Taxploration No 02

taxploration Issue 2 - April 2020

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taxploration

Editorial The second edition of Taxploration comes at a time when the world we all live in today is not the world we lived in the last time we wrote the first editorial to this well received publication. The date then was 6 November 2019. That time we spoke extensively of the newly set up Malta Academy for Taxation Studies.

Since then this planet was invaded by an alien nicknamed COVID -19 Our Island was by no means exempted from such invasion and indeed the business community was well hit by this alien. Taxation, the main partner in the business arena had to play its role as well.

Never in recent history have we experienced such frequency in Press Conferences being given by the Finance Minister and The Minister for Economy, Investment and Small Business.

Never has the Government of Malta come out with Financial Aid Packages and Taxation Deferral Packages aimed at reducing the liquidity pressures on the Maltese businesses, maintaining operating continuity and safeguard against loss of employment.

Co- Editors

The argument remains, however, is this enough? for how long will we remain haunted by this Alien? when will our shopping centres be populated again and when will we see the country at large restored to normality. Will the Maltese economy require further Government intervention directed towards the Small and Medium sized Enterprises (SME's).

The future holds the answers to the above, yet, the future is un-predicable.

For how long can the reserves of the Maltese economy hold equilibrium when one of Malta's main contributing industries (tourism) is at a halt. When financial services are declining and when we now hardly hear anything about Gaming. What has happened to the prospects of Block Chain and Crypto Currencies?

Hector Spiteri

Will we see taxation on the rise to balance off such economic setbacks?

Do we need to change the way we look at taxes?

Our taxes are based on the assumption of a growing economy. The realities changed and what used to be common services have now changed. Undoubtedly many will stick to these services since in many circumstances they are more convenient in terms of time and money. Indeed there may be the need to rethink Malta’s tax strategy in order to stimulate business again be it domestic or foreign direct investment.

Hector and Reuben

Reuben Buttigieg

www.taxploration.com info@taxploration.com facebook | Taxploration

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Issue 2 - April 2020

The Malta Academy for Taxation Studies (MATS) has taken all reasonable steps to ensure that the content in this publication is accurate.

Nevertheless, the MATS does not assume any responsibility on the contents of these articles.

These articles are not to be considered in any way as advise or legal opinion. Readers should take professional advice for their specific circumstances.

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DIPLOMA IN VAT COMPLIANCE

The Diploma in VAT Compliance is one of the Association of Taxation Technicians qualifications. Which is the leading indirect taxation professional body in the United Kingdom and is being delivered in Malta through the Malta Tax Academy.

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taxploration

Contents 6

The Unified Approach Under Pillar 1:

AN EARLY ANALYSIS 12

VAT IN ENGLAND - after BREXIT

14

Succession Planning for

FAMILY BUSINESSES 16

The way forward

FOR OUR ECONOMY 18

EU TAX TRANSPARENCY TOOLS - effectiveness in the fight against tax evasion

20

CRYPTO ASSETS AND TAX LAW

26

The OECD's International VAT/GST Guidlines 2017

ITS VALIDITY TODAY? 28

An analysis of Pillar 1 & 2 OECD recomendations

by PROF. PASQUALE

Issue 2 - April 2020

5

The Unified Approach Under Pillar 1:

An Early Analysis

T

The Unified Approach Under Pillar 1: An Early Analysis

© 2019 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

This article analyzes the recently released he international discussion regarding the OECD public consultation document for a unified taxation of highly digitalized businesses has approach under pillar 1, recognizing that a unified arrived at a breakpoint. Countries have realized or internationally agreed approach appears to be in that having immobile consumers in their territories 1 principle preferable when compared to other unilateral could generate significant revenue. Therefore, the measures such as digital services taxes.3 discussion is no longer about whether we tax where 2 It stresses, however, that some features are still value is created —if that was once the relevant discussion at all —but rather whether we do it through underdeveloped, and unless modified, risk rendering COMMENTARY & unable ANALYSIS unilateral measures that could give rise to more the proposal to accomplish its goal of fairly ® complexity, uncertainty, and double taxation, or through reallocating taxing rights to all market jurisdictions, tax notes international coordinated rules. particularly small developing countries.

large consumer-facing businesses, creates I. The Unified Approach in Brief a new nexus for taxation independent of On October 9 the OECD released for uncertainty, and double taxation, or through Leopoldo Parada is a the concept of permanent establishment public coordinated rules. lecturer in tax law at the embodied consultationThis its article proposal for a unified analyzes the recently released in the requirement of physical University of Leeds presence.

The whole idea behind the OECDpillar public document for a unified approach under 1, consultation a highly awaited School of Law in the approach under pillarof1,its recognizing that a unified United Kingdom. document after proposal is to reallocate taxing rights to the May release work or internationally agreed approach appears to be In this article, the market jurisdictions that would otherwise program, entitled “Programme of when Work compared to in principle preferable to other author provides an 3 be prevented Develop a Consensus Solution such to the Tax services unilateral measures as digital taxes. from taxing any of the profits early analysis of the It stresses, however, that some features are still from those companies precisely because Challenges Arising From the Digitalisation recently released OECD underdeveloped, and unless modified, proposal for a unified theyrisk lack physical presence.4 of the Economy.” rendering the proposal unable to accomplish its approach under pillar The the of proposal, whose scope is rights to LEOPOLDO PARADA1, recognizing that an In brief,goal fairly reallocating taxing all new nonphysical nexus is determined by the amount of sales a approach like thatlimited market jurisdictions, particularly small appears to be in developing countries. company may have in a market jurisdiction, to highly digitalized companies and Leopoldo Parada is awhen lecturer principle preferable compared with in tax law state at themeasures University unilateral such as digital I. The Unified Approach in Brief of Leeds taxes.

School of Law in the services On October 9 the OECD released for public United Kingdom.

Copyright 2019 Leopoldo Parada. All rights consultation itsPillar proposal for a University unified of approach 1 Michael Devereux, “The OECD One Proposal,” Oxford Saïd Business School Blog (Oct. 22, 2019).

In this article, the author reserved.

2 For discussion of value creation, see, e.g.,awaited Itai Grinberg, “User Participation under pillar 1, a highly document after in Value Creation,” 4 BTR 407 (2018); provides an early analysis Johanna Hey, Where Value Is Created’ and the OECD/G20 Base Erosion and Profit Shifting Initiative,” 72(4/5) the“‘Taxation May release of its work program, entitled of The the recently released international discussion regarding the Bull. Int’l Tax. (2018); Aleksandra Bal, “(Mis)guided by the Value Creation Principle — Can New Concepts Solve Old “Programme of Work to Develop a Consensus OECD proposal a unified businesses has Problems?” 72(11) Bull. Int’l Tax. (2018); Johannes Becker and Joachim Englisch, “Taxing Where Value Is Created: What’s taxation of highlyfor digitalized Solution to the Tax Challenges Arising From the arrived at aunder breakpoint.

Countries have realized approach pillar 1, ‘User Involvement’ Got to Do With It?” Economy.”

47(2) Intertax 161 (2019); and Marcel Olbert and Christoph Spengel, “Taxation in Digitalisation of the that having immobile consumers in their recognizing that an approach the Digital Economy — Recent Policy Developments and the Question of Value Creation,” 3 Int’l Tax Stud. (2019).

In brief, the proposal, whose scope is limited 1 territories could generate like that appears to be insignificant revenue.

3 Digital services taxes have been largely criticized in literature, especially because they would discriminate against to highly digitalized companies and large Therefore, the discussion particular sectors and countries, inviting retaliation and generating double taxation. See, e.g., Oct. 18, 2018, letter principle preferable whenis no longer about consumer-facing businesses, creates a new nexus 2 —if that whether we tax where value is created from Senate Finance Committee Chair Orrin G. Hatch, R-Utah, and ranking minority member Ron Wyden, D-Ore., to compared with unilateral for taxation independent of the concept of was once the relevant discussion President Donald Tusk and European Commission President Jean-Claude Juncker; Daniel Bunn, “A state measures such as digital at all —but European Council permanent establishment embodied in the Summary of Criticisms of the EU Digital Tax,” Tax Foundation (Oct. 22, 2018); Oct. 31, 2018, statement from House rather whether we do it through unilateral services taxes. requirement of physical presence. The whole idea Ways and Means Committee Chair Kevin Brady, R-Texas, on the U.K. DST; Ruth Mason, “Implications of Wayfair,” 46 Int’l measures that could give rise to more complexity,

by Leopoldo Parada

Tax Rev. 810 (2018); and Mason and Leopoldo Parada, “Digital Battlefront in the Tax War,” Tax Notes Int’l, Dec. 17, 2018, p. 1183. For a defense of unilateral DSTs, see Wei Cui, “The Digital Services Tax: A Conceptual Defense,” Tax Law Rev. 3 (forthcoming 2019).

1 Digital services taxes have been largely criticized in literature, Michael Devereux, “The OECD Pillar One Proposal,” University of 4 OECD, “Secretariat for awould ‘Unified Approach’against Underparticular Pillar Onesectors — Public Consultation Document,” at 8, para. 27 especially Proposal because they discriminate Oxford Saïd Business School Blog (Oct. 22, 2019). and countries, inviting retaliation and generating double taxation. See, (Oct. 2019) (hereinafter “unified approach”).

2

Copyright 2019 Leopoldo Parada. All rights reserved.

