Cold winds from the north buffet financial services

Council Directive2011/16/E U of 15 February 2011 concerning administrative cooperation in the field of taxation has been subsequently amended twice – in 2014 and in 2015, introducing automatic exchange of information procedures among member states.

Both amendments came into force on 1 January 2017. In addition to the new amendments, there is to be an automatic exchange of information regarding interest, dividends and similar type of income, gross proceeds from the sale of financial assets and other income, and account balances as well as the automatic exchange of information regarding crossborder tax rulings and advance pricing arrangements.

Pierre Moscovici, EU Commissioner for Economic and Financial Affairs, Taxation and Customs, has been reported as saying that the new measures against profit shifting (BEPS) “equip member states and their national tax administrations with the information they need to detect certain abusive tax practices and take the necessary action in response.”

It remains to be seen whether the new directive to expose secret tax rulings will act as an effective solution, that is, whether it will truly equip member states with ‘everything they need’ to counter tax abuse. The task is complex, given that the objective to sanitise tax codes across the EU may be too ambitious a decree, albeit a wellintentioned one.

Moreover, it remains to be seen whether the caveat concerning the privileged information exchanged will act as a revolving door to the disclosure of industrial/commercial or professional secrets. It is hoped that fear of a loss of privacy will not be inflated to again form a ruse for certain tax rulings to remain secret and undisclosed, thereby posing as an exhibit of the ‘same wine, different bottle’ syndrome’. The footnote here is to the Primarolo tax committee of member states, suggesting with some vigour that the EU model is made of a flawed rubric that is doomed to never attain any of its objectives unless there is a uniformity amongst the agendas of the different member states.

The 2007 report of the Primarolo group denounced tax rulings, stating that it will qualify the same as illegal state aid. Thankfully, the wheel grinds but it is slow and the first tangible feeler in this direction emerged only last year in view of gross tax avoidance by Apple that was ordered to be repaid (€13 billion plus interest).

Again, 2014 saw the Lux leaks consisting of a vast number of secret tax rulings en- tered public recognisance, where more than 300 were concluded by Luxembourg alone. The sad thing is that public press points towards Luxembourg concluding a further 172 similar ‘sweetheart’ deals in 2015, that is one year following the scandalous leaks, and showing in the most coarse manner an absolute defiance and lack of remorse by the land-locked country. In addition, and perhaps more unsavoury than the former, are reports that the whistle-blowers who revealed the Lux Leaks are currently on trial in Luxembourg, exposing a worrisome state of affairs emerging from the cacophony of legal grey areas and severe disagreement over what constitutes right and wrong.

In October 2015, the European Commission ruled that selective tax advantages granted to Fiat in Luxembourg and Starbucks in the Netherlands constituted illegal state aid and ruled for tax authorities to recover €20 million to €30 million of alleged unpaid taxes.

The truth is that the financial services industry offers rich rewards to the Big 4 audit and top legal firms where in Malta exorbitant charge-out rates are not uncommon. The snouts in the feeding bucket are enjoying the feast and are fiercely fighting to maintain the status quo. Tools in their armour are plentiful and include inter alia the offering of an attractive fiscal base to non-residents which in turn acts as a sizeable domino in the ambits of economic stability for EU countries. Hence, it is natural for the industry to be wary of changing definitions bearing the force of statute that could considerably alter its carefully guarded economic well-being.

This raises several questions. To appreciate them, it is necessary to look at the greater scheme of things, such as if one member state’s tax regime has been persisting legally and successfully for many years, and if the removal or significant modification of the same would almost surely reap havoc on that member state’s economy, then would not the EU’s main goal here be to safeguard such member state’s financial health over pulling the proverbial rug that would spell almost certain ruin?

An observation would be to note that in the light of the explicit ‘repeat offender’ syndrome exhibited by Luxembourg and followed by Belgium in the flagrant abuse of sweetheart deal phenome- of chronic unemployment, this tax leakage leaves a bitter and somewhat confused aftertaste as to what is really being fought for and with which metric it is measured. The question is: is it all being done for the greater good, or is it seeking the greater good for the smaller number?

Another important observation is that EU countries are not homogeneous and each has particular handicaps in its economic use of productive factors, so as a measure to bridge over such drawbacks they offer regulated tax planning as one means to an end. They strongly feel that corporate tax should remain a matter of sovereignty for member states. The concept of fiscal harmonisation (such as the introduction of CCCTB) is in itself strewn with paradoxes and leads to a final observation that certainly a one-sizefits-all approach cannot properly serve its purpose where fiscal matters are concerned. For instance, although Malta’s fiscal regime has in recent times been singled out by the EU as one possibly aiding tax avoidance, our country has, until now, never been tarnished by scandal nor marred by the fiscal frugality of sweetheart deals.

However, the threat of illegal state aid’s definition being widened to stultify tax regimes – including our own – cannot be ignored. In truth, the threats will be amplified or otherwise following ECJ rulings from here onwards, in terms of how much clout is afforded to the EU Commissioner for Competition to identify illegal state aid and unfair competition within fiscal set-ups. The fear is compounded by talk of such identification of illegal state aid having retroactive impact, although this position has not, as yet, been crystallised.

If such power is afforded to the EU Commissioner for Competition, then this would be to the extent of having supremacy over national policy and legislation, using the hermeneutic art of interpretation cleverly interwoven with the statute’s golden plate to raise the profile of harmonisation at the cost of pilfering away at national sovereignty. The icy winds hitting our shores from the North bring with them the stark realisation that the status quo is not a permanent fixture for our cocooned tax professionals, and perhaps there is no better time than now to reach for the drawing board and seriously retool our fiscal armoury.