Dark clouds on the horizon

There is a sense of déjà-vu in the warning sounded at a KPMG conference this week by firm partner Juanita Bencini.

“There are dark clouds on the horizon and a closer European Union may not necessarily be good for us,” she said, referring to the European Common Consolidated Corporate Tax Base proposal that would require EU member states to develop a common set of rules to determine the tax base of companies with operations in multiple European countries.

“We cannot allow large countries to run roughshod over Malta in the name of tax transparency,” Bencini told the conference. “Tax transparency shouldn’t dictate what countries’ tax rates should be or what their taxation system should look like.”

Dire as the warning sounds, it is nothing new. Resistance has long been building to the current European tax regime, which permits member states to attract industries by competing with lower tax rates. As long ago as 2011, Commissioner Michel Barnier had flown to Malta for talks with then finance minister Tonio Fenech, over Malta’s opposition to what was then called the ‘Tobin Tax’.

Then as now, the government’s line was that a collective European tax regime for the financial (and related) sectors was ‘not in Malta’s interest’. In 2012, the Labour Party issued a formal position on the matter: declaring that the Common Consolidated Corporate Tax Base (CCCTB) was “not in the country’s economic interest”, and declaring its total opposition to the common corporate tax.

“Any tax method that our country adopts should be more ‘growth friendly’ and not mainly aimed at fiscal consolidation,” the (then shadow minister) Karmenu Vella said on that occasion. Ironically, he is now a European Commissioner, where he must view issues from the perspective of a Union which looks more at fiscal consolidation than individual country’s interests.

None of this is very helpful, however. The argument that ‘it is not in the national interest’, for obvious reasons, does not carry much weight outside the nation in which it is used. It is only to be expected that any country would safeguard its national interest, within the parameters set by international law. 

The question being asked at European level, however, is whether these legal parameters should permit ‘national interests to be safeguarded’ when setting corporate tax levels. Neither Labour nor Nationalist governments have ever really given an answer to that.

The logic follows on from other areas where European legislation is indeed harmonised. European Directives bind all countries equally, and some of these directives go into considerable detail when it comes to regulating certain market sectors. 

In all cases, the issue of whether or not individual countries may benefit from the directives is not the concern of Europe as a whole. The only exception – clearly inapplicable in this scenario – is if we were talking about an issue in which Malta had a special case to plead: perhaps concerning its size or accessibility, etc.

Now that the CCCTB looks increasingly likely to materialise, the question facing the Maltese government is another. How does it intend to cope with the potential domino effect, if a sector which accounts for a sizeable percentage of GDP, were to suddenly shrink?

This possibility is envisaged in a study, commissioned by the Malta Business Bureau, into the impact of the new legislation. The MBB president put it tastefully 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.”

In other words, 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. This may even be true, but the argument is unlikely to convince the rest of Europe to halt its plans for tax harmonisation.

If we are to defend Malta’s taxation regime at European level, we are going to need better arguments than that. Yet none has so far been forthcoming.

If anything, arguments have been raised that Malta might benefit from the new taxation system. It is after all doubtful whether it really is in Malta’s interest to depend on slashing tax rates to attract growth in certain sectors. AD-The Green Party has for years argued that this constitutes a race to the bottom; that a point would be reached when Malta cannot compete by lowering its tax rates any further; when the competitive edge would be gone… and then what?

Is it really wise to base one’s economic growth strategies on sectors which are notoriously prone to drift according to the taxation tides? Sectors which wouldn’t even be here at all, were it not for that very tendency?

The reality is that Malta’s economic policies in this regard have all along been a high-risk gamble. And like most gambles, there doesn’t seem to be a Plan B. The government must be aware that it cannot forestall the CCCTB merely by opposing it at Commission level. What, therefore, are its plans to cope with the predicted impact?

Ultimately, Bencini’s warning about ‘dark clouds on the horizon’ could just as well have been about chickens coming home to roost.