Encouraging the avoidance of paying tax

The issue as to whether or not  Malta is a tax haven has been brought to the fore once again, as a result of the amendment to the Panama Papers Inquiry Report discussed in the European Parliament earlier this week. The defeated amendment would have seen Malta, Luxembourg, Ireland and the Netherlands labelled by the European Parliament as “tax havens”.

The matter is much more complex. On the one hand it involves tax competition and on the other hand it is a matter of justice in taxation matters.

As has been repeatedly stated, competition on taxation matters is one of the few areas in which small, as well as peripheral, countries in the European Union have a competitive advantage. Alternattiva Demokratika-The Green Party is not in favour of loosing this competitive advantage through tax harmonisation in the EU. However, it has to be used in a responsible manner.

The rules permitting the refund of a substantial amount of tax paid by foreign-owned companies based in Malta is one of the main reasons for the current spotlight. This substantial tax refund effectively reduces the tax paid by such companies from 35% to five per cent and is obviously considered very attractive by a number of companies. The basic question that requires a clear answer is how many of these companies are letter-box companies, that is companies which do not have any part of their operations on Maltese soil?

It would be reasonable to encourage companies to base part of their operations in Malta and, as a result, make use of tax advantages. But in respect of those companies which have not moved any part of their operations to Malta, making use of beneficial taxation arrangements is unreasonable and unjust. It leads to such companies avoiding paying tax in the countries in which they create their profits and consequently avoiding their social responsibilities on paying taxes in the countries that are providing them with the very facilities which make it possible for them to create their wealth.

In a nutshell, Malta is providing these companies with the legal framework to avoid their taxation responsibilities in the countries in which they operate through payment of a fraction of these taxes to the Maltese Exchequer. They pocket the rest.

Hiding behind the EU unanimity rule on tax issues will not get us anywhere, as Ireland has learnt in the Apple case. At the end of the day, the situation is not just about  taxation: it also involves competition rules and rules regulating state aid, as the legal infrastructure encouraging the avoidance of taxation is, in effect, a mechanism for state aid. The is also an issue of tax justice, as a result of which tax should be paid where the profits are generated.

Tax competition has a role to play as an important tool that small and peripheral countries in the EU have at their disposal. No one should expect these countries, Malta included, to throw away the small advantage they have, but it should be clear that this should be used responsibly and in no way should it buttress the urge of multinationals to circumvent the national taxation system in the country where their profits are generated.

Profits should be taxed where they are actually generated and not elsewhere. The EU needs to end – once and for all – not only tax evasion but also tax avoidance resulting from loopholes in national taxation rules. For this to happen, the EU member states must not only be vigilant, but they must also refrain from encouraging tax avoidance through the creation of more loopholes.

Tackling tax evasion and tax avoidance seriously will mean that taxes are paid where they are due, thereby funding the services and infrastructure that is required in a modern, civilised society. This can only happen if more companies pay their dues.

Tax competition need not be a race to the bottom.

published in The Malta Independent on Sunday : 17 December 2017

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