At a European Union level, the subject of tax harmonisation has been mentioned a number of times. Rightly so, Malta, together with other countries, has resisted the notion of tax harmonisation across the whole of the EU for two main reasons.
First, tax is a subject of national competence and not EU competence. Second, our tax rules had been agreed at the time of the country’s accession to the EU and we cannot now be expected to give them up for the sake of harmonisation.
However, the matter has now taken a different twist. US President Joe Biden has proposed to have a global minimum rate of effective corporation tax. He is not talking of tax harmonisation at a global level but we are not that far off. Moreover, financial and economic analysts seem to be very warm to the idea because they see it as a way of reforming global corporate taxation and a way of isolating the so-called tax havens and combating money laundering.
Ever since the financial crisis and subsequent economic recession post-2008, there have been various calls to regulate further international financial markets, to address the issue of tax avoidance by global companies, and to reach some sort of worldwide agreement that would in effect dissuade countries from attracting foreign investment for tax reasons.
It was no longer acceptable that the simple movement of capital would enable the few to get richer while eating away at governments’ tax revenues needed for their social welfare programmes. Post-coronavirus, one would expect a fresh impetus in this direction. One would also expect a drive to exercise some form of control over digital transactions.
We need to start thinking now as to what should constitute the competitive advantage for businesses based in Malta if they lose the tax advantage
During the pandemic, governments have been very forthcoming in supporting businesses and the expectation is that such businesses now pay their tax dues in the country that has kept them alive and not seek some way of avoiding paying tax by channelling funds through other countries.
It is evident that the proposal of the US president wants to address three issues. The first is that global companies stop shifting their profits to low-tax jurisdictions. The second is to stop governments from competing against each other in attracting investment on the basis of corporate tax rates. The third is to identify where international businesses have located their activities. Tax will no longer be a basis of competitive advantage.
It has been reported that Biden has received the support of countries such as Germany, Canada, France, Italy and Japan and, therefore, there is a good chance that this proposal will be adopted in some forum or other. The forum could be OECD, or it could be the G7 meeting. The original tax rate proposed was 21 per cent and this has now been brought down to 15 per cent.
What are the implications for Malta? Malta has traditionally competed for international investments on the basis of a favourable tax regime. This is what we did post-1964, when the country became an independent nation, through 10-year tax holidays, and this is what we are doing now, through the tax refund system.
One will need to see how such a global minimum corporate tax rate would be implemented. However, if the leading world economies support it, I believe that moral suasion will come to bear on both businesses and the other countries which may not be too keen to implement such a minimum rate. Moreover, there can easily be a system of blacklisting for countries that insist on remaining tax havens.
The implication of all this is that, as a country, we need to start thinking now as to what should constitute the competitive advantage for businesses based in Malta if they lose the tax advantage. Due to our size, we will always be an economy that is reliant on the exports of goods and services and on international investment. What is it that we can offer international investors to make it advantageous for them to locate in Malta?