The Malta-US double taxation agreement

During his recent visit to the United States, Prime Minister Lawrence Gonzi, speaking to the Maltese press, stressed that the Malta-US double taxation agreement had been abrogated under a Labour administration in 1997.

It would have been fairer had he laid all the cards on the table.

The original treaty had been signed in 1980 under a Labour administration while the US took the formal decision to terminate its tax treaty with Malta on November 16, 1995 - that is under a Nationalist administration.

At a time Malta was still trying to pick up the pieces after the US government and Congressional flak following the release, two years earlier, of convicted terrorist Ali Rezaq (who had hijacked the Egyptair aircraft to Malta in 1985).

One of the unofficial reasons brought up then was that there was a lot of treaty shopping in the financial services sector, particularly by companies that had Libyan connections.

In a document entitled 'Developments in US Double Treaty policy' when referring to the cancellation of the Malta-US treaty in a sub-paragraph titled 'Cancellation of treaties', it had been stated that "the termination provides an example of the US Treasury's commitment to prevent the misuse of income tax treaties by third country residents, even if it means termination of long-standing relationships".

One has to distinguish between the date when the decision to abrogate the treaty was taken and the effective date of the termination of the treaty.

At the same time the US was considering abrogating other treaties.

On October 10, 1995, the US and the Netherlands had signed a protocol that phased out provisions in the Netherlands treaty as extended to the Netherlands Antilles. It is understood that the goal of pursuing the protocol was to terminate the treaty but not affect the market for transactions entered into before mid-1984.

In the case of the Aruba treaty, the US had also announced on October 15, 1995, the termination of the US/Aruba treaty, which was to be become effective on January 1, 1997.

This sequence of events was completely ignored and glossed over by our Prime Minister.

The Prime Minister equally failed to mention the efforts made by former Finance Minister John Dalli to get the revocation of the treaty reversed before the 1996 election.

In fact he had been in correspondence with the Assistant Secretary of the Department of the US Treasury up to September 19, 1996 - practically one month before the general election.

He was also in correspondence with US government international tax counsel Guttetag on technical aspects of the treaty - a government official who had received me in his office to discuss the subject when I was in Washington in Eastertime 1998 on a roadshow to promote Malta as a financial services centre.

In its correspondence the American side stated:

"Based on your explanations, it appears that we did not fully understand the technical operation of some of the provisions of Maltese tax law. We are satisfied, however, that in broad outline our conclusions were correct.

"In particular, it appears that our understanding of the tax treatment of a foreign shareholder of a Maltese company deriving foreign source income was essentially correct in that after the company distributes its foreign income account to the shareholder, Malta will have collected and then transmitted to the shareholder any tax that it collected from the company with respect to such income.

"It also appears that Malta would not be in a position to obtain and provide bank account information with respect to non-Maltese residents who may establish Maltese bank accounts..."

The Americans were so adamant that they stated officially: "It appears that while our explanation of the operation of Maltese law may not have been complete and possibly even incorrect in certain respects, the basic conclusions we drew as to how the law operates were correct."

In official correspondence the US government went on to insist: "I do not believe that, with your (the minister's) explanation in hand, we would have made a decision different from the one we made last November..." It is a pity that Dr Gonzi tried to turn this issue into a political ping-pong by blaming the Labour administration.

He would have done more justice to the cause proper had he gone through the files of the Ministry of Finance and scrutinised the correspondence between the two governments some nine years ago.

In taking a bipartisan stand when we visited Washington last April, the House Foreign and European Affairs Committee showed far more maturity than the Prime Minister did during his recent visit, when he tried to hit at Labour in one of his political asides.

Labour had even tried to promote the national interest from the Opposition benches, when Alfred Sant and Lino Spiteri had visited the US in 1995 and had taken up the Maltese cause on this issue during their talks with US government officials.

leo.brincat@gov.mt

Leo Brincat is the Shadow Minister of Foreign Affairs and IT, and served as Minister of Finance and Commerce between 1997-1998.