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For discussion of value creation, see, e.g., Itai Grinberg, “User Participation in Value Creation,” 4 BTR 407 (2018); Johanna Hey, “‘Taxation Where Value Is Created’ and the OECD/G20 Base Erosion and Profit Shifting Initiative,” 72(4/5) Bull. Int’l Tax. (2018); Aleksandra Bal, “(Mis)guided by the Value Creation Principle — Can New Concepts Solve Old Problems?” 72(11) Bull. Int’l Tax. (2018); Johannes Becker and Joachim Englisch, “Taxing Where Value Is Created: What’s ‘User Involvement’ Got to Do With It?” 47(2) Intertax 161 (2019); and Marcel Olbert and Christoph Spengel, “Taxation in the Digital Economy —

e.g., Oct. 18, 2018, letter from Senate Finance Committee Chair Orrin G. Hatch, R-Utah, and ranking minority member Ron Wyden, D-Ore., to European Council President Donald Tusk and European Commission President Jean-Claude Juncker; Daniel Bunn, “A Summary of Criticisms of the EU Digital Tax,” Tax Foundation (Oct. 22, 2018); Oct. 31, 2018, statement from House Ways and Means Committee Chair Kevin Brady, R-Texas, on the U.K. DST; Ruth Mason, “Implications of Wayfair,” 46 Int’l Tax Rev. 810 (2018); and Mason and Leopoldo Parada, “Digital Battlefront in the Tax War,” Tax Notes Int’l, Dec. 17, 2018, p. 1183. For a defense of

taxploration allowing that jurisdiction to tax a proportion of the profits. As stated in the proposal, the new rule seeks to address the issue of creating a new taxing right when a business “has sustained a significant involvement in the economy of a market jurisdiction, such as through consumer interaction and engagement, irrespective of its physical presence in that jurisdiction.”5 Therefore, the rule does not repeal any PE or profit allocation rules, but rather applies on top of them.

The proposal also provides rules for allocating profits, which go beyond the arm’s-length standard and include a formulaic approach.

Profits are divided into amounts A, B, and C. Amount A corresponds to the amount of nonroutine (residual) profits that should be allocated to market jurisdictions. It is determined by considering the total profits from the multinational enterprise using consolidated statements. From that, a deemed amount of routine (businessline) profits is determined using a formula.

The remaining amount will correspond to non-routine profits. A proportion of those residual profits is then allocated to the market jurisdiction.

Amount B provides market jurisdictions with a fixed remuneration for distribution and marketing functions, thus solving old transfer pricing disputes on how to calculate distribution and marketing activities under the current rules.

Amount C appears to allow a market jurisdiction to challenge the amount that it has received as amount B by increasing the total using traditional transfer pricing methods. It also includes binding dispute resolution that covers the entire proposal.6

II. Analysis of the Proposal A. Scope 1. Consumer-Facing Businesses The OECD’s original intention to avoid ringfencing the digital economy and targeting only largely digitalized business

5 6 7 8 9

is perhaps the main reason for extending the scope of the new nexus to consumerfacing businesses.7 However, the concept is vague and does not contribute to the transparency and simplicity the unified approach is meant to achieve. Indeed, determining what is a consumer-facing business can be a complicated, if not impossible, task. For example, could we say that a business with 51 percent of total sales directly to consumers and 49 percent to other businesses is consumer facing? What is the policy reason to exclude business-to-business transactions when most of the transactions in the digital economy are business to business? Are not businesses also consumers of good and services?8 Moreover, within a particular business it is almost impossible to say which operations are wholly consumer facing and which are not; in most cases, those operations are hybrids.

Take a classic business-facing process like budgeting or training. Even though that kind of activity can be understood as business facing, it cannot be isolated from the goal of satisfying consumer demand. Activities like that indeed consider customer points of view because at the end of the day they must satisfy customers.

They are in their origin business facing, but they all include consumer-facing elements — for example, training must include consumer-facing elements involving the interaction between employees and customers. Therefore, isolating businessfacing or consumer-facing processes to determine whether a business is more one than the other seems useless.

A unified proposal should avoid those unnecessary layers of complexities and provide a clearer approach.9 If at the end of the day all actors (including the OECD) recognize that the international debate has evolved from taxing highly digitalized business (or specific digital services) to fairly taxing all large MNEs, perhaps the proposal should focus only on defining what is a large MNE for purposes of the approach.

Id. at para. 22.

Id. at 6, para. 15.

OECD, “Addressing the Tax Challenges of the Digitalisation of the Economy — Public Consultation Document,” at 5 (Feb. 2019).

Yariv Brauner and Andrés Baéz Moreno, “Tax Policy for the Digitalized Economy Under Benjamin Franklin’s Rule for Decision-Making,” in: Tax and the Digital Economy: Challenges and Proposals for Reform 82 (2019).

See Devereux, supra note 1.

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2. Carveouts The unified approach contemplates the exclusion of extractive industries, commodities, and possibly financial services, but it is unclear why it does so.10 Take the example of extractive industries, which have generally benefited from generous tax incentives in market jurisdictions. They also generally engage in aggressive tax planning and profit shifting, as do other industries.11 Why exclude them from the scope of the new nexus?

Another important issue refers to the common understanding of traditional businesses, which are constantly evolving.

Do we really know what a financial service is today? For example, Facebook has recently announced the launch of Libra, its new blockchain digital currency.12 Does that mean Facebook will also provide financial services, and will those services be excluded from the unified approach?

Also, carveouts should be carefully considered from a tax policy perspective because they generally create unnecessary opportunities for gaps and abusive practices, as well as difficulties in application and enforcement.

B. New Nexus Rule The new nexus rule in the unified approach fills the gap between highly digitalized businesses and a government’s right to tax those businesses.

It is far from being unquestionable, however, especially from the perspective of safeguarding the interests of small market jurisdictions.

First, the new nexus is based exclusively on sales or users. That raises concerns and could become extremely important for countries whose market size is insufficient to guarantee a positive result, if any, from the new rule.13 Indeed, it is evident that a

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country with a small sales market will not benefit at all under the new rule. In other words, money will flow to the same string of tax administrations with large sales markets.14 It is true that relying exclusively on sales is attractive because compared with assets or employment, sales are less mobile and therefore less subject to abuse.

However, the exclusive reliance on sales may still encourage MNEs to use independent distributors who will carry on the sales in the market jurisdiction or ultimately create nexus themselves.

Some international actors have stressed using employment as an additional factor.15 That idea should not be prematurely discarded under the assumption that employment, unlike sales, is easy to manipulate, especially if it could play a major role for small developing countries.16 Instead, the idea should be considered, at least until the OECD releases the data to properly calculate the impact of the unified approach.

Second, high revenue thresholds such as that proposed by the OECD (€750 million group threshold) can also be problematic and could raise nondiscrimination concerns under both EU and WTO law, as do DSTs.17 Accordingly, they may not avoid ring-fencing the digital economy — a goal stressed since the beginning of the OECD’s work — and could ultimately result in small market jurisdictions receiving zero benefit from the new nexus rule. Indeed, high revenue thresholds simply add another level of ringfencing, because one ring-fencing level already occurs with the distinction between consumer-facing and nonconsumer facing businesses, whatever that distinction means.18 One could rightfully argue that the use of high thresholds is required to evaluate the participation a business may have in a specific economy to avoid simply

OECD, unified approach, supra note 4, at 7, para. 20.

Julie Martin, “OECD Director, Tax Experts, Explore Proposed ‘Unified Approach to Pillar One’ for Taxing Multinational Groups,” MNE Tax, Oct. 21, 2019 (in which Stephen Shay “noted that although extractive industries are excepted from the Secretariat’s unified approach to pillar one, these industries can also make use of tax havens”). Perhaps the only good reason, besides particular industry interest involved, could be that in both cases (that is, extractive industries and

commodities) it is more difficult to elude physical presence.

12 Gian Volpicelli, “What Is Libra? Facebook Cryptocurrency, Explained,” Wired, Aug. 14, 2019.

13 Independent Commission for the Reform of International Corporate Taxation, “ICRICT Report: Current Reform of International Tax System: Radical Change or Yet Another Short-Term Fix?” (Oct. 6, 2019).

14 Id. 15 Alex Cobham, Tommasso Faccio, and Valpy FitzGerald, “Global Inequalities in Taxing Rights: An Early Evaluation of the OECD Tax Reform Proposals,” SocArXiv Papers, at 22 (Oct. 4, 2019).

16 Id. 17 See Mason and Parada, supra note 3. See also Mason and Parada, “Company Size Matters,” 5 BTR (forthcoming 2019).

18 The problematic of double or even triple “ring-fencing” has already been assumed in the international tax literature.

See Brauner and Baéz, supra note 8, at 88. See also Wolfgang Schön, “Ten Questions About Why and How to Tax the Digitalized Economy,” Max Planck Institute for Tax Law and Public Finance Working Paper 2017-11, at 7 (Dec. 2017).

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taxploration granting market jurisdictions the right to tax a company with an insignificant economic presence. However, quantum requirements are ambiguous and troubling to apply. For example, how can we really ensure that a company with €X million has less economic presence in a country than a company with, say, €X.1 million?

Does €1 below a threshold really make a difference?19 Moreover, the current rules based on physical presence require lower thresholds to determine the impact a company has on an economy. For example, an office with a few employees is enough to conclude that there is nexus between the business and the country. What makes a consumer-facing business — whatever that means — a different animal?

Still, if thresholds are going to be implemented anyway, they should be countryspecific and flexible enough to reflect the realities of different market jurisdictions, especially if the OECD wants to avoid discouraging MNEs from entering new markets or abandoning a significant presence in another country because of high compliance costs.20

C. Profit Allocation Rules The idea of allocating taxing rights to market jurisdictions using a simplified formulaic approach is in principle positive.

Yet some improvements are necessary to guarantee a positive result, especially for small developing countries.

1. Amount A The starting point for determining amount A is calculating the MNE’s total profits, which is taken from consolidated financial statements.

