Malta’s OECD Blacklisting: Storm In A Teacup, Or Shit Hitting The Fan?

October 18, 2018 at 3:13 pm

Malta made local and international headlines this week, and not just because of the one year anniversary of journalist Daphne Caruana Galizia’s brutal murder. As reported in several online newspapers, including The Guardian, the OECD has proceeded to blacklist Malta, together with Cyprus and Monaco, over our citizenship-by-investment scheme.

This move follows last week’s damning report by Transparency International and Global Witness 2018, where the scheme and Malta were hammered over alleged money-laundering risks.

The OECD’s action is not out of the blue. Back in May 2018, the OECD’s tax policy centre the CTPA warned Minister Edward Scicluna that the scheme could facilitate tax evasion, and that Malta would likely be blacklisted unless “mitigating measures to prevent misuse” were taken. It appears this wasn’t an empty threat. It also seems that countries such as Portugal and Spain, both having their own “golden visa” programmes, have been spared.

With the damage now done, it is important to understand just what, and to what extent, the repercussions of this move really are.

First off, what is the OECD?

The Organisation for Economic Co-Operation and Development (OECD) is an inter-governmental organisation that focuses on economic and social policies. Simply put, it is a group of member states that compare and discuss policies, mostly ones focusing on taxation.

There are 36 member countries, but Malta isn’t one of them. Nor has it ever been… though not for lack of trying. Malta had applied to join the group in 2005 together with smaller EU countries such as Cyprus, Estonia and Lithuania. Some were eventually accepted, but others including Malta, Cyprus and Bulgaria were left out. The organisation nowadays includes larger EU countries, including Germany, France, and the UK, as well as smaller ones such as Luxembourg, Latvia and Lithuania. There are also several non-EU countries including the U.S., Australia and Turkey (who blocked Cyprus from joining).

Perhaps the most important function of the OECD is to analyse countries around the world and to issue “outlooks” over said countries in fields such as tax compliance, information sharing etc. You know, fascinating stuff.

So what is their issue?

The OECD’s qualms relate to how the passport scheme can facilitate tax avoidance, or worse, evasion. Simply put, a foreigner who is meant to pay tax in their home state may acquire a Maltese passport and use this as a basis to dodge tax by not sharing information with their home state. Rather, they would share information with the Maltese tax authorities and pay much less tax in Malta. Or abusively not share information, and pay no tax at all. The fact that the programme doesn’t, in practice, require the applicant to be physically present in Malta is an added concern to the OECD.

Objectively speaking, this is somewhat unfair. Several OECD and EU members such as Austria, Greece and Portugal, have “golden visa” residence-by-investment programmes that are substantially cheaper than the Maltese programme. Granted, they do not immediately lead to the issuing of a passport, but if the concern here is tax avoidance, then such programmes still grant residence documents that can just as easily be abused.

It is telling that such countries haven’t received the same level of scrutiny, especially since the European Commission claims it wants to crack down on so-called “golden passports” as a whole. Perhaps it is due to our size, or the fact that our low effective tax for foreigners has annoyed other countries enough. Regardless, it appears that we are not on a level playing field.

OK, but we’re not in the OECD, so why should we care?

The OECD commands a lot of respect. We may not be members, but we do want to be in their good books.

Consider that the double tax treaties that we have with over 70 countries are all based on the OECD model. These treaties, together with our tax rebate system, have been the pillars of our financial services industry for the past 20 years. Gloss over the many legal and accounting firm websites in Malta, and the reference to our “OECD model-based treaties” is rife. Firms use this as a benchmark for quality, and clients like it.

Understood. So how bad is the damage?

Financial services, gaming, blockchain & crypto…these are all services industries that rely on reputation. Perhaps we have grown accustomed to the successes of the past couple decades, but the reality is that Malta as a jurisdiction is not owed anything. One small blemish could stunt Malta’s attractiveness to foreign entrepreneurs, definitely for new incoming business, but also for companies already based here who we risk losing.

How could this unfold in practice?

Well, imagine you were a foreign national looking to expand your business globally. In considering options, the first thing your trusted advisor will do is run an online search to find the right jurisdiction. It is to be expected the word “blacklist” won’t go down too well here.

One could argue that not being a member of the OECD hasn’t hurt us so far, but there is a stark difference between not being a member and being on an outright blacklist. We are now the latter.

This news doesn’t come at a great time either. Malta is already facing Europe-wide flak over its low effective tax rate. Gaming is also feeling the brunt of other countries choosing to regulate the industry, slowly diluting the value of a Malta gaming license when compared to a decade ago. We are on the brink of positioning ourselves as the Blockchain Island, which means we can’t afford to have any bad press. And we are currently dealing with the unsolved murder of Malta’s most vocal corruption critic in recent times.

Should we have known?

Without going into the merits of whether this blacklisting was justified, it’s fair to say that we could have seen this coming.

When the Government announced the scheme back in 2013, there was a lot of backlash in terms of how this would affect Malta’s reputation. That backlash was dubbed as negative and sensationalist. The method might have been slightly so, but most critics were industry professionals, not politicians, who could foresee the consequences – exposing solid industries that were built over years, upon which a sizeable demographic came to rely on as an occupation.

In choosing to go down the passport route, the Government chose a quick monetisation model that was high risk, high reward, but failed to consider the long term view. Arguing that we are being treated unfairly doesn’t do much in practice, and the critics’ calls back then are regrettably being proven right.

And let us be clear; the many millions made via the programme pale in comparison to the dangers of crucial industries collapsing.

How do we fix this?

No use crying over spilt milk; we must now kick into damage mitigation mode.

The Government would do well to immediately address this issue with the OECD. It already had the opportunity to do so, and it seems like it didn’t do it well enough. With unsavoury reports about Henley & Partners making international news, and the European Commission hot on our heels, this needs to be a priority. The OECD regularly updates its lists and upgrades countries. We need to work towards a solution and get off that list.

On its part, the Opposition – and especially PN MEPs – would do well to direct their criticism via the right fora. The Government needs to be held accountable for this situation, no doubt, but airing our dirty laundry abroad can do more harm than good. There are serious consequences in portraying Malta as a tax haven. Let us be critical, even scrap the programme if that’s what it takes, but let us do so wisely. There is simply too much at stake.