Malta unmoved by call for global corporate tax minimum

Malta has jealously guarded its status as a ‘financial centre’ despite European attempts at bringing the country to heel over its 85% discount to corporate taxpayers whose foreign business gets tax residence here.

Despite widespread tax competition across Europe, large member states like France have led a massive effort to bring to fruition a common corporate tax across the EU bloc. States like Malta, and previously the United Kingdom, have maintained steadfast opposition to tax harmonisation.

Now, the Americans – whose firms like Apple, Facebook and Google seek zero-tax deals in countries like Ireland – are also trying to close the loophole, this time globally.

The idea of a global minimum corporate tax has been a long been discussed in the corridors of OECD summits, but it has garnered widespread traction since April after US Treasury Secretary Janet Yellen publicly announced America is working with G20 nations to agree on a common minimum rate.

The Biden administration is proposing a global tax on multinational corporations of at least 15% to reach a deal with countries that fear hiking their rates will deter investment. President Joe Biden proposed raising the corporate tax rate in the United States to 28% from 21%, which would be higher than the rate in many other countries. A deal over a global minimum tax would better allow the United States to make the increase without putting American companies at a disadvantage or encouraging them to move operations offshore or shift profits to other countries.

Sources in the Maltese government say this push for a minimum corporate tax rate among G20 countries is derived from an appetite to increase tax revenues on the back of substantial deficits due to the pandemic. But Malta remains steadfastly opposed to any harmonisation for as long as it can wield its competitive edge, especially as it heads out of a year-long economic rut from the COVID-19 pandemic.

Indeed, Finance Minister Clyde Caruana insists that Malta must be allowed to remain competitive and attract businesses seeking tax residence here. “Malta has numerous physical disadvantages such as a lack of economies of scale and the major drawback of it being in the Southern periphery of Europe, resulting in limited connectivity. These physical barriers mean high transport costs for trade, possibly among the European Union’s highest,” he explained.

Caruana echoes a common problem elicited by the EU’s border nations and smaller member states. At the centre of the EU is the power of Germany itself – the largest economy and largest population in the bloc – whose trade surplus in 2019, that is, the excess of exports over imports, is €257 billion. That sum illustrates, in layman’s terms, the dependence of so many European states on German products and the Germans’ lack of need to import goods from other member states.

So arguably, is Malta wrong to flex its corporate tax muscle (international tax revenue runs at around €200 million annually) when German surpluses are accused of harming southern European prospects by sucking money from the sale of BMWs, high-tech machinery, chemicals and aspirins without spending it on other European imports?

And yet, Malta’s tax refunds to corporate giants with a tax foothold here remains a sensitive issue for other member states who are equally jealous of claiming tax on the profits created back home. Norbert Walter-Borjans, a German minister of finance of the federal state of North Rhine-Westphalia, had described Malta as a “Panama in Europe” over a data leak of the Maltese company registry (he claimed, wrongly, that all the companies were ‘offshore’, but had correctly identified many having connections with German firms and investors).

Edward Scicluna, finance minister at the time of the reports, insisted that Maltese authorities share company information with their German counterparts as per EU rules. Tonio Fenech, also a former finance minister, told the BBC at the time that Malta had nothing to hide in its tax structures, and that it was “not Malta’s fault that it has an attractive tax jurisdiction”.

Indeed, Malta’s 35% corporate is already the fifth highest in the world… as far as statutory tax rates go. The global corporate tax being suggested stands between 20% and 28%.

But in terms of effective tax rates, Malta’s convenient tax rebate feature allows shareholders that do not reside in Malta to earn back six-sevenths of the tax paid, bringing the tax paid to around 5%. It’s an ingenious method devised by members of Big Four auditors in the 1990s to salvage Malta’s offshore services, through which the island attracts a steady flow of corporate tax revenue.

But Malta has long opposed EU attempts to harmonise taxation, as well as claims that unequal tax rates among Member States create ‘unfair competition’ in the internal market. If the EC push-es forward this argument by drafting a policy under the competitiveness principle rather than the tax one, it would only require a qualified majority vote whereas taxation always requires unanimity.

That would leave Malta and other member states with similar tax frameworks unable to veto it.

Yet a global corporate tax regime that focuses on statutory tax alone is like a tiger without teeth. Countries will find an abundance of loopholes through tax rebates that will allow them to skirt the minimum and bring its effective tax down to zero.

There’s no doubt that countries will get creative in trying to lure the currency and profits of wealthy itinerant elites and multinational companies. Malta even offers lower flat-rate tax for upper management positions in particular high-value industries, which serve as a pull for companies to set up headquarters locally.

The real challenge for the IMF and G20 lies not in adopting a global minimum corporate tax, but in designing it in such a way that does not trigger another race to the bottom in other taxation sectors.