Analysis | Malta and taxation: The whole picture and nothing but that

Tax matters have to be decided by unanimity in the EU but last week Malta just avoided being labelled a tax haven by the European Parliament.

It was an amendment put forward by the Socialists and Democrats that called for Malta, Luxembourg, Ireland and the Netherlands to be placed on the EU’s black list of tax havens.

The justification put forward to blacklist Malta was that foreign investment amounted to 1,474% of the size of the island’s economy.

This figure from the National Statistics Office was described as “a clear indication” that Malta was “facilitating excessive profit-shifting activities at the expense of other EU member states”.

The European Parliament debate was driven by the yearning of the larger countries like Germany and France to harmonise corporate taxes across the EU - Konrad Mizzi and Keith Schembri were not the reason for the debate.

But numbers can be odious when trying to drive home a point, especially if they only give a partial picture.

A debate on taxation matters cannot be held unless it is contextualised within the disparity that characterises the economic and social progress of the different member states.

Trade figures out last Friday show Germany with a huge trade balance of €206.7 billion between January and October. This means that Germany exported more than it imported from the EU and the rest of the world.

Germany is one of just 11 member states that registered a trade balance but it outstripped the rest by a long shot.

A breakdown of that figure shows that Germany registered a trade balance with its EU partners of €58.7 billion.

On the flipside, Malta registered a trade deficit of €2.6 billion, meaning that it imported more than it exported. These numbers did not feature in the European Parliament debate and yet they are important. Why?

A large trade surplus means money from other EU member states readily flows into the German economy, bolstering job creation there. This is not a bad thing but this heavily-skewed, one-sided flow also says a lot about the inability of other member states to be competitive.

This is where the use of taxation becomes an important tool for economies on the periphery and yet MEPs berating Malta were not interested in this argument.

It is true that MEPs are reflecting the anger of their constituents afflicted by years of austerity as the rich find ways of slithering around to pay the lowest tax possible.

But Malta can hardly be faulted for the pain endured by voters across the EU. The island also passed through a painful re-adjustment period soon after joining the union.

The VAT rate was increased to 18% from 15% in 2004. New excise taxes were introduced in the year after that.

Public holidays falling on weekends stopped being compensated by additional vacation leave and the pensionable age was increased to 65 for both men and women.

Public companies such as Sea Malta and Maltacom were privatised and some closed down. Energy prices for households and businesses increased through the imposition of a surcharge to cover rising oil prices.

The measures hurt people and yet they also helped the country weather the worst impacts of the 2008 crisis. The competitive taxation system on its own cannot explain Malta’s success despite the impression given by some MEPs and foreign media outlets.

A debate on tax harmonisation that ignores the wider context does little justice to the complexities that shape the different economies across the EU.