Brussels calls out member states attracting business through ‘aggressive tax planning’

European Commission semester reports ‘names and shames’ seven member states, Malta included, for using aggressive tax structures to attract FDI

Finance Minister Edward Scicluna. Photo:Ray Attard
Finance Minister Edward Scicluna. Photo:Ray Attard

Brussels has ‘named and shamed’ several member states, Malta included, for using “aggressive tax planning” structures, in its annual semester reports.

The reports are annual studies of EU member states and their economic and social situation.

But the European Commission yesterday made a note to single out Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and the Netherlands for their aggressive tax planning schemes.

“Some indicators continue to suggest that the country’s corporate tax rules are used by companies that engage in aggressive tax planning,” the EC said in Malta’s country report.

The Commission quoted a forthcoming study on tax indicators that shows the capital flows into Malta are “only partly explained by real economic activities taking place in the country. The high level of dividend, interest and royalty payments as a percentage of GDP continue to suggest that the country’s tax rules are used by companies to engage in aggressive tax planning.”

The EC estimated the level of inward foreign investment stock to Malta at 1626% of Malta’s €8.8 billion GDP, or €143 billion and outward flows of €55 billion – making it among the five highest in the EU.  

Malta employs an imputation tax system that refunds some 85% of the corporate tax paid on profits from overseas operations that are booked in tax-resident companies in Malta. The result is an effective tax rate of some 5%.

The EC said the large majority of foreign direct investment in Malta is held by letterbox companies or ‘special purpose entities’, estimated to be holding values of some 96% of gross domestic product in 2016. “A special purpose entity is a legal entity that has little or no employment, operations or physical presence in the jurisdiction where it is located. It is related to another corporation, often as its subsidiary, and is typically located in another jurisdiction.”

The EC said the absence of withholding taxes on dividends, interest and royalty payments by these Malta-based companies “may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient country. This may facilitate aggressive tax planning.”

Brussels also said that Malta’s new notional interest deduction (NID) regime, does not have strong enough anti-avoidance provisions. The NID regime allows companies to claim a deduction of up to 90% of their tax base, on their equity. “This lack of strong anti-abuse rules, combined with the high return rate and not-incremental system of the regime, may provide opportunities for tax avoidance, thus pointing to the need to closely monitor the effectiveness of these anti-avoidance rules.”

Malta’s MEPs have already declared they will vote against plans for a common consolidated corporate tax base, with two reports in the European Parliament set to be voted upon presently.

The MEPs say that plans for a common taxation system will damage Malta’s tax competitiveness and ability to compete with stronger economies.

The European Parliament votes on its position for the CCCTB next week.

The Green Group in the European Parliament, a long-standing critic of international tax avoidance schemes, welcomed the semester reports identifying member states for their role in facilitating tax avoidance.

“It is great to see the European Commission at last acknowledges the role of EU countries in facilitating tax avoidance,” Green MEP and spokesperson for tax justice Sven Giegold said. “The big offenders are not just distant tropical locations like Panama and Bermuda. We have long said that the EU needs to get its own backyard in order if it is serious about tax justice. By naming and shaming the worst offenders, the Commission has corrected the huge error made by the Council in excluding EU countries from its blacklist of tax havens.

“The countries singled out today owe it to their citizens, and people all across Europe, to bring forward robust plans to end their complicity in tax dodging.”

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