Table of Contents

Executive Summary ................................................................................................................................................... 2

Glossary of Terms....................................................................................................................................................... 3

Our understanding and scope of work .................................................................................................................. 4

Chapter 1....................................................................................................................................................................... 5

1. Background ......................................................................................................................................................... 5

2. European Treaties and ECJ case law developments .......................................................................................... 7

3. High level technical analysis of the Directive ..................................................................................................... 9

4. Political landscape – the Barroso II Commission and Europe 2020 ............................................................... 14

Chapter 2..................................................................................................................................................................... 18

1. Inclusion of revenues in the tax base................................................................................................................ 18

2. Deductibility of expenses.................................................................................................................................. 19

3. Other key differences........................................................................................................................................ 19

Chapter 3..................................................................................................................................................................... 23

1. Methodology adopted ....................................................................................................................................... 23

2. Selection of participants.................................................................................................................................... 24

3. Limitations of this study ................................................................................................................................... 24

4. Data collected from participants....................................................................................................................... 25

5. Results and findings of computations .............................................................................................................. 26

Chapter 4..................................................................................................................................................................... 30

1. General comments on the anticipated effects of CCCTB on business............................................................ 30

2. General comments on the anticipated effects of CCCTB on inbound investment ......................................... 37

3. General comments on the anticipated effects of CCCTB on outbound investment ................................. 40

4. General comments on the anticipated effects of CCCTB on Maltese tax incentive legislation ...................... 44

5. Impact on tax administration............................................................................................................................ 44

Chapter 5..................................................................................................................................................................... 46

2

Executive Summary

The Malta Business Bureau (the MBB) engaged PwC to conduct a study on the European Commission’sproposal for a Common Consolidated Corporate Tax Base (hereinafter CCCTB) Directive which wouldtake place on the basis of financial and tax figures of groups operating in Malta across different industrieswhich accept to furnish such information for this purpose.

Thus, this report sets out the results and conclusions of an income tax modelling exercise, which involveda review of the financial statements of a number of businesses operating in Malta (hereinafter“participants”) in a variety of industries. The participants include groups that are exclusively based inMaltagroups which are foreign owned (i.e. representing inbound investment into Malta) and Maltese-owned businesses which have invested outside of Malta.

A strong effort was made by PwC and the MBB to ensure that key sectors of the Maltese economy arewell represented in the study. However, this was impacted by the fact that a number of groups were, forone reason or another, not in a position to provide the requisite information.

For confidentiality reasons, the actual identity of the participants has not been disclosed. However, aprofile of each participant has been provided in this report in order to enable the user to betterunderstand the results of this study.

For the purposes of the modelling exercise, the existing tax computations of these businesses wererecomputed according to the rules set out in the proposed Directive, and the direct tax liability underCCCTB was then compared with the current direct tax liability calculated in accordance with the MalteseIncome Tax Acts for the corresponding years under review. Differences in the tax results are explained inthis report.

The methodology adopted for the purposes of this exercise is further set out in Chapter 3.1 and Chapter3.2 of this report, and the outcome of this exercise is then presented in Chapter 3.3 of this report.

Whilst it would not be possible to determine conclusively whether it is desirable to introduce the CCCTB,either on a compulsory or optional basis, it is possible, on the basis of our findings, to anticipate some ofthe effects that the introduction of CCCTB might have on the level of corporate taxation in Malta. Theseviews are set out in detail in Chapter 4.

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Glossary of Terms

CCCTB – Common Consolidated Corporate Tax Base

CFC – Controlled Foreign Company or Companies

ECJ – European Court of Justice or Court of Justice of the European Union

EU – European Union

FIA – Foreign Income Account

FRFTC – Flat Rate Foreign Tax Credit

ITA – Income Tax Act (Chapter 123 of the Laws of Malta)

ITCRs – Investment Tax Credits

MBB – Malta Business Bureau

MS – Member States

OECD – Organisation for Economic Co-operation and Development

PE – Permanent Establishment/s

TFEU – Treaty on the Functioning of the European Union

4

PwC’s understanding and scope ofwork

To the Malta Business Bureau and Bank of Valletta plc:

Our work was conducted and this report was prepared under the terms and conditions set out in theletter of engagement dated 27 July 2011. The letter of engagement was signed following the submission ofour proposal to the MBB in response to a public request issued by the MBB and further discussions withthe MBB on the scope and nature of the study. Further minor changes to the methodology and the scopewere agreed between us and the MBB in regular update meetings that were held as the engagementprogressed.

This report was to the MBB as presented. The MBB are authorised by us to use the report and disclosethe contents thereof to third parties, provided that this does not prejudice us, our clients, any of theparticipants in this report and any third parties. To this end, we do not accept any third party liability.

On a general basis, our comments relate exclusively to the impact of CCCTB on Maltese income tax andno consideration has been given to any foreign tax or foreign legal implications that might arise from theproposed introduction of CCCTB.

Any opinion in this report is restricted to the proposed CCCTB Directive, and its possible application.

We have relied on data provided to us or that was publically available, without verifying its accuracy in allinstances. Due to the limited information provided to us, it has been necessary in several cases to makecertain assumptions. Whilst we have endeavoured to ensure that the assumptions that have been made inthe course of our modelling of the CCCTB are reaonsable and realistic, it is possible that a change inthose assumptions may give rise to different results which may in turn have an impact on our findingsand comments. Accordingly, this essentially places a restriction on our comments hereunder in that suchcomments do not reflect a complete picture of the impact of the CCCTB.

Further limitations and assumptions set out in the models are listed in Chapter 3.3.

Unless otherwise indicated, comments herein reflect our views and not necessarily those of any Court orauthority, and it is not necessarily the case that our said views would be agreed to by any such Court orauthority.

167 Merchants StreetVallettaMalta

2 April 2012

5

Chapter 1Introduction to the proposed Directive

1. Background

The proposed CCCTB Directive is by no means the first political effort in the domain of direct corporatetaxation, to approximate fiscal regimes amongst the Member States of the European Union.. A numberof similar pan-European projects have been attempted in the past, some of which have beenimplemented with mixed results.

One of the main priorities of the common market, following the signing of the Treaty of Rome in 1957,was the removal of obstacles to cross border trade within, what was to become, the European Union.Company taxation, or rather, the different systems of company taxation employed by each of the MemberStates was identified as constituting one such obstacle. Indeed, the existence of different systems oftaxation by each of the Member States, results in several potential restrictions or impediments toencouraging cross border trade, including:

Prohibitive withholding taxes on cross-border payments, e.g. dividends, interest and royalties;

Inability to offset cross-border tax losses arising in one Member State with profits arising inanother Member State;

The imposition of taxation by different Member States on the same income (i.e. double taxation);

High compliance costs due to having to deal with different tax laws and tax authorities acrossdifferent Member States.

Unlike most indirect taxes (e.g. Value Added Tax and Customs Duties), the European Union has, to date,not managed to harmonise corporate income tax. Part of the reason for the lack of agreement in this areais due to the fact that any harmonising measure proposed by the Commission requires unanimousagreement between all Member States.

In fact, the CCCTB proposal is merely the latest in a string of unsuccessful attempts to bridge the variantcalculations of the tax base on which the due corporate tax should be levied, particularly for cross-borderbusiness operations in the European Single Market.

In 1962, the Neumark report, proposed a split-rate system based on the system existing in Germany atthat time, as a method for reducing economic double taxation on dividends paid out by EU companies.This was followed by the Van den Tempel report in 1971 on the possibility of implementing a classicalsystem for the reduction of the overall effective tax rate on distributed company profits.

In 1975, the Commission published a draft Directive for the harmonisation of corporation tax across theEuropean Community which included the introduction of an imputation system for the avoidance of

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economic double taxation, containing characteristics similar to the one that is currently employed inMalta.

In 1984 and 1985, the Commission proposed two further Directives which both dealt with the use oflosses and in particular the possible application of cross-border loss relief.

Due to a lack of agreement on the introduction of any all-encompassing direct tax harmonisationmeasures, towards the end of the 1980s the Commission adopted a different approach in order to bringabout a degree of direct tax harmonisation between Member States.

Under this alternative approach, the Commission proposed Directives that aimed to harmonise MemberStates’ tax systems in specific areas.

In this regard, since 1990 a number of ‘scaled down’ direct corporate tax Directives have in fact beenimplemented, which Directives are commonly used in everyday dealings by EU companies involved incross-border activities between Member States. The main direct corporate tax Directives currently inforce include:

1. The Parent Subsidiary Directive, which removes withholding tax on dividends paid by companies tocorporate shareholders subject to a minimum shareholding requirement. The Directive alsoimposes a requirement on the Member State of residence of the corporate shareholder to grantdouble tax relief for corporate tax suffered by the company on the profits so distributed;

2. The Interest and Royalties Directive, which removes withholding tax on royalties and interest paid betweenrelated EU companies subject to certain conditions; and,

3. The (Tax) Mergers Directive, which ensures that certain transactions that involve cross-borderrestructuring (e.g. cross-border mergers of companies) do not trigger a tax charge for thestakeholders involved in the restructuring. Instead, Member States are obliged to defer tax ongains/losses arising on the restructuring until future periods.

These Directives have gone some way towards removing some of the obstacles resulting from thedifferences between Member States’ tax systems.

In addition to the above mentioned Directives, other Directives have been introduced which are aimed atincreasing the level of cooperation between tax authorities of the Member States. Moreover, otherinstruments of harmonisation have also been introduced within the context of the EU Treaty1 as well asalongside it, that function as inter-governmental agreements entered into by all the Member States andsome third countries2.

However, none of the Directives currently in force, or indeed the other instruments of harmonisation, areas far-reaching as the proposed CCCTB Directive.

The proposed Directive aims to harmonise the rules on how a company which is resident or has a taxablepresence in the EU calculates its taxable profits and tax losses.

1 These include, inter alia, a number of non-legally agreements such as the 1997 Code of Conduct for Business Taxation andvarious recommendations published by the Commission.2 An example of such agreement is Convention 90/436/EEC on the elimination of double taxation in connection with theadjustment of profits of associated enterprises (the Arbitration Convention).

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Furthermore, the proposed Directive also seeks to allow such companies that belong to the same groupto consolidate their taxable profits and tax losses into one single tax computation. If the aggregationresults in a consolidated taxable profit, such profit would then be allocated between Member Statesaccording to a pre-determined formula.

It has been stated by various commentators, academics and professionals that the current proposalrepresents the most ambitious direct tax-related initiative that the Commission has ever sought tointroduce. Indeed, the proposal has generated a significant amount of discussion and has been treated as ahigh level priority by both the Commission and successive presidencies of the EU over the past ten years.

The Commission and supporters of the CCCTB have argued that if implemented, the CCCTB Directivewill reduce the compliance costs of groups seeking to engage in cross-border activities and boost thecompetitiveness of the Single Market as a region in which to do business.

According to the Commission’s estimate, every year, the CCCTB will save businesses across the EU €700million in reduced compliance costs, and €1.3 billion through consolidation. In addition, businesseslooking to expand cross-border will benefit from up to €1 billion in savings3.

However, critics of the Directive have argued that the proposal takes away too much power fromMember States and restricts them from determining the manner in which they choose to impose andcollect tax on corporate profits. It is argued that in turn, this would have a direct impact on the ability of aMember State to adopt a fiscal policy that is suited to its own particular circumstances.

The extent to which the Commission will be able to convince all the relevant parties on the desirability ofintroducing the CCCTB and if so, what final form it will take, remains to be seen.

2. European Treaties and ECJ case law developments

As noted above, one of the reasons why harmonising measures have proved to be so difficult tointroduce in the EU is due to the unanimity requirement. In terms of the Treaty of the European Union,in order for an EU-wide tax measure to be introduced, all Member States have to agree on itsimplementation4.

This requirement has proved to be a stumbling block in respect of various initiatives that had been takento introduce direct tax harmonisation measures.

In the absence of significant proactive harmonisation measures, a degree of harmonisation (referred to as“secondary harmonisation”) has nonetheless occurred through the intervention of the Courts of Justice(“ECJ”). Secondary harmonisation is the process by which the laws in different Member States areharmonised not via positive legislative efforts, but via the ECJ reviewing the legality of existing direct taxlaws contained in the domestic law of Member States and assessing whether such rules are compliant withthe principles set out in the EU Treaties and other EU legislation.

Various direct tax cases are brought before the ECJ every year. The vast majority of these cases arereferred to the ECJ by domestic courts in the different Member States requesting the ECJ to provide aninterpretation on a point of European law. Alternatively, cases are instituted by the European

3 Commission Press Release IP/11/319 of 16 March 20114 Article 115 of the Treaty on the Functioning of the European Union (“TFEU”)

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Commission if it is of the view that tax measures of particular Member States breach any of the principleslaid down in the EU Treaties/EU legislation.

Most of the direct tax cases that have been considered by the ECJ concern domestic tax measures thatallegedly restrict an EU national (including a company) from exercising its right to the four fundamentalfreedoms that are enshrined in the EU Treaties, in particular the free movement of persons (including theright to establishment), the free movement of capital and the freedom to provide services.

