The focus on tax harmonisation remains at the centre of the European Commission’s plans to promote economic growth and prevent tax avoidance by those operating in the EU.
In October 2016 the Commission announced plans to overhaul the way in which companies are taxed in the Single Market “delivering a growth-friendly and fair corporate tax system”. Some smaller EU member states have made tax competitiveness their critical success factor for strong economic growth. Ireland, Luxembourg, the Netherlands and Malta see a threat in the revived plans for the introduction of the Common Consolidated Corporate Tax Base (CCCTB).
A recent study by the UK-based think-tank Tax Justice Network found that Malta will see its income tax arrangements deriving from subsidiaries or multinationals registered in Malta decline by more than half, and in some cases slashed by two thirds.
The extent of the adverse effects of the introduction of CCCTB and other tax harmonisation policies is staggering. Maltese politicians serving locally and in the European Parliament are adamant in opposing the proposed Brussels meddling with taxation which has often been called “an essential pillar of a state’s sovereignty”.
One can easily understand the stand taken by local politicians to resist the introduction of tax harmonisation without the unanimous consent of all member states. It will not be a surprise if countries like Malta, Ireland and Luxembourg will use their right to veto the adoption of a harmonised tax system.
Finance Minister Edward Scicluna is quoted saying that any attempt to circumvent the veto power would not be acceptable. He was referring to the possibility of the European Commission resorting to a little used EU treaty clause that would allow tax reforms to pass with a majority vote.
Apart from the political sabre-rattling, economic policymakers need to ask whether tax efficiency is indeed a sustainable competitive advantage for Malta. A sustainable competitive advantage is one that competitors find hard to imitate in the short and medium term. It also needs to be supported by other strategies and tactics that make a country attractive.
Even if at the political level Malta and other low-tax countries manage to halt the tax harmonisation pressure coming from countries like Germany, France, Spain and Italy, the tax competitiveness of Malta would remain under threat. Tax reforms in the US and those likely to be introduced by Britain when it leaves the EU will erode Malta’s tax efficiency.
A refined economic strategy is needed more urgently than ever. Malta needs to invest more in workers in such a way that productivity gains are reflected in dramatically improved labour performance that drives revenue and higher profits.
We may not be doing enough on this front. The most recent Progress in International Reading Study 2016 report places Malta in the 40th place out of 50 countries in the literacy proficiency of ten-year-old pupils. The best way to create good jobs is operational excellence in businesses, and operational excellence is driven by investment in people.
Defending our turf on issues of tax sovereignty will serve us in the short term. But sustainable economic growth depends on a steely determination to improve educational achievement.
This is a Times of Malta print editorial