George Mangion

Senior Partner, PKF Malta

George Mangion has over thirty years’ experience in the financial services industry at large, with a special focus on the founding spheres of accounting, auditing, and taxation. He was one of the pioneers behind the local remote gaming industry and over the past years has actively been promoting the honing of a research and development ecosystem for innovation in Malta with the support of industry world leaders. He is the registered and licensed Accredited Agent for PKF Malta under the Malta Citizenship by Investment Programme (MIIP), the Malta Residence and Visa Program as well as the Global Residence Program Rules and Highly Qualified Person Rules.

Tax Harmonisation Invokes A One-Size-Fits-All Approach

Monday 02nd April 2018

The penny has finally dropped. Larger EU member states want tax harmonisation, and some fear that a stalemate brought by opposition from small states can be ended if the European Commission triggers a neglected article of the EU constitutional treaty to suspend states' veto powers on tax matters.

“We certainly don't exclude using it,” Tax Commissioner Pierre Moscovici said. “We will work on it. We will make proposals in that direction." In fact, invoking Article 116 of the EU Lisbon Treaty, the Commission can compel states to drop the unanimity rule and take decisions on tax matters by majority when it proves that competition in the EU market is distorted. One EU official called it "the nuclear option" on tax issues because it could break prolonged legislative deadlocks and can also be effective to halt interference with national powers, especially from the smaller countries. For example, Luxembourg and The Netherlands have a flourishing industry aided and abetted by a host of tax advisers which help global corporations save about €15 trillion for tax purposes.

Therefore, it comes as no surprise that pressure on jurisdictions is continuously increasing in view of the releases of confidential documents such as Lux Leaks, the Panama and Paradise Papers, and the PANA Report, in which multinationals and a number of political persons were caught seeking tax paradises to avoid paying taxes. Jeep Kofod, a PANA Report rapporteur, recently called for the introduction of a minimum corporate tax rate, in his words to stop "the sick race to the bottom on taxation and regulation." In his opinion, countries which exploit tax inequalities for their own profit may be adversely affected by a law which aims to close this loophole once and for all. Is this a clarion call by the larger states to launch tax harmonisation as they focus on the merits of the "equalisation" approach, which causes each country to converge with the others until it ends up with the same fiscal system which in turn removes fiscal barriers and discrepancies between the tax systems of the various countries comprising the EU?

 On the other hand, Hungarian Prime Minister Victor Orban said that “For small states, taxation is an important component of competition.” He pontificates that Hungary would not like to see any regulation in the EU which would bind its hands in terms of tax policy, be it corporate tax, or any other tax. In simple terms Hungary does not consider tax harmonization a desired direction. Similarly, Ireland feels that countries should set their own taxation rates, including both corporation taxes and income taxes. Ireland’s Prime Minister Leo Varadkar stated that, “We share a view as governments that we should continue to have competition among member states in terms of tax policy.”

The opposing view adopted by Malta, Belgium, Netherlands, Hungary and Ireland states that having a healthy competition arena helps nurture a "fiscal diversity" approach, empowering each country to use its tax system as a policy tool in achieving its economic aims. But should Malta jettison its fiscal regime (running smoothly since 1998 with some refinements) based on a standard corporation tax of 35 per cent but linked to a full imputation system so that upon application any shareholder may apply for a part refund of tax. Can Malta afford to embrace tax harmonisation? A recent report by NGO Tax Justice Network states that we could lose more than half of corporate tax base if the European Commission adopts the proposed tax measures such as the planned (CCCTB) and the Common Corporate Tax Base. Put into action, they form a single set of rules for corporate tax: the first sets a common corporate tax, the second allows multinationals to offset losses in one-member states against profits in another to reach an adjusted tax based on three arbitrary factors: payroll, turnover and capital. Once enacted, it mandates a common tax for all companies starting with an annual turnover of over €750 million, and after a transition period of seven years-for-all European companies.

It is common knowledge that all decisions concerning the passing of new tax legislation (except VAT) need a unanimous vote. Recently this veto took a different twist and a variation was echoed by Commissioner Pierre Moscovici who ventured to move from unanimous voting to absolute majority within the Council. In conclusion, where healthy competition exists, it works like a magnet for FDI and this rewards nations that offer transparency and engage in pro-growth tax reform. Tax competition is particularly important and since the EU is not composed of homogeneous member states, so it is natural to expect that tax incentives can compensate for the handicaps which burden smaller states.