When the ECJ determines that a specific direct tax measure of a Member State is unlawful, then suchMember State is bound by its obligations under the EU Treaties to amend its legislation so as to removethe restriction. At the same time, it is also expected that other Member States which have the same orsimilar rules amend their legislation to reflect the ECJ decision.

Over the years, the ECJ has considered various direct tax measures and assessed their compliance withEU law. Amongst those that have been considered are the following measures where the ECJ has heldthat in certain cases those measures were contrary to EU law (in particular the fundamental freedoms),and therefore unlawful:

Withholding taxes that are applied in a discriminatory fashion or which restrict the free movement,where those withholding taxes are not justified and are disproportionate5;

A domestic Group (loss) relief regime that does not allow for the cross border relief of final losses6;

Exit taxes, which are levied when a taxpayer transfers assets or tax residence from one MemberState to another Member State7;

Rules which tax the income attributed to genuinely established subsidiaries that are resident inother Member States, such as controlled foreign company rules and Offshore Funds rules8;

Rules that prevent the relief of currency losses in certain cases9;

Rules limiting interest deductions in certain cases10; and

Rules that adjust the pricing between related companies that represents either an arm’s length price or acommercially sustainable price11.

In several instances, this process has led to the ECJ striking down various direct tax measures on whichMember States have relied in order to collect tax revenues without it being clear which EU-complaintmeasures may be used as alternatives.

This, in turn, has led to a form of piece-meal harmonisation, in what has been termed “harmonisationthrough the back-door” and does not involve formal coordination at EU level.

Many commentators view this form of harmonisation as causing, in general terms, a perceived increasedwillingness by legislators to harmonise by agreement (i.e. through proactive harmonisation), rather thanallow the ECJ to determine the lawfulness of existing rules. Indeed, the role of the ECJ is restricted tointerpreting EU law and it is unable to actively propose or approve legislation for Member States to adoptin lieu of those domestic tax measures which are in conflict with EU law.

5 ECJ decision in Denkavit Internaational (C-170/05)6 ECJ decision in Marks and Spencer (C-446/03) and X Holding BV (C-337/08)7 ECJ decision in National Grid Indus B.V. (C-371/10)8 ECJ decision in Cadbury Schweppes (C-196/04)9 ECJ decision in Deutsche Shell (C-293/06)10 ECJ decision in Lankhorst-Hohorst (C-324/00)11 ECJ decision in SGI (C-311/08)

9

To a certain extent, the proposed CCCTB Directive attempts to provide the Member States with an EUcompliant corporate tax system. Whilst by itself it may not completely remove the risk of an ECJchallenge, the proposed Directive seeks to address those areas of Member States’ corporate tax systemthat have been held to be in breach of EU law by removing obstacles that distort free movement ofcapital, services and persons.

Therefore, if introduced, one of the effects of the CCCTB Directive would be to materially reduce therisk of litigation between the taxpayer or the Commission and individual Member States before the ECJ,and thus arguably provides greater certainty to Member States that the mechanism through which theyimpose and collect tax on corporate profits is in line with EU law.

3. High level technical analysis of the Directive

As stated in the previous section, the proposed Directive was drafted with the intention of removing taxobstacles that stand in the way of cross border trade and movement as protected by the Treaty.

From a technical perspective, this is reflected by the absence, in an EU context, of several measureswhich generally result in impediments to engaging in cross-border activities such as withholding taxes,thin capitalisation rules and Controlled Foreign Company (“CFC”) rules that discriminate or arerestrictive, often without justification. The proposed Directive also seeks to eliminate the risk of not beingable to offset losses incurred in one Member State against profits generated in another Member State.Furthermore, the proposed system envisages an environment that removes the requirement to adhere tothe existing complex transfer pricing rules for the pricing of transactions between EU related companies .

From a practical perspective, the system does away with some of the existing administrative burdens, asthe taxpayer will only be required to prepare one tax return and deal with one tax authority in oneMember State. Currently, if a group of companies is established in a number of Member States (whethervia tax residence or just by having a taxable presence therein), the group may have to deal with a numberof tax authorities, comply with the different rules imposed by the respective Member States, and riskdouble taxation from any mismatches that may result.

How does the system work?

The proposed Directive introduces one set of rules for a company to calculate its taxable profits or taxlosses. Accordingly, irrespective of the Member State in which a company operates, that company willhave the possibility of calculating its taxable profit or loss in the same manner.

Furthermore, the proposed Directive allows companies that belong to the same group to consolidatetheir taxable profits and tax losses into one single tax computation. The resulting consolidated taxableprofit would then be allocated between Member States according to a pre-determined formula.

The tax rate at which the profits are taxed remains the prerogative of the individual Member States towhich those profits have been allocated under the pre-determined formula.

Calculation of profits and losses

The taxable profit of a company or group would be equal to all revenues (with certain exceptions) lessdeductible expenses and other deductible items. Taxable profit is to be calculated on an annual basis.

10

Deductible expenses include all costs of sales and expenses incurred by a company with a view toobtaining and securing income. In addition to this, deductible expenses also include the cost of researchand development and costs incurred in raising equity or debt for the purposes of the business.

The Directive also allows a company (or group) to deduct depreciation incurred on fixed assets, whichdepreciation is calculated by reference to specific rules.

That having been said, the Directive includes a list of expenses which are specifically treated as non-deductible. This list includes inter alia profit distributions and repayments of debt or equity, 50% ofentertainment costs, capital expenditure on fixed assets, fines and penalties payable to a public authorityas well as expenses incurred for the purposes of deriving exempt revenues.

With regard to exempt revenues, these are also listed in the Directive and include the following:

Profit distributions receivable (e.g. dividends received from other companies);

Income attributed to a permanent establishment situated in a third country; and

Proceeds from the disposal of shares.

In view of the above, the Directive introduces a quasi-territorial system of taxation, whereby profits ofthe group that are generated within the EU are taxable, whilst those generated outside of the EU (subjectto certain exceptions) are not to be included in the consolidated tax base.

Recognition of revenues and expenditure

The proposed Directive states that as a general principle profits and losses should only be recognised fortax purposes when they are realised. Furthermore, revenues, expenses and all other deductible itemswould be recognised in the tax year in which they accrue or are incurred.

With regard to revenues, the Directive states that these should be regarded as accruing when the right toreceive them arises and they can be quantified with reasonable accuracy, regardless of whether or not theactual payment is deferred.

With regard to expenses, these are regarded as incurred when (a) the obligation to make the payment hasarisen and (b) the amount of the obligation can be quantified with reasonable accuracy.

The Directive then contains certain specific rules for particular types of revenues/expenses. For example,where a financial instrument is held for trading, then any movements in the fair value of such instrumentare regarded as taxable /deductible in the year in which they arise.

Furthermore, the deductibility rule for expenses is relaxed in the case of the recognition of provisions(with the exception of provisions for bad debts). In this regard, the Directive allows a company to claim adeduction in respect of provisions as long as it is probable that a future obligation will arise which willresult in a deductible expense and the said obligation can be reliably estimated.

Depreciation of fixed assets

Fixed assets are depreciable for tax purposes, subject to certain exceptions.

The Directive classifies fixed assets into one of two types: (i) long-life assets and (ii) pool assets.

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Long-life assets consist of:

buildings (which can be depreciated on a straight-line basis over 40 years);

other long-life tangible assets (being assets which have a useful life of 15 years or more – these canbe depreciated on a straight-lines basis over 15 years); and

intangible assets (being assets that were not internally generated – these can be depreciated overtheir life or if that period cannot be determined, over 15 years)

Profits or losses derived from the disposal of such assets are taxable/deductible.

All other fixed tangible assets that are subject to wear and tear and obsolescence are pooled together andcollectively depreciated at a rate of 25% per annum on a reducing balance basis.

All additions of such assets are added to the pool whilst all proceeds from the sale of such pooled assetsare not taxable but are deductible directly against the balance of the pool.

Consolidation

As noted above, companies which form part of the CCCTB group are able to consolidate their taxableprofits and losses.

A CCCTB group (hereinafter a “group”) broadly consists of a parent company, its permanentestablishments situated in the EU, its EU resident qualifying subsidiaries and the EU permanentestablishments of non-EU resident qualifying subsidiaries. Certain additional rules also potentially applyin this case.

A subsidiary is a qualifying subsidiary if the parent has (i) the right to exercise more than 50% of thevoting rights and (ii) holds more than 75% of the subsidiary’s equity or more than 75% of rights givingentitlement to profit. In respect of lower-tier subsidiaries the 75% threshold must be satisfied on an“effective holding” basis12.

The two thresholds (i.e. voting and capital/profit entitlement) should be met throughout the tax year.There is also a nine-month minimum requirement for group membership.

Those companies that are regarded as forming part of the same group will prepare one consolidated taxcomputation. For the purposes of preparing the consolidated tax computation, all transactions betweenmembers of the group are ignored.

Furthermore, the Directive also requires that no withholding taxes or other source taxation may becharged on transactions between members of a group.

Formulary apportionment

Where a company or a group operates in more than one Member State, the Directive requires that thecomputed taxable profits of the company/group are apportioned between the relevant Member States inwhich the company/group operates on the basis of a pre-determined formula.

12 In this context, “effective holding” is taken to mean a situation wherein the right to profit and ownership of capital in anindirect subsidiary is calculated by multiplying the interest of the parent held in intermediate subsidiaries at each tier abovethe indirect subsidiary.

12

This system differs from the current generally accepted principle of “arm’s length” dealings betweencompanies of the same group. What the arm’s length principle requires is that companies in the samegroup should transact with each other as though they are transacting with unrelated parties.

The proposed CCCTB Directive departs from this principle for intra-CCCTB group transactions, andprofits are allocated on the set formula and not on an arm’s length basis.

The formula for apportioning the consolidated tax base is based on three equally weighted factors: labour,assets and sales.

In this regard, the Directive sets out that the percentage of the tax base attributable to a Member State isthe percentage obtained by the application of the following formula:

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Sales

The sales factor represents sales made to third parties by a company operating in Member State A as afraction of total third party sales made by the group.

Sales are regarded as taking place in a Member State in accordance with the destination principle.Accordingly, when the sales consist of goods, these are attributable to Member State A only insofar as thetransport of the goods ends in that Member State. When the sales consist of services, it is necessary todetermine where the services are physically carried out.

If there is no group member in the Member State where goods are delivered or services are carried out, orif goods are delivered or services are carried out in a third country, the sales shall be included in the salesfactor of all group members in proportion to their labour and asset factors.

Assets

The asset factor consists of all fixed tangible assets owned, rented or leased by a company in a MemberState expressed as a percentage of the assets owned, rented or leased by the whole group.

Generally, intangibles and financial assets are excluded from the formula although banks, insuranceundertakings and certain financial institutions are entitled to take 10% of their financial assets intoaccount in respect of calculating the asset factor.

Assets are valued according to their average value for the year save in the case of certain rented/leasedassets which are valued at eight times the annual rent/lease charge.

Labour

The labour factor is computed by taking account of payroll and the number of employees (each itemcounting for half).

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The definition of “employee” is determined by the national law of the Member State in whichemployment is exercised. The number of employees is measured at year end.

Employees are included in the labour factor of the group company from which they receiveremuneration. However, in certain cases, where the employees are under the control and direction ofanother group company, such individuals may be treated as employees of the other group company.

Taxation of profits

Once the tax base is apportioned, the apportioned profits are taxed by the Member State at a tax rate setby the Member State.

Tax compliance

The Directive provides that groups of companies will be able to deal with a single tax administration(‘principal tax authority’), which should be that of the Member State in which the parent company of thegroup (‘principal taxpayer’) is resident for tax purposes.

The proposal also provides for an advance ruling mechanism.

Furthermore, audits will be initiated and coordinated by the principal tax authority, but the authorities ofany Member State in which a group member is subject to tax may request the initiation of an audit.

In the event that disputes between taxpayers and tax authorities arise, these will be dealt with by anadministrative body which is competent to hear appeals at first instance according to the law of theMember State of the principal tax authority.

Opting in and out of the CCCTB

As currently envisaged, the proposed Directive will not automatically apply to all companies. Indeed, inorder to apply the provisions of the proposed Directive, companies or groups acting through theprincipal taxpayer would have to opt-into the CCCTB for a minimum of five years.

Furthermore, when opting into the CCCTB, such opt-in must be followed by all companies falling withinthe group (i.e. ‘all-in’ or ‘all-out’).

Following the expiry of that initial term, the company/ group would continue to apply the system forsuccessive terms of three tax years, unless they give notice of termination.

As a result, this should mean that a company/group may be able to assess which option suits it the mostand elect accordingly. The Directive also contains detailed rules relating to when a company/groupchooses to elect into the CCCTB or chooses to elect out of the CCCTB after having been in it.