From that number, a deemed amount of routine profits will be calculated using a formula. The remaining amount will correspond to deemed non-routine profits.21 Even though consolidated financial statements appear to be a natural source of information for calculating total MNE profits, there should be clarifications regarding how to use them. It is especially important to reflect the differences in financial statements that use international financial reporting standards, generally accepted accounting principles, or other financial accounting methods.

Accordingly, the formula for calculating the amount of the group’s deemed routine profits is crucial to guaranteeing the success of allocating any profits to market jurisdictions. For that reason, the OECD should avoid using a high rate of deemed routine activities if it wants amount A to have a result different from that under the current rules.22 Accordingly, it should not underestimate the potential complexity of attributing a proportion of non-routine profits using a variable such as user participation for highly digitalized businesses.

19 Critics on the use of thresholds have already been raised in the past. See, e.g., Wolfgang Schön, “International Tax Coordination for a Second-Best World (Part I),” 1 World Tax J. 67 (2009), at 99-101 (regarding the “all-or-nothing” approach with regard to thresholds and the concept of permanent establishment). More recently, see also Brauner and Baéz, supra note 8, at 83-84 (criticizing the complexity and potential abuse that the use of thresholds may bring up in the context of proposals to deal with the digitalization of the economy).

For a conceptual defense of thresholds, see, e.g., Brian Arnold, “Threshold Requirements for Taxing Business Profits Under Tax Treaties,” 10 Bull. Int’l Tax. 66 (2011).

20 Bunn, “The ABCs of the OECD Secretariat’s Unified Approach on Pillar 1,” Tax Foundation (Oct. 24, 2019).

21 OECD, unified approach, supra note 4, at 9, para. 30.

22 See the example in Bunn, supra note 20, that uses a simplified hypothetical of two countries and two scenarios — one under the current rules and the other under the unified approach — with the impact of the unified approach being insignificant.

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2. Amount B Amount B resolves old transfer pricing discussions regarding the determination of distribution and marketing functions in the market jurisdiction. As stressed by other commentators, it is common for MNEs to manipulate the transfer pricing rules regarding the determination of distribution functions, as well as the value creation of marketing functions, especially in developing countries.23 There is no doubt that fixing a remuneration for distribution functions is a step forward for simplicity, reducing the amount of litigation in small developing countries. However, calculating the fixed remuneration and determining what will be considered distribution and marketing functions remain crucial.24

3. Amount C Amount C states that “any dispute between the market jurisdiction and the taxpayer over any element of the proposal should be subject to legally binding and effective dispute prevention and resolution mechanisms.”25 Despite that description, the role of amount C is confusing. On the one hand, it seems the OECD’s intention is to impose mandatory arbitration (or mandatory mutual agreement procedures), which has been largely rejected by developing countries.

Indeed, a recent report from the African Tax Administration Forum on the unified approach and amount C states:

23 24 25 26

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We recognise the need for effective dispute resolution mechanisms to eliminate protracted disputes and double taxation.

However, we do not support the suggestion that global adoption of mandatory binding arbitration should be available if there are disputes regarding the amounts allocated under the unified approach proposal.26 On the other hand, amount C could be read as attempting to provide legal certainty based on the arm’s-length standard — that is, recognizing that litigation between taxpayers and tax administrations will certainly arise. Yet it is important that countries do not read amount C as a safe harbor or arm’s-length let-out.

If developing countries interpret amount C that way, it is highly likely that they will oppose it. Africa has already decided as much, saying it will express to the OECD inclusive framework its strong opposition “to any rule that introduced a mandatory safe harbour with an arm’s length let out.”27 Still, if this interpretation is accepted, what brings legal certainty is arguably amount C itself, but rather the specific dispute resolution mechanism chosen for this purpose, which ultimately raises questions regarding the true reasons for the existence of amount C.

III. Other Concerns There are questions surrounding the implementation of the unified approach, particularly regarding its enforceability and interaction with tax treaties.

Martin Hearson, “The OECD’s Digital Tax Proposal: Untangling the Impact of ‘Pillar One’ on Developing Countries,” International Centre for Tax and Development Blog (Oct. 10, 2019).

Id. OECD, unified approach, supra note 4, at 9, para. 30.

African Tax Administration Forum, “ATAF’s Opinion on the Inclusive Framework Pillar One (Including the Unified Approach) and Pillar Two Proposals to Address the Tax Challenges Arising From the Digitalisation of the Economy,” at 4 (undated).

Id.

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This article was originally published in Tax Notes International (Tax Analyst) on 16 Dec. 2019 A. Enforceability The enforceability of amount A is still in doubt, especially when a company is considered to have no other physical presence in the market jurisdiction. Let us consider the OECD’s example of the application of the unified approach.

The OECD hypothetical involves Group X, a multinational group that provides streaming services and has no other business lines. Parent is a resident of Country 1 (C1), and Subsidiary is a resident of Country 2 (C2). Parent owns all the intangibles of the group and is therefore entitled to all the profits under the current rules.

Subsidiary carries out marketing and distribution functions in C1, but also sells streaming services there and in Country 3 (C3), although there is no taxable presence at all in C3.

Focusing on C3, we can easily see some problems with the enforceability of the unified approach. For C3, the example describes a situation of a nonphysical, nonresident business, so the only option for enforcing the new taxing right there will be by applying a withholding tax.28 The question, however, will remain regarding who is the taxpayer, which is a different question than who materially pays the tax.

Even though the OECD recommends setting up some general standards for applying a withholding tax, domestic laws will still determine who the taxpayer is for applying that tax. That can make enforceability a bit of a headache. For example, the OECD appears to direct C3 to tax Parent. However, it is more likely that C3 — sometimes following laws other than tax laws — will recognize that the taxpayer is indeed Subsidiary, which carries out the remote sales of streaming services in that country. Determining who is the taxpayer is not a superficial question, because it will also determine which tax treaty applies. And although tax treaties tend to be similar, each is an entirely different world at the end of the day.

Moreover, and once again, the use of thresholds may complicate things even more, allowing cherry-picking behavior as regards treaties. Indeed, as argued earlier, quantum thresholds — once settled and

Issue 2 - April 2020

sacred — may give rise to new tax planning opportunities and perhaps also to abusive practices. These practices may also affect the proper application treaties, influencing taxpayers’ decisions in relation to what treaty should be ultimately applicable, which of course will depend on the benefit that a specific treaty may offer.

B. Implementation of Tax Treaty Amendments The OECD’s proposal will require modifying tax treaties by adding articles that define the scope of the new nexus rule and address the new attribution of profit rules. Articles 5, 7, and 9 of the OECD model convention will have to be amended as well. All those modifications will require a widespread implementation of the new rules.

The best way to achieve that goal appears to be a multilateral agreement, although it is unclear whether the OECD’s multilateral instrument could serve that purpose. Perhaps a new version will be required, or, as rightfully suggested by some commentators, it is time for a true multilateral tax treaty that replaces bilateral agreements, especially given that almost all the provisions in the MLI stem from tax treaties.29 Whatever path is taken, it is evident tha renegotiating all bilateral tax treaties does not seem an attractive alternative.

Countries will continue to tax digital businesses with or without a unified approach, and the discussion has already entered the next stage. If more countries begin unilaterally imposing DSTs, it will be almost impossible to turn that trend back.

Therefore, finding a common solution becomes a priority if we want to avoid a world in which all countries impose taxes that flout tax treaty obligations and result in permanent double taxation.

The unified approach is not the fairest alternative for the global allocation of taxing rights. However, it is a positive step, and it is now everybody’s job to make it suitable to cover the needs of all countries — especially developing ones — to achieve a consistent common approach.

The time for true international compromise has come.

28

29

The OECD acknowledges that a withholding tax appears to be an appropriate mechanism for tax collection. OECD, unified approach, supra note 4, at 10, para. 39. Another option would be to use something similar to the MOSS available for EU VAT and B2C digital services.

Brauner, “The Multilateral Instrument as a Platform for Coordination of International Tax Policies,” 4 BTR 437 (2019).

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VAT in England

- after BREXIT

PETER HUGHES Peter Hughes is a freelance chartered accountant based in York in Northern England and specialising in VAT. He has clients in various parts of the UK and also a few in other countries.

His expertise lies in crossborder supplies of goods and services, property and partial exemption.

The UK officially left the EU on 31 January 2020 and has now entered into a transitional period which will last until 31 December 2020.

During this time, the UK will remain in the EU VAT territory and EU VAT rules will continue to apply.

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• Businesses which sell digital services to consumers in other EU member states are liable for VAT in those member states, although most use the MOSS (mini one stop shop) system. UK businesses which want to continue to use the MOSS system would need to register for the VAT MOSS non-Union scheme in an EU member state. This can only be done after the date the UK leaves the EU VAT territory.

The body which administers VAT in the UK, H.M. Revenue & Customs (HMRC), published some guidance notes “VAT for businesses if there’s no Brexit deal”, although the document has now been archived. Nevertheless, it gave some useful pointers as to how VAT might work once the UK is outside the EU VAT territory The important points were as follows: •

There would still be a VAT system in the UK, with procedures closely aligned with the current system.

• Businesses importing goods into the UK would use “postponed accounting” for import VAT. They would account for VAT on their VAT return rather than paying import VAT when or soon after the goods arrive in the UK. A number of EU member states already use postponed accounting, an example being the Netherlands.

• Currently if a UK business sells and dispatches goods to a consumer in another EU member state, UK VAT must be charged, or if the volume of such sales to consumers in a particular member state exceeds the “distance selling threshold” in a year, VAT must be charged in that member state. After Brexit with no deal, such sales would be zero-rated exports.

• EC sales lists would no longer be required for sales by UK suppliers to EU businesses.

• The main “place of supply” rules for cross-border services would remain unchanged.

