjustments must be made on the basis of the arm’s length principle that again refers us back to the OECD standard.

The latter regulates how transfer prices for tax purposes can be computed. As can be imagined, in similar circumstances there may arise disputes in the interpretation of how such prices are determined. In such instances, OECD rules allow for disputes to be referred to arbitration.

This follows in terms of the EU Arbitration Convention, of which Malta is a party. Another remedy is provided by the Directive on Dispute Resolution Mechanism – this was transposed to Maltese law this year. As can be expected, Malta has, so far, not been subjected to such dispute resolution since transfer pricing rules are not applicable.

For most member states, such disputes can be common and arise when exercises are carried by respective countries to ascertain the arm’s-length, that is, the true commercial price. In practice, this means that to prevent double taxation, a primary (upward) adjustment by one tax administration should be followed by a corresponding (downward) adjustment by the other.

Needless to say, no administration takes lightly to a reduction of its tax base. This said it is clear that in the field of transfer pricing, a sincere form of collaboration is paramount. Therefore, it would be expedient to recognise that it is in everyone’s interest to avoid double taxation and double non-taxation hence the reason to invoke the arm’s length principle. To assist in reaching consensus, OECD highly recommends for parties to agree to a joint audit.  The findings of such an audit should be incorporated in a concluding report.

To the extent possible, tax administrations should endeavour to arrive at a common interpretation of how the arm’s length principle applies to the findings of a specific audit based on a scientific analysis of all the facts and circumstances. Such an agreed outcome would give an undertaking that the audit does not result in double taxation. Only thus, can tax authorities reach a common understanding of how a true and fair arm’s length exercise works?

In conclusion, one may relax that the full burden of transfer pricing rules is not yet activated in Malta. How such rules will affect Malta and its financial sector in the future is too early to assess.  What is important is that practitioners avoid taking a head in the sand attitude. There is nothing to halt the introduction of an all-embracing transfer pricing rule which will be applicable to local companies as duly recommended by OECD.

Author: George Mangion
Published on The Malta Independent 15 September 2020
Get in touch: info@pkfmalta.com

Author: George Mangion
Published on The Malta Independent 9 September 2020

The European Union’s chief Brexit negotiator Michel Barnier said he is “disappointed” by the lack of progress and warned that an agreement with the UK before the end of the year “seems unlikely”.  Barnier’s British counterpart, David Frost, described the latest talks as “useful” but also flagged that “there has been little progress”.

Barnier told reporters last month that after the discussions with the UK ended “too often this week it felt as if we were going backwards more than forward”.  What can this mean for the UK, now faced with a 20% drop in GDP and signals of a start of a recession? This is obviously the cause of the lockdown while health authorities are battling the consequences of infections, amid even strict orders for citizens to maintain social distancing.

Measures were taken not only to protect the health of most vulnerable communities but also their quality of life more broadly, including their financial security, mental health, access to resources and social relationships. Even so, the economic and social disruption is clearly visible.

The streets of London, so ever fully populated by Londoners and tourists alive, are now bare and gloomy. This unexpected calamity has exasperated the double whammy of a recession combined with a near possibility of a deal Brexit.

Brexit will undoubtedly bring long-term systemic changes to the UK economy, politics and society, and there continues to be uncertainty about how leaving the EU might affect the lives of the UK’s inhabitants. It is a daunting thought that a government document outlining “reasonable worst-case assumptions” in the event of such a no-deal Brexit, has warned of rising food and fuel prices, disruption to medicine supplies and public disorder.

The UK would have to apply tariffs and quotas to goods coming into the country from the EU and the EU would apply its “third- country” tariffs and quotas to the UK. That means the UK would be hit by big taxes when it tried to sell products to the EU market. The bloc’s average WTO tariffs are 11.1% for agricultural goods, 15.7% for animal products and 35.4% for dairy. The prospect of a trade deal between the UK and the EU in time for the end of the transition period is becoming increasingly unlikely following a stalemate between negotiators. Government sources now believe that no such trade deal will come to fruition and the UK will begin trading on the WTO come midnight on 31 December.

The concern seems to be that the economic costs of abruptly withdrawing from the European Union without a trade deal might be buried by Boris Johnson beneath the damage wreaked by the Coronavirus. Can this strategy be reversed and normality maintained since it goes without saying that vulnerable groups will be affected?

Undoubtedly, there will be unintended consequences. The poisoned cocktail of Brexit and the Coronavirus in the UK will probably badly affect the lower working classes and the disadvantaged, albeit to a different extent. Indeed, Brexit without a trade deal is likely to exacerbate some of the deleterious effects of the virus. It can be argued that leaving the EU without a deal will make it more difficult to fight the pandemic.

