Malta-US pension plans and their potential use for tax evasion are being reviewed by the US fiscal authorities who have placed them on their so-called ‘Dirty Dozen’ list of scams. 

The US Internal Revenue Service (IRS) this month published a list of tax scams with a warning to watch out for Malta-based schemes which it says may be facilitating tax evasion. 

Among the new additions to the 2021 list is the “potentially abusive use of the US-Malta tax treaty”.

Some US citizens and residents, the IRS said, are relying on an interpretation of the US-Malta Income Tax Treaty to avoid property tax by moving assets to Maltese pension plans.

These plans then sell the assets and distribute the proceeds back to the US holder, without taking on any tax burden. 

The IRS said it is evaluating the issue to determine the validity of these arrangements.

It also warns that it might challenge the way the treaty is being used. 

Malta ready to strengthen policies

A government spokesman told Times of Malta the government has “taken note of the concern raised by the United States, through the Internal Revenue Service”.

“Without going into the merits of this particular issue, since broader analysis is entailed and ongoing, I can confirm that Malta is, as always, ready to discuss, support and implement any strengthening of policies that would lead to an improved and fairer framework for all,” the spokesman said. 

If it sounds too good to be true, it probably is

Last month, the Financial Action Task Force voted to make Malta the first EU state to be greylisted. 

The FATF said that among the main reasons it had failed Malta were failures to properly clamp down on tax evasion and related crime. 

Meanwhile, finance ministry sources said the Malta-US pension plan was being used as an “aggressive tax planning” mechanism to help US taxpayers obtain backdoor tax deferrals and tax avoidance benefits.

The tax scheme is believed to see US residents move assets from Malta-based pension plans to offshore trusts in their name. This, the IRS believes could be helping them avoid tax exposure.

“The IRS warns people to be on the lookout for promoters who peddle false hopes of large tax deductions from abusive arrangements,” the Washington-based watchdog said.

Referring to the entire list of tax schemes in the ‘Dirty Dozen’, the IRS said these are often promoted by offenders who make false claims about their legitimacy and charge high fees to flout regulations.

These promoters frequently devise new ways to cheat the system and market them aggressively, the IRS says.

To fight the evolving variety of these abusive arrangements, the IRS recently created the Office of Promoter Investigations (OPI) to focus on participants and promoters of abusive tax avoidance transactions. 

However, according to the IRS, the best defence for a taxpayer approached by a promoter is to show caution.

“If it sounds too good to be true, it probably is,” it said.

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