International Tax Planning and Transfer Pricing Planning: Malta from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
EXTRACTO GRATUITO

Professor Dr Rainer Zielke[1]

Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The low tax country Malta in the OECD context
    • 2.3 Transfer pricing rules of Malta
      • 2.3.1 Country-per-Country (CbC) reporting
      • 2.3.2 Laws and rules
      • 2.3.3 Arm's length principle
      • 2.3.4 Transfer pricing methods
      • 2.3.5 Documentation requirements
      • 2.3.6 Interaction between customs valuation and transfer pricing
      • 2.3.7 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Malta and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Malta-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Malta in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Malta to the US
      • 2.4.8 Case study 2: Interests from Malta to the US
      • 2.4.9 Case study 3: Royalties from Malta to the US
      • 2.4.10 Case study 4: Management and technical service fees from Malta to the US
      • 2.4.11 Case study 5: Capital gains with Malta as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to Malta
      • 2.4.13 Case study 7: Interests from the US to Malta
      • 2.4.14 Case study 8: Royalties from the US to Malta
      • 2.4.15 Case study 9: Management and technical service fees from the US to Malta
      • 2.4.16 Case study 10: Capital gains with the US as asset country and Malta as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, Malta has in 2016 a gross domestic product (GDP) of US$ 10,463 million. In Malta, the income tax rate for companies is 35.00%. There is no separate system of corporation tax, and a company is subject to tax in much the same way as an individual. A full imputation system is used. Under this system, dividends paid by a company resident in Malta carry a tax credit equivalent to the tax paid by the company on its profits out of which the dividends are distributed. This system applies to both resident and non-resident shareholders. Thus, Malta is a high tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Malta has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the Maltese Ministry of Finance, during the first half of 2016, the Maltese economy expanded by 4.1 per cent in real terms, outperforming growth in the EU bloc. In nominal terms, this increase was reflected in a growth rate of 6.1 per cent, with Gross Domestic Product (GDP) standing

at € 4,456.9 million up from the € 4,202.2 million recorded in the same comparable period last year. Growth was mainly attributed to the domestic side of the economy, driven by positive developments in both private and public consumption as they increased by 3.9 per cent and 4.7 per cent, respectively,

and also by positive growth in gross fixed capital formation. On the other hand, net exports contributed negatively as the growth in imports more than outpaced the growth in exports. During the first six months of 2016, Gross Value Added (GVA) at basic prices increased by 5.7 per cent, attributable to increases registered in the majority of sectors of the Maltese economy. Significant increases were recorded in the professional, scientific and technical activities sector, information and communication,

real estate activities, financial services and agriculture. Labor market outcomes continued to be strong and positive.

Abstract transfer pricing planning

There are no transfer pricing rules on Malta.

Introduction

International tax planning and transfer pricing planning between Malta, a highly industrialised, service based economy, that is classified as an advanced economy by the International Monetary Fund and is considered a high income country by the World Bank and an innovation-driven economy by the World Economic Forum, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2017 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, [2] Malta has in 2016 a gross domestic product (GDP) of US$ 10,463 million. In Malta, the income tax rate for companies is 35.00%. There is no separate system of corporation tax, and a company is subject to tax in much the same way as an individual. A full imputation system is used. Under this system, dividends paid by a company resident in Malta carry a tax credit equivalent to the tax paid by the company on its profits out of which the dividends are distributed. This system applies to both resident and non-resident shareholders. Thus, Malta is a high tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Malta has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the Maltese Ministry of Finance, [3] during the first half of 2016, the Maltese economy expanded by 4.1 per cent in real terms, outperforming growth in the EU bloc. In nominal terms, this increase was reflected in a growth rate of 6.1 per cent, with Gross Domestic Product (GDP) standing

at € 4,456.9 million up from the € 4,202.2 million recorded in the same comparable period last year. Growth was mainly attributed to the domestic side of the economy, driven by positive developments in both private and public consumption as they increased by 3.9 per cent and 4.7 per cent, respectively,

and also by positive growth in gross fixed capital formation. On the other hand, net exports contributed negatively as the growth in imports more than outpaced the growth in exports. During the first six months of 2016, Gross Value Added (GVA) at basic prices increased by 5.7 per cent, attributable to increases registered in the majority of sectors of the Maltese economy. Significant increases were recorded in the professional, scientific and technical activities sector, information and communication,

real estate activities, financial services and agriculture. Labor market outcomes continued to be strong and positive. The unemployment rate in Malta stood at 4.9 per cent in the second quarter of 2016, 0.5 percentage points below the rate prevailing during the comparable period of 2015. In addition, it is noted that increases in the activity rate were translated into higher employment. During the second quarter of the year, the observed employment growth was 3.5 per cent over the previous period, recording one of the highest rates in the EU. In general, employment was prevalently generated by males while increases in female employment rate were also sustained. Yet, employment growth was well-diversified, being exhibited by the majority of segments of the Maltese labor market. Most

increases originated mainly in the private sector, particularly in activities related to professional, technical and administrative activities; and arts, entertainment and recreational activities.

By contrast, the major contribution in private direct production

came from the construction industry.

According to Orbitax, [4] (Daily Tax News Digest of 21 October 2016), on 17 October 2016, Malta's Minister of Finance Edward Scicluna submitted the draft budget for 2017 to parliament. The main tax-related measures are in relation to certain investments, including:

  • A Risk Investment Scheme tax credit of up to EUR 250,000 for investments in small and medium-size enterprises (SMEs) registered on an alternative trading platform administered by the Malta Stock Exchange;
  • An exemption from tax on capital gains from the transfer of shares in newly listed companies on the Malta Stock Exchange when owned prior to listing; and
  • The possibility to claim a refund of tax withheld on dividends distributed by listed companies, provided that the shareholder holds no more than 0.5% of the nominal share capital.

The government is also planning to introduce measures in 2017 to provide for tax consolidation of groups and to equalize the tax treatment of debt and equity. Additional details of those plans will be published once available.

The pivotal question is therefore, how groups of affiliated companies with group companies in Malta and in the US can – before the background of anti-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning based on cross-border case studies.

Therefore and first of all the high tax country Malta is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of Malta (see section 3), and constructive hereon 10 case studies in international tax planning between Malta and the US are to be calculated (see section 4). Finally the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between Malta and the US.

This chapter had been written based on the following sources:

  • Orbitax[5], Orbitax Country Analysis Malta and USA, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool
  • the Maltese Income Tax Act, [6]
  • the Maltese income tax reform 2017, [7]
  • the US Internal Revenue Code, [8]
  • the US Tax reform 2017[9], and
  • the Double Taxation Convention between Malta and the USA signed 8 August 2008 and effective from 1 January 2011. [10]
The low tax country Malta in the OECD context

International tax planning and transfer pricing planning between Malta and the US based on cross-border case studies is of central importance. In Malta, the income tax rate for companies is 35.00%. There is no separate system of corporation tax, and a company is subject to tax in much the same way as an individual...

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