Harking back to biblical times, we are all familiar with the words of Christ: “Render to Cæsar the things that are Cæsar’s, and to God the things that are God’s,” and over the centuries these words of divine wisdom have been interpreted as evidence that true believers ought to pay the tax that is due.

Back to modern times, and the media has been inundated with reports from various authorities in Europe claiming that tax avoidance is rampant, especially that orchestrated by multinational companies. Of course, this issue has been a hot topic for many years but it has become more acute as many EU countries are going through a period of austerity and, as a consequence, have increased taxes across the board to try and balance their deficits. In Malta we have fared slightly better where austerity measures are concerned (apart from the burden of sky-high electricity tariffs) and the Labour administration has announced the opposite measure of reducing the rate of income tax paid by those earning up to €60,000 pa to just 25 per cent in three years time. One may argue that once the government (for which read ‘Cæsar’ in ancient times) has taken the initiative to reduce taxation, then the caution to render unto Cæsar that which is Cæsar’s takes on a different twist.

One may also question the rationale of reducing personal taxation to 25 per cent when corporate tax is still the highest in Europe, standing at 35 per cent, but then the logical answer will be that the economy cannot afford a reduction in corporate taxation when it is anticipated it will register a deficit amounting to 2.7 per cent of GDP this year (3.3 per cent last year). Critics argue that the Labour government has increased the PN forecast for this year’s deficit by one percentage point – from the previous administration’s 1.7 per cent to 2.7 per cent – but party apologists reply that this was caused by an unexpected fiscal slippage during the pre-election quarter.

Certainly, this year is not the right time to reduce corporate tax, with the government remaining committed to ensuring that the deficit falls below the three per cent threshold for 2013. This is mandated by the fiscal pact signed by all EU members which, in essence, aims at achieving a sustainable balanced budget linked to macroeconomic stability.

So Cæsar’s legitimate right to demand tax to be collected from all still rings true when seen in the context of the recession that is hitting EU countries. Yes, many initiatives have been taken by most of the bail-out states to reverse past profligate traits, but the medicine is working very slowly so that we see that – according to Eurostat – how GDP fell by 0.2 per cent in the euro area and by 0.1 per cent in the EU27 during the first quarter of 2013. During the first quarter of 2013, growth in America was anaemic, reaching only 0.6 per cent compared with the previous quarter (after +0.1 per cent in the fourth quarter of 2012). All this goes to show that the two stalwarts of global drivers are not firing on all cylinders so it is natural to expect that governments are seeking to close tax loopholes in order to gather more revenue and try to balance their budgets.

On the international level there has been a general awareness that tax avoidance is rife and is aided and abetted by the use of many tax havens that offer special tax regimes to accommodate the flight of capital and minimise the tax payable on such wealth. But let us stop and define ‘tax avoidance’ and the simple explanation is that it generally means the legal exploitation of the tax regime to one’s own advantage, to attempt to reduce the amount of tax that is payable by means that are within the law whilst making a full disclosure of the material information to the tax authorities. Tax evasion, by contrast, is the general term for efforts by individuals, firms, trusts and other entities to evade the payment of taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability and includes, in particular, dishonest tax reporting (such as under-declaring income, profits or gains; or overstating deductions).

Now purists will tell you that tax avoidance is legitimate, although of course it means that one country will gain at the expense of another, and when the state’s coffers are low there is a heightened outcry by the rich countries affected to try and claw back such tax leakages. Typically, in the G7 meeting held recently between the US, Germany, the UK, Japan, Italy, France and Canada, there was an important stepping-stone towards a global new standard on tax with an overarching plea by Britain to have a new set of rules around the world to prevent both tax evasion and avoidance. Naturally, given the clever way tax havens weave their nets, any claw back is fiendishly complex and to help achieve a breakthrough a number of countries have agreed to share information on suspected law-breaking, including very low tax countries such as Luxembourg and Austria signing up to a pilot scheme.

It makes sense for the G7 financial leaders to send out a message from on high that global efforts to ensure financial stability via appropriate regulation must continue, but equally important are the efforts of the OECD, which is also doing a lot of work behind the scenes to come up with a framework to clamp down on evasion and make avoidance less profitable for big firms such as Starbucks, Google and eBay. All these companies have attracted opprobrium because they pay a dismally low rate of tax, partly due to the smart use of tax haven accounting.

Moving on, one cannot omit to appreciate the plea by Mike Lewis, an ActionAid’s Tax Justice Policy Adviser, who reminds us that tax havens remain a key link in the chain that lets multinational companies and wealthy individuals drain billions from countries. Nearly all the UK’s biggest companies are using tax havens and most are doing business in developing countries as well. Malta has 32 UK-listed companies presumably using it as a tax mitigation tool. These findings are an update of ActionAid research released in October 2011 analysing the subsidiaries, joint ventures and associated companies of the UK’s 100 largest publicly listed companies.

Eighteen months on, ActionAid found that the banking sector maintains its position as the most prolific user of tax havens. Over half (58 per cent) of all FTSE100 banks’ overseas companies are in tax havens (1,780 companies). Developing countries constitute almost one-third of the countries in which FTSE100 banks operate, yet they have 13 times as many companies located in tax havens as in developing countries. To counteract the dominance of banks and their sometimes indulgent attitude to high risk (and use of subsidiaries in tax havens) there has been a concerted effort at EU level to legislate for a banking union. Germany is currently under renewed pressure to give more support to a banking union in the eurozone as it did at the previous IMF/G20 meeting in Washington. The grand theme is to create a single bank supervisor under the European Central Bank.

Back to tax avoidance by multi-nationals, it can be said that, at a time of recession and sluggish growth in Europe, corporate tax avoidance has risen to the top of the political agenda following revelations in the past couple of years about how little such big names as Apple Inc., Starbucks, Google and Microsoft pay in taxation in markets where they make billions in sales. In their defence, such companies say they follow the rules but in Britain one can sympathise with its Prime Minister David Cameron who has called for international action on the shifting of profits, which can help firms cut tax bills.

It is a shocking revelation to read that, in 2011, a high total of 98 per cent of the FTSE100 multinational groups had companies in tax havens. A glaring example is Amazon. Amazon.com’s main UK unit paid $€2.89 million in taxes on its 2012 income, despite group UK sales of €5 billion, prompting criticism from legislators and competitors. By using Luxembourg’s lower tax regime, this allowed the company to legitimately reduce its tax bill resulting in gigantic savings. Suffice it to say that Amazon’s main UK subsidiary paid just €3.79 million in tax last year (less than 0.1 per cent), according to its accounts, despite overall UK sales of €4.98 billion.

To conclude, one cannot ignore the Christian teachings that it is everyone’s duty to pay legitimate taxes to the state at the rates prescribed by the lawful representatives of the people, ie parliament. At a time when all the EU bailout countries are suffering from acute bouts of unemployment (Spain’s level is over 26 per cent) there is a chorus of protest against tax dodgers who use tax havens in an indiscriminate manner to slash their contribution to Caesar .Yes, now over two millennia has passed but the Bible’s teaching to render unto Cæsar the things that are Cæsar's, and to God the things that are God’s, is still relevant and, as true believers, we Europeans ought to pay the tribute at the prescribed rate .

The writer is a partner in PKF an audit and business advisers firm

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