Developments in Tax Transparency: Will this impact you?

Developments in Tax Transparency: Will this impact you?

What do new business models on a cross-border basis; enactments of anti-tax avoidance legislative instruments; fragmented policy guidance and judicial activism have in common? Unfortunately, what all these have in common is the backdrop of heightened concern about uncertainty in tax matters.

One the key developments in the last few years pertained to tax transparency with the latest instalment being DAC 7 which goes further than exchange of information through joint audits. Today Malta has a wide basis at law for access to information through its national provisions, wide double tax treaty network, tax information exchange agreements and the Multilateral Convention on Mutual Assistance in Tax Matters. In my view, the latest partially compliant rating received in the 2020 Second Round of the Peer-Review Group from the Global Forum on Transparency and Exchange of Information does not necessarily reflect this national progress.

Furthermore, the incidence of information holders receiving requests for information in furtherance of a foreign tax investigation has significantly increased in recent years. Such requests are made by the Commissioner both in the realm of income tax and separately in the field of VAT. This incidence has increased following the enactment of Automatic Exchange of Information instruments which has allowed tax authorities to gather intelligence for more targeted tax investigations.

In this area of law, the Court of Justice of the European Union jurisprudence has played an important role in balancing the powers of tax authorities with the notion of foreseeable relevance. Traditionally, the powers of the Commissioner for Revenue were quite broad. Information requested may in certain instances be quite invasive of the fundamental rights especially if they concern foreign transfer pricing investigations. However, it is only recently that the Court of Justice of European Union has started to recognise that information holders should have the possibility to file a claim through the national courts to allow an effective judicial review.

Concurrently dispute resolution on a cross-border basis has seen major legislative developments in recent years. In complex tax arrangements predictability and consistency in the application of the law is crucial. The prime route to obtain tax certainty is through the obtainment of rulings and statutory clarifications from the Office of the Commissioner for Revenue. However, this free public service has been quite lagging from our experience leading in certain situations to untimely delays.

Despite this reality, action 14 of the OECD/G20 Anti-BEPS package has laid out minimum standards which transcend more rights for taxpayers where a cross-border dimension exists. Through these initiatives Maltese taxpayers are now given a means to initiate an effective transparent Mutual Agreement Procedure (MAP). The enforcement of these minimum standards has further spearheaded two major initiatives. Firstly, Malta has conferred jurisdiction in terms of article 18 of the Multilateral Instrument (MLI) for its covered tax agreements (double tax treaties) to be subject to mandatory binding arbitration on unresolved issues. This is of course provided the other Contracting Party to that Agreement has also notified an equivalent prorogation thereof. From an EU tax perspective, the Tax Dispute Resolution Directive (which was later transposed in S.L. 123.191) further strengthened this framework through clear rules by which taxpayers may enforce their rights in a fair manner.

Therefore, the developments in this area will be a matter of interest in the next few years especially in view of the tax challenges arising from the digitalisation of the economy. Indeed, article 44(2B)(c) of the Income Tax Management Act already provides inter alia that no interest shall run on any tax payable in those circumstances where a person has lodged a claim for a Mutual Agreement Procedure. This right shall run for the period between the date when the said action under the Mutual Agreement Procedure is initiated and the date it is concluded. The latest Budget Implementation Act, 2021 has also affected an amendment to article 13(4) of the Income Tax Management Act. This amendment will allow for a downward adjustment in taxes and repayments of taxes even where an ensuing adjustment form is lodged after the statutory timeframes. Hence, adjustments which stem from the conclusions of MAP procedure in favour of the applicant taxpayer are now expected to no longer be impeded by such limitations.

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