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Other aspects

Business reorganisations

The Directive provides that a business reorganisation within a group, or the transfer of the legal seat of ataxpayer which is a member of a group, should not give rise to profits or losses for the purposes ofdetermining the consolidated tax base.

Transactions between associated enterprises

Transactions between a company/group within the CCCTB and an associated enterprise, which is not amember of the same group, are subject to pricing adjustments in line with the “arm’s length” principle.

Furthermore, interest and royalties paid by the company/group to a recipient outside the group may besubject to a withholding tax in the taxpayer’s Member State according to the applicable rules of nationallaw and any applicable double tax convention.

Anti-abuse rules

The proposed Directive also includes a general anti-abuse rule, which states that artificial transactionscarried out for the sole purpose of avoiding taxation shall be ignored for the purposes of calculating thetax base.

This general anti-abuse rule is supplemented by additional measures designed to curb specific types ofabusive practices.

Amongst these measures are:

limitations on the deductibility of interest paid to associated enterprises resident, for tax purposes,in a low-tax country outside the EU which does not exchange information with the Member Stateof the payer; and

anti-CFC rules whose effect is to attribute profits of an entity resident in a third country, to the EUcompany/group where such entity is subject to a low-rate of tax and is in receipt of certain types ofincome from relatively mobile sources.

4. Political landscape – the Barroso II Commission and Europe2020

The official publication of the proposed directive represented a significant step for the Commission afterseveral years of negotiations and discussions on this matter.

15

Since at least 2001, improvements in the approximation of corporate taxation has been regularlyrecommended as a means to strengthen the Single Market. The issue is strongly taken up as one of therecommendations contained in the Single Market Act for Europe. From a political perspective, theCCCTB has been assigned heightened priority in the annual Commission Work Programmes charteringthe legislative work being undertaken by the European Commission under President Barroso's secondmandate.. Various references are also made to a harmonised company tax system in the EU 2020 vision.

Debating whether this in fact would or could go ahead would largely be an exercise in speculation,particularly given the recent escalation of the sovereign debt and Euro crises.

An orientation debate on CCCTB among Member States in the Council will be held toward the end ofthe Danish EU Presidency, i.e. likely in June 2012, and currently, formal opinions are being developed bythe European Parliament, the European Econonomic and Social Committee and the Committee of theRegions on the CCCTB.

As noted above, one must bear in mind that for CCCTB to go through, in the format in which it is beingproposed, all Member States are required to agree to it. At this stage, this remains a highly unlikelyoutcome, for a number of reasons.

Member States which are less likely to support the CCCTB argue that a harmonised tax system removesthe competitive edge, both of the individual Member States that use their corporate tax system to attractinvestment, and of the EU as a whole, which could possibly witness an exodus of mobile businesslooking for better fiscal treatment.

In addition to this, some Member States oppose such extensive harmonisation on the basis of principle,in the sense that in their view determination of fiscal policy is a matter that is reserved exclusively for eachMember State and that no part of that sovereignty should be delegated to the EU.

Member States that have expressed support of the CCCTB, as well as the Commission, argue that taxharmonisation represents the next natural step towards closer integration of European nations. However,despite agreement on the principle, there is also an element of division amongst these Member States onthe form that CCCTB should take.

Some of the countries in favour of CCCTB are not in favour of certain aspects of the proposed Directive.By way of example, some States are arguing in favour of compulsory CCCTB, applicable across the boardto all corporates, whether as part of wider groups or otherwise. Other Member States and theCommission, on the other hand, are in favour of the introduction of optional CCCTB, whereby groupscan opt in and out of the CCCTB regime (as the Directive is currently drafted).

In fact, the optional application of the CCCTB represents one of the sticking points in discussionsbetween Member States on the introduction of CCCTB.

It is not within the scope of this report to analyse whether the introduction of optional or compulsoryCCCTB is desirable, if at all. However, aside from the results of the modelling exercise, the policydecision on whether to introduce CCCTB on a compulsory or optional basis will depend on a multitudeof political, practical and revenue factors.

If CCCTB is introduced on an optional basis, this requires that every Member State will have twocorporate tax systems applicable – CCCTB and the current domestic corporate tax system. Corporatetaxpayers then have a choice on which of the systems they will follow, with some rules on crossovers.

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At first sight, the optional application of CCCTB may appear to present a positive development fortaxpayers because taxpayers who will benefit from its introduction would opt in, whilst those who will notview CCCTB as positively impacting their tax obligations are likely to opt out.

The downside of this is that national tax authorities could potentially be placed in a lose-lose situation,given that taxpayers are only likely to choose CCCTB if it is likely to result in an element of tax saving.

If, on the other hand, CCCTB is introduced across the board, with no option for taxpayers to opt out,this will represent a major change in the mindset and method in which corporate taxpayers manage theirtax affairs. It should also mean however that taxpayers will not be able to choose CCCTB only if itbenefits them which thus reduces the risk of revenue loss for Member States.

At the same time, the obligatory application of the CCCTB would also mean that case law, officialguidance and current practices relating to the interpretation and application of current domestic corporatetax law are likely to become obsolete and it is likely to take time until a broadly equivalent body ofliterature and authority is developed for CCCTB.

In the intervening period there is likely to be a degree of divergence in the interpretation of the Directive,particularly in view of the fact that the Directive does not contain the level of detail that can be found inthe national tax legislation of most Member States.

This in turn may bring into doubt the level of tax revenues which Member States are able to derive fromCCCTB (at least in the short term) and create uncertainty for business in the level of tax that they have topay.

Against this fluid backdrop, it appears unlikely that CCCTB (at least in its present proposed form) will beapproved by all Member States.

Accordingly, another alternative to unanimity has been mooted, in the form of ‘enhanced cooperation’.Enhanced cooperation involves a reduced number of Member States going ahead with an EU initiative inthe situation where unanimity does not prove possible to achieve.

One of the main examples where enhanced cooperation is currently being used is the development of acommon EU patent system within the context of intellectual property protection.

Recent changes to the EU Treaties mean that enhanced cooperation can go ahead between at least nineMember States, and at least from a strictly legal point of view, Member States that would not like toparticipate in the initiative should be unable to exercise a veto to prevent the initiative from moving aheadbetween those states which want to participate therein.

This works differently from unanimity in direct tax measures, which is still required if a tax measure is tobe adopted on a pan-European basis.

Indeed, in a joint letter to the President of the European Council sent in August 2011, GermanChancellor Merkel and French President Sarkozy have stated that they have instructed their governmentsto prepare a proposal to create a common corporate tax between France and Germany (which includes aharmonised tax base and rates), which system is aimed to be implemented by 2013.

If CCCTB is introduced by way of enhanced cooperation, Malta will have to decide whether or not tojoin this ‘reduced’ CCCTB zone and whether CCCTB should be optional or compulsory for taxpayers.

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This option presents its own set of challenges, particularly since the concept of CCCTB would be watereddown if it does not cover the entire Single Market. The present obstacles to free market movementwould nevertheless continue to exist between CCCTB Member States and non-CCCTB Member States.

In determining whether CCCTB via enhanced cooperation is suitable for Malta, various factors need tobe considered, including the implications surrounding the impact that CCCTB is likely to have on Malta’stax revenues and fiscal competitiveness in encouraging local investment and attracting foreign investment.

In this regard, this study is aimed at contributing to the evaluation process that Malta must undertake inorder to support or resist the introduction of CCCTB in its proposed form.

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Chapter 2The Maltese tax base vs. CCCTB – acomparison

A discussion on the anticipated impact of the CCCTB could not be possible without a comparison of theproposed system with the current corporate income tax system established in terms of the MalteseIncome Tax Act (“ITA”)13.

In this respect, we set out below what in our view are some salient differences between the calculation ofthe tax base under the ITA and that proposed under the Directive.

1. Inclusion of revenues in the tax base

In calculating the tax base, the CCCTB Directive starts from the premise that all revenues and receipts ofa company should fall within the scope of the tax base. Indeed, the Directive defines “revenues” asmeaning “proceeds of sales and of any other transactions...whether of a monetary or non-monetary nature, includingproceeds from disposal of assets and rights, interest, dividends and other profits distributions, proceeds of liquidation,royalties, subsidies and grants, gifts received, compensation and ex-gratia payments. Revenues shall also include non-monetarygifts made by a taxpayer.”14.

As noted in Chapter 1, the Directive then contains an exhaustive list of items of revenue which areexempted from inclusion in the tax base which include inter alia dividends, gains from the transfer ofholdings and subsidies, although to qualify to be treated as exempt, such revenue item in question mustsatisfy certain conditions listed in the Directive.

The ITA, on the other hand, is less far-reaching in the manner in which it determines the tax base.Indeed, under the ITA, receipts are, in principle, only considered to fall within the tax base if they areregarded as “income”.

“Income” per se is not defined in the ITA save that it is deemed to include certain types of capital gains.However, Article 4 of the ITA lists sources of income which are to be regarded as falling within the taxbase (e.g. gains or profits derived from a trade, business, profession or vocation, gains or profits from anyemployment or office, etc.). Maltese and UK Court decisions as well as general practice and literature inturn provide further guidance on when a receipt is regarded as “income” or “capital”.

In 1993, the meaning of “income” in the ITA was expanded to include certain types of receipts of acapital gains (i.e. non-income) nature, which were hitherto not included in the tax base. That having beensaid, whilst the types of capital receipts that are deemed to fall within the meaning of “income” hasexpanded over time, generally speaking, the list remains limited to capital gains derived by a person on the

13 Chapter 123, Law of Malta14 Article 4(8) of the proposed Directive

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transfer of certain assets listed in the ITA . Such list includes immovable property, securities satisfyingcertain conditions, trademarks or trade names as well as certain specified other assets.

As a result, despite including a rather wide range of receipts, the ITA remains narrower than the proposedCCCTB in defining the scope of the tax base since unless an item of revenue constitutes “income” orcapital gains derived from the transfer of a chargeable asset, such revenue would be excluded from theITA tax net.

The same cannot be said for the proposed Directive which brings within its scope any item of revenuethat a company is in receipt of during the year. Accordingly, receipts of a capital nature, irrespective of theasset being transferred, including for example capital gains from the transfer of fixed-income securities(e.g. bonds), should also fall within the scope of the CCCTB tax net.

2. Deductibility of expenses

The expanded tax net contemplated under the proposed Directive is somewhat mitigated by seeminglymore flexible rules for claiming a deduction. In this regard, the conditions for claiming a deduction inrespect of an expense or outgoing under the Directive appear to be less onerous than the conditionsgoverning deductibility under the ITA.

This difference is apparent from the general principle contained in the Directive regarding deductibleexpenses. In this regard, the Directive states that “[d]eductible expenses shall include all costs of sales andexpenses...incurred by the taxpayer with a view to obtaining or securing income”15.

Under the ITA, in order for an expense to be deductible, such expense must (at least, as a generalprinciple), have been “wholly and exclusively incurred in the production of the income”16. It would thus appear thatthe threshold in order to claim a deduction in respect of an expense under the CCCTB is lower than thatcontained in the ITA, since under CCCTB, the taxpayer is merely required to demonstrate that anexpense was incurred “with a view to obtaining or securing income” as opposed to incurring the expense “whollyand exclusively” in the actual “production of the income”.

The condition contained in the Directive appears to emphasise the intent with which a taxpayer hasincurred an expense in order for the said taxpayer to claim a deduction, regardless of whether or not suchexpense has actually been made in the production of any income. On the other hand, the conditioncontained in the ITA requires that the expense must have been incurred in producing the income.

3. Other key differences

1. The immediate offset of cross-border tax losses – currently, companies operating in more than one jurisdictionrisk incurring tax losses that are not beneficially used for tax purposes in the year in which they arise,and potentially permanently lost. This is because to date, under Maltese tax law, foreign tax lossesincurred by a foreign subsidiary cannot be offset against a Maltese company’s profits.

The CCCTB Directive removes this issue by consolidating the profits of all the EU companies of agroup, providing for an immediate use of any tax losses. This could be particularly relevant in thesituation of distressed companies and/or groups of whichever size, and for start-up endeavourswhich tend to produce, at least initially, tax losses in the start up jurisdiction.

15 Article 12 of the proposed Directive16 Article 14(1) of the ITA

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2. System of capital allowances/tax depreciation – The CCCTB Directive allows companies to claim taxdepreciation in respect of a wider range of assets than the assets contemplated in this respect underthe ITA. These include all types of buildings used by the company/group in the course of itsactivities as well as intangible assets that have been acquired by the said company/group.

The ITA, on the other hand, restricts the claiming of capital allowances to “plant and machinery” and“industrial buildings and structures”17. In the case of intangible assets, the ITA allows for a deduction onlyin respect of expenditure incurred on scientific research, patents or other intellectual property rights.

