Now that the "Common Consolidated Corporate Tax Base" (CCCTB) looks increasingly likely to materialise, the question facing the Maltese economy is a sober one. How do we intend to cope with the potential domino effect if the financial and iGaming sectors, which account for a sizeable percentage of GDP, were to founder? Will the thousands of well-heeled iGaming executives renting top dollar residences suddenly migrate? Are we working on a plan B behind closed doors? Rumours abound that the finance minister is unobtrusively weaving a scheme aided by his gnomes. Will he succeed in popping a rabbit out of his hat?
The horizon is a gloomy one as most practitioners are in the dark; they do not know when the umbilical cord will be cut and the bumpy transition begins. The possibility of tax harmonisation was envisaged in a study, commissioned by the Malta Business Bureau, on the impact of the proposed EU tax legislation. The MBB president put it neatly when he summarised the conclusions: "This harmonised tax system places at a competitive disadvantage a number of European Member States that use the corporate tax model to attract foreign investment." The penny dropped and now larger states want tax harmonisation and a stalemate brought about by opposition from small states can end 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, by 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 by smaller countries.
For example, Luxembourg and The Netherlands have a flourishing industry aided and abetted by a host of tax advisers which help global corporations save about €15 trillion 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, the Pana Report in which multinationals and a number of political persons were caught in tax paradises 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 his opinion, countries which exploit tax inequalities for their own profit may be adversely affected by a law which aims to close this loophole once and for all. Is this a clarion call by the larger states to launch tax harmonisation as they focus on 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?
On the contrary, Hungarian Prime Minister Victor Orban said that "for small states, taxation is an important component of competition". He pontificates that Hungary would not like to see any regulation in the EU that would bind its hands in terms of tax policy, be it corporate tax or any other tax. In simple terms, Hungary does not consider tax harmonization a desired direction. Similarly, Ireland's prime minister also thinks that "we share a view as governments that we should continue to have competition among member states in terms of tax policy". Ireland feels that countries should set their own taxation rates. This includes both corporation taxes and income taxes. The opposing view adopted by Malta, Belgium, The Netherlands, Hungary and Ireland state that having a healthy competition arena succeeds in nurturing a "fiscal diversity" approach, empowering each country to use its tax system as a policy tool to achieve its economic aims.
However, should Malta jettison its fiscal regime (running smoothly since 1998 with some refinements) based on a high corporation tax of 35 per cent but linked to a full imputation system so that upon application any shareholder may apply for a part refund of tax? A recent report by NGO Tax Justice Network states that Malta could lose more than half its corporate tax base if the European Commission adopts the proposed tax measures such as the planned (CCCTB) and the Common Corporate Tax Base. The former was approved by 38 votes to 11 votes, with five abstentions while the latter was approved by 39 votes to 12, with five abstentions.
The two reports were proposed by EPP member Alain Lamassoure and S&D member Paul Tang. Put into action they form a single set of rules for corporate tax: the first a common corporate tax, the second allowing multinationals to offset losses in one member state against profits in another to reach a taxable net profit. Once enacted it mandates a common tax for all companies starting with an annual turnover of over €750 million, and after seven years, for all European companies. It is well known that all decisions concerning the passing of new tax legislation need a unanimous vote. Recently this veto took a different twist and a variation was echoed by Commissioner Pierre Moscovici who ventured to move from unanimous voting to absolute majority within the Council.
He argues that the single European Act poses the principle of tax neutrality in intra-community trade but taxation could hinder this principle. Nonetheless the current tax competition dilemma is exacerbated by attractive corporate taxation of smaller states such as Ireland (12.5 per cent rate of corporation tax) which is also mirrored by Cyprus with a similar rate. Larger European governments do not agree with this low-balling and call it 'fiscal dumping' so it is no surprise that they are in favour of harmonising the corporation tax rate. Another study compiled by senior economists for UK-based NGO Tax Justice Network shows inter alia that Malta will see its income from tax arrangements deriving from subsidiaries of multinationals registered here to drop substantially.
In conclusion, where healthy competition exists it works like a magnet for FDI and this 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 EU member states to implement a liberal pro-market tax policy so let us hope that our political leaders can quickly devise a substitute tax regime to save us from the blizzard that is building up on the not too distant horizon.
[email protected]
Mr Mangion is a partner in PKF Malta an audit and business advisory firm.