Malta’s economy and particularly its thriving financial services sector will suffer a big blow should the EU get its way on the introduction of new corporate tax rules, a new study shows.
Compiled by senior economists for UK-based NGO Tax Justice Network, the findings show that Malta will see its income from tax arrangements deriving from subsidiaries of multinationals registered here decline by more than half, and in some cases even slashed by two thirds.
The study, based on current proposals by the European Commission, known as Common Consolidated Corporate Tax Base (CCCTB), also show that big economies such as Germany, Spain and Italy are expected to benefit most from the proposals while Malta, Slovenia and Estonia will suffer the largest haemorrhage in income from corporate taxes.
“A diverse group of small countries (including the Czech Republic, Portugal and Sweden) might expect their corporate tax bases to shrink by around one third, with the tax base of Malta, Slovenia and Estonia declining more than half in terms of their loss-consolidated tax base due to formulary apportionment in the CCCTB scenario,” the study concludes.
“With the exception of France, for which we estimate the CCCTB formulary apportionment to have a negligible effect, all the other big Western European countries seem to gain.”
Commenting on how small EU jurisdictions like Malta, Luxembourg and the Netherlands are making a killing out of the present taxation system with large multinationals opening up subsidiaries to take advantage of diverse tax regimes in the EU, the study quotes “existing research suggests that Malta is both a secrecy jurisdiction and a country vulnerable to international corporate tax avoidance”.
The EU executive, pushed primarily by the large Member States, has been insisting on the introduction of common taxation rules for big companies. So far, these attempts have be unsuccessful due to the opposition of small Member States including Malta, Ireland and Luxembourg with the support of the UK.
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To Malta’s advantage, which adopts a bi-partisan approach against these proposals, changes can only be approved by the unanimous agreement among all Member States.
However, pressure on small jurisdictions is continuously increasing in view of the releases of confidential documents such as Lux Leaks and the Panama Papers in which multinationals are continuously exposed of tax shopping around the EU to avoid paying taxes.
Tabled last year, the new Commission proposals aim at obliging companies operating within the EU to complete only one tax declaration in a single tax jurisdiction, no matter how many countries they operate in.
Besides cutting the red tape, the proposal is also meant to close legal loopholes and stop firms from shifting profits to low-tax regimes like Malta, as taxes will be shared among the jurisdictions where the companies operate and generate their profits.
Legislation introduced in the early 1990s has made Malta one of the major financial services hubs in the EU attracting hundreds of multinationals registering subsidiaries.
Apart from direct taxes paid to the Maltese exchequer, the industry has also meant a robust spill-off into various other areas of the local economy particularly employment, services, construction and the entertainment industry.