Furthermore, it would appear that, on average, the rate at which most types of assets can be writtendown for tax purposes is faster, at least during the first few years from when an asset is purchased,under the Directive compared to the ITA. By way of example, tangible assets whose lifetime is lessthan 15 years (e.g. furniture and fittings) can be written down at a rate of 25% on a reducing balancebasis. Under the ITA, the same furniture and fittings can only be written down on the straight linemethod (thus a difference also exists between the CCCTB Directive and the ITA even in respect ofthe write-down method) over a minimum period of 10 years.

In the case of this example, this would mean that in the first 5 years, under the ITA it would bepossible to write-down the asset by 50%, whilst under the CCCTB it would be possible to write downthe asset by around 75%. In later periods, the situation should reverse itself, whereby the ITA shouldcatch-up with the CCCTB. However, it is likely that if one were to calculate the present value of thedeductions, then we anticipate that the present value of the deductions obtained under CCCTBshould generally be higher.

3. Transfer pricing based on the arm’s length principle – Whilst the ITA does not contain sophisticated transferpricing rules and therefore an element of flexibility exists in the determining the pricing betweenrelated companies, several of Malta’s trading partners have in place transfer pricing regimes, whichmeans that Maltese companies generally are still required to apply an arm’s length price totransactions with other non-Maltese related parties.

Adherence to transfer pricing rules (in particular the onerous documentary requirements) maypotentially be very complex, time consuming and costly and, in turn, could potentially dissuadebusinesses from engaging in cross border activity.

By allowing a group of companies to prepare one consolidated tax computation, the Commissionargues that this will make it easier for groups of companies to engage in cross-border activities withinthe EU since it should drive down the cost of adhering to these complex tax rules.

That having been said, the CCCTB Directive requires that an arm’s length price is neverthelesscharged between the CCCTB group and related companies falling outside the group (e.g. a commonlyheld company which is not resident in the EU). As a result, in terms of certain transactions, Maltesecompanies that elect into the CCCTB would be required to ensure, at least for tax purposes, that theprices charged to such related companies would be priced at arm’s length.

4. Tax treatment of foreign profits –When certain foreign-source income is received by a Maltese company,such income is generally taxable in Malta. In certain cases, a credit may be claimed by the companyagainst foreign tax incurred on the income. If the foreign tax paid is lower than the Maltese taxchargeable on the income, the taxpayer may generally be required to pay the difference between the

17 The definition of “industrial buildings and structures” contained in Article 2 of the ITA also includes hotels

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Maltese tax rate and the foreign tax charge on foreign sourced profits, in line with the capital exportneutrality principle18.

The CCCTB Directive is based on the principle of capital import neutrality19. In terms of thisprinciple, a Maltese company that receives foreign income should not generally be required to payfurther tax in Malta on those profits. Accordingly, this may result in an advantage for Maltesecompanies deriving profits from certain foreign sources, particularly if the rate of tax in the foreignterritories is lower than the Maltese corporate tax rate, since the benefit obtained from such lowerforeign tax rate should be preserved even after the profits are repatriated to Malta.

5. Anti-abuse rules –The proposed Directive includes additional anti-abuse rules to those that exist underthe ITA.

In this regard, the two main anti-abuse rules that the Directive contains, which are not found in theITA, (1) seek to prevent a taxpayer from claiming a deduction in respect of interest payments madeto related companies resident in certain tax haven jurisdictions20 and (2) anti-CFC rules21.

The interest disallowances rule is intended to deny a tax deduction in respect of interest payments,when such interest payments are made to a related party of the group that is resident in a thirdcountry, which third country fails certain tests. Those tests require that the said third country has anexchange of information agreement in place or that the interest is not subject to a substantially lowerlevel of taxation in that third country22 in order to allow the deductibility of the interest in suchcircumstances.

With regard to the anti-CFC rule, the proposed Directive requires that where a Maltese companyholds an interest, directly or indirectly, in an entity which is resident in a third country, theundistributed portion of such entity’s profits should, in certain situations, be included within theCCCTB tax base. Typically, the rule should only be triggered when (i) the entity is controlled by theMaltese company or the CCCTB group, (ii) the entity is in receipt of particular types of income and(iii) the entity is subject, in the third country, to a substantially lower level of taxation.

In certain cases, the proposed Directive considers that a substantially lower rate of taxation is deemedto be a rate which is less than 40% of the average statutory corporate tax rate applicable in theMember States. Such a rate is to be published by the Commission annually, however, according toour estimates such a rate stood at around 9.2% in 2010.

Given that equivalent rules do not exist under the ITA (save in particular cases of interestdeductions23), these rules may bring in an added level of complexity for Maltese taxpayers comparedto the situation currently in existence under the ITA.

18 Capital Export Neutrality is an economic concept that renders the decision on whether to invest funds domestically oroverseas neutral from a tax perspective. The general feature of this concept in practice is the charging of domestic companiesa standard rate of tax, whether the profits are domestic or foreign sourced.19 Capital Import Neutrality is an economic concept that renders the decisions on whether to repatriate foreign profits or re-invest the profits overseas neutral from a tax perspective. The general feature of this concept in practice is the exemption offoreign profits from domestic tax, thus achieving competitive conditions for the domestic company investing abroad bypreserving the tax conditions overseas, whether the profits are repatriated or otherwise.20 Article 81 of the proposed Directive21 Article 82 of the proposed Directive22 A deduction for the interest may nonetheless be claimed in certain instances and subject to the satisfaction of certainconditions for that element of the interest that is considered to be on arm’s length terms.23 Article 26(h) of the ITA prescribes that when a person incurs interest in respect of borrowings used to finance, directly orindirectly, the acquisition, development, construction, refurbishment, renovation, etc. of immovable property situated in

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6. Tax compliance –Where a Maltese company forms part of a CCCTB group but has not been appointedas the principal taxpayer of the group, such Maltese company should not be required to file a separatetax return in Malta. Rather, its tax results shall form part of the consolidated tax return that is filed bythe principal taxpayer on behalf of the entire group with the tax authority in which the principaltaxpayer in resident.

This difference should also result in consequential compliance-related implications, including that theMaltese company may be subject to investigations/tax audits coordinated by the principal taxauthority.

That having been said, the Directive provides that the tax audit is to be conducted in accordance withthe national legislation of the Member State in which the audit is carried out and therefore domesticrules in this context should continue to apply.

The opposite scenario will occur where a Maltese company has been designated as the principaltaxpayer, wherein under CCCTB, such Maltese company would be required to file a consolidated taxreturn with the Maltese Inland Revenue in respect of the entire group. In such cases, any tax audit ofthe group must be initiated and coordinated by the Maltese Inland Revenue.

Malta, the lender is a related person of the borrower and the lender is not resident in Malta, the borrower is denied adeduction in respect of such interest when the interest is exempt from tax in Malta.

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Chapter 3Presentation of study findings

In light of recent political and economic developments, the introduction of a common EU-widecorporate tax base is now a priority for the Commission and for some of the Member States.

In summary, the European Commission argues that the CCCTB is needed to tackle some major fiscalimpediments to growth in the Single Market. In the absence of common corporate tax rules, it is arguedthat the interaction of national tax systems often leads to over-taxation or non-taxation, thus creating anuneven playing field.

For this reason, the Commission argues that businesses may face heavy administrative burdens and hightax compliance costs. From an EU point of view, this situation creates disincentives for cross-borderinvestment in the EU and, as a result, runs counter to the priorities set in the Europe 2020 Strategy. Onthe other hand, reservations have been expressed about the manner in which the CCCTB, as proposed,would operate and the fiscal implications that the system could have on the national budgets of MemberStates.

In view of this, the MBB has commissioned us to carry out the study through which we have sought tomodel the manner in which the introduction of the CCCTB could impact the tax position of a number ofgroups of companies that operate in key sectors of the economy. The purpose of this study is to providean indication of the financial impact that the CCCTB could have on the tax position of companies thatwould elect into it/ on which it would be imposed if CCCTB were to be introduced on a compulsorybasis.

From these findings, we then seek to extrapolate the possible effects that the CCCTB might have on thefiscal revenues that the Maltese government derives from the taxation of corporate profits and the fiscalcompetitiveness of Malta as a jurisdiction in which to carry on business operations.

1. Methodology adopted

The methodology that has been adopted for the purposes of this study has been that of computing thetaxable profits of a select number of groups of companies (“the participants”) in accordance with theprovisions of the Directive.

The computation has been restricted to the computation of taxable profits under the CCCTB for onefinancial year. Participants could choose the financial year in respect of which they could provide data.However, in the vast majority of cases, the financial year that was used for the purposes of the CCCTBcomputation was the financial year ended before 30 June 2011 (typically financial year ended 31December 2010).

The data for each of the participants was obtained through a series of interviews that were carried outwith representatives of each of the participants over the course of 5 months as well as through various

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follow-up queries where necessary. In a number of cases, certain assumptions needed to be made inrespect of certain data.

Whilst some of the information provided by each of the participants is publicly available (e.g. informationcontained in published financial statements), a significant portion of the data is confidential and has beenprovided to us by each of the participants on condition of anonymity. Accordingly, the participants’identity is not disclosed in the study.

However, in order to aid the reader of this report and provide context to the findings of our study, a basicprofile of each of the participants has been included in the findings below.

2. Selection of participants

MBB and PwC identified 22 potential groups of companies operating in and from Malta for the purposeof participating in this study.

The groups that were identified were chosen from key industries of the Maltese economy and include thefollowing:

- Financial services (encompassing banking groups, insurance groups and other groups involved in theprovision of related financial services)

- Tourism- Manufacturing- Information Technology (including companies involved in online gaming)- Education, and- Construction

Together these industries account for a significant percentage of Malta’s GDP and employ approximately60% of the gainfully occupied population24.

In identifying the potential groups of companies to participate in the study, account was also taken of:

(i) the size of the groups (including assets and turnover);(ii) the jurisdictions in which those groups operate (in particular whether those groups have

operations in the EU or outside of the EU); and,(iii) whether the ultimate owners of the group are Maltese residents or the group is foreign owned.

From the 22 groups that were identified, 11 accepted to participate in the study. The participants areinvolved in each of the key industries that were identified. Furthermore, the participants consist of a mixof companies that are Maltese-owned and foreign-owned and have interests in varying degrees situated inboth the EU as well as outside the EU.

3. Limitations of this study

This study does not purport to be an exhaustive exercise in modelling the impact of CCCTB on the taxaffairs of the participants. Indeed, the methodology that has been employed is not intended to provide acomplete picture on the impact of CCCTB. Rather it is designed to provide some preliminary indications

24 Source of data: Economic Survey, November 2011

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and insights on the potential effects that the introduction of the CCCTB (as currently proposed) couldhave on a diverse set of groups of companies that could be eligible to elect into the CCCTB.

In this regard, the study is restricted to modelling the CCCTB in respect of approximate results obtainedby each participant in one financial year and accordingly, does not consider the economic fluctuations towhich the participants may be exposed in the medium and long term.

The study assumes that all the companies consolidated within the CCCTB formed part of that groupthroughout the entire financial year that has been analysed. Accordingly, it does not take into accountsituations involving the transfer of companies or the termination of groups that may have occurredduring or subsequent to the financial year that has been used for the purposes of the model.

The study also does not take into account the provisions of the proposed Directive that deal with the useof losses and other tax attributes created under domestic tax law prior to the group falling within thepurport of the CCCTB. Accordingly, it has been assumed that none of the participants have anyunutilised tax losses or other tax attributes available to it under domestic law that were generated in priorperiods.

It has also been assumed that the opening tax written down value of assets falling within the asset poolfor the purposes of tax depreciation is equal to the accounting net book value of those assets as per thefinancial statements made available to us.

Additionally, the computations do not take account of the anti-abuse rules contained in the Directive andassumed that any such anti-abuse provisions including, in particular, the application of the interestdisallowance rule and anti-CFC rules should not be triggered by any of the participants.

Moreover and unless otherwise indicated, it has been assumed, for the purposes of applying the formularelating to the attribution of the tax base, that participants which provide services are deemed to providethose services in the jurisdiction of the customer. Furthermore, it has been assumed, unless otherwiseindicated, that the participants do not incur material lease charges in respect of assets in the jurisdictionsin which they operate.

The Directive contains a significant number of general provisions and we are not aware of any officialguidance or authoritative literature regarding how these provisions should be interpreted.

Accordingly, the application of the proposed Directive for the purposes of this study is based exclusivelyon our own interpretation thereof and does not reflect the interpretation of any court, authority orinstitution. Indeed, it is not necessarily the case that a court, authority or institution would agree with ourinterpretation of the relative provisions.