The UK left the EU at the end of January and is now being excluded from EU decision-making and any collective support packages, for instance, the EU’s Coronavirus Response Investment Initiative on the pandemic. The British government has stated that it does not plan to take the option to extend the transition period by up to two years. One cannot but lament the loss of some EU nationals working in the health and social care sector since Brexit, at a time when they are most needed. Readers may ask why is there so much fuss about the UK leaving without a deal?

For a start, the consequences of an economic divorce will most probably leave some disadvantaged people with less financial and social resilience, therefore more vulnerable to both Brexit and the Coronavirus. The European Union’s chief negotiator Barnier said progress in four areas of discussion had been “disappointing” while a British statement said, “limited progress was made in bridging the gaps between us and the EU”.  One can never be fooled that having four months till the end of the year is sufficient time to reach a trade deal on complex issues which took over 40 years in the making.

To be realistic, it is pushing it when Boris Johnson reiterates that there will be no extension beyond the end of the year. There are complex matters to be negotiated starting on the critical issues of aviation to fisheries, new customs posts at the border and a new immigration system. As stated earlier, this could result in higher prices, border backlogs and delays, and even shortages of staples, such as food and medicine. When the prospect of a no-deal arose last year, some British companies and citizens began stockpiling goods.

Thankfully, one major hurdle was solved that in case of a no-deal, this will not lead to a so-called hard border between Northern Ireland and the Republic of Ireland, but rather to customs checks on goods traversing the Irish Sea. Last year saw several international firms which shifted their investments from the UK to elsewhere in the EU.

Aerospace giant Airbus is a prominent example, pointing towards a policy of directing funds and jobs away from the UK if there is no trade deal. Such moves could put tens of thousands of British jobs at risk. Without sounding partisan to the EU’s interest, yet one must admit that London’s role as a world finance leader could also be in jeopardy. Previously, as a full EU member, one notes that the UK’s financial services provided 11% of tax revenue; 44% of exports go to the EU. If the majority of economic forecasts are correct and the UK’s economy suffers post a no-deal Brexit, the negative effect will impact all those groups represented in the low-income bracket (that is, ethnic minorities, the disabled, refugees and asylum seekers and people considered precarious workers) who rely more on public services and benefits and have less disposable income and spending power.

One augurs that Boris Johnson takes the bull by the horns and prioritises the immediate damages inflicted by the pandemic and in a pragmatic manner seeks an extension so that the UK is adequately positioned to resolve the tangled web of a hard Brexit.

Author: George Mangion
Published on The Malta Independent 9 September 2020
Get in touch: info@pkfmalta.com

Author: George Mangion
Published on The Malta Independent 11 August 2020

A recent meeting with the Prime Minister by the Chamber of Commerce discussed the best recovery plan post COVID − this has revealed interesting topics. One of the topics advocates a fiscal remedy. It was suggested by the Chamber to lower VAT on travel and hospitality services. At present, the VAT rate of 18% can be reduced to 7% and the wage subsidy retained until a COVID-19 vaccine is found.

This major recommendation (costing millions) was the fruit of a consultation exercise carried among the members of an elite industry think tank. Obviously, there were other recommendations forming part of a wide-ranging document drawn up to map out an economic strategy in the wake of the COVID-19 pandemic.

Such a bold fiscal measure is not a unique one, since both Germany and the UK have already introduced lower VAT rates at 5%. There were other interesting proposals such as the regeneration of depleted areas in towns and villages, incentives for digital smart manufacturing, and the creation of a rapid mass transit system.

This document kicks in a stark reminder to the government that an immediate reduction in the cost of living could be the antidote for a revival of a subdued “feel-good factor”. There are many other recommendations, but in my opinion, the stabilisation of the demand lost due to COVID-19 lockdowns and a severe drop in tourism needs to be given top priority.

The recent issue of free cash vouchers (some are still to be collected) was but a knee jerk tactic. It gives lower-income workers a chance for a couple of free meals but will not necessarily guarantee a permanent solution to restaurants, hotels, and the travel sector, which are facing low occupancy.

It is a smart solution to achieve parity in VAT rates, reducing them to match those charged in other Med. countries. Really and truly, there exists sclerosis in the system that so far has blinded operators not to take up arms and protest that they are being charged a higher rate of VAT than similar businesses in other EU countries, which compete to attract quality tourists.

The writer fully concurs with the lowering of tax since this smart initiative is one which, if well supervised (by linking all cash registers to a central unit), can boost demand. One acknowledges that sections of this industry are known to under-declare VAT returns in an effort to meet increasing overheads and fierce competition from foreign packaged tour operator rates. This anomaly is not being tackled and perhaps is pushing operators to indulge in tax evasion, possibly trade in the black economy to mitigate losses arising from steady cost escalation in catering products, mainly food, drinks, and rents.

