It is almost a decade since the European Commission proposed the introduction of a consolidated corporate tax base that would be the end game for a fair, transparent and efficient tax system.
In 2018, the European Parliament, by a substantial majority, voted in favour of this plan.
Two years later, the idea of EU-wide tax harmonisation has been revived by the urgency of identifying a reliable source of financing the expenditure needed to revive the sluggish EU economies after the impact of the pandemic. Never mind that EU institutions are currently paralysed by Poland and Hungary, which are blocking the approval of the much needed seven-year multiannual financial framework because they object to the rule of law conditions attached to it.
The tax harmonisation proposals are not supported by everyone either. They have generated conflict among politicians of different political factions and among members of the European Parliament.
Some MEPs, including those from Malta, last week again voiced their concerns over the proposals being made by the European Commission, basing their arguments on the damage to their countries that would ensue.
Reflecting the political consensus back home, MEPs Roberta Metsola and Alfred Sant agreed that tax harmonisation would not be in Malta’s interest as its effects on small countries would be ‘disproportionate’.
Metsola argues that the EU budget could be financed by less controversial means, such as a tax on emissions. She believes that the proposed tax reforms would damage the competitiveness of small niche economies like Malta’s.
Sant made a daring statement in the context of a widely held perception of Malta being an EU tax haven.
He said: “We are against all tax avoidance but, on the other hand, we should push for tax transparency rather than harmonisation. Financial services in Malta do not facilitate tax avoidance.”
At present, direct taxation falls within the competence of the European Union’s member states but they must exercise that competence consistently with EU law.
The president of the European Commission, Ursula von der Leyen, did not veil her intentions when she said: “I will make use of the clauses in the treaties that allow proposals on taxation to be adopted by co-decision and decided by qualified voting in the Council.”
The EU has profound weaknesses in its governance structures. The ability of small and not-so-small member states to veto much-needed reform could lead the Union into a period of operational and strategic paralysis.
Following the departure of Britain from the European Union, small countries like Malta, Ireland and Luxembourg have lost a strong ally in their resistance to tax reform that could harm their economies.
It is justified to ask for how long these smaller countries can resist the push by larger member states, like France and Germany, to tap rich sources of financing by making tax avoidance less easy for businesses.
The government needs to use the time available until the final decision on the consolidated corporate tax base is taken to reduce the economy’s dependence on our favourable tax regime for new investment to flow into Malta.
Smart laws are essential but more important is the determination to invest in core national competencies like the enhancement of the skills base of our young people.
The common approach taken by Malta’s MEPs in opposing the tax harmonisation proposals is understandable. However, being a member of the European Union has more dimensions than maximising the benefits of our taxation system.
Malta, like all other member states, needs to help ease the tensions between national and European Union long-term interests.