4. Data collected from participants

In order to compute the tax base of a group under the CCCTB, it was necessary to obtain certaininformation pertaining to the group. The data that was sought to be obtained included:

An up-to-date Group Structure chart, showing all EU group companies and permanentestablishments of non-EU group companies situated in the EU (“EU branches”);

The accounting profit and loss of all EU Companies and EU branches for the financial year beinganalysed;

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The opening and closing balance sheets of all EU companies and EU branches relative to thefinancial year being analysed;

Details of transactions that occurred between EU companies and EU branches during the financialyear being analysed;

Revenues received by EU companies and EU branches consisting of:- subsidies linked to the acquisition, construction and improvement of fixed assets;- proceeds from the disposal of fixed assets;- dividends or other profit distributions;- proceeds from the disposal of shares; and,- revenues of EU group companies’ branches that are situated outside the EU;

Capital costs relating to research and development incurred during the year;

Expenditure consisting of entertainment expenses, fines and penalties and benefits granted toshareholders (or family members thereof) and other associated companies;

List of tangible and intangible fixed assets of which EU companies and EU branches are economicowners (i.e. where the EU company/EU branch carries substantially all the economic risks andrewards) including original cost and year of acquisition;

Any withholding taxes paid in the EU on dividend, interest and royalty payments;

Corporate tax charge of EU companies/EU branches incurred in the year reviewed;

Number of employees and payroll costs of each EU company and EU branch including bonuses,social security contributions, etc;

Tangible fixed assets rented or leased by each individual EU company and EU branch (of whichassets the EU company/branch are not the economic owners) as well as the amount of annual rent orlease charge;

Total revenues derived from sales of goods and services made by each EU company and EU branchin the ordinary course of business.

Data collected served as a basis for computing the taxable profits or losses of each participant in line withthe provisions of the CCCTB Directive. The computations were carried out through the use of acustomised software model which was developed for the purposes of this study.

The results obtained in respect of each participant are set out in the following sections.

5. Results and findings of computations

Participant #1

This group of companies is primarily involved in the education sector and runs educationalestablishments located in various jurisdictions around the world. The group is parented by a Maltesecompany and the main shareholders are Maltese.

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Participant #2

This participant is a banking group with operations located in Malta. The group however also hasrepresentative offices situated in various other jurisdictions. The group is parented by a Maltese companyand the shareholders consist of a mix of Maltese-resident and non-Maltese-resident persons.

Participant #3

This participant consists of a group of companies which includes an insurance company and operatingsubsidiaries thereof, which are all resident in Malta. In the year reviewed, the group’s shareholdersconsisted of a mix of Maltese-resident and non-resident shareholders.

Participant #4

Participant#4 is primarily involved in the online gaming sector. The group is parented by a company thatis tax resident in the EU (although not in Malta), and most of the ultimate shareholders of the group arenot resident for tax purposes in Malta.

Participant #5

This participant is a group of companies that are primarily involved in the provision of financial andinvestment services in Malta. The group is owned by Maltese-resident shareholders.

Participant #6

This participant consists of a Maltese parented group that is engaged in various industries which primarilyconsist of tourism, construction and retail operations. The group is ultimately owned by Maltese-residentshareholders.

Participant #7

This group of companies is a developer and manufacturer of electronic components and products. Thegroup is parented by a non-EU company and its ultimate shareholders are not resident in Malta.

Participant #8

The group’s main business is connected with the ownership, development and operation of hotels, leisurefacilities, and other activities related to the tourism industry and commercial centres. The group is ownedby a mix of Maltese resident individuals and non-Maltese institutional investors.

Participant #9

Participant #9 is a group involved in the provision of information technology solutions. During the yearfor which the computation was carried out, the group’s shareholders consisted of a mix of Maltese-resident and non-Maltese shareholders.

Participant #10

This participant is a Maltese parented group involved in the provision of online gaming services. Thegroup is owned by persons who are not resident in Malta.

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Participant #11

This participant is a financial services group with banking and other ancillary operations situated in Maltaand in another Member State. The shareholders of the group consist of a mix of Maltese resident andnon-Maltese resident persons.

Summary of findings

Participants% change in Malta

Tax ChargeComments +/-

#1 +5.4%

Higher proportion of group's profits taxable in Malta due tosharing mechanism +Higher tax depreciation under CCCTB compared to capitalallowances under ITA -

#2 +3.6%

Positive fair value movement treated as taxable under CCCTB +Deduction for provisions recognised during the year -Higher tax depreciation compared to capital allowances -

#3 +78.0%

FRFTC not claimed under CCCTB model +Tax losses brought forward not taken into account forCCCTB purposes +

Positive fair value movement treated as taxable +Non-applicability of 12% final withholding on sale ofimmovable property +Higher tax depreciation under CCCTB compared to capitalallowances under ITA -

#4 -50.9%

Tax refunds are not being taken into consideration todetermine change in tax charge +

Re-allocation of profits reduces Malta tax base by almost 50% -Tax losses brought forward not taken into account forCCCTB purposes +Higher tax depreciation under CCCTB compared to capitalallowances under ITA -

#5 +69.2%

Non-applicability of investment income provisions allowingfor 15% final withholding tax +Higher tax depreciation under CCCTB compared to capitalallowances under ITA -

#6 -100.0%

Losses incurred by European companies were absorbed byMaltese company -Higher tax depreciation under CCCTB compared to capitalallowances under ITA -

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Participants% change in Malta

Tax ChargeComments +/-

#7 +2791.6%ITCRs not taken into account for purposes of CCCTB +Higher tax depreciation under CCCTB compared to capitalallowances under ITA -

#8 -100.0%

Losses incurred by companies in other Member States wereabsorbed by Maltese company -Higher tax depreciation under CCCTB compared to capitalallowances under ITA -

#9 -72.6%

Use of losses incurred by non-Maltese company against taxbase -

Greater apportionment of profits to other Member States -ITCRs not taken into account for purposes of CCCTB model +

#10 -52.4%

Tax refunds are not being taken into consideration todetermine change in tax charge +Significantly lower proportion of group's profits taxable inMalta due to sharing mechanism -More flexible deduction rules under CCCTB for holdingcompany expenses -

#11 +630.4%

Write-off of a loan to a subsidiary was treated as non-deductible under CCCTB +Tax losses brought forward not taken into account forCCCTB purposes +

No maintenace allowance on rental income under CCCTB +Lower tax depreciation under CCCTB compared to capitalallowances under ITA +

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Chapter 4Interpretation of findings

In this following section, we set out our views and comments on some of the effects which we anticipatethat the introduction of the CCCTB Directive is likely to have on the Maltese tax system as well as otherpossible implications for business.

Our comments are based on the findings set out in the previous section, our interpretation of theDirective as well as on our experience in general. All views and comments expressed below are entirelyour own and it is not necessarily the case that our views and comments would be agreed to by otherstakeholders, authorities and others involved in the ongoing debate surrounding the possible introductionof the CCCTB.

In addition, as noted above, the findings and comments set out in the previous section do not and shouldnot be construed as constituting an exhaustive analysis of the potential impact that the CCCTB couldhave on the level of Maltese income tax incurred by companies. The findings are merely intended toprovide some insight into understanding some of the possible and potential repercussions that couldresult from the introduction of CCCTB.

Furthermore, some of our comments are based on assumptions which we have been required to make inthe course of computing the Maltese tax charge of the participants under a CCCTB scenario. Whilst everyeffort has been taken to ensure that the assumptions that we have made are reasonable, it is possible thatif some of these assumptions do not faithfully reflect reality, then this could consequently affect the viewsand comments set out below.

1. General comments on the anticipated effects of CCCTB onbusiness

In this section, we set out some of the anticipated effects that the introduction of CCCTB could have onMaltese business in general. The effects listed hereunder are likely to apply irrespective of the industry inwhich businesses operate as well as regardless of whether the business is resulting from inboundinvestment into Malta or is owned by Maltese resident individuals.

Calculation of the tax base

Inclusion of revenues in the tax base

As noted in Chapter 2, the CCCTB Directive starts from the premise that all revenues and receiptsreceived by a company should fall within the tax base, unless such revenues fall within one of the types ofexempt revenues listed in the Directive.

As a result, when seen from this perspective, the tax base of a company/group calculated under theCCCTB could potentially be higher than that which is calculated under the ITA.

That having been said, despite the seemingly wider tax net proposed under CCCTB, from the analysiscarried out in respect of each of the participants, it does not appear that this difference is likely to give

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rise to a significant increase in the tax base of companies that fall within the purport of the CCCTB. Thisresult appears to be reasonable on the basis that capital receipts are not likely to constitute a significantpart of a company’s profits in the normal course of business.

However, it is possible that if a significant level of capital receipts do arise, due to for example theoccurrence of an event that falls outside the normal operations of a business (e.g. waivers of debt arisingin connection with the restructuring of a business), then such capital receipts would be included in theCCCTB tax base which could in turn result in increased tax for those businesses in the years in whichsuch capital receipts occur.

Deductibility of expenses

As outlined in Chapter 2, the inclusion of a wider scope of revenues in the CCCTB tax base, is somewhatmitigated by seemingly more flexible rules for claiming a deduction.

The greater ease with which it appears possible to claim a tax deduction under the CCCTB Directivecompared to the ITA is reflected in the general rule dealing with deductibility of expenses. In this regard,the general rule under CCCTB states that expenses should be deductible insofar as they are “incurred...witha view to obtaining or securing income”25.

This general approach is also apparent from various other provisions of the Directive when viewedagainst their equivalent counterpart under the ITA, as reflected in the following examples:

a) The CCCTB Directive allows companies to deduct provisions that are not connected to bad debts,subject to the satisfaction of certain conditions, in the period in which they recognise thoseprovisions. The ITA, on the other hand, denies a deduction for provisions outright.

This dissimilarity between the CCCTB and ITA was one of the main contributing factors giving riseto a difference in the tax base (and resulting tax charge) for Participant #2.

That having been said, the benefit of claiming a deduction for a provision could merely result in atiming advantage for the taxpayer. This view is based on the fact that if the provision is crystallisedand the loss is actually incurred, then generally it should be possible to claim a deduction for that lossunder the ITA in the year in which it is crystallised. On the other hand, the reversal of a provisionshould be treated as taxable under the CCCTB.

b) As outlined above, the scope of assets in respect of which a taxpayer is able to claim tax depreciationunder the CCCTB is wider than that allowed under the ITA.

Indeed, our findings indicate that the increased availability of tax depreciation under CCCTBcompared to capital allowances allowed under the ITA contributed to a reduced tax base of at leastseven of the 11 participants26.

Furthermore, in line with expectations, it appears that this difference could be greater in thoseparticipants which own immovable property that they use for the purposes of their business andwhich property does not consist of an industrial building or a hotel.

25 Article 12 of the proposed Directive26 According to our findings, tax depreciation resulted in a lower tax base for Participants #1, #2, #3, #4, #5, #6 and #8.

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This is due to the fact that the value of buildings typically represents a material portion of the totalassets of the company/group. Accordingly, the resulting tax depreciation that may be claimed onsuch assets is likely to be significant.

The advantage obtained through claiming tax depreciation in respect of buildings could potentially bea temporary one. In this respect, if the company/group had to dispose of the building at some pointin the future, the chargeable gain under the CCCTB computation should be calculated by reference tothe proceeds received for the building, less the depreciated cost. As a result, the gain that couldpotentially result from the disposal of building is likely to be larger under a CCCTB scenario27.

c) Under the ITA, chargeable income is calculated in respect of each source of income derived by acompany.

With the exception of losses incurred in connection with a trade or business, if it results that theexpenditure connected to the production of a particular source of (typically passive) income exceedsthe receipts therefrom, the company is unable to offset the resulting loss against other sources ofincome.

Under the CCCTB, given that all income and expenses are grouped together, it does not appear, fromour interpretation of the Directive, that such limitation exists.

Accordingly, if the same company incurred an excess of expenditure against its rental income, thensuch excess should be grouped with income and expenses from other sources and may therefore beoffset against profits obtained from other sources, as long as all the expenses are regarded as havingbeen “incurred...with a view to obtaining or securing income”.

It does not appear, from our findings, that this difference between the CCCTB and the ITA has hada significant effect on the calculation of the tax base of the participants. However, the potentialimplication of this difference may be illustrated by the results of some of the participants, particularlythose whose structure includes a Maltese holding company.

For example, in the case of Participants #1, #4 and #9, the Maltese holding company incurred amaterial level of expenses during the year under review. Typically, such expenses are not deductibleunder the ITA, since such expenses were not incurred in the production of income received by theholding company. Indeed, we understand that such expenses were incurred by the respective Malteseholding companies in connection with their holding activity.

Under the CCCTB, given that the results of the holding company are grouped with those of itssubsidiaries, those expenses were taken as deductible on the basis that they were incurred by theholding company “with a view to obtaining or securing” the income of the group, and thuscontributed to a reduced CCCTB tax base.

The trend noted above, was somewhat reversed in the results for Participant #11. In fact, this participantexperienced a significant increase in its Maltese tax charge in part due to the unavailability of the 20%statutory deduction that the ITA provides against rental income as well as due to lower tax depreciationunder the CCCTB compared to capital allowances under the ITA.

27 Article 38 of the proposed Directive provides for the possibility of roll-over relief when an asset in respect of which taxdepreciation has been claimed is sold and replaced by another asset. This should defer part or all of the gain which thetaxpayer may otherwise have recognised on the disposal of the said asset.

