Malta braces itself for MEPs’ vote on common corporate tax

It’s a battle as old as the common market, but certainly not as dead as its federalist founders: a common corporate system for EU member states, an idea profoundly detested by Malta.

Members of the European Parliament on 14 March are voting on two reports proposing a common corporate tax base (CCTB) and a common consolidated corporate tax base (CCCTB). Together 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 states against profits in another to reach a taxable net profit.

Tax harmonisation was mooted as early as the 1960s in policy documents but it was not until 2011 that the Commission proposed the CCCTB. In that last skirmish, the proposal was blocked in the Council by the member states. Certainly enough, Malta will veto any common tax proposal in the Council, but creating alliances with other member states may get more difficult when electorates become more sensitised to tax avoidance.

This week a revamped version of the law gets voted upon by the European Parliament, that would make the common tax mandatory for all companies with an annual turnover of over €750 million, and within seven years, for all European companies. One of the rapporteur MEPs, Dutch socialist Paul Tang, proposes that the turnover threshold be €40 million, to be phased out over five years.

There is a different climate in Europe. After years of austerity, the revelations of Luxleaks and Swissleaks, the Panama and Paradise Papers, and Malta Files, are calling time on the international tax games played by multinationals and the global rich.

These scandals moved a common corporate tax to the forefront of the international agenda against the backdrop of the global financial crisis. The mood inside the European Parliament reflects this climate, Labour MEP Alfred Sant tells MaltaToday.

“There is a clear to big majority in favour of the reports. Malta’s position on tax flexibility has very limited support. On a country basis but not necessarily in terms of MEPs, it is basically only defended by Ireland, Cyprus, Luxembourg (but sotto voce) and possibly Belgium.”

He illustrates the political alliance as voices ranging from the ideological inside the Green group, his own Socialist party, the left-wing GUE, as well right-wing voices like the 5-Star Movement MEPs and those from the European of Nations and Freedom, to those who take the national interest in the fight against tax leakages.

“The CCCTB is an essential missing brick in the construction of the genuine internal market and in fighting tax avoidance,” says Alain Lamassoure of the European People’s Party in his report on the CCCTB which will be up for the vote. The French MEP, a staunch Europeanist, says the common corporate tax will allow member states to tax business income where the value is created.

And it is here that Malta profits generously through its imputation tax system, a system that allows multinationals operating outside the island to book their profits into a Malta “tax resident” company, and qualify for an 85% refund on tax paid here.

It is a lucrative industry that forms the cornerstone of the island’s financial services industry. According to figures published by the finance ministry, international tax receipts amount to some €200 million annually. The EC estimated that Malta was attracting foreign investment stock to Malta 16 times the size of its €8.8 billion GDP, or €143 billion in inward flows which were “only partly explained by real economic activities taking place in the country.” The size of FDI passing through Malta earns its place as a top-10 “sink” offshore financial centre according to University of Amsterdam computer science experts that analysed the global flows of capital.

In the run-up to the European Parliament vote, the Commission has sharpened its knives. Only this week it singled out Malta together with Belgium, Cyprus, Hungary, Ireland, Luxembourg, and the Netherlands, for using “aggressive tax planning schemes”.

“That reference to Malta could be seen coming,” Alfred Sant told MaltaToday, adding, “Commissioner Moscovici has been a consistent advocate of regulating tax competitiveness in line with the traditional French stand. What has been damaging our position is that while the actual tax arrangements we propose – and which had been validated by the Commission in the past – have increasingly come under critical attack, the impression has been heightened that anyway, the implementation of the same arrangements is not sufficiently transparent, nor subject to sufficient diligence and enforcement.”

In the same week, the EC started infringement procedures against Malta’s VAT system for yachts, whereby owners of yachts longer than 23 metres pay a reduced VAT rate of 5.4%. That rate is charged instead of 18% if the vessels are used for leasing. Owners use a company to purchase a yacht on their behalf, which then leases the yacht back to them. This ‘lease-purchase’ gets classified as a service, not as a good, which means the standard VAT rates gets levied on a minor amount of the real cost price of the craft once the yacht has finally been bought, the rest being taxed as the supply of a service and at a greatly reduced rate.

Nationalist MEP David Casa questioned this position. In a question to the Commission, Casa pointed out that an identical principle was used by France and others. “In fact, a 50% reduction was applied on the total rental time in the case of pleasure craft by France. The French system also features a complete exemption from VAT on works and services on the basis of a yacht undertaking a commercial activity. The yacht’s location in international waters was justified by the taking of photographs. The French system was introduced by Pierre Moscovici in 2015 when he was a minister.”

The Commission, Casa said, had accepted that the French applied the use and enjoyment principle in the case of rental of pleasure yachts. “So why was it taking action against Malta, Cyprus and Greece if this was an accepted principle?”

For its supporters, Malta’s ingenious tax system is the story of survival for a small, island-nation with little to compete with against the huge economies in the centre of Europe. For this reason the financial services industry enjoys bipartisan backing.

Not only is Malta this week facing the CCCTB vote. MEPs will be keeping up the pressure through a new committee, TAX 3, set up after the PANA committee investigating the Panama Papers scandal.

The Maltese MEPs are not alone.

“We face an almost daily battle against a European Parliament and an EU Commission that, under the banner of fighting tax avoidance, are intent on rewriting the rules for corporate tax policy in the EU, exclusively for the benefit of larger member states,” three EPP members – Esther de Lange, Brian Hayes and Gunnar Hoekmark, respectively Dutch, Irish and Swedish MEPs from the European People’s Party – recently wrote in a joint article on the CCCTB and CCTB proposals.

Alfred Sant believes that countries that push for tax harmonisation will still be wary about such a position, but few member states apart from those with a direct interest will make a clear stand against harmonisation.

“The compromises ‘at the margin’ that might be eventually attempted would still be hardly to our liking. Developments could stall for a while at Commission-to-Council levels given current political developments and the approaching end of the Commission’s mandate. However, in the wake of the Panama, Paradise and other ‘scandals’, the current wave of tax populism should not be underestimated, and not just at the level of the EP.”