Corporate tax harmonization and Malta based firms

Abstract

Corporate tax harmonization has long been an elusive goal in the realm of international taxation. Historic tales have long featured the perpetual strife between countries competing to attract cross-border merchants through tax incentives. Nowadays, with the intention of profiteering, merchants exploit the disparate tax systems of multiple jurisdictions through the shifting of paper profits and intangible chattels from higher tax to lower tax countries. These novelties have led to the enactment of the “Pillar Two” which anchors multinational enterprises (MNEs) earning more than €750 million worldwide to a global minimum tax of 15%. While being auspicious for more affluent economies, such a reform is also envisaged to pluck the competitive edge of low-tax economies including Malta, making it equal parts effective and controversial. This study explores this initiative from the locus of MNEs and the Maltese state to get to grips with its economic intricacies. A mixed-methods approach is employed, considering a quantitative analysis involving a case study on three MNEs coupled with a numerical analysis. Simultaneously, reference is made to key developments in the European Union along with insights drawn from an array of interviews with policymakers and tax practitioners, whose accounts make up the qualitative branch. Therefrom it was revealed that in a static scenario, discounting firm specific behaviour, the tax reform would generate €610 million in extra tax revenues for Malta. Conversely, in a dynamic scenario accounting for firm behaviour, the reform is estimated to decrease foreign direct investment and corresponding tax revenues by 13% and €2.7 billion respectively, with such a burden being primarily borne by labour. This dissertation contributes to the state of knowledge of a topic whose importance is inversely proportional to the amount of research that has been so far published. The findings have principally showcased that, in a bid to lenify the coming effects, maintaining tax incentives from the outset is of paramount importance. Such an exercise makes this dissertation highly topical in domestic and international fora, whilst providing for a novel account by way of which the researcher hopes that Malta will be well braced to parry the rise of capital flight.