The agreement signed by the G7 group of wealthy nations was almost inconceivable up to a few months ago as governments everywhere considered the right to tax as the essence of their sovereign power.
But when US President Joe Biden announced an ambitious plan to upgrade the ageing infrastructure of his country and improve social security, he rightly argued that this could only be done if multinational companies paid their fair share of tax.
Negotiations to reform the global tax system started in 2013. But the political will both in the EU and the US to reach an agreement that would be acceptable to most countries was at best weak.
In the EU, the need for unanimous agreement among all member states meant that countries like the UK, Ireland, Luxembourg, Malta, Cyprus and Hungary, among others, would always veto any collective agreement on taxation. These countries adopt economic models that are partly based on attracting investment through low corporate tax.
The deal agreed in principle is that multinational companies pay a minimum tax rate of 15 per cent in each country they operate. Olaf Scholz, the German finance minister and the Socialist Party’s candidate for chancellor at the 2021 elections, described the deal as “very good news for tax justice and solidarity and bad news for tax havens throughout the world”.
Aid charities were not impressed though. They consider the global minimum tax rate as “soft” and not enough to deter multinational companies from tax avoidance schemes.
The first shot at attacking tax avoidance schemes has been fired. Low taxation countries, including Malta, will continue to argue publicly that they will resist any attempt to undermine their tax competitiveness. Following the deal, Finance Minister Clyde Caruana has reaffirmed Malta’s stand in opposition to a blanket corporate tax, insisting that tax issues fall squarely within the sovereignty of individual member states.
Malta and similar jurisdictions have two options to consider. The first is to dare swim against the tide of sentiment running to all corners of the globe: that multinational firms should pay a fairer share of tax. The other option is to start preparing to manage the effects of the gradual elimination of their reliance on low tax regimes in their economic models.
Ireland, arguably the EU country that has benefitted most from its tax competitiveness, seems to have adopted a sensible approach. It is not aiming to resist this change but will try to make a case for ‘the role of legitimate tax competition’ before the framework of global tax policy is concluded in the coming months.
Irish Finance Minister Paschal Donohue said the Irish government is looking at other policy areas in the future to ensure that Ireland continues to remain a very attractive place for domestic and international investment.
The Maltese government must be pragmatic by improving the country’s competitiveness profile beyond the advantage it offers as a low taxation regime. The first area that needs to be addressed is the underperforming educational system. Malta has one of the worst educational achievement levels in the EU. Digitalisation and investment in the green economy, which is the EU blueprint for future sustainable economic growth, will never take off until the skills base of the Maltese workforce is upgraded substantially.
Improvements are also needed in the legal process that is often too slow to decide on contested business issues.
The G7 taxation agreement is, as rightly argued by Italian Prime Minister Mario Draghi, “a historic step towards a fairer and more equitable society for our citizens”.