By David Lindsay
The full disclosure of banking details between EU member states and the payment of Maltese tax on earnings accrued from such accounts and a withholding tax on income earned from accounts held in offshore jurisdictions is in the offing for Maltese holding funds abroad this summer.
Many Maltese holding funds in offshore locations who did not participate in the government’s recent Investment Repatriation Scheme could very well be caught unawares come 1 July when the European Union’s Savings Tax Directive comes into force.
The Directive’s implementation is to allow for the full exchange of information on interest payments received on savings and investment income across the 25 EU members states. The Directive will see EU member state residents’ interest earned from personal deposits and income producing investments held in another EU country being taxed at the appropriate rates in their home countries. Every bank across the EU will also openly disclose details earnings to the Maltese authorities in Malta’s case, after which the tax will be paid in Malta.
More ominously, the Directive will also see the application of a withholding tax on earnings, while still guaranteeing banking secrecy, across a number of offshore locations such as the Channel Islands, the Isle of Man and Switzerland. Although not part of the EU, these jurisdictions will be implementing the Directive. But instead of full disclosure, which would effectively put an end to the jurisdictions’ attractive banking secrecy legislations, they will be offering an alternative in the form of a withholding tax option on interest earned. The withholding tax starts at 15 per cent upon its introduction. This rate will, however, rise to 20 per cent in 2008 and 35 per cent in 2011 and thereafter. Non-EU nationals resident in EU countries will also be charged the savings tax.
Interestingly, these so-called offshore jurisdictions will retain 25 per cent of the tax revenue collected and 75 per cent will be passed on to the home country of the account holder, in bulk without naming the individual account holders.
Speaking to The Malta Financial and Business Times yesterday, Hollingsworth International Financial Services Managing Director Mark Hollingsworth highlighted the lack of information being made available to the Maltese investor, many of which could be caught unawares when they receive their reduced balance statements from abroad.
“People don’t seem to be aware of the Directive’s implementation,” he comments. “This is quite frightening, especially considering that the Channel Islands are to be involved in the Directive. There seems to have been very little communication between the banks in offshore locations with their clientele in Malta, coupled by a distinct lack of communication on the topic to date in Malta. The international press is full of information but for some reason this has not been the case here in Malta.
“We have, as a firm, tried to raise awareness on the issue over the last six months because people simply cannot wait until 30 June to seek advice. There are solutions, such as those available through effective tax planning which has been practiced for years, but people need to be aware of the situation and they need to decide on a course of action.”
Those who chose not to partake of government’s previous Investment Repatriation Scheme and declared their overseas accounts will, however, be left with a serious problem. It is estimated that the scheme had led to the return of some Lm200 million Maltese funds held secretly abroad, an amount estimated at close to just 10 per cent of all such holdings. If the estimates are correct, there could potentially be another Lm1.8 billion in Maltese funds left undeclared in offshore accounts.
This could signify positive news for government’s coffers. If a Maltese individual accrues interest of Lm100 over 2005 from an account held in the Channel Islands, for example, as EU residents, that person would be given a choice: he could either fully report the Lm100 to the Maltese authorities, or to not disclose their financial information and remain shielded by bank secrecy and accordingly accept to pay the withholding tax of Lm15 on the Lm100. From the Lm15, 75 per cent would be anonymously directed to the Maltese authorities and the remaining 25 per cent will be retained by the jurisdiction in which the account is held. As such, Lm3.75 remains in the country of the account’s origin, while the other Lm11.25 goes anonymously to the account holder’s country of residence.
Asked how he sees the progressive tax system measuring up to what is collected locally, Hollingsworth comments, “The post July 2011 rate of 35 per cent is very high, but I believe people would be willing to accept the initial 15 per cent rate, which is on par with what is collected locally. I would have thought the government would have done well by introducing another investment repatriation scheme, but this has not been forthcoming.”
He also points out that there are a number of legitimate investment schemes that will continue to allow the payment of gross income, without deducting tax, and which will continue to offer the option as to when and if to declare the income for tax purposes.
“I must stress that such schemes are not ‘tax evasion’ schemes but ones that simply do not exchange information, or deduct tax. They leave any reporting or declaration to the individual investor. Such schemes have been widely used for many decades and, not surprisingly, are becoming very popular with those who have investments and deposits overseas – both in the EU and the Channel Islands and Isle of Man,” Hollingsworth adds.
Withholding tax to be levied on:
Interest earned on deposits
Interest bearing debt claims, such as bonds issued after 1st of March 2001
Accrued or captalised interest (zero coupons)
Investment funds with at least 40per cent of the underlying investments in interest bearing instruments
Distributions from investment funds that relate to the interest income of the fund income from the sale, repayment or redemption of investment fund units.
Withholding tax will not be levied on:
Insurance companies or insurance income from insurance policies
Stocks and shares
Bonds issued before 1st march 2001
Equity related structured products.
15 per cent (1 July 2005 to 30 June 2008)
20 per cent (1 July 2008 to 30 June 2011)
35 per cent (1 July 2011 onwards)