In the run-up to this Saturday’s European Parliament elections, most political debates, gatherings and rallies have cross-haired on one phrase: tax harmonisation.
And while every local MEP candidate, from all sides of the political room, has agreed that tax harmonisation would place a heavy burden on Malta, parties and candidates are in disagreement over the extent to which their party is against tax harmonisation.
Beyond the partisan element, EU tax harmonisation is being seen as a threat to the local labour market, with jobs in the gaming, financial services and rental sectors being perceived as most at risk.
Yet, tax harmonisation has been in discussion for years. First tabled in 2011, the Common Consolidated Corporate Tax Base (CCCTB) was originally designed to strengthen the Single Market for businesses. While significant progress on many of the CCCTB’s core elements was made, EU member states were unable to reach a final agreement.
Five years later, the proposal was relaunched when, in October 2016, the European Commission announced plans to overhaul the way in which companies are taxed in the Single Market, with the aim of “delivering a growth-friendly and fair corporate tax system”. The Commission proposed a package consisting of two inter-connected proposals on a common corporate tax-base (CCTB) and a common consolidated corporate tax base (CCCTB), proposed as tools to make it easier and cheaper to do business in the Single Market, while acting against tax avoidance.
In March 2018, the European Parliament voted in favour of the two proposals by 451 votes to 141, with 59 abstentions and 438 votes to 145 votes, with 69 abstentions, respectively. For proposals dealing with taxation, the European Parliament must be consulted, with the Council being the only institution that can adopt such legislation.
For proposals dealing with taxation, the European Parliament must be consulted, with the Council being the only institution that can adopt such legislation
Following the vote, rapporteur on CCCTB, Alain Lamassoure (EPP) said: “This is a fabulous opportunity to make a giant leap in the field of corporate taxation… (this) would also halt unfettered competition between corporate tax systems within the single market, by targeting profits where they are made.”
Another rapporteur Paul Tang (S&D) added: “National and EU leaders understand that the current corporate tax system is outdated and leaves citizens and small companies worse off.
“The EU is our best chance to make our tax system more just and more modern.”
From the outset, the stand taken by local politicians was one of resistance, given two main factors: first because taxation was always seen as a pillar of a state’s sovereignty; and secondly, because studies showed how tax harmonisation could harm the economy of smaller member states, including Malta. Indeed, in December 2017, The Times of Malta had reported how a study by the UK-based think-tank Tax Justice Network found that with tax harmonisation as proposed, Malta would see its income tax arrangements deriving from subsidiaries or multinationals registered in Malta decline by more than half, and in some cases by two thirds.
According to the report, with EU tax harmonisation: “A group of small EU countries, including the Czech Republic, Portugal and Sweden might expect their corporate tax bases to shrink by around one third, with the tax base of Malta, Slovenia and Estonia declining more than half in terms of their loss-consolidated tax base due to formulary apportionment in the Common Consolidated Corporate Tax Base (CCCTB) scenario.”
This tax revenue reduction would result from the fact that an EU-wide tax system could be less attractive than the current regime – while Malta’s corporate tax rate stands at 35 per cent, foreign-owned companies can apply for refunds which can potentially reduce their tax burden to just five per cent.
Local media also reported how business leaders are at odds with the EU’s proposed tax harmonisation. In comments given to the Business Observer, Perit David Xuereb, President of the Malta Chamber of Commerce, Enterprise and Industry, said that while the Chamber believed in the European project, a one-size-fits-all principle to taxation cannot be applied. Perit Xuereb also said how Malta’s fiscal policy was not merely a way of collecting revenue, but rather, a tool to attract investment, stimulate growth and overcome its disadvantages that come with its small size and peripherality. Malta Business Bureau President Simon de Cesare concurred, saying how tax harmonisation would erode fiscal competitiveness.
The tax harmonisation issue is linked to the effort to shift from unanimity to qualified majority voting (QMV) in the Council (where EU governments are represented) under the ordinary legislative procedure, in certain areas of shared EU taxation policy, giving the European Parliament an equal say in this policy-area, as co-legislator with the Council.
For proposals dealing with taxation, the European Parliament must be consulted, with the Council being the only institution that can adopt such legislation
Currently, decision-making for areas of EU taxation policy requires unanimity among member states. This unanimity, as the European Commission communicated last January 15, “cannot be achieved on crucial tax initiatives, and can lead to costly delays and sup-optimal policies”.
In reaction, Finance Minister Edward Scicluna had told The Sunday Times of Malta that this veto removal regarding taxation in the EU is “essentially a red herring”. He added how: “Valid and OECD BEPS compliant legislation like Anti-Tax Avoidance Directive I and II were successfully enacted in spite of the veto. On the other hand, certain tax proposals like CCCTB, Financial Transaction Tax or the Digital Tax are not approved because the majority of the EU member states are unconvinced they would be in their economic interest to have. They are not being held back due to the veto. But in any case Malta will oppose any attempt to erode any rights obtained by membership. The EU Treaties are very clear about this.”
Other member states shared Malta’s position. Ireland also rejected the idea, with a government statement saying that Dublin “Does not support any change being made to how tax issues are agreed at EU level”.
While Malta sees this as a move that might lead it to lose its right of veto on matters of taxation – and therefore, possibly leading to tax harmonisation – the European Commission said that rather than proposing any change in EU competences in the field of taxation, or to the rights of member states to set personal or corporate tax rates as they see fit, the aim was to allow member states to exercise more efficiently their already pooled sovereignty so that shared challenges can be addressed more swiftly.
Commissioner for Economic and Financial Affairs, Taxation and Customs Pierre Moscovici added how: “If unanimity in this area made sense in the 1950s, with six member states, it no longer makes sense today. The unanimity rule in taxation increasingly appears as politically anachronistic, legally problematic and economically counterproductive. I am fully aware of how sensitive an issue this is, but that cannot mean that the discussion is off limits.”
In autumn, a new Commission will be in place. The outcome of this week’s European Parliament election will not only shape the composition of the parliament but will also affect the choice of European Commission President and in turn, the general policy direction of the Commission. Nevertheless, if unanimity was to be replaced by QMV for taxation, it would come about as a result of approval by all EU member states.
Common corporate tax base
The CCTB proposal provides for the determination of a single set of rules for calculation of the corporate tax base. Companies operating across borders in the EU would no longer have to deal with 28 different sets of national rules when calculating their taxable profits.
The intention is that the proposed CCTB is a step on the way towards re-establishing the link between taxation and the place where profits are made, via an apportionment formula to be introduced through the new CCCTB proposal. The legislative proposal falls under the consultation procedure.
Common consolidated corporate tax base
The proposed CCCTB is part of a wide-ranging proposal to create a single, clear and fair EU corporate tax regime.
Proposals include benchmarks to determine whether a firm has a digital presence within an EU member state which might make it liable for tax even if it does not have a fixed place of business in that country.
Firms would calculate their tax bills by adding up the profits and losses of their constituent companies in all EU member states. Taxable profits would then be allocated to each member state where the firm operates according to a sharing formula based on sales, assets, labour and use of personal data. The aim is to stamp out the current practice of firms moving their tax base to low-tax jurisdictions.
In the case that such proposals take effect, a single set of tax rules would apply in all member states. Firms would no longer have to deal with 28 different sets of national rules, and would also be accountable to a single tax administration.
Under the proposals, the legislation would cover groups of companies with a consolidated turnover exceeding €750 million.