Conversely, there is a silent majority which says that it is better not to rock the boat − let sleeping dogs lie, don’t push for a tax reduction. This ostrich-like attitude is dangerous. Some fear we spent millions in the first wave only to have to dig deeper in our pockets, top-up more debt − should God forbid a severe second wave hits us this autumn.

Therefore, it is not rocket science to argue that in order to attract more tourists and help the hospitality and restaurant sector, an island-wide embellishment road map plus a drop in VAT is essential. This concept has been wholeheartedly accepted by Germany, a country which in the past always refused to give any fiscal incentives even during the peak of the last global financial crisis but now deeply feels that palliatives won’t work.

The latest MHRA studies show a dismal low occupancy rate and some hotel owners are mulling over the idea to close for this year and reopen for business next Easter. This, therefore, calls for added state aid to furlong idle workers. Critics have repeatedly turned down the merits of reducing tax.

They say (and not without merit) that a reduction indirect taxes will go straight to the pockets of owners as in practice, they will never reduce the menu or travel prices. This may be true and studies in Ireland have proved that without adequate surveillance (a familiar local trait) consumers saw a little drop in prices. It goes without saying that poor compliance and surveillance on the sector by the fiscal authorities does scupper the desired advantages of lowering direct taxes.

Therefore, the situation creates a dichotomy – those who appeal for reform in taxation to lower the cost of living and enhance demand against those who prefer the status quo − by continuing to abuse the system. It is estimated that unrecovered tax revenue is substantial. In the past, the finance minister had admitted that abuse exists. He is reported to have exclaimed, “this is a continuous struggle. Abuse can be limited, but never eliminated. What we need to do is address the black economy and treat it as a beast on its own. It creates unfair competition and loss of revenue”.

The writer advocates a number of smart initiatives as recommended by the Chamber of Commerce to achieve a level playing field. One acknowledges that the travel and hospitality industry is known to suffer from low profitability on capital employed and high risks faced.

They habitually fight to meet increasing levels of overheads, reduction of tables due to COVID rules and fierce competition from cheaper destinations. The problem is not being solved by simply opening all the ports (done on 15 July) and trying instant schemes by MTA to attract masses. This in practice includes paid international adverts to lure low-paying youths to join us in three-day pool parties of deafening techno music, a vodka fest, and love.

These gatherings helped increase the number of infections which at the time of writing exceed the numbers registered at the peak of the first lockdown. The energetic tourism minister acts nonchalantly to protests from doctor, nurses, social organisations and other unions which demand a complete ban over such mass gatherings, as logically youths dancing in pools cannot easily maintain a social distance or wear protective face masks!

Authorities changed tack and issued new guidelines against Ibiza-styled mass gatherings. Naturally, there is a strong argument that jobs need to be protected and the ministry of tourism was advised that taking a measured risk to attract foreigners for mass pleasure events (currently banned from other countries) is a money-churning opportunity; too good to be ignored. Such a short-sighted attitude exacerbates the dire long-term health risks inflicted on the community and leverages the cost of medical care.

Author: George Mangion
Published on The Malta Independent 11 August 2020
Get in touch: info@pkfmalta.com

Author: Jurgen Dalli – Junior Legal Associate, PKF Malta
Published on Malta Chamber of Commerce Blog – 15^th July 2020

Foreign Direct Investment or better known as FDI basically comprises an investment affected by either a legal or a natural person in one jurisdiction into corporate interests situated offshore. Mostly, this occurs when an investor sets up operations offshore or acquires foreign assets in a foreign entity. Nonetheless, FDIs are not to be treated as portfolio investments since in the latter the investor only acquires equities.

Author: George Mangion
Published on Malta Independent 7 July 2020

Pre-COVID, the island was basking in the glow of an artificial sense of hedonistic living. This made us believe that the party will never stop – but it did with the discovery last December of a lethal virus in Hubei China.

This week marked the long-awaited opening of the airport and seaports with a trickle of tourists arriving to join us in the land of milk and honey. Gone are the days when the low-cost airlines attracted millions of budget tourists (mainly accommodated in Airbnb units) who roam our streets and tour the concrete jungle adorned by tower cranes that reach out like mechanical monsters clanging their way delivering building materials. Nostalgically, we all remember how the dream of having an upper-class tourist resort never materialised yet tourism secured us a multiplier effect that gently percolated in the lower echelons of the economy.

