"Taxonomics" is a neologism and entirely of my own creation. It stands for international tax competition among nation states whose purpose is to attract international capital and investment.
I think Malta has positioned itself in the global market as a reputable, transparent and cooperative tax jurisdiction, with certain specific tax advantages for international businesses and internationally mobile persons, and this in turn has attracted to our shores international customers that consume locally-supplied professional services (e.g. legal, financial, business-advisory).
As a result Malta is fast becoming a centre of excellence for the provision of professional services. The quandary is that taxonomics is increasingly being considered by a growing number of G20 countries as an unfair tax practice and certain tactics are being employed to undermine an activity of business-friendly tax.
Granted: Taxation is crucial to the proper functioning of any state, especially if it is to supply its citizens with "public goods" and provide the legal framework and economic space for individuals or businesses to create wealth. In addition, taxation allows nation states to raise important revenue for the government to operate; to redistribute wealth in society; to regulate the market-economy itself; and/or to influence (sometimes regulate) consumer buying behaviour. Unfortunately, the G20 countries worst hit by the global recession (namely US, UK, France and Germany) are now trying to undermine the taxonomics competition game and this could be worrying for a country like Malta.
Before the 2008/09 global recession, it was accepted that tax competition among nations was good for the world economy, especially as globalisation intensified the mobility of money. There was an almost pendulum swing (politically) from left to right, from high taxation to low taxation, as a means of encouraging international wealth creation.
The status quo is starting to change, particularly with the advent of the worst global recession in 70 years and the huge budget deficits that the G20 economies seem to be amassing. Crazy figures are being bandied about, such as the figure of $11.5 trillion which apparently represents the total global assets estimated to be sheltered in tax havens, or that 50 per cent of global commerce goes through tax havens each year!
In my opinion, there is nothing uncompetitive or unfair with taxonomics and we must not confuse tax-havens or offshore tax centres with business-friendly jurisdictions. It is in fact healthy for the global economy if countries engage in transparent and fair tax-competition. Thus, if a small country like Malta, with no natural resources, can successfully attract capital and investment because of it being a legitimate and transparent tax jurisdiction which offers certain specific advantages to international business, one would like to think that it will continue to be allowed to do so. I make this point because powerful and influential countries seem to be looking at non-competitive ways to taxing international capital.
Tax specialists are keeping a watchful eye, for example, on America's proposed Qualified Intermediary scheme which potentially could change the competitive landscape. I say this because the proposal seems to envisage that if anyone fails to join the proposed QI scheme they will be required to withhold 20 to 30 per cent on any US payments to customers of non-QI institutions. Alternatively, there is the UK-sponsored idea of "country-by-country" reporting which according to recent foreign media seeks to want to indiscriminately crack down on both tax avoidance and tax evasion. This is all very worrying and could have huge implications especially if the world recedes into some form of global tax-protectionism.
In fact, this is why specific countries are allegedly employing the services of lobbying firms vis-à-vis the new American administration. In Malta's case we apparently have hired the lobbying services of Sonnenschein Nath & Rosenthal. Why? Presumably to try and persuade the American government that we are in fact a reputable and transparent tax jurisdiction. Which begs the question, why is the Malta-USA tax treaty, which is still waiting to be ratified by the Senate Foreign Relations Committee and provides for full disclosure from our end, apparently still stuck in limbo? More worryingly, perhaps, why is Malta being lumped in the same list as other tax havens? For the record, Malta is not a tax haven but the US has put Malta on a list of 34 tax havens as part of a report being compiled in relation to the Stop Tax Haven Abuse Act.
The EU, probably Malta's most effective leverage in the taxonomics competition game, could lead the way by explaining better the difference between low tax jurisdictions which have a creditable and sizeable number of tax-information exchange agreements, actively pursue a policy of full disclosure on tax matters and employ a transparent or reputable regulatory framework, and on the other hand, tax havens which pursue a policy of bank secrecy or lax monitoring regulations.
Since tax competition among nation states is healthy for the global economy we just need more of a focused approach rather than an indiscriminate crusade against any jurisdiction which dares to employ a low taxation policy or one that encourages international businesses. There clearly is a difference between countries like Ireland or Malta (members of both the EU and the eurozone) and Switzerland (e.g. UBS scandal), Guatemala or the Philippines. It is obvious that the G20 governments need to raise money at a time when they can't (or shouldn't) raise taxes but this crusade against low-tax jurisdictions is unfair and could negatively affect countries such as Malta. Taxonomics is healthy and good for the world economy so long as it never aids and abets tax evasion, money laundering or fraudulent activity, but we need to start adopting more of a competitive mindset on this issue and leverage our marketing and diplomatic tools so as to ensure that taxonomics survives this recent craze of international tax protectionism.
Mr Fenech is a partner at Fenci Consulting Ltd.
www.fenci.eu