On Monday, with much of the usual fanfare, the government presented its Budget for the upcoming fiscal year. Among the raft of feel-good handouts which the government is desperately dishing out to appease its core voter base, one singular announcement in particular received far less attention than it deserves: the government’s decision to exploit an EU derogation to delay the introduction of a global minimum 15% tax on profits generated by multinational companies with a turnover that is above €750 million.
Currently, Malta’s corporate tax regime charges a 35% rate on corporate profits, which goes down to 5% through a rebate system (think of it as a conditional refund). Over the years, Malta’s system has successfully lured multinational companies into setting up subsidiary companies which are often used to book profits that are generated from economic activity that is happening elsewhere.
By way of providing an over-simplified example, let’s say company X has a presence in three countries, A, B, and C. Country A has an effective corporate tax rate of 5% (like Malta), B has a rate of 15%, and C has a rate of 30%. Even if company X generates most of its business in countries B and C, the company can simply avoid paying higher tax rates by declaring all its profits in country A, thereby increasing its profit margin and unfairly depriving the countries in which it conducts most of its business of their deserved tax revenue. This is a practice that is known as profit shifting.
In poorer words, Malta, together with Ireland, Belgium, the Netherlands, Switzerland, and Cyprus, is a European tax haven. The EU Tax Observatory, an independent research laboratory hosted at the Paris School of Economics, defines tax havens as “countries with excessive profitability of multinational firms and where the effective corporate tax rate is typically below 15 per cent”.
In 2021, over 140 countries across the world had agreed to enforce a minimum 15% tax rate across the board, a major step in the fight against tax evasion and one huge leap forward for global tax harmonisation. However, in its latest Global Tax Evasion report published last week, the EU Tax Observatory sounded the alarm about the dilution of this proposal through loopholes that will still allow countries to tax corporate entities below the 15% rate if those same entities have enough of a real, tangible economic presence in that country.
“This exemption – a carve out for economic substance – provides incentives for multinational companies to move production to very low-tax countries – and in turn incentives for tax havens to keep providing rates below 15%,” the report reads, describing the process as a “global race-to-the-bottom”.
In that respect, Malta is one of those countries that gleefully participates in this global race-to-the-bottom, entrenching what essentially amounts to tax warfare thanks to Malta’s rebate system. Malta’s tax regime, coupled with weak enforcement from lenient authorities, provides the perfect home for major companies and ultra-wealthy individuals who wish to avoid paying taxes in their home countries.
One famous example of how Malta enables tax evasion involved superstar singer Shakira, who used a network of 14 offshore companies – one of which, Tournesol Ltd, is a Malta-registered company – to avoid paying tax dues which the Spanish government claims amount to around €14.5 million.
One of the metrics which the EU Tax Observatory uses to measure the practice of profit shifting is to compare the number of employees that work for a multinational in a given country with the profits recorded in that country. The idea behind the metric is that the number of employees is a realistic measurement of that company’s actual footprint in any given country.
Malta ranks among the top 20 jurisdictions across the world with the highest number of recorded profits per employee, with multinational companies in the country registering around $1 million in profits per employee. Malta is the only EU country that made the top 20.
In 2022 alone, $1 trillion in profits were shifted to tax havens like Malta, the report highlights.
“This is the equivalent of 35% of all the profits booked by multinational companies outside of their headquarter country. The corporate tax revenue losses caused by this shifting are significant, the equivalent of nearly 10% of corporate tax revenues collected globally. U.S. multinationals are responsible for about 40% of global profit shifting, and Continental European countries appear to be the most affected by this evasion,” the report adds.
The EU Tax Observatory repeatedly emphasises how, although the approach of countries like Malta does enhance tax collection while boosting domestic activity within the tax haven itself, on a global level, “these policies are negative sum”, arguing that “taxpayers attracted by one country reduce the tax base by the same amount in another, and global tax revenue collection falls”, thereby fueling inequality across the globe.
To stem this rising tide of global inequality fueled by tax avoidance, the EU Tax Observatory lists six key recommendations.
- Reform the international agreement on minimum corporate taxation to implement a rate of 25% and remove the loopholes in it that foster tax competition.
- Introduce a new global minimum tax for the world’s billionaires equal to 2% of their wealth.
- Institute mechanisms to tax wealthy people who have been long-term residents in a country and choose to move to a low-tax country.
- Implement unilateral measures to collect some of the tax deficits of multinational companies and billionaires in case global agreements on these issues fail.
- Move towards the creation of a Global Asset Registry to better fight tax evasion.
- Strengthen the application of economic substance and anti-abuse rules.