The Malta Business Bureau (MBB) in collaboration with Bank of Valletta (BOV) commissioned an impact assessment to evaluate the implications on company taxation for both inbound and outbound business operations in Malta. The impact assessment was carried out by Pricewaterhouse Coopers (PwC Malta), on the basis of terms of reference drawn up and approved by the MBB Board of Trustees.

The report was officially presented to the Finance Minister Tonio Fenech on Friday. The MBB delegation was led by John A. Huber, who was also accompanied by BOV and PwC representatives, whereby an in-depth presentation was given to the ministry’s senior officials. The MBB Board decided that due to the highly-sensitive nature of the financial data disclosed by the participating companies, the report will not be published for public consumption.

The study sheds considerable light on how the tax computation system as proposed in the draft CCCTB Directive would be managed in practice, the tax base on which the tax computation would be drawn up and the final tax liability to be incurred by firms when compared with the current corporate tax due under the provisions of the Maltese Income Tax Acts (ITA). The impact assessment presents in-depth results of the tax liabilities that would be owed by businesses on the basis of the computation model proposed in the draft CCCTB legislative text as applied to a test-case of a number of companies from different sectors. This is a representative sample of the wide variety of Maltese industries. The case studies include groups of companies that are exclusively based in Malta, firms which are foreign-owned (therefore representing inbound investment to Malta) and Maltese-owned businesses which have invested outside of Malta.

The CCCTB is the latest in a series of EU-level attempts to converge the calculation of corporate taxation across the internal market. Previous attempts have failed to see through the introduction of direct tax harmonization regulating both the imputation of the common tax base and the consolidation of tax returns by companies operating cross-border, i.e. in different locations within the European Union. A new political impetus has been given to the discussions on the matter following the identification of the CCCTB as a “growth-lever” in the Single Market Act published in April 2011. The MBB has been monitoring developments on the CCCTB over the past year, having originally flagged the issue to Government in its submission on the Single Market Act last year.

While addressing the media Mr Huber stated: “The MBB welcomes in principle the rationale underpinning the Commissions’ CCCTB proposal in so far that the legislative initiative is conceived to tackle cross-border obstacles in corporate taxation within the internal market, after meticulously analyzing all aspects of the report, the Board of Trustees concluded that the proposed Directive is detrimental to the Maltese economy and its underlying business community.”

“The MBB strongly believes that Malta – through the Government, the Opposition and the social partners, should take a strong position against the proposed Directive. The Government should also take a clear stand against this Directive at the forthcoming European Council meeting in June when a progress report on the political discussions held so far will be presented to the Heads of State and Government. Social partners should also take a clear position within their respective European umbrella organisations.” One must bear in mind that for CCCTB to go through in the format in which it is being proposed, all Member States are required to agree to it,” Mr Huber stated.

European Parliament developments towards CCCTB

In recent days, the MBB’s concerns have been confirmed with developments taking place within important European fora advocating for amendments in the Commission’s proposals which further strengthen our concerns.

On 19 April the European Parliament adopted a report on the CCCTB, with a wide margin proposing that the optionality to participate in this harmonised tax regime should become mandatory. A mandatory implementation of the final CCCTB arrangements would not provide any particular benefits to small businesses. They would be only incurring compliance costs induced by the eventual alignment of the national tax regime to the CCCTB system.

The European Parliament is also proposing changes to the revenue allocation formula, giving higher weight to employees and assets (45 % to each), and a lower weight to the sales factor (10 %). With such a formula, there would be considerable changes in the final allocation of the tax income to the respective member-states where the concerned businesses opting into the CCCTB regime would be operating. Should this proposal be taken on board, it would undermine further the potential tax revenue allocated to Malta.

The impact on Government revenues and Foreign-direct investment

The results of the impact assessment clearly show elements of divergent fiscal impacts on outbound business and inbound investment creating commercial activities by subsidiaries of international groups operating in the Maltese domestic market. The finish line impact of Government finances is primarily attributable to the proposed CCCTB’s tax computation system based on a revenue apportionment formula made up of three equally-weighted factors: labour, assets and sales.

Malta is very likely to be placed at a disadvantage in being attributed a share of the consolidated tax base, due to the fact that the factors present within the formula are reliant on the existence of tangible fixed assets, employees with higher payroll costs and revenues generated in Malta.

With the possible exception of inbound investment involving manufacturing, due to its size, it is unlikely that the Maltese companies within a foreign-owned CCCTB group will have significant tangible fixed assets and employees situated in Malta. Moreover, it is also unlikely that a significant part of the sales made by the group will be made to Malta’s customers.

In fact, in many instances, the significant assets of Maltese subsidiaries of a foreign-owned group are more likely to be composed of financial assets or intangible assets rather than fixed tangible assets as such. However, these assets (with the exception of financial assets in the case of banks and other financial institutions) are ignored for the purposes of the formula.

Calculation of revenues in CCCTB

The CCCTB Directive states that all revenues and receipts received by a company should fall within the tax base, unless such revenues fall within one of the types of exempt revenues listed in the Directive. As a result, when seen from this perspective, the tax base of a company/group calculated under the CCCTB could potentially be higher than that which is calculated under the current Maltese ‘Income Tax Act’.

That having been said, despite the seemingly wider tax net proposed under CCCTB, from the analysis carried out in respect of each of the participants, it does not appear that this difference is likely to give rise to a significant increase in the tax base of companies that decide to opt-in the CCCTB.

However, it is possible that if a significant level of capital receipts do arise, due to for example waivers of debt arising in connection with the restructuring of a business, then such capital receipts would be included in the CCCTB tax base which could in turn result in increased tax for those businesses in the years in which such capital receipts occur.

Anticipated effects of CCCTB on inbound investment

A significant part of Malta’s economic growth over the past 40 years has been fuelled primarily by the level of investment that Malta has been able to attract from overseas. With Malta’s accession into the European Union in 2004, the level of inbound investment into Malta (particularly in the area of financial services) has grown significantly.

In order to attract the investment, Malta must be able to offer foreign investors an environment in which business activities can be carried out competitively and profitably. Whilst some of the factors cannot be controlled (e.g. geographic location and market size), others, like the tax system, can be changed in order to counter-balance the disadvantages of some of the uncontrollable factors and give an edge over other jurisdictions that are competing to attract the investment.

In view of the above, the introduction of the CCCTB may impact on Malta’s ability to maintain a competitive business environment. The CCCTB would undermine Malta’s FDI proposition based to an important extent on the fiscal attractiveness of company taxation.

Impact on tax administration

As per the current CCCTB proposal, a corporate group would be allowed to opt for the CCCTB rather than it being mandatory. This should mean that member states would be required to maintain two tax systems running in parallel to each other, one for CCCTB groups who opts in and one for those outside the system, i.e. those remaining under the current tax system. One questions whether the Maltese Inland Revenue has sufficient resources to maintain both systems in such event.

The burden of tax compliance costs may also increase for small and medium size enterprises, given that such enterprises may not have sufficient resources to determine which system suits them better.