Malta opposing EU law attacking tax shopping

Malta is being reported to be the only member state “stopping a tax loophole costing billions of euros” from being closed, according to the authoritative euractiv.com.

According to the European affairs website, Sweden has dropped its opposition to an agreement by EU finance ministers to stop multinational companies exploiting hybrid loan arrangements to pay little or no tax.

The European Commission has identified “hybrid loan arrangements” – a combination of debt and equity – as a tax-planning tool. Some member states classify profits from hybrid loan arrangements as tax-deductible debt.

Others don’t, creating a mismatch in national laws, that is being exploited by multinational companies which open subsidiaries in other member states so that they pay little or no tax.

A proposed solution brokered by the Greek presidency is that if a subsidiary is based in a country where profits from financial instruments with both debt and equity characteristics are tax-deductible, those dividends must be taxed by the member state where the parent company is based.

The compromise deal states that countries should tax certain profits. The Commission’s original proposal said member states should not tax profits if they were not deductible by a subsidiary company.  

Maltese diplomats were reported saying that Malta supported the closing of the hybrid loan loophole, but said the wording was a “point of principle” as it strayed into national competences. Agreeing to the deal could also set a precedent for future legislation, which Malta is keen to avoid.

Diplomats who spoke to euractiv.com said Malta will not support the agreement on the revised Parent-Subsidiary Directive, which requires unanimous support from all member states to go ahead.

Malta argues that the wording of the compromise will compel member states to levy taxation on the basis of the revised Parent-Subsidiary Directive, which infringes on its sovereignty over tax decisions.  

EurActiv said that Sweden intends to support the law at a 20 June meeting of EU finance ministers. 

The Greek compromise would have split the revised Parent-Subsidiary Directive in two, allowing EU governments to close the loophole, without agreeing to a hotly debated general anti-tax abuse rule. The anti-tax abuse rule also requires unanimity to become law.

Malta criticised

Tove Maria Ryding, tax coordinator at the European Network on Debt and Development (Eurodad), a network of 48 NGOs said Malta’s behaviour would “only serve the interests of the multinational corporations trying to avoid taxation. 

“We mustn’t forget that corporate tax dodging is costing our societies billions of euros, and therefore this is too serious an issue for governments to start playing political games. The Parent Subsidiary Directive is a small but important step in the right direction, and will close some of the most obvious loopholes in the EU tax legislation.”

Malta was one of five member states named and shamed by European Tax Commissioner Algirdas Šemeta yesterday during a press conference for the Commission’s annual policy recommendations to governments. The Netherlands, Ireland, Cyprus and Luxembourg were also criticised.

Šemeta said, “They need to do more in fixing their legislation […] they need to do more to address aggressive tax planning.”

At the same conference, Commissioner for Economic and Monetary Affairs Olli Rehn said, “If there is any consistent and crosscutting message from European citizens, it is that we must further strengthen and intensify efforts against tax evasion and aggressive tax planning.”

Šemeta added: “Even leaving aside the major issue of fair tax competition, there is a question of sustainable public finances here. Member states cannot rely on short-sighted tax schemes to attract multinationals. When it comes to tax evasion, political interest cannot be confined to campaigns. It must translate into with swift and decisive action, at national, European and international level.”