One issue that is gradually coming under the spotlight is what is being referred to as the digital tax. It has been on the agenda for quite some time but is now gaining importance among a number of EU member states who are battling with remaining within the deficit and debt parameters that had been agreed upon.

These countries do not wish to increase personal tax, value added tax or corporation tax, and rightly so, as in some EU member states they are already quite high. Therefore they are resorting to finding ways and means of how to tax those companies which operate within these countries by providing goods and services, but do not pay any tax because the system has no means of finding out what they are doing. The reason for this is that they mainly operate through the internet.

Moreover, some of these companies are domiciled in jurisdictions which have the attraction of low effective corporate tax. Malta is one of them but so are other EU member states such as Ireland, Luxembourg and Cyprus.

Alternatively they could be domiciled in the country where the management is located, even if it is not a low tax country. However, they do not pay any taxes in those countries which are providing them with most of their profits.

The topic was one of those discussed this week by US President Donald Trump and French President Emmanuel Macron, when the latter visited the White House earlier on this week. France imposes a three per cent levy on companies with at least €750 million in global revenue and digital sales of €25 million in France. Trump warned that the US will retaliate and impose tariffs on the products being exported by France to the US. The reason for Trump’s position is that such a digital tax would harm US technology companies.

There is very little that can give businesses operating in Malta a competitive advantage

France responded by stating that the EU would retaliate strongly against any imposition of tariffs. UK Prime Minister Boris Johnson has also pledged that the UK would impose a digital sales tax – his reasoning is that technology companies should make a fair contribution for the profits they are making in the UK.

Italy, Austria, Spain and Belgium are also considering imposing such a tax. On the other hand there is no common EU position as some countries have opposed the concept, even though the European Commission has proposed a digital tax strategy, with interim measures becoming effective on January 1, 2020. Moreover there are other countries outside Europe that are taking both interim and long-term measures.

The real challenge governments have is that national taxation systems have not geared themselves up to deal with the digital economy. Admittedly the digital economy has brought great benefits for both consumers and businesses. However, the exponential increase in digital activities has become a growing challenge to the existing taxation systems, because taxes are not always paid where the economic value is created, which is one of the fundamental principles of taxation in traditional economic theory.

According to 2018 figures provided by the European Commission, global technology companies paid a 9.5 per cent average tax rate compared with 23.2 per cent for traditional firms.

We need to appreciate that Malta and other countries have benefitted from such a situation. Up to a certain extent, given our location and our size, and given the lack of natural resources, there is very little that can give businesses operating in Malta a competitive advantage. Malta has been offering tax benefits to foreign investors since the 1960s to provide such a competitive advantage.

Therefore the solution cannot be a head-on clash as there are good arguments to be made on both sides of the issue. The idea should be to seek a fair solution, which takes into account the requirements of both low-tax countries and those countries that provide the market for these technology companies. The issue needs to be resolved multilaterally and not bilaterally, and more importantly in a collaborative way.

If a long-term global solution is not found, there is the possibility that more countries will adopt their own digital tax measures, thereby making the issue more complex. Malta needs to be prepared for such eventualities.