Investment under threat

It seems that our tax system is quite the topic of conversation. It has even been called “not European”, “not social” and “a harmful tax practice”. Indeed.

The idea that there is some moral code that can be called ‘European’ is as absurd a notion as any I have ever heard. Of course the various peoples of Europe each have their own sense of morality, as does the rest of the world. This would vary from country to country, from region to region, from time to time and would be a function of history, tradition, culture and necessity.
Whatever commonality in morality exists is human and not particularly European. Europe is a widely diverse grouping of peoples who have as much in common with each other as they do with the rest of the world. The only values I see guiding European foreign, monetary and economic policies are those of self-interest, each country trying to get ahead at the expense of its neighbours.

Surely having people paying a lower tax is more “social” than having people pay a higher tax. Look at the chart. Sixty-eight per cent of EU countries (19 in number) have a company tax rate of 22 per cent or lower, plus regulations selectively reducing that further. In view of our taxation rules on foreign business we can legitimately also include ourselves with the lower tax group. As lower tax countries are in the majority in the EU, I think it makes more sense for higher tax countries to be called “not European” and “not social”.

The persistent reference to harmful tax practices by the EU elite in my mind betrays a hidden agenda that has more to do with an attempt to dominate countries economically than anything else. It is normally a higher tax country that would accuse a lower tax country of having harmful tax practices and this, of itself, speaks volumes. Malta should not be made a scapegoat for the governance failings of higher tax countries. This name calling does not stand on any moral high ground and we should unashamedly rebut it.

Let us move on. It is our tax system that is under attack by the EU. Our tax system underpins our financial services. Financial services is the single largest facilitator and contributor to foreign investment made in Malta in recent years.

The attack is two-pronged: (a) An attempt to dictate what the rules should be for the calculation of the tax base in all EU countries (including Malta of course); (b) Criticism of the tax advantages Malta provides to foreigners setting up a company in Malta.

A company tax equation is typically as follows: Tax Base (company income less deductible costs = profit) x company tax rate = company tax” e.g. €100 profit X 17% = €17.

You will be pleased to learn that tax competition is still alive and well in the EU. The rates in the chart above are the standard company tax rates used to tax company profits. As you can see, company tax rates in the EU vary between the lowest rate of 10 per cent in Bulgaria and the highest rate of 35 per cent in Malta. Having the highest company tax rate in Europe is certainly a dubious honour for us Maltese – this we will discuss again on another occasion.
It is important to understand that the standard tax rate by itself is not the full story. Countries have tax regulations through which they apply other rates of tax to certain sectors, for example, by having reduced rates for SMEs or the agricultural sector. Countries also have rules for calculating the tax base. Governments of all countries use these rules as tools to (a) increase or reduce the tax bill on segments of taxpayers in order to create more equitable outcomes; and (b) create tax incentives in order to attract Foreign Direct Investment (FDI).

EU countries in the early 2000s were beneficiaries of 50 per cent of the world’s FDI. This has fallen to 20 per cent by 2013. The over-regulation, the push to integration and harmonisation has caused a dramatic economic slowdown in the EU. The EU has become the place to get out of and no longer the place to go to, or even stay in.

It is critical for Malta be able to independently determine the tax base for Maltese companies and the tax rates that are applied. In financial services the product we sell is Malta. Malta means many things, among which it also means lower taxation for foreign entrepreneurs whom we have the privilege to welcome to our shores. Financial services need a Maltese sovereign government that has the independent decision-making powers to do whatever it takes for our country.
Last autumn the EU re-launched the Common Consolidated Corporate Tax Base (CCCTB) initiative. This initiative’s aim is to impose a single and uniform way of calculating the tax base, on all EU Member States. When CCCTB is implemented, the control of the first part of our company tax equation will pass to Europe.

It does not stop here. The declared EU plan is also to set a minimum tax rate for all EU companies below which no EU country will be allowed to go. This threshold would be absolute. We could not then reduce taxation for ourselves or foreign investors below such a threshold. This will transfer the control of the second part of our company tax equation, that taxes business, to Europe.

It is easy to see how this same takeover push would then spread to personal tax rates, VAT, stamp duty and national insurance contributions. This insidious plan will then have reached the ultimate goal of taking over tax sovereignty from Member States and have it all centrally controlled from EU institutions in mainland Europe.

The power of a country’s democratically elected politicians to collect taxes from their electorate and to spend those tax revenues for the benefit of those same taxpayers is a vital ingredient in our democracy. It is Malta’s prerogative to forego tax revenue in order to attract investment and create jobs, should this be deemed to benefit its people. We must defend our tax sovereignty like Malta’s very existence depends on it, because it actually does.
Tax competition is present across the EU and worldwide and this is good. Governments should be made to compete on tax. Competition in the private sector breeds efficiencies, reduces costs and improves performance. In the same way, tax competition will breed more efficient and effective governance and governments that deliver more with less.
This means lower taxes and smaller budgets. Governments should earn and deserve the privilege of managing our money and they should do so frugally.