It is important to note that the above represents the position should no trade deal be reached. It may be ambitious to expect that a trade deal with the EU can be agreed by the end of 2020. With regard to import VAT, the Government has already passed The Value Added Tax (Accounting Procedures for Import VAT for VAT Registered Persons and Amendment) (EU Exit) Regulations 2019, which come into force from a date to be announced. The Government has yet to confirm whether postponed accounting would apply in circumstances other than a no-deal Brexit.

During the transition period, it will still be possible for a UK business to reclaim input tax incurred in another EU Member State, subject to the usual rules. There has been some confusion on this point, not helped by HMRC publishing guidance to the effect that no input tax could be claimed under the EU VAT refund scheme after 31 January 2020. This is incorrect and has now been updated. The guidance now says that the scheme can be used until 31 March 2021. Consequently, any UK business which incurred VAT in another EU Member State in 2019 (for example on subsistence during a business trip, or in the course of buying or importing goods in a Member State and selling them onwards in the same Member State) will have until 30 September 2020 to make the claim for repayment.

Peter Hughes is a independent chartered accountant practising independently in the UK. He has spoken three times at the Malta Institute of Management’s VAT and EU Conference.

taxploration

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he Advanced Diploma in International Taxation (ADIT) is the only International recognized Diploma in Taxation in Malta through the Chartered Institute of Taxation (UK), which is the leading taxation professional body in the United Kingdom and is delivered in Malta through the Malta Tax Academy.

This internationally recognised qualification is considered to be at a level of a post graduate professional qualification.

email: info@taxacademy.mt for further information.

Issue 2 - April 2020

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Succession Planning for

Family Businesses

F

amily businesses are unique, at the core lies an important dynamic connecting the family and the business through the family’s ownership, which offers both opportunities and challenges.

ANTHONY PACE Anthony Pace is an accountant by profession and a tax partner at KPMG in Malta working extensively in the area of family businesses and transaction services.

When one takes a look at the most successful family businesses, one will note certain common characteristics. Dedication to community, an entrepreneurial ethos, and a concentration on deep-rooted and lasting strategic thinking and legacy. All of these qualities are essential for a business to thrive, but the key to sustaining the business in the future and ascertain its growth, lies in smart succession planning. This imperative ‘middle’, bridges the gap between two visions – the entrepreneurial creativity that establishes the business and the long-term ambition to ensure the growth and continuity of the business. Although businesses might be faring well enough in the present-day, what about a decade or two from now? Generally, most family business owners find themselves so involved in the daily running and operations that they do not contemplate on what is required to make sure that the business continues to, not only function in an effective manner, but also grow substantially once they step down as leaders.

A smart succession plan therefore envisions the future of the business, anticipates the struggles that the business may be faced with, and prepares for it. This includes making preparations for disturbances within the business, such as the exigencies of new leadership and the transfer duty implications arising upon succession.

The role of the Advisor A smart succession plan covers the succession of both the ownership and the management of the business – two equally important yet distinct functions. Yet, the

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transition of any business, including these functions, can generate a mix of emotions.

Letting go is not an effortless exercise and taking over the reins can also have its challenges. Having the right advice during such a pivotal business and life decision can make all the difference. This is where the advisor’s role becomes crucial since they can help their clients consider all the elements that go into passing the business on to the next generation including in relation to the following:

Communication and implementation The transition of a family business from one generation to the next is an intricate and, more often than not, a sensitive exercise, especially since succession planning closely relates to the owner of the business eventually retiring. Most business owners are hesitant to address the subject as they feel that they still have a lot to contribute to the business and that they are the ones which truly understand its needs. It is thus important for the advisors to sit down with the family members and listen to their needs, expectations, worries and fears – both collectively and independently. Indeed, involving family members in the succession plan can help ensure that all persons involved are informed and feel comfortable making decisions about their individual and collective futures in the ownership and management of the business.

Communication and implementation of the succession plan can ensure that all the risks are mitigated and each person is duly informed on the process, timelines and goals.

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Management process planning Management process planning guarantees that family members clearly understand the prospects and responsibilities of taking over the business. Ownership and family frameworks with well-established principles, in addition to a family charter may aid in addressing these issues. A family charter is a set of guidelines which helps the smooth transition of the family business to the next generation as it ensures transparency and clarity, and foresees and mitigates any disagreements which might arise through specific procedures which would kick-in in such eventualities. A family charter also administers other areas of management structures within the business, such as profit distribution and the process of selling shares.

in addition to advice on governance issues is key as certain routes are only available if one prepares and plans ahead.

In advising their clients, advisors must take a number of matters into considerations, mainly:

— The wishes and ambitions of the inner team as well as the family members, even those which play a rather non-active role in the running of the business; — The way in which the vision, values and beliefs of the family may affect the succession plan; — Scenarios where the family business already has in place rules regarding the integration of the next generation;

SHARON MAY SCICLUNA Sharon May Scicluna is an Associate Director at KPMG Malta. Over the past years Sharon has managed a team of tax advisors in providing varied tax advice and assistance to clients on various taxation matters including in relation to succession planning, financing structures and group restructuring.

— Whether there is an interest in an initial public offering (IPO) and going public;

— The worth of the business and how that Leadership succession strategies Solid and effective succession planning goes beyond identifying a successor, but also comprises coaching and training the successor during the transition period – making sure that he knows the nitty-gritty details of the business and is well-prepared to take over once the time comes. Although the persons to which the owner intends to pass on the business to (generally the children) may be highly accomplished and competent, there may still be questions about whether they can run the business as well as their successors have done, and this is precisely why the transition period is pivotal to a business’ continuity.

Leadership succession strategies can aid in examining and identifying the right leader and develop a plan of action to coach and train the next generation.

Tax Implications Another important consideration that needs to be taken into account are tax implications. Family business owners would need to rest assured that upon their retirement or even death, the wealth generated through the operation of the business is not largely paid in taxes. Seeking expert advice

Issue 2 - April 2020

may influence the decision to either sell or pass the business down from one generation to another.

KPMG: Our view At KPMG, we believe that the growth and durability of a family business lies in creating a balance between the demands of the business and the expectations of the family, therefore it is important for us to work shoulder-to-shoulder with our clients and hold regular meetings with them so as to understand their concerns as they come about and provide reassurance. Building such long term and close relationships with our clients enable us to grasp the basic practical details of the business, and most importantly, the family dynamics putting us in the best position to be able to assist the family understand their options for the future, provide tailored solutions that are ideal for that specific family business, and encourage them in reaching decisions that bring together their traditions, values and ambitions. In aiding our clients build an effective succession plan, we aim towards ensuring that our clients rest assured that management, governance, ownership succession and the subsequent tax implications have been addressed.

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The way forward

for our ECONOMY

B

y any measure, Malta is a remarkable success story. Since 1964 our GDP has grown by a hundred times, reflecting the emphasis that policymakers have always given to economic progress and the establishment of businessfriendly legislation. Successive administrations have strived to attract investors to our islands and create the conditions for new economic niches. As a result, Malta is one of the most diversified and open economies in the world.

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Having an attractive tax system played a significant role in attracting foreign direct investment and helped the development of our locally-owned industries. The taxation profession and the advice it has dutifully provided to Government have been key to our progress. Corporate taxation is one of Government’s main revenue sources, amounting to one euro in every six euro of tax revenue collected.

Legal, accounting and management consultancy services generated nearly â‚Ź690 million in value added last year, double the amount in 2012. This sector generates 12,000 very well-paying jobs, providing employment to a lot of our graduates.

Some think that our success story is down to us having an attractive tax system.

As Minister for the Economy, I can attest that tax would not be a sufficient motive for a company to set up shop in Malta. Investors with real presence require much more than a good tax system. They need things like an excellent infrastructure, good access to their markets, a well-trained and productive labour force, and a good business climate.

In coming years, the challenge that we face as a prosperous economy is not as some fear whether we will have to change our tax framework. I believe that with the aid of the excellent tax profession we have

Issue 2 - April 2020

in this country, we will be more than able to accommodate any changes arising from our international obligations.

Our challenge will be how to ensure that our success does not make us less competitive. This goes beyond whether our wages converge and start to exceed the EU average. Again, I believe that we should not see this as a risk, but as one of our aims. We joined the EU to become the best in Europe and not to remain a low-cost economy.

To make our next move up the global value chain we have to improve our factors of production so that they become more productive. Our education system needs to make a great leap forward and create the entrepreneurs of our tomorrow. We have to build a better infrastructure that supports the economic sectors of the future. Our way of doing business needs to modernise and facilitate the transformation of our economy.

My priority is to ensure that our country makes large strides forward in the ease of doing business. We cannot rest on our laurels and have to remain nimble, continuing to keep our legislation the best in town. We have to continue to diversify, while still supporting existing industries. The moment we stop moving forwards we will start sliding backwards.

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EU tax transparency tools - effectiveness in the fight against tax evasion.

I

n 2018, the EU Council adopted rules aimed at boosting transparency to prevent aggressive cross-border tax planning. The directive targets intermediaries such as tax advisors, accountants and lawyers that design and/or promote tax planning schemes. Such transparency rules require practitioners in the field of taxation advisory to report schemes that are potentially aggressive.

EDWARD SPITERI Edward Spiteri graduated with a Bachelors in Accountancy and Management and is currently undertaking a Masters in Accountancy with specialisation in taxation at the University of Malta.

Edward Spiteri joined Erremme Business Advisors in 2018, his area of work is in the accountancy and tax advisory departments working on several local and international assignments.

Edward showed interest in corporate group structures inspiring him to specialise in the implications and tax perspective with relation to corporate group formations and intra-group dealings.

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The information received automatically exchanged

will be through

a centralised database. Penalties will be imposed on intermediaries that do not comply.

