Loopholes that could allow illicit funds to be laundered through Malta’s corporate tax refund system are set to be closed, as the country scrambles to get off the Financial Action Task Force (FATF) grey list of untrustworthy financial jurisdictions.

Sources have told Times of Malta that a national team of experts working on closing the gaps in the country’s financial crime framework is set to propose a reform of Malta’s corporate tax regime.   

The reform, which will soon be pitched to the cabinet, will address the practice of reimbursing large chunks of tax dues paid by foreign companies operating here.

In a nutshell, the issue revolves around the depth of checks carried out by local tax authorities when deciding whether or not to refund the lion’s share of their tax payments.

At present, tax authorities process applications for reimbursement in an average of just four to six weeks, with some requests approved in half that time. 

The proposed reform, which would need to pass through parliament, would see this window extended to as much as a year, giving authorities the chance to properly establish the provenance of the funds before affecting large payments from the public purse.

Tax authorities carrying out fresh due diligence on foreign companies

Malta’s on-paper tax rate stands at 35 per cent, but the island offers international corporations an effective rate of five per cent through a series of refunds and related schemes.

This attracts foreign companies to set up shop here, generating hefty tax revenues for the public coffers.

In recent weeks, tax authorities have been carrying out fresh due diligence on foreign companies operating through Malta which have applied and received tax reimbursements.

Sources said that concerns had been highlighted about Malta’s system during a review of its anti-money laundering regime by the Financial Action Task Force. 

In June, the global watchdog placed the country on its so-called grey list of countries that are not doing enough to stem the flow of illicit funds. 

Malta has since signed an agreement with the FATF to bolster its fight against financial crime and it must prove it is taking that commitment seriously before it can be taken off the list.

At the heart of the plan is an improved commitment to effectively fight tax crimes by using intelligence to catch tax cheats and better policing of ultimate beneficial ownership rules.

Earlier this month, Times of Malta reported how the timeframes within which the police may investigate and prosecute tax crimes will be widened.

Meanwhile, the future of Malta’s corporate tax rate is in doubt as the international community’s push towards the introduction of a global minimum rate has gone up a notch. 

The Organisation of Economic Co-operation and Development (OECD) is proposing the introduction of a new minimum tax rate of 15 per cent.

Global minimum tax deal: What you need to know. 

The proposal is one of two pillars of reforms that would also allow countries to tax a share of profits of the 100 most profitable companies in the world – such as Google, Facebook and Apple – regardless of where they are based.

In a few weeks, the government is expected to present the organisation with a set of proposals which it hopes will help the country maintain a competitive edge in attracting foreign businesses to its shores.

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