Issue link: https://maltatoday.uberflip.com/i/1381694
8 OPINION 10.6.2021 THIS month, a group of G7 finance ministers gathering in London agreed to back a global minimum tax of at least 15% on multinational companies. is important milestone means that no more will multinationals be able to incorporate into low-tax states and sell their products elsewhere since the min- imum tax will be levied regardless of the present arrangements. For debt-stricken countries reeling under heavy borrowing to finance the pandemic recovery, the deal was hailed as an oasis in a desert of debt. As can be expected, more details need to be hammered out in time for countries of the wider G20 grouping. ey intend to meet next month in Venice and then among all OECD countries. ere is a lot of detail still to be agreed, and the deal is not yet "done". At this early stage, observers think agreement looks more likely. UK finance minister Rishi Sunak an- nounced the agreement, saying G7 fi- nance ministers – hailing from Canada, France, Germany, Italy, Japan, the UK and the US – had "reached a historic agreement to reform the global tax sys- tem to make it fit for the global digital age and, crucially, to make sure that it's fair so that the right companies pay the right tax in the right places". US president Joe Biden has called for a unified minimum corporate tax rate of 15 per cent and his proposal has so far won broad support from countries such as France and Germany, as well as the International Monetary Fund. German Finance Minister Olaf Scholz suggested it would herald "a revolution in interna- tional corporate taxation". OECD and the United States have said a final sign- off might not be possible until a subse- quent G20 meeting in October. is gives Biden time to pass the deal through Congress as a domestic tax package. Should G20 concur, this would mean the world's largest economies will implement it, so its reach would effec- tively be worldwide. at said, a lot of the metrics still need to be worked out and there is scope for countries to make their point of view heard within the debate. e stark truth is that countries need to offset $16 trillion spent on stimulus during the Covid-19 pandemic. e present practice for countries such as Malta, Cyprus, BVI, Netherlands and Ireland attract many companies to set up local branches and enjoy tax conces- sions including relatively low corporate tax rates. In simple terms, that means companies only pay the local rate of tax, even if the profits mainly come from sales made elsewhere. So far, all this is legal and commonly done. Proponents for the deal argue that a minimum 15% tax is necessary to stem competition between countries over who can offer multinationals the low- est rate. Switzerland, which is under pressure from abroad, has promised to eliminate special low tax rates that ben- efitted about 24,000 foreign companies. What has changed in the G7 summit? e stoical deal aims to stop harmful tax competition in two ways. First- ly, companies will pay more tax in the countries where they are selling their products or services, rather than wher- ever they end up declaring their profits in tax havens. Secondly, they want to stop countries using the tax system in a race to the bottom to attract investment to their shores and deprive trillions of tax at the host country of origin. Ireland, which has successfully re- cruited global companies including big US tech firms by offering a corporate tax rate of just 12.5%, is one country that has expressed significant reserva- tions over the Biden proposal. Its 12.5% tax rate is one of the lowest in the world yet Malta charges even lower. Ireland's tax package attracted tech giants such as Facebook and Google as the home of their European operations. What implications of the deal will hit us? Our long agreed policy with the EU accession team to continue using the strategy of low tax as a tool to at- tract companies will become largely re- dundant. is may create an exodus of some existing companies while others will remain. It goes without saying that Castille must start putting its hat on especially now that the Minister Owen Bonnici is in charge of marshalling a post-pandemic revival. Perhaps there is no space for doom and gloom provided we come out of the post-pandemic lethargy and focus on the tsunami that is about to hit us. e agile finance minister has to think quickly out- of-the-box and refrain from the tempta- tion of solving the problem by appoint- ing a committee of cronies and persons of trust to shelve the problem. Can you imagine if for example, such tax advantages were eliminated had particular companies such as AUM, Cranes Currency, Chinese investment in Enemalta, 250 gaming companies, Insurance and Fintech sector, Vitals Health Care and Electrogas would ever grace our shores. e future of a nascent Blockchain community will also be in peril. Unless we bring out the rabbit out of the hat, future investment flows will be affected, particularly in areas where tax plays a key role in decision-making and only time can tell if operators could stay. is deal will put pressure on Kurt Farrugia CEO Malta Enterprise to im- prove the packages designed to attract FDI at a time when our national debt has hit the eight billion euro mark and the tourism sector needs three years to pick up. Practitioners are licking their wounds in the financial services sector following years of corruption and sleaze which some believe led to the death of a leading journalist four years ago. ere is no time for palliatives and using band-aids, we need to rise above the fray since the game is up and using low tax as a bait for FDI is passé. e implication of all this is that, as a coun- try, we need to start thinking now as to what should constitute the competitive advantage for businesses based in Malta if they lose the tax advantage. e smile on the faces of the G7 leaders (see pic- ture) may be a fig leaf for many. Quo vadis - imagine a minimum 15% corporation tax? George Mangion George Mangion is a senior partner of an audit and consultancy firm, and has over 25 years experience in accounting, taxation, financial and consultancy services. His efforts have seen PKF being instrumental in establishing many companies in Malta and ensured PKF become one of the foremost professional financial service providers on the Island UK prime minister Boris Johnson is hosting the G7