For decades, many large countries, including the US and the more significant EU member states, have argued, with little success, that there was an urgent need for global tax harmonisation.
They insist that by reducing the effective tax rates on foreign corporations’ profits to significantly low levels some small countries deprived them of the income needed for investment in their social and physical infrastructure. Small countries like Malta and Ireland, on the other hand, insist that their size imposes economic disadvantages that tax competitiveness can partially overcome.
But changes in tax harmonisation are now nearer than ever partly because of the immense burden governments, especially in the EU, have to carry to stimulate sluggish economic growth by investing in their infrastructure.
The changes are being rammed through various international forums by highly motivated people in Washington, Brussels and Paris, the headquarters of the Organisation for Economic Cooperation and Development (OECD).
The implications of these changes on the Maltese economy are substantial. Many are rightly asking what the country’s economic life will look like after the EU is expected to issue a directive imposing a 15 per cent tax on the profits of all foreign corporations.
Government sources have told Times of Malta that talks were being held with foreign investors in Malta to see what could be done to keep them in the country once the tax regime is amended, possibly from January 2023.
It makes sense for Malta to ask for a two-year extension to introduce a new minimum corporate tax to reduce the negative impact of the loss of the tax advantage in the eyes of potential foreign investors. In a similar situation, other countries like Ireland have managed to win some concessions that are arguably more significant than that which Malta is aiming for.
A global corporate minimum tax, including the OECD plan, would not be self-implementing. Each country would have to incorporate the rate and rules into its own tax system. Still, life after harmonisation will not depend so much on when the new tax rules come into effect but on other issues that often get little mention in the debate on what makes a country competitive.
The economic competition among countries should be influenced more by the comparative quality and strength of their infrastructure and the skill of their workforce rather than their lower tax jurisdiction.
Our economic policymakers would do well to heed the advice of the governor of the Central Bank of Ireland and member of the European Central Bank’s Governing Council, Gabriel Makhlouf.
Last year he argued: “Taxes can be changed fairly regularly. So an investor’s judgement is made based on confidence in the quality of the labour force and the quality of the government. Once companies have been there for decades, they are unlikely to leave”.
Some economists argue that tax harmonisation represents a rational compromise between eliminating tax disparities between member states and protecting their legislative or judicial autonomy. It is unlikely to ever lead to a fiscal union as the divergences on this matter among member states are too deep-rooted.
The government needs to consistently address fundamental challenges relating to our underperforming educational system, the erosion of good public governance practices, and the damage to Malta’s reputation due to the FATF greylisting.
Ultimately, life after tax harmonisation will be what we make it.