The European Commission’s intention to crack down on so-called letterbox companies set up in tax-friendly jurisdictions used by companies to avoid taxation in their home countries could potentially spell trouble for Malta.

The European Commission recently unveiled proposals aimed at closing a loophole that allows companies to cut their tax bill by using subsidiaries in other EU member states.

The Commission wants rules to prevent companies setting up “letter-box subsidiaries” in countries solely to qualify for a softer tax regime and cut their bill, a situation that the Maltese company registry is all too familiar with.

For example, companies like energy giant Npower have dodged paying up to £108 million in UK corporation tax by posting a loss in the UK, and instead shifting its profits to a subsidiary company in Malta. And Australia’s Commonwealth Bank had used a back-office firm in Malta, Commbank Europe Limited, to save several millions in taxes.

Algirdas Šemeta, the EU’s taxation commissioner, wants to insert an anti-abuse clause by the end of next year, allowing authorities to target artificial ‘parent-subsidiary’ schemes that flout the spirit of the tax code.

The Parent-Subsidiary Directive was originally conceived to prevent same-group companies, based in different member states, from being taxed twice on the same income. However, certain companies have exploited provisions in the Directive and mismatches between national tax rules to avoid being taxed in any member state at all (double non-taxation). The Commission’s proposal aims to close these loopholes.

“When our rules are abused to avoid paying any tax at all, then we need to adjust them,” Commissioner Šemeta said. “This proposal will ensure that the spirit, as well as the letter, of our law is respected.”

He however declined to name countries or companies that exploited the loophole but said that billions of euros were at stake.

By forcing large companies to disclose how much tax they pay to which country, Commissioner Šemeta hopes they will be shamed into paying more. Without international agreement, companies will be able to arbitrage between different tax regimes.

Schemes used by Starbucks, Apple, Amazon and others, operating within the law to minimise taxes, put aggressive tax “planning” at the top of the political agenda earlier this year.

But progress in tackling the problem is likely to be slow. Europe is torn between the demands of small countries, such as Malta, Luxembourg and Ireland, fiercely resisting change to their low-tax regimes which attract foreign investment, and states such as Britain and Germany, wary of driving away big employers.

 

Offshore Leaks database uncovers 39 Maltese offshore entities

A database of the ownership of offshore entities and the networks built around them published by the Washington-based International Consortium of Investigative Journalists recently listed 39 Malta-based companies complicit in a global network of offshore secret stashes belonging to tax- and investigation-shy politicians and celebrities.

From data released, it transpires that Malta was one of the 10 so-called offshore havens that the consortium investigated. Moreover, the data shows that the total of 39 Malta-based companies have been labelled as “offshore entities” – companies, trusts or funds created in a low-tax, offshore jurisdiction – and two more have been listed as master clients – which are intermediaries or go-betweens that help a client set up offshore entities.

The ICIJ also listed addresses of the entities and, in some cases, the names of those running the companies. For the time being, this newspaper is only publishing the names of the offshore entities in question.

The ICIJ’s offshore leaks revelations had sent shockwaves through several governments around the world, and have also prompted the European Union into a renewed crackdown on tax evasion. It has sparked investigations, resignations and a renewed sense of urgency among world leaders that this is the time to rein in offshore abuses

The data the consortium has published so far forms part of a cache of 2.5 million leaked offshore files it analysed with 112 journalists in 58 countries.