I have previously written about Malta Retirement Plans in my article The Grinch Who Stole The Maltese Pension Plan (Dec. 31, 2021). In a nutshell, the U.S. Treasury was asleep at the switch in 2011 when the U.S.-Malta tax treaty was negotiated, and this allowed folks to set up retirement plans in Malta which work like a supercharged Roth IRA. The Treasury Department tried to “fix the glitch” (for Office Space fans) in IR-2021-253 by entering into a so-called Competent Authority Arrangement (CAA) with Malta which sought to clarify the Treaty in a light favorable to the Treasury Department ― but without amending the Treaty itself which would have required approval by the U.S. Senate. Importantly, the CAA confirmed that there was a glitch in the Treaty, since otherwise there would no need to attempt to fix the glitch with a healthy dose of what amounts to international duct tape.
The IRS how now published proposed regulations (REG-106228-22) to make Malta Retirement Plans a listed transaction a/k/a a presumed tax shelter. This has the ad terrorem effect of making prospective participants in the listed transaction think hard about doing the deal, since the penalties could be substantial if the U.S. Tax Court ultimately rules in favor of the IRS, and also puts the promoters of such transactions on thin ice in recommending such transactions. Usually, this is a good thing, and I’ve long applauded Treasury for listing transactions, but this one feels different because there has not been anything like a U.S. Tax Court adjudication that Treasury is correct ― and there is substantial reason to believe that perhaps it isn’t.
At the top of the hierarchy of U.S. law is the Constitution. The Constitution empowers Congress to make laws and the Senate to ratify treaties which then have the effect of law. Only once laws or treaties have been made or ratified can the Executive Branch, which of course includes the U.S. Treasury, promulgate regulations to carry out those laws or treaties.
Here, as I have previously discussed, it appears that the U.S.-Malta tax treaty itself authorizes these Maltese Pension Plans. That there may have been a mistake, or negligence, on the part of somebody involved in drafting the Treaty is irrelevant. What is relevant is the form of the Treaty that was ultimately ratified by the U.S. Senate. Once that Treaty was ratified, it became law based on its express text (not what it was implicitly meant to accomplish) and the U.S. Treasury Department can only lawfully promulgate regulations that are consistent with that express text. If Treasury promulgates regulations which go beyond that express text, or is contrary to it, the Treasury Regulations are simply void and inoperative to that extent.
This is where the duct tape comes in. Instead of going back and renegotiating the U.S.-Malta tax treaty, and then procuring ratification by the U.S. Senate, the U.S. Treasury Department is trying to shortcut the process by way of this goofy CAA which attempts after-the-fact to change the express language of the Treaty. That Treasury would go down this shortcut isn’t that surprising, considering that Treasury also tried to shortcut its promulgation of Notice 2016-66 relating to microcaptives and then was embarrassed when the U.S. Supreme Court ruled that Notice was invalid because Treasury had not properly followed the Administrative Procedures Act.
What this creates is thus a mess, since nobody will know whether the CAA will be effective to retroactively amend the U.S.-Malta tax treaty until some court, and perhaps the U.S. Supreme Court again, rules on the issue. The mess favors the IRS, of course, since the risk of losing and suffering steep penalties is on the taxpayers who attempted to utilize a Maltese Pension Plan and might have to fight all the way to America’s highest court to validate their position.
Still, for the U.S. Treasury it is a pretty shoddy way to run a railroad. Why can’t we just do things right from the get go?