Author: George Mangion
Published on The Malta Independent on 13 June 2021

US Treasury Secretary Janet Yellen was among the finance chiefs who hailed the announcement of a minimum tax on big US companies as an unprecedented move.

This could see their profits taxed outside the US and may include the likes of Amazon and Facebook. This month, a group of G7 finance ministers gathering in London, agreed to back a global minimum tax of at least 15% on multinational companies. This important milestone means that multinationals cannot easily incorporate into low-tax states and sell their products elsewhere since the minimum tax will be levied regardless of the present arrangements.

For debt-stricken countries, reeling under heavy borrowing to finance the pandemic recovery, such a deal was hailed as an oasis in a desert of debt. As can be expected, more details need to be hammered out in time for countries of the wider G20 grouping. They intend to meet next month in Venice and then among all OECD countries. There is a lot of detail still to be agreed and the deal is not yet sealed and polished. At this early stage, observers think an agreement looks more likely. France voiced concern that US e-commerce giant Amazon could avoid the tax as its profit margin would be under a 10% threshold to be levied.

While Joe Biden has the support of G7 allies, he has more work to do back home, as nearly half the 100 companies in “Pillar 1” are American. Paradoxically, tax experts argue that the proposed system of allocating the global profits of the largest multinationals to the countries where they made their sales were unlikely to raise large sums. In fact, a number of multibillion-dollar US companies would probably be excluded from the “Pillar 1” proposals. These include Uber, Tesla, Twitter and Snap, as they remain loss-making or their pre-tax profit margin falls below the 10% threshold.

US president Joe Biden has called for a unified minimum corporate tax rate of 15% and guess what; his proposal has so far won broad support from countries such as France and Germany, as well as the International Monetary Fund. The US stands to gain because its multinationals have shifted profits around the world to avoid domestic corporate taxes, making it comparatively one with the lowest corporate revenue among advanced nations. OECD and the United States have said a final sign-off might not be possible until a subsequent G20 meeting is held in October. This gives space for Joe Biden to pass the deal through Congress as a domestic tax package. Should G20 concur, this would mean the world’s largest economies will implement it, so may extend its reach globally. That said, a lot of the metrics still need to be worked out and there is scope for G20 countries to make their point of view heard within the debate.

The stark truth is that countries need to offset $16 trillion spent on stimulus during the Covid-19 pandemic. The present practice for countries such as Malta, Cyprus, BVI, Cayman, The Netherlands and Ireland attract companies (but not all multinationals) to set up local branches and enjoy tax concessions including relatively low corporate tax rates. In simple terms, that means companies only pay the local rate of tax, even if the profits mainly come from sales made elsewhere. So far, all this is legal and commonly done.

To its credit, Malta’s tax neutrality and commitments protect it against aggressive tax avoidance, unfair tax competition and steers away from any tax harm to other jurisdictions. One may ask what has changed in the G7 summit? The stoical deal aims to stop harmful tax competition in two ways. Firstly, multinational will pay more tax in the countries where they are selling their products or services, rather than wherever they end up declaring their profits in tax havens. Secondly, they want to stop countries using the tax system in a race to the bottom to attract investment to their shores and deprive trillions of tax at the host country of origin.

Ireland, which has successfully recruited global companies including big US tech firms by offering a corporate tax rate of just 12.5%, is one country that has expressed significant reservations over the Biden proposal. Ireland’s tax package has attracted tech giants such as Facebook and Google as the home of their European operations. Perhaps there is no space for doom and gloom provided we come out reborn from the post-pandemic lethargy on the tsunami of debt that needs attention.

Back home, our agile finance minister has to think out-of-the-box and refrain from the temptation of solving the problem by appointing a committee of cronies and persons of trust in a classical move to shelve the problem. As can be expected, unless we do something, the future of a nascent post-pandemic pent-up demand may be in peril. Unless we bring the rabbit out of the hat, future investment flows will be affected, particularly in areas where tax plays a key role in decision-making and only time can tell if operators leave.

This deal will add pressure on Kurt Farrugia, CEO of Malta Enterprise to improve the packages designed to attract multinationals at a time when our national debt has hit the €8bn mark and the tourism sector needs another three years to pick up. Practitioners are contemplating how and if such seismic changes can open opportunities for Malta to attract niche opportunities. There is no time for palliatives and using band-aids, we need to rise above the fray and devise new tools suited to attract multinationals.

The implication of all this is that, as a country, we need to start thinking about what should constitute our competitive advantage for keeping mega businesses based in Malta once and if multinationals lose their ability to exploit low tax domiciles. The smile on Yellen, attested at the G7 meeting, may be a fig leaf for many.

Author: George Mangion
Published on The Malta Independent on 13 June 2021
Get in touch: info@pkfmalta.com