No double taxation agreement with Panama; Maltese domicile subject to tax on worldwide income

Maltese individuals resident and domiciled for tax purposes, that is people whose permanent residence is in Malta, are required to pay tax in Malta on their worldwide income, according to the Income Tax Act.

This essentially means that Minister Konrad Mizzi is required to pay tax on foreign earnings. However the situation can get a little tricky when his company is registered in a country that is under no obligation to divulge information to Maltese authorities as to its ultimate beneficial ownership.

Controversy emerged when it came to light that Dr Mizzi has set up a trust in New Zealand which owns shares in a company registered in Panama. He announced the trust himself, however that Panamanian company was then revealed by blogger and Malta Independent columnist Daphne Caruana Galizia. It later emerged on the blogger’s site that the Prime Minister’s Chief of Staff also owns a company in Panama. Dr Mizzi has since said that he will close down the Panama company.

Questions were raised as to why the Minister chose to set up company in Panama, considering that it has been blacklisted by the EU, was placed on a ‘grey list’ by the OECD and is generally known for its financial secrecy, holding companies which evade tax and launder money.

Questions further arise when considering that the company is owned by the New Zealand trust, not Dr Mizzi personally, but at the same time he has the power to order the closing of such company.

Panama is known as a non-cooperative jurisdiction, meaning that it refused to have double taxation agreements with any other countries. Over the last few years, in an attempt to improve its international standing it has opened up such agreements with countries such as the Netherlands, Luxembourg and the USA.

The scope of a double taxation agreement is the exchange of financial information between national authorities upon request. Within the EU and the European Economic Area, such financial information is slowly starting to become automatically shared.

Malta and Panama have no double taxation agreement, meaning that Panama is under no obligation to divulge any financial information to Maltese authorities, and vice-versa. Even if it were under obligation to divulge such information, Panama corporations are under no obligation to prepare annual financial statements.

They are also under no obligation to audit its financial statements. These points have been advertised heavily on a number of ‘Offshore Service Providers,’ highlighting the high levels of secrecy surrounding financial operations.

Not being required to prepare annual financial statements or auditing of those financial statements effectively mean that even if a company registered in Panama had to be investigated, which in itself is questionable given the lack of jurisdiction of the Maltese tax authorities, the documents found/provided would have to be taken at face-value. There would be no verification method since the company itself is not legally obliged to prepare accurate documentation.

Tax experts were contacted by this newsroom for their interpretation of events, however chose not to comment in light of the controversy surrounding Minister Mizzi.

Minister Mizzi has publically invited Commissioner for Revenue Marvin Gaerty to audit him. Asked by this newsroom as to whether he will be taking up the offer, Mr Gaerty replied: “..kindly be informed that the Inland Revenue Department may not divulge any information in terms of the Income Tax Acts.”

Even if the Commissioner were to attempt to investigate, this would not be possible because Panama is under no obligation to pass along information, that it probably has no way of acquiring in the first place. A quick look at the secrecy laws in Panama reveal as such, therefore this request by Minister Mizzi cannot be more than attempt to save-face, and maintain that he has not actually done anything illegal.

Companies and trusts such as Minister Mizzi’s are set up to manage significant levels of wealth. Dr Mizzi has maintained, through providing documentation, that the company holds no assets, liabilities or bank accounts.

One must keep in mind that owning a company requires substantial compliance costs, such as paying directors, shareholders and trustees. It therefore stands to reason that the company and trust was not set up in order manage the family’s property in the UK, but that he is expecting to earn significant income/assets in the future.

Mrs Caruana Galizia has also revealed Mr Schembri holds a company in Panama, which was acquired on the same day as Dr Mizzi’s. The Nationalist Party has since focused attention to this fact, which prompted Mr Schembri to threaten libel proceedings against the PN and issue a statement. In his statement, Mr Schembri did not make reference to allegations of his Panama company once, but spoke about how his appointed financial advisers have taken care of such matters, and that he reserves the right to take legal action against those attempting to “tarnish” his reputation.

The Malta Independent has sent questions to Mr Schembri, however 48 hours later there has been no acknowledgment or response.

When one takes into consideration the financial secrecy surrounding Panama, its reputation for tax evasion, the level of public scrutiny a government minister is subject to and the costs associated with maintaining offshore companies and trusts, the underlying question here remains: why Panama? Especially in the light of Dr Mizzi claiming he has been transparent and honest in all of his dealings.