EU tax transparency rules and the use of automatic exchange of information between Member States are delivering added-value when it comes to countries’ ability to track down tax evasion practices, according to an evaluation published in September 2019 by the EU Commission. An effective shift in Member State mentality and practices seems to be taking place, from an opaque exchange of information to a semi-transparent exchange of information seems to be the common practice. Some Member states are on the resisting end of this, whilst other member states are fully applying such a practice.

The reports provided by way of the EU tax transparency rules have provided a snapshot of the commonly agreed legislation underpinning the exchange of tax information on financial accounts and on the tax rulings that Member States provide multinational companies. For example, in 2017 Member States exchanged information on almost 18,000 tax rulings given to multinationals. The evaluation shows that Member States should now be receiving the information they need to fight tax fraud and evasion, and that the new rules have helped to deter taxpayers from hiding income or assets.

The EU Commission continues to encourage all EU countries to make full use

Issue 2 - April 2020

of their access to the wealth of useful tax information being made available through the new Member State communication.

The report published on September 2019 assesses Council Directive 2011/16/EU (Directive on Administrative Cooperation), on administrative cooperation in the field of direct taxation. The report analyses the success, competence, lucidity, significance and the benefit of administrative cooperation for the EU Member States. The report itself and more information on the current rules are available. As such rules are still in the juvenile stages, a full assessment and in regards to practicality and utility cannot fully be examined. However it is notable that due to the implementation of the rules even more tax data has now started to be exchanged between Member States, such as, the corporate tax revenues paid by big companies in each country. From next year, Member States will also start sharing intelligence on the tax planning advice being provided by intermediaries in each country.

Nevertheless a number of difficulties arises in this regards. Notably; the difficulty in balancing both the needs of tax transparency and tax confidentiality between EU member states. In this regards many of the Member states are lobbying in favour of the idea that such rules are pushing towards a uniformed tax system across the European Union. However most scholars are raising strong arguments with regards to the negative impacts on the economical structures and governance on societies through the reduction in tax sovereignty of Member States brought abought by the introduction of EU tax transparency tools.

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Crypto Assets and Tax Law 1. Which laws, regulations and court cases exist dealing with crypto assets?

On the 1st of November, 2018 the Maltese Government published and enacted the Virtual Financial Assets Act (Chapter 590 to the Laws of Malta) and the Innovative Technology Arrangements and Services Act (ITAS) (Chapter 592). Subsequently, the Virtual Financial Assets (VFA) Regulations came into force through Subsidiary Legislation, Legal Notice 357 of 2018.

Following that the Maltese Commissioner for Revenue (“CfR”), issued its guidelines on the income tax, stamp duty and VAT perspective in relation to Digital Ledger Transaction (DLT) assets. These guidelines have been issued under Article 96(2) of the Income Tax Act. The Virtual Financial Assets Act seeks to provide regulation and investor protection through a variety of obligations, assurances, and guidelines. One particular part of the VFA Act pertains to Initial VFA Offerings, therefore covering inter alia Initial Coin Offerings and token offerings. Under the new rules, companies operating in the sphere of virtual financial assets may be required to apply for a licence with the Malta Financial Services Authority, as well as adhere to a number of stipulations regarding the whitepaper, marketing materials, and

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civil liabilities. They are also required to implement a fully compliant Know Your Customer (KYC)/ Anti-Money Laundering (AML) checks that are applied to all parties deemed necessary by both local, and EU law.

Similarly, the Innovative Technology Arrangements and Services Act is intended to be an extension to the Malta Digital Innovation Authority Act (MDIA) and the VFA Act. The ITAS act provides the definitions to `Innovation Technology Arrangement` (UTA) and `Innovative Technology Services` (ITS) which are subject to eligibility under the Maltese Authority rulings.

2. What are crypto assets from an income tax point of view?

The Maltese Commissioner for Revenue (CfR) has classified Distributed Ledger Technology (DLT) assets into two (2) categories. The first category is “Coins”, whereby the CfR determined that Coins refer to those DLT assets, that do not have the characteristics of a security and that have no connection with any project or equity in the issuer, and whose utility, value or application is in no way directly related to the redemption of goods or services. The CfR deems DLT assets as cryptocurrencies that are designed to be used as a means of payment or a medium of exchange, or else

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as a store of value. The CfR deems coins to functionally constitute the cryptographic equivalent of FIAT currencies.

The second category is “Tokens� which are sub-categorised into two (2), Financial Tokens and Utility Tokens.

In respect of Financial Tokens, the CfR deems such DLT assets as presenting qualities which are similar to those presented by equities, debentures, units in collective investment schemes, or derivatives including financial instruments which are referred to in the crypto world as security, asset or asset backed tokens. The CfR understands that such tokens would be analogous to equities, debentures, units in collective investment schemes, or derivatives including financial instruments, where such instruments would grant rights to dividends in a similar fashion or alternatively could grant rewards based on performance, voting rights, or represent ownership or rights in assets or a combination of both.

The CfR deems Utility Tokens as DLT assets, whose utility, value or application is restricted solely to the acquisition of goods or services either solely within the DLT platform or in relation to which they are issued with a limited network of DLT platforms. This definition very much reflects the understanding of the Malta Financial Services Authority. The CfR includes under

Issue 2 - April 2020

the term Utility Token all other DLT assets that are tokens whose utility is restricted solely to the acquisition of goods or services, whether or not listed, may be transferred on a peer to peer basis or converted into another type of DLT asset, but only until such time as it is so converted.

The CfR also looks at hybrid tokens and states that the tax treatment should be dependent on the nature of the token at that particular moment in time. If the intention of such token, is that of a Utility Token, then it needs to be treated as such. Nonetheless the CfR also leaves room for interpretation, wherein its guidelines the CfR states that the tax treatment of any type of DLT asset will ultimately by determined not by its categorisation but on the purpose for and context in which such DLT asset is used.

3. What are the income tax consequences of selling crypto assets against fiat currency?

of a non-trading nature, one needs to check if the transaction falls under the capital gains rules under Article 5 of the Income Tax Act. The analysis shall classify if the tokens meet the definition of securities. Transfers of tokens which do not fall within the definition of securities, fall outside the scope of the tax on capital gains.

4. What are the income tax consequences of exchanging crypto assets against crypto assets?

The tax consequences for the exchange of one asset to another depends on the market value of the assets in question and the capital gain made on such exchange.

One also needs to assess if this transaction falls under the provisions of the capital gains rules of Article 5 of the Income Tax Act. As an example, transfers of convertible tokens which would not be issued as a financial token at issue date do not fall under the capital gain rules unless they are converted into securities.

All transactions need to be analysed by reference to the nature of the activity, the status of the parties and the specific fact and circumstances of the particular case.

In the case of coins sold against fiat currency, the income tax treatment shall be the same as any other sale transaction between any other currencies. The determinant factor for tax purposes is not the categorisation of the type of asset but the purpose and context in which it is used.

In order to arrive at the value of income to brought to tax, one needs to establish the market value of the crypto asset.

In the case of transfer of financial or utility tokens, one needs to analyse if the transfer is of a trading or capital nature. In the case of a trading transaction, tax will be charged as usual by adding the revenue from this transaction with all the trading profits for the year.

In the case of financial tokens which are

5. What are the income tax consequences of trading in crypto assets?

For Maltese income tax purposes, any return derived from Financial Tokens, whether received in FIAT, in crypto or in kind, should be treated as income. The tax treatment of the transfer of a Financial or Utility Token depends mainly on whether the transaction (transfer) is of a trading nature or of a capital nature.

If the transfer is in the form of trading transaction, the consideration should be treated as a receipt of revenue/income.

Therefore transfers or trades which are made as a result of the ordinary course of business are to be taxed as trading transactions. A proper analysis would be needed to determine whether one or more transactions would determine such

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transactions to be of a trading or nontrading nature. Therefore if the transaction is determined to be a trading transaction, ordinary income tax rules shall apply, and accordingly, profits from the sale of tokens which would have been acquired with the intention of resale at a profit from a profitmaking undertaking or scheme, are to be treated as trading profits.

If the transaction is not a trading transaction, according to the CfR, one would need to determine whether such transfer falls within the scope of the provisions on capital gains. Such determination would need to result in an understanding on whether such token would meet the definition of a “security” under the Income Tax Act. If such a transaction does not qualify under the definition of “securities”, then transfers on Utility Tokens would fall outside the scope of capital gains.

6. What are the income tax consequences of forks of crypto assets?

A fork in a crypto asset occurs when parties within the DLT network are not in agreement and this results in a split of such DLT network, creating alternative chains, such as with Ethereum, which when forked ended up with Ethereum and Ethereum Classic. Forks can form in two ways which are a soft fork or a hard fork. In a soft fork, is a software update which would still be compatible with the previous version. A hard fork is when a software update is not backwards compatible therefore all blocks need to follow the new rules to remain valid.

When a hard fork occurs, the person who held the original tokens has now given up such tokens in exchange for the new tokens.

The event would need to be analysed to determine whether it is an event of a trading nature or not. The Maltese Income Tax guidelines are silent in this respect.

From an analysis point of view, upon the transfer to the new version of the blockchain, each crypto asset would be worth more or less, depending on the market value of the new tokens. If a profit is realised from the sale of the asset, then tax is to be paid as it would be similar to trading income. If tokens would be held as an investment, then one needs

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to analyse if capital gains tax is triggered. In the event of a soft fork, this change does not create a new cryptocurrency, therefore no profit or loss would be realised. Apart from the trigger of direct taxation, Stamp Duty will also be triggered and the respective guidelines shall be followed with respect to duty on transfer of assets.