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This fact pattern shows that the increased deductibility of expenses that is seemingly available underCCCTB needs to be analysed in the particular circumstances of the group. As a result, it will notnecessarily be the case that in terms of the CCCTB a group would necessarily be entitled to greater taxdeductions compared to the deductions allowable under the ITA.

Applicability of rules allowing for final withholding tax

The ITA contains various rules that provide for the charging of a final withholding tax on specific typesof income. Two such rules are found in the investment income provisions and in Article 5A of the ITA(i.e. the property transfer tax).

The investment income provisions allow most taxpayers to suffer a final withholding tax of 15% ondefined types of investment income. The tax is withheld at source by the payor of the income andtaxpayers, in turn, do not suffer any further tax on such income.

The property transfer tax generally consists of a final withholding tax of 12% that applies on transfers ofimmovable property situated in Malta. The withholding tax is usually charged on the higher of theconsideration and the market value of the property being transferred, although some exceptions to thisrule may apply.

Given that both taxes are withheld at source and represent final taxes28 there is some doubt whether theymay be applied to a company/group that elects into the CCCTB. This doubt stems from the fact that theincome that has been subject to the final tax is effectively excluded from the tax base of the company,when such company prepares its self-assessment, since such income would not be subject to any furthertax. It is debatable whether within a CCCTB system it would be possible for Malta to apply such a systemwhich imposes tax at a specific rate on a specific source of income.

The situation is complicated further in a scenario involving the apportionment of the tax base betweenMalta and other Member States. In such a situation, the application of the final withholding tax may resultin Malta charging to tax part of the tax base that would be allocated to another Member State under thesharing mechanism, which would run counter to the provisions of the Directive29.

Our findings indicate that if the said final withholding tax rates cannot be maintained in a CCCTBcontext, this is likely to have an impact on the tax charge of the particular company.

Indeed, in the case of Participant #5, the disapplication of the investment income provisions was themain factor contributing to the increase in such participant’s tax charge, since income that was previouslysubject to a final withholding tax of 15%, was included in the tax base and taxed at the standard rate of35%.

An increase in the tax charge levied on a CCCTB tax base was also observed for those participants whichduring the year under review transferred property which, under the ITA, was subject to a finalwithholding tax of 12%. In this regard, Participants #3 and #6 would have suffered a greater tax charge

28 A final withholding tax should be distinguished from a provisional withholding tax. In the case of the latter, the taxwithheld merely represents an advance payment by the taxpayer in respect of his actual tax liability. Accordingly, if theactual tax liability of the taxpayer is higher than the provisional tax payment, then the taxpayer should be required to settlethe difference by a further payment of tax. In the reverse situation, the excess payment should generally be refundable to thetaxpayer.29 Such a scenario may arise if operations situated in the other Member State result in losses, and therefore the consolidatedtax base is likely to be reduce the tax base of the Maltese company.

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under CCCTB due to the fact that a 35% tax charge on the profit that was earned on the transfer ofproperty would have been higher than 12% final tax that was levied on the consideration.

However, this result should not be regarded as suggesting that the disapplication of the property transfertax should necessarily result in an increase in the tax charge when a company falling within the purport ofthe CCCTB. Indeed, if the profit on the transfer of property is low, the 35% tax charge on the profit mayresult in a lower tax burden than the 12% final tax chargeable on the consideration.

Comments on the interpretation of the Directive and possible consequences thereof onbusiness

Comments regarding the interpretation of the Directive

In our view, one of the difficulties which we anticipate could arise from the introduction of the CCCTBas currently proposed is the interpretation of the proposed Directive itself.

The substantive part of the proposed Directive consists of around 135 Articles spread over approximately50 pages and drafted in a relatively straightforward manner. That having been said, allowance must bemade for the fact that under the proposed Directive, the Commission would be delegated with powers tointroduce more detailed rules regarding parts of the said Directive, even if such powers of delegation havebeen limited to specific areas of the proposed Directive (e.g. tax depreciation, types of companies eligibleto elect for the CCCTB and other minor areas).

Interpretation issues

The relatively simple language may in itself bring with it certain advantages, including making theproposed Directive more accessible to taxpayers and tax authorities, especially when compared to existingtax legislation which has over the years arguably become more complicated and harder to comprehend.

However, this could, in our view, also be one of the Directive’s significant drawbacks. Tax law, by its verynature is usually sophisticated since it generally reflects the complexity of business and different businesstransactions. Indeed, tax legislation needs to encompass an entire spectrum of business activities rangingfrom the straightforward activities of a passive holding company to the more complex activitiesassociated with for example the financial services industry.

It is uncertain, in our view, whether the proposed Directive, as currently drafted, is sufficiently detailed toprovide tax authorities and taxpayers with clear rules on how the system will work in certain complexsituations.

That having been said, one of the reasons for this apparent lack of detail could be due to the fact that interms of general European Law, Directives are meant to be binding on Member States only with respectto the result that is required to be achieved. As a result, the Directive does not dictate the form ormethods to be applied to achieve those goals since these are left to the Member States to decide.Therefore, the way in which a Directive is implemented into domestic law is a Member State’s prerogativeand accordingly left out of the Directive.

However, if the 27 Member States are left to implement the Directive in their own manner this could toan extent undermine the principal aim of the Directive, that of achieving harmonisation in corporate taxmatters within the internal market. This is particularly so if there are substantial divergences in theinterpretation of particular provisions of the Directive, particularly when those provisions are rathergeneric.

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It may be argued that such divergences should not affect individual groups, given that by its very naturethe proposed Directive introduces a one-stop-shop concept whereby the group would only be required tofile a return with the principal tax authority. Accordingly, it should be the implementation of the Directiveby the Member State of that principal tax authority that is relevant for the particular group.

This however has wider implications, whereby the different implementation of the Directive andinterpretations from different tax authorities within the EU could distort competition, and possibly fallfoul of fiscal State Aid rules in the EU Treaties.30 In the future, this could also unduly influence operatorson how and where business is located within the European Union, in favour of those Member States thathave implemented the Directive in a more flexible manner.

This may also create a perceived vacuum until the existing the body of literature is replenished. In themeantime, this may cause significant uncertainty on the manner in which the tax base is calculated as wella heightened risk of tax abuse which could ultimately impact the tax charge of a company or groups, andpresents a budgetary risk for Member States in general.

Tax Treaties

The Directive also provides little guidance on how the existing network of double tax treaties, particularlythose treaties which Member States have concluded with third states, will fit into the framework of theCCCTB.

In this regard, certain provisions of the Directive imply that bilateral Tax Treaties with third countries willstill apply. It is not entirely clear however, how the arm’s length principle in Article 9 of the OECDModel will interact with the formulary apportionment in the proposed Directive, particularly in triangularsituations.

Further, the definition of a permanent establishment in such treaties may differ from the definition of apermanent establishment in the proposed Directive. This could therefore result in a situation where theEU Member State in question would be apportioned an amount of income under CCCTB for taxation,but such taxation may be in breach of that Member State’s treaty obligations.

Furthermore, it is uncertain how third countries that have concluded bilateral tax treaties with MemberStates, will interpret any Limitation of Benefits clauses that they have introduced into the double taxtreaties, particularly if the income arising in the third country is to be apportioned between Member Statesthat might not have concluded a bilateral tax treaty with said third country.

As a result, the introduction of the CCCTB may require the renegotiation of certain treaties concludedwith third countries which could take several years.

Transferring of legislative powers to EU institutions

Another challenging aspect that may in turn give rise to its own implications is the speed at which theproposed Directive can be amended. Tax law is by its very nature, ever-changing since it reacts and adaptsto the environment for which it caters. Moreover, in our view, it is highly likely that there are always goingto be areas of tax law which result in an unintended tax consequence, whether in favour of the taxpayeror in favour of the tax authority, which would therefore also require a change in the legislation.

30 Article 107 of the Treaty on the functioning of the European Union

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In terms of the proposed Directive, the Commission is to be delegated with authority for the detailedimplementation of specific parts of the Directive, which therefore means that the Commission togetherwith the assistance of a specialist committee should be entitled to amend and alter such implementingregulations in much the same way that the government of a Member State is able to amend and alter partsof its own domestic tax system.

However, these areas of delegated authority are very narrowly defined and therefore any amendments tothose parts of the Directive which have not been delegated to the Commission would depend on all 27Member States (or fewer if the CCCTB Directive is implemented by way of enhanced co-operation)consenting to the amendment.

Experience shows that it is extremely difficult for all 27 Member States to agree on matters of tax law andtherefore, unless the Directive can be updated and amended with sufficient regularity, there is a risk thatthe Directive may quickly become archaic and difficult to interpret in future years, which would in turnimpact those businesses that have elected into the CCCTB.

A possible solution to this issue would be to make the Commission responsible for the detailedimplementation of additional parts of the Directive than those currently proposed. However, this couldalso mean that Member States would be giving up more and more of their sovereignty in deciding mattersof a fiscal nature.

Concluding remark on the impact on business in general

On the basis of the results obtained from this study, it is naturally not possible to determine on the basisof information made available to us whether the differences between the calculation of the tax base underCCCTB and the ITA would result in a higher or lower tax burden for Maltese companies in general.

This will depend on the consideration of certain other factors, including whether certain aspects of theMaltese tax system (e.g. the final withholding taxes on transfers of immovable property situated in Maltaand investment income, the tax refund provisions etc) can be reconciled with the provisions of theCCCTB, more detailed rules which may eventually be published clarified aspects of the CCCTB, moredetailed information on the particular company/ group’s precise financial and tax circumstances, etc.

That having been said, what is certain from our findings is that there will be some winners and somelosers depending on the specific facts and circumstances of each company or group that decide to adoptCCCTB.

Indeed, it is also very possible that a company or group may switch from an advantageous position to adisadvantageous position or vice-versa over the course of different tax years.

By way of example, companies or groups may find that they have a lower tax base under the CCCTB dueto the ability of that company or group to claim tax depreciation in respect of buildings that they own,only to find the situation reversed in later years where circumstances might change leading them todispose of capital assets that do not fall within the scope of the ITA’s capital gains rules but are includedin the CCCTB tax base.

In view of the above, it would be misleading to draw any wide-ranging conclusions at this point, exceptthat CCCTB will result in changes in the manner in which a company or group calculates its tax base andthat those changes will depend primarily on the specific circumstances of the company or group in eachyear.

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2. General comments on the anticipated effects of CCCTB oninbound investment

A significant part of Malta’s economic growth over the past 40 years has been fuelled primarily by thelevel of investment that Malta has been able attract from overseas. With Malta’s accession into theEuropean Union in 2004, the level of inbound investment into Malta (particularly in the area of financialservices) has grown significantly.

In order to attract the investment, Malta must be able to offer foreign investors an environment in whichbusiness activities can be carried out competitively and profitably. Several factors contribute to thecreation of such an environment including political and economic stability, market size, geographiclocation, availability of a skilled work force, legislative and tax framework, etc.

Whilst some of the factors contributing to a competitive business environment cannot be controlled (e.g.geographic location and market size), others, like the tax system, can be changed in order to counter-balance the disadvantages of some of the uncontrollable factors and give a competitive edge over otherjurisdictions that are competing to attract the investment.

In this respect, successive Maltese governments have chosen to develop and maintain a flexible system oftaxation as one of several factors that contributes towards making Malta a competitive place forinvestment. Indeed, this has been done in order to counter some of the disadvantages which Malta haswhich could otherwise significantly impair its ability to attract the said investment.

In view of the above, it is imperative to understand the precise effect (if any) that the introduction of theCCCTB may have on Malta’s ability to maintain a competitive business environment.

In this respect, around half of the participants in this study consist of groups that are foreign owned andhave invested into Malta in order to locate part of their business operations in Malta. We therefore set outbelow our comments on some of the anticipated implications of the introduction of CCCTB based onthe findings obtained from the analysis of such participants’ tax calculations.

Possible impact on the system of tax refunds

Malta’s tax system provides that subject to certain conditions, a person in receipt of a dividend from acompany registered in Malta may be entitled to claim a full or partial refund on the corporate income taxsuffered by the company on the profits so distributed. The quantum of the tax refunds depends on thenature and source of the taxed profits being distributed.

Indeed, the refund system is highly dependent on the system of tax accounts that Maltese registeredcompanies are required to maintain. The tax accounts serve to ensure that the company keeps a record ofthe source and nature of the taxable profits that it has earned. These in turn are necessary to assist theshareholder in determining whether or not it is entitled to claim a refund in respect of profits distributedto it and if so the quantum of such refund.

As noted in the analysis to our findings in respect of Participants #4 and #10, some detailedconsiderations would need to be made in order to reconcile the application of the CCCTB with the taxrefund regime.

This view is based on the consideration that the profits attributable to Malta under the CCCTB modelrepresent a formula-based percentage of the consolidated profits of the group as whole. As a result, in

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certain cases, it may not be evident what is the source or nature of the profits that have been attributed toMalta, since under a CCCTB scenario, this would merely represent a fraction of a consolidated whole.

