The Power of Partnership

The Malta Independent



Alinghi carried the Louis Vuitton Cup and is now poised to take on the New Zealanders in the bid to bring the America`s Cup to Europe for the first time. The UBS-sponsored Swiss boat flying the Power of Partnership sail beat the American challengers ensuring that the America`s Cup will stay out of the American continent for the third consecutive time.

But there is more to the power of partnership then yachting. Take the ECOFIN package deal reached this week after 13 years of negotiations to reach an agreement on cross border tax on savings. With the creation of a single market France and Germany could not accept that their citizens avoid taxes on their interest income simply by driving to Luxembourg and depositing their money there. Luxembourg built its financial industry on this fiscal differentiation advantage before extending further to fund management and fund administration.

`For candidate countries like Malta who are still in the negotiation phase, it was made clear to them that they have to adopt full disclosure upon membership and no derogations or transitory periods will be considered.` At Feira in Portugal two years ago the European Union members agreed to adopt full disclosure of interest payments to citizens of other EU members as from 2010. In the run up between 2004 and 2010 member countries were left with the discretion to adopt either immediate full disclosure or adopt a withholding tax concept temporarily avoiding full disclosure. For candidate countries like Malta who are still in the negotiation phase, it was made clear to them that they have to adopt full disclosure upon membership and no derogations or transitory periods will be considered. Offshore island dependencies forming part of the UK but not part of Britain as an EU member, were brought under the same arrangements. Britain committed itself to bring them in line. There remained one major problem. The whole deal would not work if non-EU member Switzerland and small European states such as Lichtenstein, Monaco and Andorra do not co-operate to adopt `similar` measures. At Feira EU members gave the European Commission two years to persuade Switzerland and the small states to cooperate. `Our small size would allow the flexibility to come up with such creative schemes that attracts business and creates sustainable growth. Membership would on the other hand kill our flexibility.` All pressure and threats of retaliatory action would not move Switzerland from refusing even to consider or discuss full disclosure at any point in time now or in the future. Finally the EU had to accept that Switzerland can permanently adopt the withholding tax concept without any concessions on full disclosure. EU members Luxembourg, Austria and Belgium insisted and were allowed a similar arrangement. And where does this leave Malta`s plan as an international financial centre` If we are constrained to adopt full disclosure our plans for Private Banking international business are dead as we will be disadvantaged against Switzerland and Luxembourg. Some argue that we can compete and get business in fund administration and fund management winning market share away from Luxembourg and Ireland. But how can we do this if we are not allowed to differentiate our offer` Consider however the power of the partnership option. Even if we accept exactly the same package offered to the Swiss, even levying perfectly identical final withholding tax from interest payments to non-resident depositors, we can still compete through flexibility. Part of the withholding tax which would be retained by Malta (amounting to 25 per cent of the tax withheld) could be re-invested in promotion offering investors free or subsidised travel and hotel accommodation. Our small size would allow the flexibility to come up with such creative schemes that attracts business and creates sustainable growth. Membership would on the other hand kill our flexibility.