7. What are the income tax consequences of airdrops of crypto assets?

Airdrops are a distribution of a cryptocurrency for free with the intention of gaining attention and attracting new followers to widen the user base of such crypto asset. Whilst the concept of air drops is not mentioned in the guidelines issued by the CfR, by analogy an airdrop is somewhat similar to the issue of bonus shares, whereby an individual is given shares as a bonus. From a Maltese perspective, bonus shares are treated in the same manner as dividends. In terms of the Maltese Income Tax Act, since the entity would be distributing cryptoassets to its users, upon allocating such, the entity should send to the token holder a statement showing the gross tokens, the tax paid on behalf of the token holder and the net amount involved in the allocation of the airdropped tokens.

8. What are the income tax consequences of losing crypto assets?

There are two ways of losing crypto assets. The first is through theft which can happen from hacking of system through cyberattack. In such a case, if the blockchain does not manage to recoup the stolen bitcoins, a loss needs to be declared.

In the second case, one can lose the key to access the system, therefore, although the bitcoins would still remain on the blockchain, without having access to these assets, one can never redeem them to check is a realised profit or loss could be done. In such a case, one also needs to show a loss and write off the tokens from assets.

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Although the CfR has not yet issued any guidelines in respect to pool mining, we believe that it should be treated like a partnership. Revenue will be received by the partnership for the mining work provided and then distributed to the partners with respect to the output given individually, thereby each partner being responsible for their own self tax assessment.

Individuals usually work as employees or self-employed entrepreneurs. Employers record and collect taxes on behalf of their employees. Individuals who work as independent entrepreneurs would need to declare their own taxes.

In relation to Value Added Tax on mining activities the VAT guidelines provide for two instances. Where mining constitutes a services, for which compensation arises in the form of newly minted coins. This case would fall outside the scope of VAT since there would be no direct link between the compensation received and the service rendered, and there would be no reciprocal performance between a supplier and receiver.

If on the other hand, miners receive payment for such activities, such is deemed to be a provision of services and such service would result in a chargeable event for VAT purposes. If the supply of the service would be in Malta, Maltese VAT would apply.

10. What are the income tax consequences of staking crypto assets?

It must be noted that the loss is only deductible for Income Tax if one demonstrates that a reasonable effort was done to recoup such assets.

9. What are the income tax consequences of solo, pool and cloud mining?

For Income Tax purposes, the CfR guidelines mention that gains or profits in relation to revenue made from the mining of cryptocurrencies should be considered as

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income and subject to income tax. The local guidelines do not distinguish between the three different ways of mining. Solo mining is when an individual does all the mining work, without any help from anyone else.

A pool mining is when individuals pool resources together and compensation would be shared together depending on the amount of work performed. Cloud mining is the process of bitcoin mining utilizing a remote datacenter with shared processing power. Cloud mining enables users to mine bitcoins or alternative cryptocurrencies without managing the hardware.

In order to understand the tax consequences of staking crypto assets, one needs to better understand what staking means. The term “to stake” refers to a process through which a node on a DLT network sets aside a certain number of coins to participate in a process employed within the network. Such cryptocurrency networks which support staking make use of the Proof-of-Stake (PoS) consensus mechanism.

Staking coins is considered as a smarter way of HODLing. Within the cryptocurrency community, HODLing is a term that refers to the practice of holding an asset for an extended period to maximize profits in the long-term. Staking, on the other hand,

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the hands of the shareholder as already taxed at company level.

and a capital gains perspective. Nonetheless the revenues generated through the proceeds of such an issuance would then be liable to Income Tax during the course

12. What are the income tax consequences of operating crypto ATMs?

allows users to keep their assets stored away safely in a manner that still supports profit-making. While HODLing is a passive action, staking is the opposite as people who participate in this manner are likely to see the value of their tokens increase over time.

The Maltese CfR guidelines do not make a direct reference to staking, however one should look at the purpose of such an activity. If the purpose of staking is seen as part of the ordinary course of business, any revenue or profits made would be deemed to be income and subject to income tax as per the ordinary rules as determined in terms of the Maltese Income Tax Act. If on the other hand, the intention of staking would be to hold as a long term investment, the resulting capital gain could fall outside the scope of the capital gains rules.

11. What are the income tax consequences of distributions on crypto assets?

Distributions from crypto assets either in FIAT or in crypto would be deemed to be income and therefore liable to tax in terms of the Maltese Income Tax Act. However, Malta has a full imputation system and consequently if distribution is in the form of a dividend these would not be taxed again in

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The provision of a service for which a fee is being earned in the provision of such service would lead to such income to be liable to Income Tax like any normal trading operation.

When one uses a crypto ATM, fiat currency is changed into crypto currency.

Therefore we would need to asses a transfer from one currency to another asset. The transaction in itself of exchanging fiat into crypto assets does not trigger tax. Tax would subsequently be triggered once the crypto asset will be exchanged to other crypto assets or redeemed to fiat currency.

From a taxation point of view, the department needs to make sure that the crypto company operating the exchange would be duly registered and paying all respective taxes on profits made by operating such exchange.

13. What are the income tax consequences of operating a crypto exchange?

Crypto Exchange platforms which are generating profits from the provision of the platform service shall be treated like normal trading company and hence such income will be chargeable to tax under the normal principle of Maltese Income Tax law and regulations. From a VAT perspective, this would constitute a supply of services for consideration and Maltese VAT would be applicable unless an exemption from the VAT may be availed of.

14. What are the income tax consequences of selling crypto assets in an ICO/STO/ IEO? For Maltese Income Tax purposes, the raising of finance through an ICO/STO/ IEO would not be considered as an income generating event and therefore would not be liable to tax both from an income perspective

of normal business operations. From a VAT perspective, the issuance of an ICO/STO/IEO does not constitute a chargeable event for VAT purposes.

15. What are the income tax consequences of an indirect investment in crypto assets?

An indirect investment in crypto assets may constitute the investment in a company operating in the infrastructure of crypto assets. In this way, one would still be investing in crypto without actually buying any crypto assets. Since this type of investment will still be in fiat currency, the usual Maltese Income Tax rules would apply in the case of a dividend distribution to investors which shall be taxable at gross value. The company on the other hand shall pay taxation on any profits made as per operation process of the company.

16. What are the income tax consequences of receiving wages or salaries in crypto assets?

When a payment is made or received in a cryptocurrency, such payment is deemed to be treated as a payment in any other currency and this would therefore mean that it is subject to income tax as any other income.

17. What are the income tax consequences for a merchant receiving payment in crypto assets?

When a merchant is accepting payment for goods or services in the form of cryptocurrencies, for Maltese Income Tax purposes there is no change to when the revenue is recognised or the manner in which taxable profits are calculated.

18. How is income from crypto assets to be treated under double tax treaty law?

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To date, there is no reference to crypto assets in the present double taxation treaty.

22. Are crypto assets subject to exit tax?

Until guidelines are issued or a clause would be included in these treaties, one should

in Malta on the 1st of January 2019 with

assess the presented transaction and analyse how this would have been treated for

the exception of Exit tax rules which were applicable from the 1st of January 2020. To

taxation if transaction had been between fiat currencies.

date, the CfR has not issued any guidelines on exit tax treatment of crypto assets. One

ATAD rules have been implemented

needs to analyse if these assets were being kept as a long-term investment or trading

19. What are the value added tax/sales tax consequences of selling crypto assets?

purposes.

In the case of long-term held assets, one needs to analyse the residence state

In the case of Financial Tokens, which are used to raise capital, such an issue would not give rise to any VAT implications. In respect of Utility Tokens, where such token carries the obligation to be accepted as consideration of part thereof for the supply of a good or service, then VAT would be applicable. In respect of hybrid tokens, one would need to determine the ‘state’ of that token at that particular point in time when the transaction was undertaken.

20. Do transactions with crypto assets trigger any transfer taxes?

Stamp Duty treatment in relation to transactions involving DLT assets shall be assessed through the determination of whether such DLT assets have the same characteristics of “marketable securities” as defined in the Income Tax Act. If such definition is satisfied, then Stamp Duty shall be paid in accordance with the provisions of Duty on Documents and Transfer Act.

21. Do transactions with crypto assets trigger any gift or inheritance taxes?

There are no inheritance, gift or wealth taxes in Malta. At the same time, tax is imposed on the transfer of certain capital assets such as immovable property and shares. The CfR have not yet issued any guidelines on taxation after the transfer of crypto assets as gifts. At this stage, one should analyse carefully the tax liability upon sale of non-virtual assets and apply the same principles to crypto assets.

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of the blockchain in question due to the decentralised blockchain system, and subsequently analyse tax consequences in the case that the same transaction was in fiat currency or any other asset held in Malta.

23. Can mining trigger gambling tax?

Gaming tax in Malta is at a rate of 5% on gaming revenue for Malta based players.

the CfR guidance note the CfR states that “Any obligation under the Income Tax Acts to keep proper records applies to transactions involving DLT assets. Values expressed in a cryptocurrency will need to be translated to the reporting currency in which the taxpayer presents its financial statements. Applicable sanctions in terms of the said Acts shall apply where proper records are not kept and where there is failure to report and pay any liability to tax.”

25. What measures have tax authorities undertaken in the past to ensure crypto tax compliance?

The field of crypto tax compliance is a relatively new area and the tax authorities are still developing their policies and procedures.

Nonetheless the CfR has issued its guidance which is available to the general public in relation to its expectations for the treatment of income or gains from crypto assets.

In mining, one is preparing and processing transactions or producing new bitcoin.

Alternatively, mining is also necessary for miners to make the payment network trustworthy and secure by verifying its transaction information. Therefore this process does not fall under gambling which is a mere dependence of luck unlike mining which is a service being provided to the blockchain company.

A person who is not a professional gamer shall include all income gained from gambling in the “Other Income” section of the Tax Return and tax on progressive rates appropriately. In the case of a professional gamer who undertakes this job on a full-time basis, would usually be classified between self-employed gambling. For tax purposes, all income shall be listed in tax return and taxed on progressive rates.

