OECD Malta Report 101: Relevance to Insurance Undertakings (including PCC and/or Captives)

Date

23.09.20

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The aim of this short piece is to synthesize the OECD Report on Malta issued recently in 2020 which resulted in a downgrade for the country from 'largely compliant' to 'partially compliant' on matters of transparency and exchange of information for tax purposes.

OECD Malta Report 101: Relevance to Insurance Undertakings (including PCC and/or Captives)

James Portelli is a chartered insurance risk manager holding an senior executive role in an international insurance undertaking, non-executive directorships on a portfolio of insurance companies operating in or from Malta by virtue of the EU Freedom of Service Directive and a member of the Cutts-Watson Consulting panel. He is also lecturing on insurance programmes at the University of Malta.

Views expressed are personal and may not be deemed to constitute advice.

Aim

The aim of this short piece is to synthesize the OECD Report on Malta issued recently in 2020 which resulted in a downgrade for the country from ‘largely compliant’ to ‘partially compliant’ on matters of transparency and exchange of information for tax purposes.

More importantly the paper expresses views on the potential impact of this report on insurance undertakings and new applicants or entities considering applying to be authorized as an insurance undertaking in Malta.

Executive Summary

If you do not have time to read the rest of the paper the following 3 paragraphs succinctly summarize the piece and of the OECD report (in as far as it will impact insurance undertakings specifically).

Enterprises that use their insurance companies as insurance companies, i.e. to underwrite and carry risk and who share risks with their reinsurers to mitigate net exposure from or leverage capital on their balance sheet, have nothing to worry about. One is to expect increased scrutiny from banks in requests for information on ultimate beneficiary owners. But, other than that, there is no increased risk to their undertaking and/or their clients arising from the conclusion of this report. It is highly unlikely that profits, taxation on profits (6/7th rebates and/or NID) and repatriation of profits would be impacted by any actions arising from the findings of this report; and

Enterprises with multiple layers of ownership and/or opacity at ultimate beneficiary ownership, whose insurance companies are purely or, mainly, camouflaged vehicles for leveraging tax liabilities may have a problem. The whole focus of this ongoing exercise is specifically on transparency and exchange of information for tax purposes; and

The OECD Rating has no bearing on the country’s credit rating, which even in the wake of economic upheavals inflicted by Covid-19, Malta retained its A rating.

Report Caveats

What the report is and is not:

⦁ It provides insight into transparency and exchange of information for tax purposes.

⦁ It is not a credit rating report of the economy.

The Global Forum behind the report consists of 160 countries on equal footing charged with monitoring and with country peer reviews. So the report is not the result of a regulatory or supervisory inspection imposed upon a country but a peer review exercise. ‘Fishing expeditions’ are also not authorized since the underlying framework of such exercises are the United Nations Model Double Taxation Convention and all information is freely and officially provided or publicly available by / in countries under review.

Views expressed in these peer review reports are not necessarily the official views of OECD countries. Nonetheless they are a compelling ‘sanity check’, in this case for Malta, on issues of transparency and exchange of information for fiscal purposes.

Report Conclusions and the Underlying Factors

The full report is Below: Go to it right now

Global Forum on Transparency and Exchange of Information for Tax Purposes: Malta 2020 (Second Round) Peer Review Report on the Exchange of Information on Request

In the latest round of assessments Malta was deemed to be “Partially Compliant”. This is a downgrade from the earlier “Largely Compliant”.

Summarizing the result from the 10 categories that were assessed by rapporteurs, in 6 of these areas (including access to information, rights, safeguards, EOIR mechanisms, Network of EOIR Mechanisms and confidentiality) Malta was deemed to be “Compliant”. There is no change in 2020 from the earlier round of assessments in 2013 in these areas.

Which are the 4 areas that suffered a downgrade and why are they sufficiently important to drive an overall

⦁ “Largely Compliant” result in 2013 when 3 of the 10 assessment areas were largely compliant (the rest were compliant)?; and

⦁ “Partially Compliant” result in 2020 when 4 of the 10 assessment areas were partially compliant (the rest were compliant)?

The areas where, in the opinion of rapporteurs, Malta was partially compliant were:

1. The availability of ownership and identity information. This refers primarily to ultimate beneficiary ownership of companies registered and opening bank accounts in Malta.

2. Availability of accounting information, again, of ultimate beneficiary owners.

3. Quality and timeless of responses for information under the OECD Co-operation rules.

These 3 areas are at the heart of transparency principles and exchange of information for tax purposes between the cooperating countries and, therefore, largely viewed as a concern for the jurisdiction as a whole (and banks in particular), resulting in the said downgrade.

While affirmative action has already been taken to strike out inactive accounts, the report did note some 20,000 inactive companies in the Register of Companies and 12,000 inactive accounts with the Commissioner for Revenue. The inactive accounts caused concern on the availability of information and financials of ultimate beneficiary owners and, according to the report, “caused failure in practice to provide related information to partner countries.” Similarly, while the legal framework was in place for the collecting of UBO information, the supervisory process or regime for this to be undertaken was deemed by rapporteurs to be weak. This finding also perhaps explains the recent flurry of activity by the larger banks on the island to collect and or confirm UBO information that they have on file particularly for locally registered, foreign owned companies, for trusts, for foundations and for NGOs or voluntary organizations.

Conclusion

Malta is a willing participant country in these peer reviews and takes findings seriously. MFSA (Malta Financial Services Authority) has beefed up supervisory teams, banks are actively engaging with clients to ensure completeness of information where this was (or may be) deemed to be weak or insufficient, the Registry of Companies and the Commissioner for Revenue are striking off inactive companies / accounts and resources and regimes for EOI responses have been made more robust. The review process is a continuous exercise not unlike internal audit cycles in companies.

Therefore, with the above measures it is expected that Malta will regain the “Largely Compliant” or “Compliant” status again.

In the meantime, it should still be business as usual for insurance undertakings or applicants.