12 October 2005

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Business Today

Hail the star spangled flag

In the past three decades US business involvement was lukewarm, to say the least and we do not seem to be on the mass tourism route for the cigar swinging American tourist

It is refreshing to note that in a short while since her appointment as US ambassador, Ms Bordonaro has coordinated a high powered meeting for the prime minister with President Bush.
Ms Bordonaro is a political appointee and it makes a pleasant change since in the past most appointments were career diplomats. She previously served as principal of The Gallatin Group in Portland, Oregon, a public relations and public affairs firm operating in the North West United States. The new ambassador acted as Mr Bush's regional campaign chairman for the Pacific States in the presidential campaigns of 2000 and 2004 as well as the chairman of the Oregon Victory 2000 and 2004 presidential campaigns. Now that the news of a USD50 million capital injection for a new embassy is leaked to the press it is harkening to comment whether the sleepy giant has started to take a closer look at the tiny island.
Regrettably, in the past three decades US business involvement was lukewarm, to say the least and we do not seem to be on the mass tourism route for the cigar swinging American tourist. Will this change after the awakening of American interest in our fragile economy? Certainly we need every dollar of support to make up for lost chances during the Lockerbie saga in attracting US foreign inward investment. Just try to compare and contrast the massive US investment in Ireland and if we play our cards well we can easily double the 10 US firms currently domiciled here. There is an air of great expectations in the air.
The next major step will surely be the negotiating of a favourable double tax treaty which was unilaterally abrogated in 1997. Preparations may also be underway to pave the way for introducing more business friendly incentives for American business particularly firms targeting the expanding Libyan oil market and its booming internal infrastructural development. So is there anything more that our minister of foreign affairs can do to attract the attention of the star spangled flag?
Pundits have long speculated that government foreign policy can positively encourage economic growth. According to these economists a comprehensive incentive legislation catering for the US market is badly needed as in the past we have leaned too much towards other traditional jurisdictions. A revamp of the Malta Enterprise attitude towards business from across the Atlantic should both stimulate growth and raise corporate productivity. We are practically anonymous to the US businessman.
Why not organise more one to one meetings rather then generic conferences in the USA? The foreign minister should ride the crest of the wave, which can easily turn into a flood.
A new strategy also implies that abundant inflows of foreign direct investment should turn the tables towards a better standard of living. A feather in our cap is the use of financial services industry to maximise our potential.
Naturally, we have been preparing this sector since 1988 when we engaged Chase Manhattan bank to formulate our then so called offshore regime. In a discreet way, Malta has started to make headway in a number of hitherto uncharted territories in the financial sector. News that US captive insurance management companies are coming to Malta has been a favourite subject among insurance practitioners. Certainly this is good news for the financial services industry and augurs well for a number of professional practitioners who have been active to promote the island as a competitive and well regulated centre.
The attractiveness of the legislation can be measured by the ease that a body corporate licensed in another jurisdiction to carry out any insurance business or to provide insurance management or broking services, may be authorised to continue as a company formed or registered in Malta. A tangible fiscal benefit is that of an outright exemption from duty under the Duty on Documents and Transfers Act, 1993 in respect of any contract of insurance relating to a risk situated outside Malta. Furthermore, captive management services are also zero rated for VAT purposes under the Value Added Tax Act. A company carrying on affiliated insurance is taxable at the normal company rate of tax which currently stands at 35%. However, if such a company underwrites risks situated outside Malta, it is able to operate the foreign income account and non-resident shareholders may benefit from the refund of tax on distributions from this account bringing the effective tax rate to 4.17%. It is not surprising that the market leaders in captive management are slowly but steadily focusing on the opportunities in the sector available on the island. But what has made captives the flavour of the month. One may say that traditionally captives were in the domain of established centres such as Bermuda, Cayman Islands, Isle of Man, Hong Kong, British Virgin Islands, some US States, Dublin and Luxembourg. The reason for their success is simple to explain. We notice over the past decades that corporate insurance buyers have determined the value of captives and have found ways to utilize them in developing strategic risk financing programs.
The financial regulator MFSA is committed to the development of the captive insurance sector and last year it announced that legislation was being introduced to allow the setting up of Protected Cell Captives (PCC's) within the jurisdiction Companies Act (Cell Companies Carrying on Business of Insurance) Regulations, 2004; Legal Notice 218 2004 .Some may well ask what is a protected cell company and how can US companies use it to exploit the unique features in Malta?
The answer is that the unique qualities of a protected cell company, or PCC, can be thought of as being a standard limited company that has been separated into legally distinct portions or cells. The revenue streams, assets and liabilities of each cell are kept separate from all other cells. Each cell has its own separate portion of the PCCs overall share capital, allowing shareholders to maintain sole ownership of an entire cell while owning only a small proportion of the PCC as a whole. In terms of the PCC regulations a ‘Cell Company’ is a company constituted or converted into a cell company having within itself one or more ‘cells’ for the purposes of segregating and protecting the cellular assets of the company in accordance with the Regulations. A cell company is a single legal person. A ‘Cell’ is in turn a class of shares within a cell company designated as a cell and created for the purpose of segregating and protecting cellular assets belonging to the company in the manner provided by the Regulations. A cell is not bestowed with separate legal personality. Due to its inbuilt flexibility a PCC can provide a means of entry into captive insurance market to entities for which it was previously uneconomic.
The use of PCC is not limited to captive insurance but is used extensively by investment vehicles such as hedge funds and sophisticated SICAVs. This means that we have sharpened our pencils to attract more inward US investment but of course we cannot rest on our laurels as there is much more to accomplish.
Luckily with her captivating smile Ms Bordonaro can lead us up the path to entice more business operators. This is a once in a lifetime drift. Competition is stiff and we cannot expect pennies from heaven.
Malta’s coming of age in the financial services market is being crowned by the attention it is enjoying in the captives and possibly in the hedge funds sectors. The island has the necessary local expertise to ensure the formation and running of more American owned enterprises.
Combined with its EU membership status, Malta is becoming an increasingly attractive domicile for multinational companies in which to form a coordinating centre in the Mediterranean.
Let us hope that the warm welcome afforded to Dr Gonzi by President Bush at the Whitehouse will blazon a path towards closer economic and social ties with the star spangled flag.

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