26. Are crypto exchanges subject to CRS/ FATCA?

24. What documentation requirements exist for taxpayers regarding crypto assets?

The Maltese CfR to date does not accept payments of dues to it in crypto assets.

Due to the uncertainty in the respect to FATCA, US investors or clients of Maltese crypto-exchanges should verify on a regular basis their US tax obligations, including FATCA. Currently no reporting is required under FBAR (“Foreign Bank Account Reporting”) as noted by FinCEn (“Financial Crimes Enforcement Network”) which in mid-2019 reported that the list “types of reportable accounts” currently do not include crypto currency accounts.

27. Is it possible to discharge tax debts with crypto assets?

Tax payers are to maintain all necessary records and documentation as would be required if they were to receive income, gains or profits from ordinary activities. In

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The OECD's International VAT/GST Guidelines 2017

Its Validity Today?

T HECTOR J. SPITERI Hector is a certified public accountant and holds a practising certificate in auditing. He is a Fellow member of the Malta Institute of Accountant, a Fellow Member of the Malta Institute of Taxation and an honorary member of the Malta Institute of Management.

Hector commenced his career in 1979 working in industry, from where, later in the same year, he moved into auditing.

He also worked as a financial controller for a foreign bank and in 2003 joined Busuttil & Micallef where today he holds the position of senior partner.

Hector also holds various directorships and is a keen activist in the corporate and financial industry. Currently, he is also the Vice-President of the Malta Institute of Management and the Managing Director of the Malta Academy for Taxation Studies.

In 2017 Hector was appointed Honorary Consul of the Republic of Poland to the Republic of Malta.

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he main purpose of the Organisation for Economic Co-operation and Development (OECD) is to improve the global economy and endorse global trade in all commonly shared industries in international trade, by providing a shared society in which governments of different countries may work together to uncover solutions to common problems that may be a hindrance to possible engagements of international trade.

It includes working with self-governing nations that share a devotion to convalescing the local economies and well-being of the general population. Thus resulting in continues adaptive improvements for the global economy.

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The OECD’s main focus is to help governments around the world achieve the following:

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Improve confidence in markets and the institutions that help them function.

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Obtain healthy public finances to achieve future sustainable economic growth.

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Achieve growth through innovation, environmentally friendly strategies, and the sustainability of developing economies.

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Provide resources for people to develop the skills they need to be productive.

The OECD published its new International VAT/GST Guidelines in the year 2017. The Guidelines were published previously and made available in 2015 however the 2015 guidelines had undergone material amendments throughout the OECD’s post-discussions. Hence an amended version with varying views was published in 2017 guidelines.

As from kick-off of this briefing article, it must be noted that the Guidelines do not prescribe rules that jurisdictions must follow. The OECD states that jurisdictions remain sovereign with respect to the intent and applications of their own domestic laws. In this regards, the Guidelines purely identify objectives, and suggest the means that various jurisdictions should go about in achieving them.

They support and give strong arguments in relation to the destination principle for the imposition of VAT, (also known as ‘Goods and Services Tax’ (GST)) from which it follows that tax should be ultimately levied only on the final consumption brought about by the end user within the taxing jurisdiction.

for cross-border supply of services and intangibles, VAT/GST should be charged in the consumer’s jurisdiction, rather than the supplier’s jurisdiction, the underlying principle that VAT alike to Income Tax should only be charged once is being reflected. Hence it is understood that such an approach used by the OECD with regards to VAT/GST is the possible basis for the EU COUNCIL DIRECTIVE 2006/112/ EC of 28 November 2006 on the common system of Value Added Tax. In light of the difficulties that may be faced in applying the destination principle to services and intangibles, the Guidelines provide place of taxation rules for determining the place of taxation for business-to-business (B2B) and business-to-consumer (B2C) cross-border supplies of services and intangibles.

For B2B supplies, the Guidelines recommend the implementation of a reverse charge mechanism, in such a case, the business customer is responsible for paying VAT/GST instead of the non-resident supplier. For B2C supplies, the Guidelines recommend that non-resident suppliers be required to register and account for VAT/ GST in the jurisdiction of taxation (based on the destination principle) under a simplified registration and compliance regime, even if it is not located in the jurisdiction of taxation.

It also provides recommendations for mutual co-operation among tax administrations, in order to facilitate a consistent interpretation of the recommendations in the Guidelines, particularly in respect of neutrality and place of taxation, so as to minimize double taxation or double non-taxation, and the potentially resulting disputes.

trade is being undertaken in.

With the publication of the Guidelines and the increasing growth and challenges of the digital economy, many jurisdictions around the world have responded and/or are responding to this through the adoption of the recommendations provided under the Guidelines (specifically in relation to the destination principle and the cross-border supply of services and intangibles). This has resulted in additional costs and complexity to the offshore supplier who has to comply with the different rules and compliance requirements under the various jurisdictions it operates in.

Back in 2016, under their ‘Better Regulation’ agenda, the European Commission adopted a ‘VAT Action Plan’ so as to “reboot the current EU VAT system to make it simpler, more fraud-proof and business friendly”- In this regards on viewing of the effects of the EU VAT Action Plane on the EU VAT Directive, it is noted that similarities are apparent between the OECDs’ guidelines and the EU Vat Action Plane.

Since then, the global VAT scenery has continued to transform dramatically due to the dynamic world of trade. Navigating the transformation of the EU VAT regulations, alongside many other countries introducing or modifying their own indirect tax regimes, is a significant challenge for multinational businesses.

As this period of change continues, businesses must be prepared for how this impacts their own evolving models, operations and structures.

In relation to internationally traded services and intangibles the guideline states that the destination principle should

The use of among others, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and the various bilateral double taxation treaties and exchange of information treaties are highly recommended by the guidelines. In this way mutual co-operation, information

apply to such supplies. In other words,

exchange and mutual assistance may be

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brought about between the various tax administrations in the jurisdictions that

Reflecting on the narrative above, one cannot overlook the value added, in practical terms, by the OECD’s International VAT/ GST Guidelines. However the question that remains for one to ponder upon is that of its isolated relevance in the current global market trade of today.

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An analysis of Pillar 1 & 2 OECD recomendations

by Prof. Pasquale Pillar 1 – Unified Approach 1. In your opinion what is the absolute scope that is trying to be reached under Pillar One – Unified Approach?

PROF PASQUALE PISTONE Prof Pasquale Pistone graduated cum laude in law at the Federico II University of Naples in 1990, obtained his doctoral degree in 2000 cum dignitate publicationis at the University of Genoa.

He is Associate Professor of Tax Law at the University of Salerno and (since 2005) Professor at the WU Vienna University of Economics and Business, where he currently holds an EU Jean Monnet ad Personam Chair on European Tax Law and Policy. For his research activity on European and international tax law he has received several international awards. He is fluent in seven languages, frequent speaker at international tax conferences, editor of twenty six books, author of two monographic studies, as well as over one hundred and twenty articles on various tax issues written and/or translated in nine languages.

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The ultimate scope of Pillar One is to adjust international tax nexus and allocation to the (new) business models, which rely on global value chains, decide where to create value and can operate largely on a remote basis. In line with such models, MNEs in fact operate like stateless entities across the globe, challenging the validity of the criteria that determine liability to tax in the different jurisdictions. During the first phase of the BEPS Project, it seemed as if this phenomenon was necessarily associated with base erosion and profit shifting and only concerned digital business.

However, the analysis conducted in the past few years has shown that the true challenge of Pillar One is to rethink international taxation and the exercise of taxing jurisdiction across the world in the framework of coordinated action that reflects global value creation and apportions it consistently among the countries.

The political struggle among winning and losing countries (in terms of collected revenue) proves that this is easier said than done.

This becomes especially clear if one considers the unprecedented alignment between tax policy reform supported by some OECD and non-OECD countries (such as for instance some EU Member States, Colombia and India) on the one hand, and other countries, on the other hand, including in particular the US. This context has generated the proliferation of unilateral levies on digital services as a reaction to the loss of revenue by some countries, which can potentially undermine the efforts of decades of international tax coordination. This is what the OECD is trying to avoid wit its promise

to deliver a comprehensive reform with worldwide acceptance by 2020. The OECD has high international credibility as the real engine of international tax reforms, due to its enormous success with the coordination of tax transparency and the fight against base erosion and profit shifting. However, this is a much harsher challenge, which should be handled in the framework of a global political compromise including also Pillar Two.

2. In light of considerations with respect to the financial services industry do you predict future complexities under the Unified Approach?

Just like all other global players, the financial industry is not immune from future complexities, at least insofar as the structure of Pillar One remains the one that has been envisaged by the OECD in its last draft proposal and to the extent that the financial industry does not succeed in getting a dedicated carve-out.

Together with my co-authors of the IBFD Task Force on the Digital Economy, we have been pleading against carve-outs in our academic writing, published and submitted to the OECD. Our proposal is to limit the scope of lobbying, normally associated to the establishment of a carve-out, and rather act by means of a lower allocation of taxable income to the market countries in the presence of a limited exercise of function in such countries.

However, there are two more risks for the financial services industry. First, the uncoordinated levying of taxes on turnover from digital activities. Insofar as such taxes do not fall within the scope of tax treaties, in the absence of a permanent establishment in the State of the recipient of the digitally supplied financial service,

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there will be taxation on turnover in such country on top of the one of profits in the State of residence. The negative effects of this scenario can exponentially grow insofar as each country applies a different concept or structure for this tax (which is the reason for favouring an EU harmonized approach in this respect). Second, taxes on financial transactions levied in some countries could alter the conditions for tax neutrality with other global competitors in some parts of the world, such as for instance the European Union.

