PKF comments on the shifting sands of fiscal tax incentives

Author: George Mangion
Published on The Malta Independent, 24 January 2016

taxA packed hall at Xara Lodge saw a strong gathering of IFSP members at the annual conference held last Thursday listening to talks about Malta’s future prospects in the financial services industry. The general comment on tax was that the Commission seems to be pushing to introduce mandatory tax harmonization, which may sound the death knell for our fledgling industry. Certainly practitioners need not slow down in their quest to promote the island but please be discreet while EU negotiations are underway. Delegates were relieved and reassured that the industry is in good hands and the elected council members at IFSP are actively pursuing all avenues. Pragmatists, on the contrary, know that as a small nation there is more we can do to protect our sovereignty when it comes to handling our internal tax affairs and ask whether this could be the right time to redesign from scratch our tax code, rather than patching it with minor adjustments every time a move is made by the Commission or the Code of Conduct.

The latter are on constant alert to weed out miscreant countries which, barring Malta, did shelter multinational companies in the past, and as indicated in this article evaded taxes by the millions. Malta was always very careful in its international obligations and this is enough reason not to be targeted in any move to diminish its sovereign right on internal tax. Our approved tax regime based on the imputation system was satisfactory in the past but due to constant change in trading patterns perhaps it is now opportune to trim our garden. It is true that collectively we managed to diversify from a manufacturing driven economy to a services-based economy driven mainly by tourism but also by financial services and electronic gaming.

Awful news reached us in a report “on tax rulings and other measures similar in nature or effect”, which was presented in October and approved by 508 votes in favour, 108 against and 85 abstentions. This resolution created some anxiety among local practitioners, as that combined with the issue of a final report on BEPS (base erosion and profit shifting) could be a precursor to a mandated tax harmonization. Certainly all our six Members of Parliament in Brussels voted against tax convergence and the one-size-fits all approach saying tax competition should remain part of the limited array of decision tools available to national economies. All MEPs expressed their firm agreement in tax transparency and the fight against tax fraud, but this should not mean the mandatory introduction of a Common Consolidated Corporate Tax Base (CCCTB). There are several economic and social factors backing this argument. The first is that the 28 member states are not a homogenous area and not all regions in the EU face the same economic realities, be it for their domestic market size, geographical realities or resources.

Proponents of CCCTB argue that corporate tax systems in EU member states were conceived in the 1930s, when cross-border trade was more limited, business models were simpler and products were tangible. They argue that the current rules no longer work in a globalised, digital, mobile business environment. In consequence, they devised an Action Plan based on five key areas which, collectively, would significantly improve the corporate tax framework in the EU. On 15 January, the Commission published a Call for the setting up of the Platform for Tax Good Governance.

CCCTB was launched in 2006 but was put on hold partly due to the global recession. CCCTB was revived last year. Some may question the reason why CCCTB was taken out of mothballs and why there is a strong drive to kick-start it. The answer may be partly due to tax scandals in Europe culminating in the revelation of low tax paid by banks particularly in the UK. Recently, the seven investment and corporate banks operating in London reported figures showing they only paid a combined £21 million in corporation tax in 2014. Between them, the banks generated revenues of £15.6 billion in the UK, profits of £3.6 billion and employed 33,000 staff. It is unbelievable to read that five of the world largest banks – JP Morgan, Bank of America Merrill Lynch, Deutsche Bank AG, Nomura Holding and Morgan Stanley – said their main UK arms paid no corporation tax.

Strange but true that Goldman Sachs and UBS AG used tax breaks and tax losses generated during the banking crisis to reduce their tax bills, while Goldman Sachs Group UK Ltd said it made £1.34 billion profit in Britain in 2014 and paid a cool £17.9 million in corporation tax. Tax advisers said the low tax bill partly reflected “timing differences” around payment of shares awarded to staff.

This news surfaced only now since recent EU rules oblige banks to publish country-by-country profit and tax break-downs.

Spokespeople for the banks declined to comment although their tax advisers state they followed legitimately the tax rules .In their opinion, tax payments can be volatile and may reflect profits generated in earlier years. The string of tax leakages in UK does not get any sweeter when one remembers how Google and Starbucks were shifting profits out of Britain to avoid tax.

In another tax dodge, there was the leakage discovered in Belgium using a popular “excess profit” tax loophole introduced in 2005. Secret rulings by the Belgian tax authority, typically lasting for four years, were often granted to multinationals that had relocated a substantial part of their activities to Belgium or made significant investments. Such practice is not permitted in Malta – Belgium was ordered by the EU to recover €700 million from 35 multinationals. The ingenious Belgian “excess profit” tax system permitted multinationals to reduce their tax bases substantially, but the fly in the ointment was that this was discriminatory as it was not available to smaller firms, thus distorting competition.

Last October, the Commission ruled that Starbucks Corp. and Fiat Chrysler Automobiles NV benefited from clandestine arrangements with the Dutch and Luxembourg authorities, and ordered each country to recover €20-30 million in back taxes. Coupled with this was an investigation of tax arrangements by Amazon in Luxembourg and Apple in Ireland. In Milan, prosecutors confirmed a report that Apple agreed to pay a substantial tax refund for six years spanning 2008-2013 and that the prosecutors are working to reach an accord on what the company’s tax liabilities will be for successive years. Apple Italia has agreed to pay €318 million in taxes and is working out a deal to cover future tax liabilities for business it does in the country. These tax leakages are becoming more frequent in the media after the scandals in Luxembourg were revealed by a group of journalists. These secret tax rulings in Luxembourg, in some cases slashing multi-nationals’ tax bills to little more than zero have now come under closer scrutiny but again Malta should not be tarred with the same brush as it scrupulously follows the rules of tax transparency.

European Competition Commissioner Margrethe Vestager stated: “Tax rulings that artificially reduce a company’s tax burden are not in line with EU state aid rules. They are illegal. I hope that, with today’s decisions, this message will be heard by member state governments and companies alike.” A tax harmonization plot could sound the death knell for smaller jurisdictions which depend on financial services industry. As always, practitioners have faith in IFSP’s vigilance, working in tandem with the government to find a remedy on how to stay attractive to investors in a globalised environment.

Author: George Mangion
Published on The Malta Independent, 24 January 2016
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