At European Union level, the subject of tax harmonization has been raised on several occasions. Rightly, Malta, along with other countries, has resisted the notion of tax harmonization across the EU for two main reasons.
First, taxation is a matter of national competence and not of EU competence. Second, our tax rules were agreed upon when the country joined the EU and we cannot be expected to abandon them for the sake of harmonization.
However, the matter has now taken a different turn. US President Joe Biden has proposed to have an effective global minimum corporate tax rate. He is not talking about tax harmonization at the global level, but we are not that far from it. In addition, financial and economic analysts seem very warm to the idea as they see it as a way to reform global corporate taxation and a way to isolate so-called tax havens and fight money laundering.
Since the financial crisis and the economic recession that followed after 2008, there have been several calls to further regulate international financial markets, to solve the problem of tax evasion by global companies and to reach some kind of global agreement that would in fact deter countries from attracting foreign investment for tax reasons.
It was no longer acceptable that the simple movement of capital allowed a few to get rich while eating away the tax revenues of governments needed for their social protection programs. After the coronavirus, we would expect a new impetus in this direction. One would also expect a willingness to exert some form of control over digital transactions.
We need to start thinking now about what the competitive advantage should be for companies based in Malta if they lose the tax advantage.
During the pandemic, governments have been very willing to support businesses and these businesses are now expected to pay their taxes in the country that kept them alive and not look for a way to avoid paying taxes. by channeling funds through other countries.
It is obvious that the US President’s proposal seeks to address three issues. The first is that global companies stop shifting their profits to low tax jurisdictions. The second is to prevent governments from competing to attract investment on the basis of corporate tax rates. The third is to identify where international companies have located their activities. Taxation will no longer be a basis for competitive advantage.
It has been reported that Biden has received support from countries such as Germany, Canada, France, Italy and Japan and, therefore, there is a good chance that this proposal will be adopted in a forum or other. The forum could be the OECD, or it could be the G7 meeting. The originally proposed tax rate was 21 percent and is now reduced to 15 percent.
What are the implications for Malta? Malta traditionally competes for international investments on the basis of a favorable tax regime. That’s what we did after 1964, when the country became an independent nation, with 10-year tax holidays, and that’s what we are doing now, thanks to the tax refund system.
It will be necessary to see how such an overall minimum corporate tax rate would be implemented. However, if the world’s major economies back it, I think moral persuasion will come both on companies and on other countries that might not be too keen on putting such a minimum rate in place. Plus, there can easily be a blacklist system for countries that insist on remaining tax havens.
The implication of all this is that, as a country, we need to start thinking now about what should constitute the competitive advantage for companies based in Malta if they lose the tax advantage. Due to our size, we will always be an economy dependent on exports of goods and services and international investment. What can we offer international investors to enable them to set up in Malta?
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