EP votes in favour of stopping corporate tax avoidance; Malta could lose competitive edge

A vote taken in the European Parliament could effectively rob Malta of its ability to attract multinational companies and their millions of Euros in taxation revenue.

A vast majority of MEPs, spanning across all political groups showed their support for a resolution, prepared in Parliament’s Economic and Monetary Affairs Committee. Co-rapporteur Anneliese Dodds (S&D, UK) started off the debate by stressing the need for multinational companies to clearly state where they are earning their profits and where they are paying their taxes.

Parliament came out with a number of legal steps, which build on the work of Parliament’s Special Committee on Tax Rulings. Following the parliamentary debate a vote took place, which saw the resolution pass by a resounding 500 votes in favour to 122 against. There were 81 abstentions. The Commission is now obliged to respond to each legal proposal, and must provide satisfactory reasons if it chooses to reject the proposals.

Among the recommendations, the most problematic for Malta would be the introduction of a Common Corporate Tax Base – as this has been proposed as a precursor to a consolidated tax base. This refers to consolidating taxable profits of a multinational corporations and distributing the profits to each individual company based on a formula. In this way each Member State can then tax profits of the companies in its state at their own national tax rate.

The scope of this is to have companies pay their taxes in the countries they are earning profits. Many large companies open up offices in Malta and transfer their profits to the island so they can pay preferential tax rates. If the consolidation element passes then Malta will lose most of the taxation revenue it has been enjoying because these large companies earn the overwhelming majority of their profits in other countries with much larger markets.

Other elements proposed by the report and approved by Parliament include country-by-country reporting on profit, tax and subsidies, introducing a “Fair Tax Payer” label – awarded to companies with fair taxing practices, a common European Tax Identification Number and legal protection for whistle-blowers.

An element being proposed that has the potential to formally quantify the amounts being lost due to aggressive tax practices that lead to tax avoidance is the calculation of corporate tax owed minus corporate tax paid.

“This report shows the determination of both the EP and the people of Europe to see real legislative change to prevent companies jumping across borders to reduce their tax bills to almost zero. The ‘Luxleaks’ scandal showed how much these corporations have been getting away with, dodging tax that could have been used to build schools, hospitals or pay down national debt,” said co-rapporteur Dodds.

“Rapid adoption of measures proposed by Parliament and the OECD would provide a unique opportunity not only to improve national tax collection, but also to guarantee fairer corporate tax competition and to reduce compliance costs for businesses,” co-rapporteur Ludek Niedermayer (EPP, CR) said at a press conference today.

EPP MEP Burkhard Bartz slammed the Luxembourgian presidency for not attending the plenary debate, and cautioned that Member States who are being are benefitting from preferential tax practices should be stopped from “slamming on the brakes of this important initiative.”

S&D MEP Hugues Bayet said that “it is time to act” against multinationals benefitting from tax avoidance, especially since these are the very companies who have the resources to pay.

A few MEPs have argued that such a move would abolish tax competition among Member States which is healthy; however they were outnumbered by a stark majority.

Others questioned the possibility of a common tax base since other regions of the world could make use of preferential tax rates and cause taxable profits to be transferred outside of Europe.

“I don’t know if CCCTB is the right way of doing stopping aggressive taxation practices. I am not sure that it is possible to have a European agreement if there is no worldwide agreement. What is going on in Luxembourg is unfair and distorts the internal market, it is a low blow to citizens who believe in a unified Europe and this report is useful for future discussions,” EPP MEP Stanislav Polcak said.

MEP Steven Woolfe anticipated that the introduction of a CCCTB will lead to full tax harmonisation, a concern echoed outside parliament by local MEP Alfred Sant.

Humanitarian Aid and Crisis Management Commissioner Christos Stylianides stressed the need to have taxation regulations which are relevant to today’s practices during his closing remarks in Parliament.