CCCTB may signal the end of our fiscal incentives

Mr Mangion is a senior partner of PKF an audit and consultancy firm, and has over 30 years experience in accounting, taxation, financial and consultancy services. He can be contacted at gmm@pkfmalta.com or on +356 21493041.

Concurrently, the Commission last week announced plans to relaunch the CCCTB (Common Consolidated Corporate Tax Base) camouflaged as the elixir in tax systems which shall deliver a growth-friendly and more competitive regime in the Single Market. The Commission had originally proposed the CCCTB in 2011, but it proved too ambitious and stalled.

Following the late tax scandals, the Commission is expected to shortly introduce this system in a two-stage process. The appetizer on the menu is harmonization of the tax base followed by a main serving styled “consolidation“across the EU. The latter is worked out using a prescribed three-point formula (a one size fits all) to allocate profits to respective member states where the group operates. So far there is no heinous move to steam roll a common tax rate across the Single Market which goes against national sovereignty rules. Many think that this will follow anyway. In my opinion, more debates should be organized by professional bodies to inform the commercial community on CCCTB – particularly to explain how this could blunt the competitive edge of our tax incentives which so far has attracted substantial investment in financial services, aviation and iGaming sectors.

This does not mean that attempts to fight tax double taxation and aggressive tax planning are not welcome. Minister for Finance Professor Scicluna stated that Malta can accept tax avoidance legislation (such as ATAD) which in due course will be fully reflected in our laws. However, in his opinion, it is imperative that Malta defends its imputation system and there is consensus among locally elected MEPs in Brussels to defend our patch in a highly competitive market for FDI.

It is a fact that due to our geographical insularity, entrepreneurs are handicapped as the island has no raw materials and suffers extra logistical costs to import and export its merchandise. Thus, we need EU support to overcome such handicaps. So far, the use of the full imputation tax system has been the fulcrum around which fiscal incentives are activated to attract FDI so that shareholders are entitled to claim refunds on tax credits imputed on distribution of dividends. The percentage of refund depends on a number of factors but can be conveniently categorized into two – active and passive income. Various rules are built in the tax code aimed to help start-ups and SMEs, including among others, accelerated rates of capital allowances each according to the industry sector. Thus, for example, aviation benefits from a sixyear accelerated rate.

These rules will be obliterated by a common base introduced by CCCTB. So far the CCCTB directive was strongly opposed by the triumvirate composed of Malta, Ireland and the UK as it was considered ushering in a one size fits all. Sadly, given the fact that the UK is leaving the EU, there will soon be only two small states among the 27 members (us and Ireland) to stem the stampede of such legislation.

Adherents of CCCTB argue that a common corporate tax base would make it cheaper for SMEs to operate cross-border in the Single Market as it reduces significant fees charged by tax consultants when filling complex returns dealing with up to 28 different set of rules. The hype at Brussels announcing the entry of CCCTB says that time spent on annual compliance activities should decrease by eight per cent while the time spent setting up a subsidiary would decrease by up to 67 per cent, making it easier for companies, including SMEs, to set up abroad. Once fully operational, the CCCTB could raise total investment in the EU by up to 3.4 per cent. As can be expected, the full benefits of the CCCTB will only come about when both stages of the common base and consolidation are implemented.

So how will it affect Malta’s level of attractiveness to FDI? The answer is uncertain as CCCTB will be mandatory only for entities with global revenues exceeding €750 million a year. Perhaps a study can be commissioned by IFSP to find out the incidence of such companies on the MFSA register. CCCTB is a belated move following the tax scandals that hit the headlines when Apple Inc. was fined over $13 billion for tax evasion in Dublin, apart from other earlier instances revealed in the LuxLeaks and SwissLeaks report where multinationals signed secret tax deals with authorities saving billions in taxes. The original idea in 2011 was to introduce CCCTB on a trial basis but now, following the tax scandals and the BEPS study, it has become amply evident that it must be mandatory – to ratchet the fight against aggressive tax planning.

To sugar the pill, the medicine is being administered in small doses. The consolidation measure has been put on the back burner while the emphasis is to fast forward the part relating to the creation of a common base. As can be expected with this Trojan horse technique, once the common base is operational then consolidation will be introduced steathily at the final step. There is an ingenious recipe which tries to allocate profits to companies within a diversified group on the strength of three economic criteria – capital; labour; sales. Undoubtedly, Malta will stand to lose, as due to its size it cannot punch high in the formula particularly where the two factors of labour and capital are concerned unless ad hoc tax planning is invoked.

So what is CCCTB in practice and how does the allocation formula work? The notes issued by the Commission state the magical formula might not fit all sectors such as shipping or air transport; therefore these will be allowed to use an adjusted version. A positive side to CCCTB is the support it gives to innovation by allowing the costs of R&D investment to be fully deductible plus an additional percentage of the costs, depending on certain conditions. This means the full cost of R&D plus an additional 50 per cent deduction will be offered for expenses of up to €20 million. This is a welcome measure as Europe falls behind USA on the amount it invests in R&D. On the negative side, as long as the CCCTB is not made mandatory for all firms (within and outside the EU), national administrations will experience additional compliance costs as they have to maintain two parallel systems.

To conclude, prima facie unless CCCTB is modified, Malta stands to lose part of its competitive edge once it is fully implemented. There is a lot at stake – financial and insurance activities last year contributed €149 billion or 98 per cent of total FDI according to NSO. iGaming companies can easily switch servers and relocate to non-EU domiciles.

Let us hope the six MEPs in Brussels in a unique solidarity gesture with all political parties in Valletta will stand up to be counted in a crusade to oppose it. They need to team up with Dubliners and others to jointly lobby against its roller coaster effect. Providentially, there is a golden opportunity next year to fight our patch during our presidency of the EU.

Alice in Wonderland reminds us sternly that the clock is ticking and in order to save the mythical Hatter, Malta cannot hide its head in the sand.