The Inland Revenue Service of the United States has listed the “potentially abusive use of the US-Malta tax treaty” as one of a “dirty dozen tax scams” warning American tax payers against using “abusive arrangements” to help Americans avoid tax.
In a recent statement the IRS said it was “evaluating the issue to determine the validity of these arrangements and whether (the US-Malta tax) Treaty benefits should be available in such instances.”
The US-Malta double taxation agreement has been in place since 2011 but this issue only appears to have come under IRS scrutiny this summer.
The IRS said that some US citizens and residents are relying on an interpretation of the tax agreement between Malta and the US “to take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the US taxpayer. Ordinarily, gain would be recognised upon disposition of the plan’s assets and distribution of the proceeds”.
In simple terms, people are avoiding paying tax due in America on the profits made when they sell property that has appreciated over time by doing so through a Malta-based pension plan. The IRS said it “may challenge the associated tax treatment”.
The issue was picked up last week by the Wall Street Journey that published a link to this YouTube video by a California-based attorney selling the “unique opportunity” of using Malta to dodge US tax.
But other US tax advisers contacted by the Wall Street Journal disagree that this use of the Treaty is legitimate and do not recommend to their clients this method of avoiding US tax on profits on sold property. One of the tax lawyers interviewed by the Wall Street Journal said they expected the Treasury to also join the IRS’s crackdown on the Malta tax treaty.
US international treaties, including the one with Malta, are ratified by the US Senate. The Wall Street Journal reports that the US Congress “could also move to limit benefits” for American tax dodgers using the Malta treaty in this way.
This new scrutiny on Malta’s tax advantages and moves by other countries to restrict tax leakage as a result of their citizens exploiting Malta’s advantageous tax offer is likely part of the increased heat on Malta since its reputation as a financial services jurisdiction took several blows in the last few years. This has culminated in the recent grey-listing of Malta by the Financial Action Task Force.