Issue link: https://maltatoday.uberflip.com/i/920426
11 maltatoday SUNDAY 31 DECEMBER 2017 News In 2018 • A taxing problem Thin red line of sovereignty MATTHEW VELLA MALTA and Ireland have long argued that being on the periphery of the EU, a low-tax regime is crucial to attract foreign invest- ment. Malta's tax arrangement that sees compa- nies effectively paying tax at 5% is in line with international standards. However, the system has often been the target of larger countries that accuse Malta of harbouring tax dodgers, who would otherwise be paying higher taxes in their home country. Changing the tax sys- tem would harm Malta's economy and that of other small states. The EU executive has long clamoured for a uniform corporate tax base across the EU. The latest effort comes in the wake of Para- dise Papers, a new data leak that followed the Panama Papers, which showed how rich people were avoiding tax through complex company structures and the use of low-tax regimes. Bigger EU countries are pushing for reforms that would reduce tax dodging. The fact is that after years of enduring aus- terity policies, MEPs are facing constituents who are demanding clear action on tax avoid- ers and the global rich who make use of loop- holes to pay less tax at home. Malta may not be the worst offender in the global tax game, but it is nevertheless a player. Germans espe- cially have long viewed Malta with contempt: as an example, the island serves as the tax base for a subsidiary of the chemicals giant BASF, which used aggressive tax strategies and incentives available in Belgium, Malta, the Netherlands and Switzerland to avoid €923 million in taxes between 2010 and 2014. Tech companies like Google and Apple steal the headlines with their spectacularly low tax rates in countries like Ireland, but Malta allows multinationals to pay effective 5% tax rates through its six-sevenths rebate on company tax. Clearly, the revelations of Panama Papers and Paradise Papers and so many offshore leaks are starting to influence political agen- das. Italy wants to levy a 3% charge on inter- net transactions, complaining that compa- nies such as Amazon, Apple and Google have avoided taxes by maintaining they do not have a "stable presence" in the country, even though they generate huge revenues there and routing profits to low-rate countries such as Luxembourg or Ireland. To get around that hurdle, the new "web tax" will be aimed at firms buying "intangi- ble digital products" such as advertising and sponsored links embedded in webpages. Italy, France, Germany and Spain are push- ing to change the EU tax legislation, but are facing resistance from smaller nations like Luxembourg and Malta, which fear reform could hurt their economies. France has also proposed its own national, digital levy, but the European Commission urged countries to hold their fire. The European Commission will propose new rules in 2018 to ensure that the online sector pays its fair share of taxes. The EU has threatened to move ahead alone rather than wait for the world's rich nations to find an ac- cord. "We are of the opinion that in the digital sector, tax has to be paid where it is due, be it online or be it offline," Jean-Claude Juncker said. "The Commission will propose next year new rules on fair and effective taxation that provides legal certainty and a level play- ing field for all." Not all EU countries agree on how the digi- tal sector should be taxed, but Juncker said he believed they would reach a deal. Of greater threat to Malta is the fact that the European Commission will outline how the EU could make use of so-called 'passerelle clauses' so that it will move from unanimity in matters of taxation, to qualified majority voting – but that will require agreement from all heads of government, something that Mal- ta knows is a red line that cannot be crossed. Finance minister Edward Scicluna has al- ready gone on record saying that any attempt to circumvent the veto power would not be acceptable. So far tax matters have been the compe- tence of national governments with any changes at EU level requiring unanimity. But the EU executive is considering triggering a never-used clause in the EU treaty that would allow tax reforms to pass with a majority vote. Known in Brussels jargon as the 'nuclear op- tion', the move is intended to unblock legisla- tive reform that has so far been opposed by a number of states, including Malta, Ireland and Luxembourg. "Any political quick-fix crossing a long- standing red line would not be acceptable to many… but I do not want to speculate about what if," Scicluna told MaltaToday earlier this year. Even Green MEP Sven Giegold called out Juncker on the passarelle clause, saying it was "totally unrealistic" because tax matters need unanimity to move to majority vot- ing. Instead, the German MEP claimed the Commission can invoke Article 116 of the EU Treaty, which allows the use of directives to tackle member states who are "distorting the conditions of competition in the internal market." It could easily be a charge levied at surplus economies such as Germany. The Head of the Labour Delegation at the European Parliament and former Prime Min- ister Alfred Sant says he is confident that "common sense and good will" will prevail on the proposal for tax harmonisation across all EU member states and on Malta's financial services. "We should ensure that financial services are not and should not be subjected to un- acceptable misuse. Those organisations that safeguard Malta's financial services should be strengthened to protect them from any sort of abuse. Transparency is the best way of safeguarding our financial services. We should strive against European initiatives to harmonise taxation. In this sector, as well in other sectors, the one-size-fits-all policy does not benefit Malta. We should strive hard on the importance of transparency. Information on those paying taxes, and what they are pay- ing, should be available without obstacles." Sant said that during 2017, Maltese repre- sentatives showed they were on the ball dur- ing the EU presidency and "impressed in the way they conducted the decisions." "I must admit I never heard one word against the Maltese performance during those six months." Sant has accused the Nationalist Opposi- tion of exploiting the uproar created by the Panama Papers scandal which rocked Eu- rope. "Instead of accepting electoral defeat and mounting a strategy that could win it the next general elections, the Nationalist Opposition – or part of it – harped on the themes that caused its electoral defeat. Then the news of the atrocious murder of Daphne Caruana Galizia reached all parts of Europe and taint- ed Malta's fame. "Among European quarters there already existed concerns that financial services in Malta served for money laundering, a claim which the Maltese authorities have always denied. This outcry served the cause among European states, especially the big ones, who have been persisting on the need for tax har- monisation. If this proposal goes through and Malta will adjust its taxation system to that of France and Germany, this would be a throw- back for Malta." 2018 will be a tough year for the Maltese government seeking to allay fears of tax har- monisation and fighting off European Com- mission attempts. A plan B could see Malta eventually padding itself for a compromise tax rate that is not as low as 5%. The other alternative would be enhanced cooperation, where a minimum of nine participating EU member states get to introduce an EU pro- posal. A first experiment was carried out with the EU financial transaction tax, but no final agreement is yet in sight now for five years. What's sure is that it is unlikely that any EU state would be prepared to give up more fiscal sovereignty. What's sure is that it is unlikely that any EU state would be prepared to give up more fiscal sovereignty