Taxing the Internet’s giants? Finance minister Edward Scicluna is a sceptic

Malta's finance minister has called for caution against a “quick-fix” solution by the EU’s largest four member states, to tax internet giants like Google and Facebook on their turnover, rather than profits.

Edward Scicluna warned that the proposal, intended to stop such multinationals from taking advantage of low tax rates in other member states, could damage EU competitiveness as a whole.

The proposal was made in a letter to the Estonian presidency of the European Council, by France, Germany, Italy and Spain. In it, they are asking the European Commission to tax internet giants like Google, Apple, Facebook and Amazon, on their turnover rather than on their profits, in an effort to prevent them from taking advantage of low tax rates in some member states.

“So called quick-fix solutions as this proposal is being labelled, which are taken on a unilateral EU basis, should be avoided, particularly where this could end up damaging EU companies, in the face of retaliatory responses from China or the US,” Scicluna told MaltaToday upon returning from Tallinn, where EU finance ministers met last week.

Malta operates a competitive tax system that rebates up to six-sevenths (85%) of tax paid by companies whose operations are based outside of Malta.

While the ‘internet turnover tax’ does not affect Malta’s taxation system, which deals with profits, it potentially would affect companies in the digital economy. 

“Should this proposal be implemented within the EU, companies that offer online services and that are established in EU member states may find themselves being taxed more than once on essentially the same business, that is, once on their profits through the applicable corporate tax system, and another time through the proposed system on their turnover. This double taxation could render the EU as a whole far less competitive,” Scicluna said.

As a small member state, Malta sets much store by its financial services industry and competitiveness on tax, a generator of thousands of jobs as well as millions in annual tax revenues.

Scicluna admits that digitalisation – the virtual economy – is upsetting tax systems that are based on the physical residence of assets, where the business is actually generated. “The current taxation systems were not designed for such a virtual activity,” he said.

Added to that is a recent decision by a French court to annul a €1.1 billion tax adjustment imposed on Google by the French taxman on revenue it made through its AdWords service. “The French don’t want this to happen again and have devised a proposal which they wish the EU member states to endorse and implement.”

American companies like Google, Facebook, Apple, and Amazon already have ‘back office’ operations in countries such as Ireland, where they benefit from low tax rates. But earlier this year, the European Commission ordered Ireland to recoup €13 billion in back taxes from Apple, after it allowed Apple to pay effective tax rates as low as 0.005% over 20 years on profits from sales in Europe.

That is why the Franco-German proposal is to tax them not on profits where the company legally resides, but on the revenue made across the countries where they operate.

“Malta’s position at this stage, and until more information is forthcoming, is that given the global aspect of digitalisation of our economies and the work already being carried out at the OECD on this matter, we are of the view that any action emanating from the EU should be directed at reinforcing the work of the OECD,” Scicluna says.

That is no endorsement.

Scicluna knows how Malta’s tax system, which grants companies like German chemical giant BASF an effective tax rate of up to 5%, is frowned upon by countries like Germany and France and parties on the left which see ‘tax optimisation’ as another form of tax avoidance.

Even Estonia, now as holder of the six-month EU presidency, has authored a proposal to tax internet companies where their profits are actually generated – and not just where their offices are physically located.

Taxing internet companies on not just their physical but also their virtual establishments would not affect Malta’s imputation tax system, which Scicluna makes a point of noting is “EU approved”. 

“Our concern lies more with the level of complexity this proposal may introduce,” Scicluna says. Tax rules are already complicated enough when dealing with businesses that are physically resident in a country, let alone those with a virtual presence. He prefers to see the OECD take the lead in these discussions. In short, Malta does not like to rock the boat on taxation.