Issues applicable to the taxation of banks under Maltese law

Abstract

This thesis aims to examine issues arising in the taxation of banks in Malta, be they local or foreign. It is made clear at the outset that no specific legislation exists in relation to the tax treatment of banks, although at times it is evident that the Legislator did target banks specifically albeit in a somewhat indirect manner. Therefore, the taxation of such entities may only be examined by the application of the general tax principles and legal provisions relevant to all companies. Chapter 1 serves as a foundation on which the thesis is developed and is dedicated to outlining the Malta corporate tax regime providing a preliminary examination and analysis of the salient tax provisions that regulate the imposition of income tax. Issues such as chargeable income, tax deductions, exemptions, tax accounts and double taxation relief are covered. Reference is also made to tax imposed on Capital Gains, Value Added Tax as well as Duty on Documents and Transfers. Chapters 2 and 3 elicit the tax provisions and principles of relevance to banks and investigate their application to these entities and through this exercise, reflect the uniqueness of the banking industry. While Chapter 2 examines the applicability of general tax principles such as the distinction between capital and income, Chapter 3 focuses on some specific issues including bank interest, bad debt deductions and financial instruments. The study would be incomplete without an international dimension. Chapter 4 is therefore devoted to cross-border issues arising as a result of banks establishing their presence overseas. The concept of a permanent establishment is discussed and develops into an analysis of the manner in which business profits attributable to banking branches in foreign countries are to be established, all in the context of the OECD being the reference organisation on such matters. Chapter 5 finally selects a series of issues that warrant discussion in the light of the fiscal treatment of banks. Matters such as whether banks should be subject to heavier tax burdens and whether the VAT exemption without credit for a majority of banking services is desirable are questioned. The underlying mood of this thesis is somewhat critical of the lack of guidance available to banks in Malta with regard to their tax treatment particularly when compared to the more sophisticated tax infrastructures available for banks overseas. It is precisely on this note that the thesis comes to a close when it is proposed that some kind of direction, even if not in the form of fully-fledged tax laws, are urgently required to remove the inconsistency that stands to haunt the banking sector.