Furthermore, the present system of refunds is significantly dependant on the distribution of a company’staxed profits to its shareholder. Whether or not a company is able to distribute profits is established inaccordance with rules contained in the Companies Act31, which rules generally limit a company todistributing its accumulated, realised profits32. A company’s accumulated, realised profits are generallycalculated by reference to the company’s financial statements.

The starting point for calculating the taxable profits of a company (at least, insofar that they are derivedfrom a trade or business) is generally the accounting profit contained in the company’s financialstatements.

Under a CCCTB system, the profit attributable to Malta through the application of the formula may bearno resemblance to a company’s accumulated, realised profits. Therefore, if the taxable profit attributableto Malta is significantly higher than the profits which the Maltese company is able to distribute, theshareholder should be unable to claim the relative tax refund.

Naturally, there may be ways and means to alter the refunds system so as to allow it to reconciled to aCCCTB scenario but this is something that still needs to be considered in appropriate detail.

Disallowance of interest deduction

As outlined above, the proposed Directive contains a rule that denies a taxpayer from claiming adeduction in respect of interest payments made by a company/group to a related person that is residentin a third country, where inter alia such related person would be taxed at a rate that is substantially lowerthan the average EU rate.

Under the ITA, interest is generally deductible as long as the interest represents sums that are payable onmoney borrowed by a taxpayer and the interest is payable in respect of capital employed in acquiring theincome33. A deduction may be denied in respect of interest that is paid to non-residents, although thisonly applies when the interest is payable on borrowings that were directly or indirectly employed toacquire/develop immovable property situated in Malta34.

As a result, generally speaking, as long as the condition noted above is satisfied, a taxpayer should beentitled to claim a deduction in respect of interest payments, without the need to determine where therecipient of that interest is resident in Malta and the tax rate at which such interest is taxed in the otherjurisdiction.

It has been assumed in the course of our workings that none of the participants paid interest which fellwithin the scope of the anti-abuse provision contained in the CCCTB. Accordingly, we have notquantified the impact that such an anti-abuse provision could have.

That having been said, the introduction of such an anti-abuse provision within a CCCTB scenario is likelyto reduce the flexibility that a foreign investor currently has in terms of financing Maltese subsidiaries.Indeed, if the interest would not be allowed as a deduction against the CCCTB tax base, the cost of debtfor the foreign investor is likely to be significantly higher. Accordingly, if it would not be feasible for a

31 Chapter 364, Laws of Malta32 Article. 192, ibid33 Article. 14(1)(a), ITA34 Article 26(h), ITA

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foreign investor to finance its Maltese operations through equity, it is possible that the CCCTB maydiscourage inbound investment into Malta.

Anticipated impact of the sharing mechanism on profits attributable to Malta

One of the more controversial aspects of the proposed Directive is the sharing mechanism of the taxbase. As outlined in Chapter 2, the formula that has been proposed in the Directive relies on threefactors: (a) tangible fixed assets situated in a Member State, (b) employees and cost of payroll incurred ina Member State and (c) third party sales effected to persons situated in a Member State.

Accordingly, the higher the tangible fixed assets, the number of employees (and associated payroll cost)and sales made to third parties in a Member State, the higher the percentage of the tax base that suchMember State is likely to be allocated.

According to our estimates, most of the inbound participants that were analysed, in particular Participants#4, #9 and #10, are likely to have a smaller part of their tax base being attributed to Malta than iscurrently the case. Indeed, in the case of Participant #4, it has been estimated that Malta’s share of theprofits under the CCCTB may amount to around 50% of the consolidated tax base, despite the fact thatfrom an accounting perspective, the Maltese companies generate approximately 80% of the group’sprofits.

In our view, if these findings are borne out by a sufficiently large number of companies operating inMalta, this would indicate that Malta is likely to be placed at a disadvantage in being attributed a share ofthe consolidated tax base, particularly in the context of inbound investment, due to the fact that thefactors present within the formula are reliant on the existence of tangible fixed assets, employees withhigher payroll costs and third party customers of the group being situated in Malta.

Indeed, with the possible exception of inbound investment involving manufacturing, due to its size, it isunlikely that the Maltese companies within a foreign-owned CCCTB group will have significant tangiblefixed assets and employees situated in Malta. Moreover, it is also unlikely that a significant part of thesales made by the group shall be made to customers that are situated in Malta.

In fact, in many instances, the significant assets of Maltese subsidiaries of a foreign-owned group aremore likely to be composed of financial assets or intangible assets rather than fixed tangible assets assuch. However, these assets (with the exception of financial assets in the case of banks and other financialinstitutions) are ignored for the purposes of the formula.

In our view, the proposed sharing mechanism seems to be more adequate for more traditional goods-based industries, where a large part of the value is derived from fixed tangible assets. However, thisapproach appears to be at odds with the general development of European economies over the past fewdecades with the move towards a more services-oriented economy.

Indeed, the proposed formula also appears to be inconsistent with the EU’s own Europe 2020 strategy,which considers innovation, research and development and development of intellectual property to beone of the main pillars that will drive growth in Europe over the next decade.

Notwithstanding the above, it could be argued that whilst Malta is likely to obtain a lower percentage ofthe consolidated tax base, that percentage represents a share of a larger tax base altogether. Accordingly,in absolute terms, the Maltese government may still increase its tax revenues under a CCCTB system.Whilst that argument may be valid, we have been unable to find support for this assertion across amaterial percentage of the tax computations that were analysed.

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Concluding remark on impact on inbound investment

As outlined above, the current domestic tax system has been one of the factors which contributes toMalta’s ability to attract foreign investment. By introducing and maintaining a flexible tax system,successive governments have foregone tax revenues in the short-term in order to attract foreigninvestment with the hope that such foreign investment would give rise to increased economic activity andgreater tax revenues in the future.

Whilst the CCCTB Directive allows Member States to determine the tax rate at which they tax their shareof the taxable profits of a group, if companies/groups elect into the CCCTB, it is unlikely that this wouldprovide sufficient flexibility for Malta in terms of the tax regime that it can implement.

Indeed, the tax rate represents only one half of the equation towards calculating the tax charge, the otherhalf being the tax base.

However, one impressive feature arising from the information collected during the course of this exerciseis the potential impact of the CCCTB’s provisions also on aspects of the tax system that may traditionallyhave been considered as affecting exclusively the tax rate.

We have already referred to various key issues in these respects, including the CCCTB’s possible impacton final withholding tax provisions, the flat rate foreign tax credit, the tax refund regime, the InvestmentTax Credits etc.

Thus although the Commission’s official position is that the CCCTB does not impact Member States’powers to select their tax rates, it is felt that in the context of the Maltese tax system, due considerationneeds to be given regarding the manner in which certain tax imposition provisions may be reconciled withthe CCCTB.

That having been said, the application of the CCCTB would be at the option of a group. Presumably, if agroup is of the view that the application of the CCCTB is going to result in a higher tax charge for thegroup, it is unlikely that it would elect into the CCCTB. This in turn should mean that the group shouldremain subject to the domestic laws of Member States to calculate the tax base and tax charge.

In view of this, for as long as the application of the CCCTB remains optional, the impact which CCCTBcould have on Malta’s ability to attract inbound investment through the flexibility of its tax system, shouldbe limited to those taxpayers which are likely to obtain a tax saving from the application of CCCTB.

3. General comments on the anticipated effects of CCCTB onoutbound investment

Due to the limited size of Malta’s domestic market, the expansion into overseas markets is viewed byseveral businesses as a necessary step for growth.

In this regard, the introduction of CCCTB could give rise to some significant advantages for Malteseowned businesses that are looking to invest in other Member States or outside of the EU.

In this regard, more than half of the participants in this study consist of groups that are Maltese ownedand have invested overseas or are looking to invest overseas. We set out below the salient implicationsthat the introduction of CCCTB could have on business with the aforementioned profile.

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Use of losses incurred outside of Malta

One of the most attractive features of the CCCTB to taxpayers is the ability to offset losses incurred inother Member States with profits earned in others. As a result, a company or group’s tax base is likely tobe more aligned to its commercial results where profits and losses have been incurred by different groupcompanies that are resident in different jurisdictions.

Indeed, in our analysis, the ability to offset cross-border losses has resulted in a reduced tax base and taxcharge for at least three participants, two of which are groups with Maltese parent companies (i.e.Participants #6 and #9). In both cases, both groups derived profits from their Maltese operations andincurred significant losses in companies situated in other Member States. Under CCCTB, those lossescould thus be consolidated against the profits generated in Malta, thus resulting in an overall decreasedtax base.

Such a system is likely to be an attractive option for groups that are seeking to expand their operationsoverseas, particularly if it is envisaged that in the first few years, the overseas operations are likely to incurlosses.

Under the ITA, the only way in which relief for such losses can be obtained was if the Maltese companyhad to establish its overseas operations through a branch of the Maltese company rather than through theestablishment of a separate subsidiary. Given that under CCCTB, relief for losses would also be possibleif a subsidiary was established, a group that is seeking to expand overseas has greater flexibility inchoosing the legal form through which it wishes to effect such expansion.

Participation exemption

Another aspect of the CCCTB that can prove to be advantageous for Maltese outbound investors is theavailability of a participation exemption in respect of dividends derived by the CCCTB group fromholdings in other companies and in respect of gains from the disposal thereof. The exemption appliessubject to the satisfaction of various conditions, most notably that the profits at the level of thedistributing company were subject to a level of taxation that is not substantially low.

Whilst Malta has in place a participation exemption regime, there may be additional tax considerationswhen such exemption is claimed by a Maltese company whose direct or indirect shareholders consist ofindividuals who are ordinarily resident and domiciled in Malta. Accordingly, in such cases, companiesgenerally do not seek to apply the participation exemption.

As a result, dividends or gains received by such a Maltese company are generally taxable in Malta. Thathaving been said, the company may be entitled to claim double tax relief in the form of a credit againstthe Maltese tax that is chargeable on the dividend or gain. Such relief is provided either in terms of adouble tax treaty that Malta would have concluded with another state or in terms of the unilateral reliefprovisions35 contained in the ITA. The credit is provided in respect of foreign tax that was suffered onthe profits distributed by the non-Maltese company or on the gain derived from the disposal of shares inthe said company.

Accordingly, where foreign tax has been suffered on the profits being distributed by the non-Maltesecompany or on the gain derived from its disposal, the Maltese tax charge may be reduced by the amountof foreign tax suffered.

35 Article 79 to 88 of the ITA

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Alternatively, a Maltese company may also claim the Flat Rate Foreign Tax Credit (“FRFTC”) in respectof dividends/gains derived from the foreign company instead of relief under a treaty or the unilateralrelief provisions36. The FRFTC generally results in a reduction of the post-double taxation relief Maltesetax burden from the statutory 35% rate to a rate ranging between 7.5% and 18.75%.

Given that under the CCCTB, dividends/gains derived from holdings in other companies may beexempt, this could potentially represent a significant tax saving for Maltese companies that invest outsideof Malta and which currently are directly or indirectly owned by Maltese-domiciled and ordinarily residentindividuals.

Indeed, as noted above, Participants #1, #8 and #11 hold shares in several subsidiaries situated outsideof Malta. Under the ITA, when profits from those subsidiaries are distributed to Malta, such profitsshould be subject to tax in Malta. Under the CCCTB, such profits should be eliminated from the tax baseand accordingly, should be exempt from tax subject to the satisfaction of the relevant conditions.However, given that in the years reviewed for these participants no dividends were received from theirrespective subsidiaries, it has not been possible to quantify the tax saving.

Exemption on non-EU permanent establishment profits

The CCCTB Directive also provides for an exemption in respect of profits derived by a company from apermanent establishment (“PE”) that is situated in a third country.

Under the ITA, Maltese companies are taxed on a worldwide basis. As a result, such profits are taxed inthe year in which they arise. However, as explained in the previous section, the Maltese company shouldbe entitled to claim double tax relief in terms of a relevant double tax treaty, the unilateral reliefprovisions or through the application of the FRFTC.

Indeed, the availability of the exemption in respect of a PE’s profits could provide an advantage to allMaltese companies, irrespective of the place of residence of such companies’ shareholders.

The downside to the exemption under CCCTB is that if the PE has incurred a tax loss, then such losswould not be deductible against the tax base calculated in accordance with the Directive. On the otherhand, as noted above, such losses would be taken into account when calculating the tax base under theITA.

None of the participants in this study has a PE situated outside of the EU and therefore the impact of theexemption has not been illustrated in the study.

Application of CFC rules

As outlined above, the CCCTB Directive contains anti-CFC rules which Maltese companies investingoutside of Malta should be required to apply if they elect into the Directive.

This may mean that profits of a foreign subsidiary, which under the ITA would only be taxable whendistributed to the Maltese shareholder, may need to be included in the tax base of the Maltese company.

