Tax harmonization is not a subject to be taken lightly and during the festive season one can be excused for shying away from discussing this sensitive issue; yet, ever since joining the EU, our political leaders have assured us that they will resist tooth and nail against any imposition of a one-size-fits-all tax base. We have been reminded that the principle of subsidiarity precludes the idea of a total harmonization of corporate taxation. The tax policy of the European Union has two wings: indirect taxation, i.e. VAT, which has to be regulated at European level, in order to guarantee fiscal neutrality between domestically produced and imported goods and services and, thus secure the free movement of goods and the freedom to provide services, and direct taxation, which does not affect the commerce between member states and another wing that needs only coordination of company taxation and of the fight against tax evasion, in order to prevent distortions of competition in the internal market and in capital movements. In this context, we can refer to the string of tax leakages in UK. This does not get any better when one remembers how Google and Starbucks were shifting profits out of Britain to avoid tax.
In another tax dodge, one comes across the leakage discovered in Belgium through the operation of a popular "excess profit" tax loophole introduced in 2005. Secret rulings by the Belgian tax authority, typically lasting for four years, were often granted to multinationals that had relocated a substantial part of their activities to Belgium or made significant investments.
The penny dropped and now larger states want tax harmonisation and a stalemate brought by opposition from small states can be ended if the European Commission triggers a neglected article of the EU constitutional treaty to suspend states' veto powers on tax matters. Tax Commissioner Pierre Moscovici said: "We certainly don't exclude using it. We will work on it. We will make proposals in that direction." In fact, invoking Article 116 of the EU Lisbon Treaty, the Commission can compel states to drop the unanimity rule and take decisions on tax matters by majority when it proves that competition in the EU market is distorted. One EU official called it "the nuclear option" on tax issues because it could break prolonged legislative deadlocks and can also be effective to halt interference with national powers, especially from the smaller countries. For example, Luxembourg and The Netherlands have a flourishing industry of tax advisers which help global corporations hold about €15 trillion in the two countries for tax purposes. Therefore, it comes as no surprise that pressure on jurisdictions is continuously increasing in view of the releases of confidential documents such as Lux Leaks, Panama and Paradise Papers in which multinationals are continuously exposed to tax shopping around the EU to avoid paying taxes. Jeep Kofod, a PANA Report rapporteur, recently called for the introduction of a minimum corporate tax rate, in his words to stop "the sick race to the bottom on taxation and regulation".
In an effort to save our bacon, our six MEPS voted against tax convergence and the one-size-fits-all approach saying tax competition should remain part of the limited array of decision tools available to national economies. What is the primary objective of tax harmonisation in the EU when there is such a huge disparity in the economies of the 28 member states? The rich members are constantly arguing that a blanket policy should be set in motion to eliminate tax distortions rather than a mere harmonisation of tax rates. Their hobbyhorse is the CCCTB project which has been adopted by some countries - Malta, UK, Ireland and Luxembourg opposed it. It is simply an attempt to introduce a common base in fiscal regimes that would make tax competition more transparent in that using it means that only variations in tax rates would matter. In turn, base consolidation would eliminate the scandals that have rocked the EU when multinational companies in the past used shelters in Dublin or Luxembourg to shift profits and reduce drastically the final tax bill. Proponents of the common tax base recite three main reasons to justify its universal adoption.
First, participating countries would reap immediate gains in terms of reduced compliance costs and extended ability to carry losses for firms, and reduced cases of 'double non-taxation' for governments. Second, a group of possibly large countries speaking with one voice would have more weight to convince third countries to cooperate and close loopholes. Third, in the event of the creation of a 'fiscal capacity' at the level of the Eurozone, a harmonised corporate tax could lead to unify the taxation of the banking sector.
Proponents of tax harmonization, talk about the merits of the "equalisation" approach, which causes each country to converge with the others until it ends up with the same fiscal system which in turn removes fiscal barriers and discrepancies between the tax systems of the various countries comprising the EU.
The opposing view adopted by Malta and a few others is that having a healthy competition arena by permitting a "fiscal diversity" approach, empowers each country to use its tax system as a policy tool in achieving its economic aims. But how can Malta protect its fiscal regime (running smoothly since 1998 with some amendments) based on a high corporation tax of 35 per cent but using a full imputation system any shareholder may apply for a refund of tax under a number of set conditions. The architect of this unique regime was successful and a flourishing financial services industry was built up that now contributes almost 12 per cent of GDP, and has so far caused no major scandal compared to the Luxembourg leaks, the HSBC Swiss secret bank accounts or the mega tax shelters afforded by Dublin. Due to the unprecedented global recession in 2007/8, countries have pushed for greater tax harmonisation to fill dwindling tax revenues. Tax harmonisation if approved by a qualified majority under article 116 may mean the death knell for our financial services sector ushering the introduction of a mandatory Common Consolidated Corporate Tax Base (CCCTB) as the first step towards eventual full harmonization. As if by stealth, it will be introduced in stages - the first stage will be limited to consolidating taxable profits of a multinational corporations and distributing the profits to each individual company based on a formula. Under CCCTB, Malta will stand to lose its unique fiscal attractions and may suffer a flight of capital.
In conclusion, where healthy competition exists it works like a magnet for FDI and rewards nations that offer transparency and engage in pro-growth tax reform. Tax competition is particularly important for smaller nations in today's global economy with its fragile growth patterns. In the past, competition helped convince many nations to implement a liberal pro-market tax policy so let us hope that next year politicians can shield our economy to weather the storm.
A Merry Christmas to all readers.
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