Common corporate tax – skirting the poisoned chalice

Why is it that out of six elected MEPs whom we voted to represent us in Brussels, only one had the guts to stick her neck out to protect our financial services sector? Gallantly, our Joan of Arc has charged fearlessly on her golden horse to caution the bureaucrats in Brussels not to extend EU competences on member states’ taxation policies.

This was the voice in the wilderness of PN MEP Roberta Metsola. She warned that the furore unleashed by the Luxleaks and similar scandals should not be taken as a carte blanche for the Mandarins in Brussels to extend their powers, riding rough shod over the tax sovereignty – a right enjoyed by all member states. Naturally the curse of money laundering has to be addressed and Metsola argued that there is no doubt of the need and urgency to tackle it.

At the same time, she cautioned against the unpleasant effect of knee-jerk reactions. The young politician wisely rebuked overzealous lawmakers eager to go down the road of having a disproportionate legislative response that risks infringing states’ sovereignty on taxation matters under the guise of going after money laundering. Out of many MEPs, she was the only one to pick an argument in favour of tiny Malta – a jurisdiction which over past years nurtured a clean image where good governance and tax transparency has not attracted mammoth tax evasion scandals so prevalent in other countries.

A dark shadow is cast over jurisdictions (other than Malta) which discovered billions of euros in tax dodges cleverly siphoned off from host countries by multinationals after signing sweetheart deals with respective EU states. This is not easily forgotten. Some firms managed to get away with effective tax rates of less than one percent on profits when economies in Europe are sluggish with over 20 million unemployed.

Readers may recall how the LuxLeaks scandal broke when Juncker took the top post at the EU Commission. Juncker has consistently denied any wrongdoing despite having governed the small landlocked nation for two decades. This scandal exposed the corrupt money laundering activities on an almost industrial scale and shed a light on the secret financial set-ups aided and abetted by senior EU politicians.

Tax transparency advocates are now pushing to force mega companies to make more financial information public. The idea has gained some traction with more countries backing plans aimed to create public registers that reveal the true owners of businesses and where the profits were actually generated. Only last week a new report by Eurodad, a Brussels-based NGO, shocked many as it revealed that secret tax deals between Luxembourg and multinationals have increased dramatically since the LuxLeaks scandal broke in late 2014.

This centre around elaborate schemes devised by tax consultants to reduce global tax bills of multinationals and the breaking news was that in Luxembourg more schemes have been secretly signed following the scandal which rocked the financial world in 2014. During the eight years to 2010 around 340 tax evasion schemes were discovered. Since 2014, these have in fact mutated in number by another 50 percent.

One can easily comment that the sinner never repented and quoting Tove Maria Ryding, one of the authors of the report, she said in a statement it’s “as if the LuxLeaks scandal never happened”. Ryding remarked that the fact that multinational corporations now have more than 1,000 sweetheart deals in Europe – this is deeply concerning. As an antidote to such scandals, a select panel of tax experts at the OECD and G20 have been drafting strict anti-avoidance rules styled BEPS (base erosion and profit shifting) to buttress member states regulations in their armoury how to combat abuses.

Concurrently Apple in Dublin was investigated and recently was charged a €13 billion fine for obtaining illegal corporate tax benefits from Ireland. As can be expected, Apple, which employs thousands in Dublin, wants to appeal while the Irish government is rather careful not to scare away such a prize horse in their stables. The Commission is investigating other firms based in Luxembourg, including Amazon, Engie [formally GDF Suez], and McDonald’s.

Back to Malta, readers may ask, but what are we doing to protect our own patch given that over the years we were diligent and have not indulged in such massive tax dodges. It is pertinent to note that the minister for finance, when addressing the last ECOFIN Council in Luxembourg, categorically stated that Malta can accept the latest version of a proposal for an EU Anti-Tax Avoidance Directive (ATAD). This consists of a new dose of tax avoidance measures introduced to fight tax evasion.

Another measure is the Common Consolidated Corporate Tax Base (CCCTB) neatly camouflaged as the elixir in tax systems which shall deliver a growth-friendly and more competitive regime in the Single market. The Commission had originally proposed the CCCTB in 2011, but it proved too ambitious, so it was stalled. Following tax scandals (as mentioned above) the Commission plans to introduce CCCTB in a two-stage process.

The appetizer on the menu is harmonization of the tax base followed by a main serving styled “consolidation” across the EU. The latter is worked out using a prescribed three-point formula (a one size fits all) to allocate profits to respective Member States where the group operates. So far there is no heinous move (refer to the cautionary admonition expressed by Metsola) to steamroll a common tax rate across the Single Market which goes against national sovereignty rules. Many fear that this harmonisation measure will follow anyway.

In my opinion, debates should be organized by professional bodies to inform the commercial community on the peril of CCCTB – particularly to explain how this may blunt the competitive edge of our tax incentives, which so far have attracted substantial investment in financial services, manufacturing, aviation and the Gaming sectors.

This does not mean that attempts to fight double taxation and aggressive tax planning are not welcome. Minister for Finance Edward Scicluna stated that Malta can accept tax avoidance legislation such as ATAD but resisted CCCTB. On the other hand, in his opinion it is imperative that Malta defends its imputation system. It is a fact that due to our geographical insularity, and open economy, entrepreneurs are handicapped as the island has no raw materials and suffers extra logistical costs to import and export its merchandise. Thus, we need EU support to overcome such handicaps.

So far, the use of the full imputation tax system was the fulcrum around which fiscal incentives are activated to attract FDI so that investors are entitled to claim refunds on tax credits imputed on distribution of dividends. Without the imputation mechanism, our tax incentives would grind to a halt. In conclusion, one prays that Malta will be spared the assault over its tax sovereignty and Roberta Metsola will ride boldly to fight the introduction of CCCTB to save our fledging financial services sector – as far as our economy is concerned this seems to be our only hope of deliverance.

George Mangion is a senior partner of PKF audit and consultancy firm, and may be contacted at [email protected] or on +356 21493041