36 The FRFTC is a form of double tax relief (given by way of a tax credit) which is provided to companies registered inMalta, which deems that foreign tax equivalent to 25% of the income received by the company in Malta, has been incurredoutside of Malta. The availability of the FRFTC is subject to satisfaction of certain conditions. The 25% credit is calculatedon the income receivable by the company after deducting any foreign tax actually incurred, but before any deductions orpayments are made from the said income. However, the quantum of the credit is capped such that the effective Maltese taxsuffered on the foreign dividends/gains should generally range between 7.5% and 18.75%.

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It has been assumed, in the course of our workings, that none of the participants held shares incompanies which fell within the scope of the anti-CFC rules. As a result, no profits derived by non-EUsubsidiaries were attributed to the CCCTB group and thus our findings do not seek to quantify theimpact that the introduction of the anti-abuse rule might have.

It is not clear from the Directive, whether relief would be given for any foreign tax paid by the foreignsubsidiary on the profits which it derives and which are attributable to the tax base of the Maltesecompany. As a result, this may discourage the Maltese company from investing overseas, at least in thosejurisdictions which are not within European Economic Area (which jurisdictions fall outside the scope ofthe anti-CFC rules).

The rule could also have the effect of discouraging foreign investors that seek to use Malta as a base forsetting up a holding company of a group, from electing into the CCCTB.

Availability of the Flat Rate Foreign Tax Credit (“FRFTC”)

As noted above, a Maltese company may be entitled to claim the FRFTC in respect of certain foreign-source income that it receives and subject to the satisfaction of the relevant conditions.

The FRFTC operates as a form of double tax relief and has the effect of reducing the post-double taxrelief Maltese tax burden on foreign-source income that falls to be allocated to its Foreign IncomeAccount to between 7.5% and 18.75%.

However, as outlined in our analysis of Participant #3, one would need to examine the manner in whichthe CCCTB provisions may be reconciled with those of the FRFTC (at least in its current form).

Although under a CCCTB scenario, Malta should remain able to determine the rate at which profits thatare allocated to it are taxed, it is unable to change the manner in which the tax base is calculated. Giventhat the FRFTC operates in a manner which requires a grossing up of the tax base, one would need toexamine whether the FRFTC could operate properly when a company elects into the CCCTB since underthe Directive Malta would not be entitled to unilaterally alter the tax base.

Furthermore, the fact that the FRFTC is applied in respect of income allocated by a company to itsForeign Income Account, one would also need to examine how this feature can be reconciled with aCCCTB which allocates a group’s income to different Member States (including Malta) on the basis of aspecific formula, rather than on the source of the particular income.

If it were not to be possible to reconcile the FRFTC with the CCCTB, unless the foreign-source incomefalls within the scope of CCCTB’s participation exemption or the exemption on non-EU permanentestablishment profits, the effective level of tax chargeable on such income might be higher under CCCTBcompared to the ITA.

Indeed, in the case of Participant #3, the highest contributing factor to the increase in its tax chargemodelled under CCCTB compared to that calculated under the ITA, was due to the fact that the FRFTCwas not applied to certain foreign-source profits derived during the year under review.

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4. General comments on the anticipated effects of CCCTB onMaltese tax incentive legislation

In terms of Maltese domestic tax law, a company that carries on a qualifying activity may be entitled toclaim investment tax credits (“ITCRs”) against the Maltese tax that is chargeable on the profits that itderives from its qualifying activity.

A company is considered to carry on a qualifying activity if it is engaged inter alia in manufacturing,information and communication technology, research, development and innovation, waste treatment andenvironment solutions, and various other activities that are listed in the Investment Aid Regulations37.

The ITCRs are calculated by reference to the level of investment that a company makes in respect of thequalifying activity. In this regard, the ITCRs that a company is entitled to claim is calculated as apercentage of the expenditure which that company incurs on tangible or intangible assets in connectionwith an investment project. Alternatively, the ITCRs could also be calculated by reference to the increasedwage cost that a company incurs if the investment project results in newly created jobs.

Given that ITCRs are given as a credit against the tax charge of a company, it appears likely that it shouldbe possible for the system of ITCRs to continue, albeit with certain amendments, even in a CCCTBcontext. This should be so since Malta would continue to provide the credit against the tax which itwould otherwise collect from the company/group carrying on the qualifying activity. Furthermore, in ourview, the quantum of such credits may still continue to be calculated according to the level of investmentthat the group carries out in Malta.

However, there may be some difficulty in ensuring that the credit is taken exclusively against profitsgenerated by the qualifying activities carried on by the group in Malta. In particular, given that underCCCTB the profits attributable to Malta constitute a percentage of the entire consolidated tax base ofgroup (which tax base could therefore include profits derived from non-qualifying activities carried on inand outside of Malta), it is likely not to be straightforward for a company/group to be able to determinethe tax chargeable on profits generated by the qualifying activity.

As a result, in our view, whilst in principle it should be possible for the ITCRs system to work where acompany/group elects into the CCCTB, it seems likely that the rules regulating the granting of the ITCRsmay have to be adapted in order to continue ensuring that the use of the tax credits is linked to the taxchargeable on profits generated from the qualifying activities.

5. Impact on tax administration

The Directive provides that groups of companies will be able to deal with a single tax administration(‘principal tax authority’). The principal tax authority, which is the competent authority of the MemberState in which the principal taxpayer is resident, would administer this process, and this same MemberState would be responsible for coordinating the appropriate checks and following up on the return (so-called “one-stop-shop” system).

In this respect, where a Maltese company forms part of a CCCTB group but has not been appointed asthe principal taxpayer of the group, such Maltese company should not be required to file a separate taxreturn in Malta. Rather, its tax results shall form part of the consolidated tax return that is filed by the

37 Legal Notice 68 of 2008, as amended, Laws of Malta

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principal taxpayer on behalf of the entire group with the tax authority in which the said principal taxpayerin resident.

This difference should also result in consequential compliance-related implications, including that theMaltese company may be subject to investigations/tax audits carried out by persons of the tax authorityin the principal taxpayer’s Member State albeit with the cooperation of the Maltese Inland Revenue.

The opposite scenario will occur where a Maltese company has been appointed as the principal taxpayer,wherein under CCCTB, such Maltese company would be required to file a consolidated tax return withthe Maltese Inland Revenue in respect of the entire group. In such cases, any tax audit of the group mustbe initiated and co-ordinated by the Maltese Inland Revenue.

Information provided to the tax authorities from CCCTB Group companies will have to fulfil twopurposes - the calculation of assessable profits, but also the provision of company specific data for thesharing mechanism, for example labour costs and asset details. The auditing of both may constituteseparate exercises.

One questions whether the Inland Revenue Department has the sufficient resources to carry out such taxinvestigations. Overall, the envisaged tax savings for business may therefore be offset (at least partially) byincreased costs for tax administrations.

Furthermore, as per the current CCCTB proposal, a corporate group would be allowed to opt for theCCCTB rather than it being mandatory. This should mean that Member States would be required tomaintain two tax systems running parallel to each other, one for CCCTB groups who opts in and one forthose outside the system, i.e. those remaining under the current tax system. Even in this instance, doesthe Maltese Inland Revenue have sufficient resources to maintain both systems in such event.?

Assuming that a number of Member States object to CCCTB, this could give rise to a situation where agroup operating within the EU may have subsidiaries applying CCCTB in one Member State but not inanother and therefore still finding itself dealing with different tax systems.

The burden of tax compliance costs may also increase for small and medium size enterprises, given thatsuch enterprises may not have sufficient resources to determine which system suites them better.Furthermore, even though presently SMEs have a higher proportion of administrative and compliancecosts than larger enterprises, this may not necessarily support the introduction of CCCTB given that mostenterprises in Malta operate within national borders only.

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Chapter 5Concluding observations

In this study, we have attempted to identify some of the implications which could arise if the CCCTBDirective, in its current proposed form, was to be introduced for businesses operating in and from Maltaincluding, in particular, the potential result that this could have on the level of Maltese tax suffered bysuch businesses.

On the basis of the findings contained in this study and depending on the perspective from which oneviews them, the introduction of CCCTB is likely to give rise to a mix of positive and potentially negativeconsequences.

It would appear that from the perspective of Maltese owned businesses that are seeking to expand theiroperations into new markets, the introduction of the CCCTB could, on balance, be regarded as a positivedevelopment.

Particularly where the business that is seeking to expand is a small or medium enterprise with a relativelystraightforward business model, the CCCTB Directive may provide such businesses with the possibility ofremaining subject to a system of taxation that exists in their home state. As a result, businesses should feelless exposed to the undesirable effects resulting from disparities between different tax systems of the EUMember States.

Indeed, the potential benefit for business falling within such a profile should not be underestimatedparticularly given the fact that SMEs provide around 2/3rds of all jobs situated in the private sector in theEU and contribute to more than half of the total value-added created by businesses in the EU38.

That having been said, the introduction of CCCTB may give rise to a number of drawbacks. As discussedabove, it appears that the proposed Directive is designed in a way which tends to favour larger MemberStates over smaller Member States particularly with respect to the manner in which it is proposed that thesharing mechanism would work.

The CCCTB Directive also departs from basic long-held principles of international tax law, and althoughadhering to such principles may at times be costly and laborious (such as establishing the arm’s lengthtransfer price in respect of a complex transaction), these are principles which governments, businessesand taxpayers in general are now familiar and have come to accept as the international norm.

Although certain aspects of the CCCTB may therefore appear to be attractive on paper (such as theelimination of transfer pricing between companies of the CCCTB group), we anticipate that until theCCCTB becomes a tried and tested system of taxation, there is likely to be a significant degree ofuncertainty and experimentation in the short to medium term.

38 Statistics obtained from the European Commission’s European Small Business Portal http://ec.europa.eu/small-business/index_en.htm

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The optional application of CCCTB, as currently envisaged in the proposed Directive, could be regardedas one way in which these concerns are addressed. In this sense, a group of companies would only electinto the CCCTB if it can reasonably anticipate the implications that such an election brings with it.

However, the optional application of CCCTB also raises other concerns for governments particularlyfrom a budgetary perspective. In this regard, it is not unrealistic to assume that a company or a group ofcompanies would only elect into the CCCTB if they are likely to derive some form of tax savings, whetherin the form of tax actually incurred and in the costs of compliance. Whilst the Directive does place somelimitations on the frequency with which a company or group can elect in or out of the system, it is likelythat companies or groups will elect for what would be likely to be the cheaper option in the longer term.

As a result, governments may view this as granting too much flexibility to taxpayers to determine thesystem under which they would choose to calculate their tax base and to a certain extent the amount oftax that such taxpayers will pay, since ultimately governments may find themselves placed in a “lose-lose”situation.

Furthermore, an optional system would mean that national tax authorities would be required toadminister another tax system in addition to their own. This in turn is likely to demand increasedresources, at a time of fiscal belt-tightening.

The introduction of CCCTB could also trigger a re-think of some of the fundamental principles ofMaltese income tax legislation. In particular, given that the CCCTB Directive is limited solely to thetaxation of corporate profits, further thought must be given as to how that system could be integratedinto the wider income tax system.

Furthermore, the introduction of the CCCTB could reduce the level of flexibility which Malta has indetermining the manner in which it imposes tax on corporate profits where companies operating from orin Malta elect into the CCCTB. This in turn, is likely to result in some form of repercussions on thefinances of the Maltese government.

In view of the above, one consideration would be to apply a middle-of-the-road approach in respect ofthe harmonisation of rules governing the calculation of the tax base. One possibility could be for MemberStates to agree to introduce measures which reflect those parts of the Directive that are less controversialand provide a clear advantage to business. Such measures would in our view include a framework for theoffsetting of cross-border losses and possible other harmonisation measures on the definition of the taxbase, but would fall short of allowing for outright consolidation.

Whilst such measures have been proposed in the past and were ultimately shelved, there is arguablybroader acceptance thereof amongst Member States nowadays, which is in part driven by the implicationresulting from judgements of the European Court of Justice in recent years, that the introduction ofcertain positive harmonisation measures is important to address the consequences of these judgements.

However, where one draws the line, in terms of the harmonisation measures to be adopted will ultimatelydepend on the political will of the Member States to continue on the process of integration and theeconomic rewards which each Member State anticipates that it would derive from such increasedintegration.

This study merely attempts to provide some insight to its readers of what some of those economicbenefits are likely to be for Malta, as well as some potential drawbacks. Still, many of the effects ofCCCTB are likely to remain uncertain and may only come to light if and when a Directive is approved

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and implemented, and possibly only after the passage of a certain number of years. On this basis, theresults of this study and the views expressed therein should be viewed with the appropriate caution.

In conclusion it is important to bear in mind that the findings of this report have been compiled on thebasis of information obtained from just 11 groups which have accepted to provide such information forthis purpose.

This constitutes only a small percentage of the number of companies and groups operating in or throughMalta. We are naturally not in a position to gauge whether these findings would be fully or at least mainlyborne out by the circumstances of a larger number of companies and groups operating in or from Malta.Consequently, this limited number of participants should be borne in mind when considering thecomments and findings contained in this report.