Two weeks ago, I wrote about the proposal of the US president to have a global minimum rate of effective corporation tax. The proposal was put to the G7 meeting (the group of the seven so-called most economically advanced countries) that took place in the UK a week ago and it was accepted. So now we have an agreement.
There is the expectation that the agreement will be put for discussion at the next G20 meeting (where countries like Brazil, Russia, India and China are involved), and although there could be some resistance, it is likely to be accepted. Another expectation is that this agreement will be adopted by the Organisation for Economic Development (OECD).
What has spurred this idea and what has helped it to get traction has been the news that a number of global corporations have been getting away with paying very little tax because of their corporate structure, with companies being domiciled in the so-called tax havens around the world. Countries want to be able to tax some of the profits made by big companies based on the revenue they generate in their country, rather than where the firm is located for tax purposes.
We would normally think that a company should pay tax in the country where it earns its income, using the same principle as personal income tax. This has increasingly become not to be the case and those countries that have been experiencing this tax leakage want a change.
It is becoming increasingly unacceptable to a number of countries that there is a disconnect between the location of an economic activity that produces a good or a service and the location where tax is paid
It is becoming increasingly unacceptable to a number of countries that there is a disconnect between the location of an economic activity that produces a good or a service and the location where tax is paid. This became possible because capital is allowed to move freely around the world and was further exacerbated by the exponential increase in digital transactions.
As such, the long and the short of it is that this agreement is seeking to tackle tax abuses by multinationals and online technology companies. Reaching agreement is one thing. Implementing it with all its detail may prove to be difficult and could take months or years to achieve full implementation.
Moreover, there will be countries who will try to resist such implementation. I am not referring to the tax havens but to countries that have a corporation tax that is below the 15 per cent threshold agreed to at the G7 meeting. These are countries that have sought to attract foreign investment through a more favourable tax regime, such as Ireland, Singapore, Luxembourg, Switzerland and Cyprus.
However, no matter how much resistance they put up, the governments of such countries know that they cannot isolate themselves from the world’s biggest economic powers. If they were to do this, they would no longer be seen as attractive investment locations because of the political risks involved, and so one would expect such countries to sign on to this agreement.
This puts Malta at a crossroads. We can claim that tax is a matter of national competence and, therefore, not even the EU can impose on us what tax rate we should charge. On the other hand, we have always sought to gain the respect of the more advanced economies as a hospitable location for foreign investment. Our economy has thrived on the back of such a policy, which has always been embraced by successive governments, from the early 1960s onwards.
We need to think hard as to what to do next. We know full well that our economic growth is highly reliant on foreign investment and the exports of goods and services. This is not a decision that we need to take for the short term, but one where we need to look at the long term. What we cannot do is ignore the issue, thinking that the problem does not really exist.