A Global Minimum Tax Rate
Does this spell a disaster for the Maltese Economy?
A couple of weeks after Malta let out a big sigh of relief after the anti-money laundering regime passed from its Council of Europe’s expert committee, MoneyVal - the Financial Action Task Force are enforcing a number of reforms and improvements that the country still needs to enact in its fight against financial crime. And if this was not enough to keep the Maltese minister of finance awake at night, his counterparts from the most powerful economies in the world, the G7, meeting in London over the weekend, have agreed in principle to battle tax avoidance by making companies pay more, in direct taxation, in the countries where they are actually doing business, and not the company’s jurisdiction. They also agreed in principle to a global minimum corporate tax rate of 15% thus avoiding countries undercutting each other.
What is the Maltese position in all of this?
Legislation does not encourage tax evasion
The Maltese legislation can never condone tax evasion — it would make Malta an instant pariah, an illegal state in the eyes of the world’s community and its position as a member of the EU would instantly be compromised. So statements from the former minister of finance are rather puerile and are only useful to assuage talk from the masses. People in the know are aware of the grey divide between the outright illegality of undeclared income for tax purposes, and the ‘art of tax management’ that many lawyers and accountants spend years learning on how to usurp any legislative loopholes to reduce the annual tax bills for their clients.
The question to be asked should actually be whether Maltese legislation encourages tax ‘avoidance’ and not ‘evasion’.
Governments are not happy with their businesses avoiding paying their legislative share of profits to their nations, and instead use intricate schemes set by other countries specifically to leak these profits to another jurisdiction based on the promise of pittance paid in taxation.
What is tax avoidance and how do corporates manipulate the system?
Fiscal policy is the sovereign right of a nation free to legislate according to the democratic wishes of the people. Every legitimate state has the power to set its own fiscal policies to determine the quantum and means of collecting taxes from its citizens (that include corporates) and how to spend that income. No nation has a right to impose on another how much taxes it should be collecting, and in turn how to spend it. Thus, we find massive disparities, with the United Arab Emirates (UAE) charging a whopping 55% corporate tax rate (according to KPMG) and countries such as Macedonia, that are happy to charge 10% or even less. And strictly speaking there should be no restrictions for companies to be established in countries that provide an advantage in taxation by seeking the most advantageous jurisdiction.
So, what are the G7 ministers of finance howling about?
Tax avoidance opportunities arise when a state, such as Malta, discriminates between local companies that pay 35% corporate tax on their annual profits, and special vehicle companies, known as international trading companies that are barred from doing business in the Maltese market, and through obedience to this rule, will benefit from a dramatically reduced tax on profits to a low single digit percentage.
Therefore, a large corporate will have an incentive to set up a company in Malta with the specific intention of accumulating as much profits as is possible from its global business to its Maltese holding company in order to save huge sums of taxes payable in its ‘home market’.
How does it work?
The Seattle-based Starbucks, with a market capitalisation of US$132.06 billion, reported no profits in the UK between 2009 and 2012, even though it had 735 outlets with sales of £1.2 billion. But Starbucks avoid paying any taxes by setting up intellectual property units in tax havens, and charging their own subsidiaries 6% royalty rates for using it. These royalties are paid to Starbucks HQ in the Netherlands, but even here mysteriously an annual revenue of €73 million is whittled to just €507,000 declared profits with the expenses seemingly crossing to Switzerland where earnings from royalties are taxed at rates as low as 2% — a far cry from the 39% payable on royalties in the USA where Starbucks originated! (Reuters Special Report, October 15,2012 by Tom Bergin)
What will happen if the G20 Heads of State and Government adopt the 15% minimum corporate tax principle during the July Summit?
With one stroke, companies will have no initiative to set up complex schemes intended to ferret away billions of revenue to the lowest tax jurisdiction because there won’t be any lower tax jurisdiction to shift the money to. What the G7 ministers are banking on, is that the windfall of tax revenue paid in where business is actually being transacted, will enable the possible lowering of corporate tax rate down to the 15% or close, making these economies even more attractive than smaller, less affluent economies that have to struggle to attract foreign direct investment without the freedom to incentivize such investment through backroom tax deals. Because if such deals will become known, the country risks being black-listed.
What is causing such a backlash on small sometimes poor nations that have little opportunities to participate in international trade?
Whenever their is a financial crisis, the mood takes such a turn because governments find themselves looking down the abyss of bankruptcy, ruined economies, and necessary yet unpopular hikes in taxation. The health and economic fall-out from the Covid-19 pandemic that has left a massive void in a ravaged the world that requires funding, and a populist decision is to turn on the shady tax avoidance practices of multinational companies that everyone loves to hate. And most countries that provide the tax avoidance opportunities do not matter much on a global scene anyway!
Thankfully, this policy will not be imposed overnight. It may be years, decades even, before it is agreed and fully implemented but the Maltese should not lose anymore time relishing in the lifestyle of low-hanging fruit gluttony, but seriously realise that future Foreign Direct Investment will only make its way to Malta if the working population is honed to perfection and provides superior attributes that will make companies want to settle in Malta attracted by the potential of the working population.
International Trading Companies will probably die a natural death … but should you? The Prime Minister of Malta, Dr Robert Abela, has included education as a pillar for the vision of the future, and he is quoted to have said that Malta needs to transform radically the education sector in Malta, where learning is an ongoing process. Saint Martin’s Institute of Higher Education, has for these past twenty years provided world renowned undergraduate BSc (Hons) programmes conferred by the University of London. The syllabus of each of the degrees reflects an international outlook of requirements by industry in the super economies of the world. Because Saint Martin’s Institute does not want to trap its Alumni to Malta, but offering them a degree that will be welcomed and validated any where in the developed world.
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