Maltese MEPs object as EU moves closer to tax harmonisation

All six of Malta’s MEPs – Labour and Nationalist alike – broke ranks with their respective political groups this week when it came down to voting on the prospect of levying a 21% minimum tax on digital-based companies in the EU.

The move, seen as another step toward establishing an across-the-board common corporate tax so dreaded by Malta, was overwhelmingly endorsed by both the Socialists and Democrats, as well as by the European People’s Party.

But, in a break from the norm, Malta’s four Labour Party MEPs all abstained from the vote.  The two Nationalist MEPs, meanwhile, went a step further and voted against the resolution, which was adopted in the end with 549 votes in favour, 70 against and with 75 abstentions.

The EU’s bid for the harmonisation of corporate tax rates has long been as bone of contention with Malta, which levies lower and more preferential rates for multinational companies basing themselves in Malta, much to the chagrin of their ‘home’ countries, which are being denied.  Such companies making bases for themselves in Malta have included the likes of BMW, Lufthansa and Volkswagen.

The EU has been seeking to draw up new rules to prevent such companies from setting up ‘letter box subsidiaries’ in countries solely to qualify for a softer tax regime. The Maltese registry of companies is riddled with a plethora of such brass plate offshore companies, and the Maltese taxman is making a pretty penny from them, despite the low tax rates being applied.

Past cases in point in Malta have included the well-known example of UK energy giant Npower having dodged paying up to £108 million in UK corporation tax by posting a loss in the UK, and instead shifting its profits to a subsidiary company in Malta. Australia’s Commonwealth Bank had used a back-office firm in Malta, Commbank Europe Limited, to save several millions in taxes.

The general accusation Malta faces is that, in so doing, it is serving as a tax haven by allowing such companies to avoid paying taxes in their home countries or in the countries in which they actually do their business. This, they argue, constitutes profit shifting to Malta, which, in their view, is and effectively robbing other states’ coffers to enrich its own.

Malta offers a specific, and attractive, tax regime with a very low effective tax rate. The nominal rate of corporate income tax is 35% but by the grace of Malta’s full imputation system of taxation, the ‘real’ rate can go as low as approximately five per cent if the taxpayer is organised in a certain way, such as by having a group of a minimum of two companies (parent and subsidiary) that are resident in Malta.

This week’s European Parliament resolution puts digital companies alone in the cross hairs over such practices, for the time being, but it is seen as having represented another large step toward establishing an EU common corporate tax - the prospect of which has been vehemently opposed by successive Maltese administrations.

Minimum corporate tax rate in through the back door – Sant

MEP Alfred Sant, head of Labour’s delegation to the EP, is sceptical the move is only about the digital age. Rather, Sant says, “Under the guise of laying out plans for a fairer tax system fit for the digital age, a minimum corporate tax rate is being introduced.”

International taxation has been changing a lot over the past years, Sant acknowledges, and he agrees that it needs to adapt to digitalisation.

“Taxation systems should reflect, I agree, the fact that as a result of digitalisation, businesses and consumers interact differently. Value is being more often created in digital environments.

“What I disagree with is the method currently foreseen to implement digital taxation,” Sant says, spelling out potential trouble on the horizon for countries such as Malta.

“Small countries with small markets would be put at a great disadvantage with regard to how taxing rights would be established. I will continue to make the case for tax competition at EU level and at global level.

Peripheral economies, he insists, “need and will continue to need attracting foreign direct investment thanks to an appealing tax system.

“Not everyone is out there to cheat, but rather to compete for investments in a legitimate way.”

Sant also “strongly disagrees”, should progress at international level stall - including talks with the US, the OECD and the UN – that the EU should go alone, as many are advocating.

“The international tax environment that faces our EU businesses present on a global scale is already complex enough,” he explains. “It would be inappropriate to add another level of uncoordinated requirements.”

Casa and Metsola call for ‘more clarity’

That explains Maltese MEPs’ resistance to the resolution, which had been widely embraced this week by Parliament, in line with its consistent calls to level out the EU’s taxation playing field.

Contacted for an explanation behind their vote, which saw them break ranks with the EPP, Nationalist MEPs David Casa and Roberta Metsola recalled how their joint position has always been that taxation should remain, as far as possible, a question of national competence.

“On this particular file,” they told MaltaToday in a joint statement, “we would have preferred if there was more clarity as to the type and size of the companies this would affect and what measures would be proposed to mitigate any negative, disproportionate, effects on economies like Malta.”

“We must be very careful not to go down the road of having a disproportionate response that risks infringing on States’ sovereignty on taxation matters.

“Coming from Malta, we need to make sure that any measures we propose do not place a hugely disproportionate burden on economies like ours that relies on competitiveness in taxation.

“Our hope is that the clarity we need will materialise going forward.”

Ambiguous text leaves question mark over remote gaming

While the overall aim is at digital giants such as Facebook and Amazon, the text is somewhat ambiguous as to which companies will be affected and, as Metsola and Casa observe, lack, “clarity as to the type and size of the companies this would affect”.

As far as Malta is concerned, there could be a question mark hanging over the remote gaming industry and the lucrative taxes the government rakes in from their presence in Malta, where they partake of the disputed advantageous tax rate on offer.

That revenue, and indeed the significant employment the industry generates, could stand at risk depending on the final version of the digital text, which would still need to be approved at Council level and, being a tax matter, will require the unanimity of all member states.

Much, however, will depend on parallel ongoing negotiations on an international level at the Organisation for Economic Cooperation and Development and the United Nations.

Last week the UN Committee of Experts on International Cooperation in Tax Matters today agreed to the text of a new article and commentary for the UN model tax treaty that would grant additional taxing rights to countries where an automated digital services provider’s customers are located.

Such automated digital services, according to the Committee, involve income received with little human involvement from the service provider and specifically include income derived from online gaming.

Commission wants new tax operable by 2023

As such, and considering its past stances against any sort of tax harmonisation, Malta could very well be expected to oppose any such move at Council level.

Heavyweights such as France and Germany, however, have given it strong public backing so far. It also comes as US President Joe Biden is pushing hard for the same tax to be levelled on an international scale, through OECD structures.

Biden envisages a 21% minimum tax, a level the European Parliament endorsed in this week’s plenary session, and would like to see that 21% minimum tax extended beyond the purely digital sphere and – in Malta’s worst case scenario – extended to include all multinationals.

The US, along with allies such as Germany and France, are pushing for an international deal through the OECD as early as this summer. The European Commission, meanwhile, said this week it intends to table its proposals for the new digital tax this summer and to have making it operational from 2023 onwards, to help fund its post-pandemic budget.

These articles are part of a content series called Ewropej. This is a multi-newsroom initiative part-funded by the European Parliament to bring the work of the EP closer to the citizens of Malta and keep them informed about matters that affect their daily lives. These articles reflect only the authors’ view. The European Parliament is not responsible for any use that may be made of the information it contains.