Overall, the biggest risk for the financial services industry is the legal uncertainty that prevents a proper planning of successful strategies, for which a stable and coordinated international tax framework is absolutely indispensable.

3. The threshold for creating nexus should be made as simple but relevantly effective as possible. What are your views on the appropriate methods for determining nexus in today’s world of business and trade?

I agree that nexus should be simple and just find it hard to accept that this may not be achieved with a corresponding amendment of the PE concept, along the lines of the digital or virtual permanent establishment, which we had proposed at IBFD with one of our studies in January 2015. Adding a new nexus on top of permanent establishment for taxing digitalized business just makes the applicable treaty framework unnecessarily more complicated, since some players would be forced to apply two different set of rules for determining how their crossborder profits and income from digital services should be linked and allocated to a taxing jurisdiction.

Besides, I am very sceptical about any form of ring-fenced solutions, which create are a structural source of biases and complexity. Unfortunately, the current OECD proposal on Pillar One is not just complicated, but also in fact endorsing the use of ring-fenced solutions for highly

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digitalized business and consumer-facing business. I wonder whether this is really desirable from a global tax policy perspective and in line with what had been previously suggested with the 2003 Ottawa Framework Conditions for Taxation, which seem to have fallen into oblivion.

4. The Consultation Document notes that the starting point for the determination of Amount A with respect to an MNE group would be the identification of the MNE group’s profits, which could be derived from the MNE group’s consolidated financial statements. The Consultation Document notes, however, that the starting point could instead be group profits calculated on a business-line-by-business-line basis, in order to address individual company profits, e.g., a situation in which a group may have one highly profitable line of business and one loss making business. A majority of practitioners believe that determining group profit on the basis of a group’s consolidated financial statements would be a significantly more administrable approach, and would avoid complexity that could lead to disputes- in this regards what would be your opinion?

This is a difficult question to answer. On the one hand, the calculation of profits on a business-by-business-line basis achieves a more accurate result; however, on the other hand, it can be more burdensome to handle and may lack a genuine link between parts of the residual group profit and the taxing jurisdiction of a country. As indicated in our academic writing on this point, we believe that the right approach is to use some margins for preventing the issues of compensation between highlyprofitable and loss-making lines of business.

This solution may achieve a satisfactory balance and help protecting the interest of the market country from excessive foreign losses that leave no residual profit to allocate under Amount A.

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Pillar 2 – Global Anti-Base Erosion Proposal The Global Anti-Base Erosion proposal under pillar two is being crudely dissected into three sections; A) The Tax base determination B) Blending C) Carve-Outs However it is only on the profound understanding of each section that all three sections may be appreciated individually as well as collectively. As an Academic Researcher what are your reflections upon the various elements mentioned in (A), (B) and (C) The overall goal of GLOBE is to prevent a global race to the bottom, while establishing some level of common rules and standards for taxation of profits of multinational enterprises. It is in fact pretty much what the Scrivener Plan achieved in respect of the VAT common system within the European Union two decades ago.

I am very favourable to the establishment of common rules for the tax base determination, but the unreasonable delay of the CCTB project in the European Union may lead to wonder whether the OECD can manage where the EU Commission has failed for long. If we were to move towards common rules for determining business profits, the IFRS rules could be a good reference, taking into account their broad international acceptance.

As for blending, I would favour its narrowest form, since the other solutions would not remove low-taxation of some group companies and thus run against the overall goals of GLOBE. My adversity for carve-outs should not prevent me from endorsing de minimis thresholds and a geographical carve-out for the least developed countries, the latter being an indispensable complementary measure to use taxes for securing sustainable development in line with the goals established by the UN. However, an overall assessment of Pillar 2 and the GLOBE proposal requires some clarifications on critical issues concerning the scope. From such perspective, it is still largely unclear whether GLOBE only covers harmful tax practices, or applies on an overall basis. The latter option can enhance a smooth functioning, but it could also raise problematic issues. This would occur if the minimum rate for GLOBE were established at two-digit levels (insofar as one believes

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that a de facto discriminatory compensation of lower taxation across the borders could be incompatible with the principles of the EU internal market), but also in the presence of at a too low rate (since it would be largely ineffective).

The application of GLOBE on an overall basis can in fact go as far as fading out the right of countries to use taxes for pursuing genuine regulatory purposes. I believe that States have the power to do so, at least insofar as they accordingly amend the nexus for the exercise of their taxing sovereignty, going beyond what already happens with CFC legislation. However, the required changes would necessarily have to address “tax sparing” clauses contained in tax treaties and other measures that are incompatible with such development.

However, solving technical issues is perhaps not enough in the absence of a strong political compromise, which involves a large group of countries, even if not necessarily all. The right approach is in my view to bundle together Pillar 1 and 2 in the framework of a holistic solution to the problems of reforming international taxation, which could level out the consequences for winning and losing countries, ensuring an obligation to secure international tax coordination and a consistent exercise of taxing powers, also regulating digital services taxes and similar unilateral levies.

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The Unified Approach under Pillar 1:

An Economic Exposition of the Methodological Approach leaves room for jurisdictions to grab a bit more where there is more going on in-country under the ALP than amount B recognizes. Amount C is rather difficult to compute and leaves a wide field of potential disputes open.

SIMON BUGEJA

OVERVIEW OF PILLAR 1 The digitalization of the world economy has brought significant progress in our modern world. However, this phenomenon has also brought new challenges in terms of the allocation of taxing rights to appropriate jurisdictions. As part of the Base Erosion and Profit Shifting (BEPS) project, the Inclusive Framework for BEPS (IF) has now proposed the adoption of a unified approach in taxing not only automated digital services but also all multinational enterprises (MNEs) with consumer-facing businesses. Automated digital services include not just the three expected types of business (online search engines, social media platforms and online marketplaces) but also digital content streaming, online gaming and cloud computing. Consumer facing businesses will have to have a significant and sustained engagement (directly or indirectly) with their markets to be caught.

The exercise aims not only to reallocate taxing rights but also to increase the tax take by adding new taxing rights on top of the existing system. The outline of the methodology borrows from the world of transfer pricing. It is referred to as a three-tier system as there is reference to three amounts A, B and C: 1. Amount A: This refers to the new taxing right over deemed residual profit based on a $750 million revenue threshold from country-by-country reporting.

2. Amount B: For amount B one applies the arm’s length principle (ALP) from transfer pricing to an extra layer of deemed residual profit to be divided up according to a new methodology between all the countries where the MNE operates and to any permanent establishment that the MNE has in other jurisdictions 3. Amount C: In several ways, this amount is a realistic acknowledgment by the IF that the new formula will not be perfect, and

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Impact assessment of Pillar 1 The IF has also been working on the impact assessment of Pillar 1 on the tax revenues gained/ lost in each of the IF’s jurisdictions through a 3 step methodology described below. Figure 1 summarizes the method with which Pillar 1 will determine a jurisdiction’s profit allocation and the respective change in its taxing rights.

Step 2: Determining the effective tax rate on the share of global MNE sales The second step is to determine both the amount of residual profits to be allocated to a particular jurisdiction and the corresponding tax rate to be applied. In order to determine a jurisdiction’s share of the pool of global residual profits, the IF proposes various allocation keys such as number of persons employed and the presence of fixed assets. The IF seems to be more inclined towards using destination-based sales as an ideal allocation key (through turnover exports). The jurisdiction’s share of global destination-based sales is then multiplied by the effective tax rate on its received residual profits.

Step 3: Determining the tax rate currently applied on residual profits which have yet to be apportioned

Step 1: Determining the residual profits to be apportioned First, the determination of a jurisdiction’s taxing right entails the determination of the global residual profits to be apportioned globally. Residual profits in this case refer to profits earned by Multinational Entities (MNE’s) in a particular jurisdiction, which are in excess of an agreed threshold. Any profits which exceed this threshold are deemed to be earned outside the jurisdiction in question. These thresholds are usually based on accounting ratios such as EBIT to turnover.

Once the residual profits of each jurisdiction are determined, these are then pooled together to form global residual profits. Of these global residual profits, the necessary carve-outs need to be determined in order to identify the scope of this exercise. Some propositions include the carve-out of those MNE’s who earn less than a certain turnover threshold (currently around $750 million), in order to avoid burdening smaller MNE’s with additional administration costs in assessing these residual profits. Thus, for automated digitalized businesses, this revenue threshold will apply and once the threshold is crossed, an MNE is within scope of this exercise. The amount in scope is then further subjected to a fraction of residual profit to be allocated to the market. This parameter is still to be determined by the IF.

The third step entails the determination of the tax rate currently applied to the residual profits which are yet to be apportioned. First, a jurisdiction’s share of global residual profits is arrived at by taking profits by companies which are in excess of the EBIT to turnover threshold, as a share of global residual profits. This amount is then multiplied by the tax rate with which these profits are currently being taxed in this jurisdiction.

Concluding remarks Even though the IF has made great strides in formulating a way to distribute taxing rights across jurisdictions based on the location of the economic activity in question, discussions are still ongoing. Some problems arising from this exercise involve the number of simplified assumptions related to the determination of the residual profit threshold, the carve outs definitions, and the appropriateness of using destination-based sales as an allocation key. Furthermore, double taxation still poses as an important issue which needs to be addressed. These limitations leave room for much discussion on a way forward in trying to achieve a consensus between jurisdictions.

Simon Bugeja is an Economist at Economic Policy Department within the Ministry for Finance and Financial Services. The author acknowledges the contribution of Mr. Aldo Farrugia, Director General (Legal & International) at the Office of the Commissioner for Revenue in preparing this article.

The views, thoughts and opinions expressed in this article belong solely to the author and not necessarily to the author’s employer.

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