Historically, some may remember how it all started in the 1960s when the island was facing British services rundown and the ex-colony was trying to build up an alternative source of income to sustain jobs. The government was advised to incentivise local entrepreneurs to risk their capital and build a welcoming tourist infrastructure by way of hotels, restaurants and beach amenities.

To this end, millions were poured into improving access to scenic spots such as beaches, places of interest and historical monuments. Various incentives were granted by the government to budding hoteliers, starting with granting of seafront sites at fire-sale prices, 10-year tax holidays and training grants for catering staff. Banks were also pulling their weight and gingerly took the risk to fund projects connected with the industry. This sector reached a consolidating point with the setting up of a national airline in the early 1970s.

Advertising helped to place Malta on the destination map for sun, sand and sea where beer is cheap and public transport on rickety “boneshakers” buses (quaintly painted in rainbow colours according to destination) attracted the British tourist in droves. Then, food and drink were cheap and the Mediterranean was being discovered by the masses which booked their place in the sun for bargain holiday resorts in places such as Spain, Cyprus, Greece and Malta. Back to Malta, the hotel lobby grew strong and influenced public opinion towards endearing the sector.

The gradual rise in job openings in hotels and restaurants over the past 50 years contributed significantly to attract vacancies for part-timers. Politicians hailed the way; the sector started reducing the unemployment queues and generated direct and indirect benefits to the economy. Bella Malta was the slogan that contributed handsomely to help balance the annual budgets (mostly in deficit) and give a multiplier effect to ancillary sectors involved in the importation, transportation, travel agents, agriculture and fisheries.

All lauded the milk cow even though tourism is a volatile industry and wages on offer are not stellar. Having spent decades trying to attract tourists, the Malta Tourist Agency is now surreptitiously compensating low-cost airlines when they develop new markets and niches. The idea was hatched to create a fund aimed to improve beaches, roads and other public amenities; a nominal day tax per tourist is levied on all arrivals.

It comes as no surprise that the World Travel and Tourism Council, proudly remarks on how tourism directly accounts for nearly 3% of the world’s GDP. McKinsey, a consultancy, reckons that one in five new jobs is generated by tourism. As a general rule, whereas the manufacturing sector employs relatively fewer people, tourism employs legions. There are side benefits, since policies designed to attract tourists, such as quality inspections on hotels and restaurants, improving general health and safety standards, also lure foreign investors.

The fly in the ointment is overcrowding. This brings hidden health costs, which are borne by local residents. Look around you and you will see that in the summer months, pavements, roads and cycle lanes are clogged. Armchair critics warn us that we should upgrade the sector to attract more upmarket tourists and stop subsidising low-cost arrivals which prefer booking Airbnb for cheaper accommodation. Quoting the NSO, one observes that arrivals for the whole of 2018 rose by 14.3% to reach nearly 2.6 million while total expenditure per capita stood at €809, a decrease of 5.5% when compared to 2017. Employment in food and beverage service activities based on 2016, showed 5,902 full-timers with over 7,000 low paid (mostly non-EU) part-timers. Restaurants saw an average spend per tourist of a mere €104 (our VAT rate on food and drink is almost double that charged by neighbouring countries).

Now after four months of COVID lockdown with zero visitors, one had hoped that no effort is spared to mend broken pavements, fill potholes and enlarge sandy beaches. Quoting, the president of the Malta Hotels and Restaurants Association, Tony Zahra he emphasised the need to turn Malta into a destination built on quality and not just numbers. This seems like the panacea that over the years has eluded us. We all enjoyed better air quality during the lockdown but alas gradually unless electric buses/cars are in circulation, we shall see a marked deterioration as 700,000 visitors are anticipated in the next four months.

Tourists fan the appetite for more luxury hotels being built or extended and this results in the island looking more like an open construction site. We need to ask ourselves, can we expect high-quality tourists when there are obtrusive tower cranes and unsightly debris in tourist zones?

In pre-COVID days, we forecasted an increase to three million visitors ushering in more carcinogenic fumes, cruise liners sludging the Grand Harbour and aircraft noise. Europe has witnessed CO2 emissions, which increased by about 80% between 1990 and 2014, and it is forecast to grow by a further 45% between 2014 and 2035. Needless to say, NOX emissions have doubled between 1990 and 2014 and are forecast to grow by a further 43% between 2014 and 2035.

Will the tiny island be spared this poisoned chalice? Can the MTA plan a five-year policy to regulate the market possibly reversing the damage to the environment by going for quality rather than quantity? One waits and hopes for new directions from the young minister of tourism.

Author: George Mangion
Published on Malta Independent 7 July 2020
Get in touch: info@pkfmalta.com