Battle of words over taxation
On December 8, there was a brief note in the media about the fact that Malta had managed to include a reference to flexibility into a European Council communiqué on taxation. You would be forgiven for overlooking it, assuming it was just a pedantic attempt to score political points. Think again. It was a major win in a battle that will determine the future for Malta. But it was just a battle, one of many in a war that is ostensibly about the highest principles.
Indeed, that is the problem. All the stakeholders – governments, financial institutions and society itself – realise that we need to insist on the right to transparency, the fight against money laundering and the moral imperative to fight tax avoidance as well as the more obvious tax evasion.
And therein lies the problem: any country which tries to harness attempts by the OECD, the EU or any other body to achieve these three things – while trying to defend its right to determine its own fiscal policy – risks being tarnished either as a tax haven or a pariah state willing to accommodate criminal and terrorist activities.
It may sound like a big leap from defending the sovereignty of taxation to compromising a country’s hard-earned reputation, but in these heightened times of regulation, compliance and information sharing, most countries prefer to lie below the radar.
The European Council’s conclusions tackled two issues: a code of conduct for business taxation, and base erosion and profit shifting.
The latter may be a mouthful but its implications are worrying: Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid, according to the OECD.
“Conservative” OECD estimates indicate annual losses of anywhere from four to 10 per cent of global corporate income tax revenues, i.e. $100-240 billion annually.
The G20 countries also supported the OECD on this, endorsed by the relevant finance ministers in October and then by heads of state in November.
The European Union clearly needed to be seen to be doing something. It has been looking at bilateral arrangements between conglomerates and member states – so-called tax rulings ¬– such as Fiat Finance and Trade in Luxembourg and Starbucks in the Netherlands, determining that they are illegal. More recently, it took its aim at McDonald’s, prompting Commissioner Margrethe Vestager to comment that “the purpose of double taxation treaties between countries is to avoid double taxation – not to justify double non-taxation”.
Clearly each member state will fight tooth and nail for its competitive tax advantages and clearly each of them will grumble about those of other member states. It was in this context that Finance Minister Edward Scicluna lobbied and threatened and cajoled – not just in Brussels but also here through diplomatic channels – and managed to get those few words inserted, which spell the difference between an irreversible slippery slope towards tax harmonisation, and appearing to be fighting on the right side of good versus evil.
So yes, we can accept “the concept” that profits are subject to “an effective level of tax” but no more.
Labour MEP Alfred Sant said last September in the European Parliament that measures aimed at eliminating tax evasion should not pave the way for tax harmonisation. That is clearly the elephant in the room – and the only way to keep it leashed is by words, fought over one at a time.
