The Group of Seven (G7) rich nations have recently reached a landmark deal for the creation of a global minimum corporate tax rate of 15%.

The tax rate would be used to target mainly the largest and most profitable multinational companies (“MNCs”) such as Amazon, Apple, Google, Facebook, and discourage them from shifting profits and tax revenues to lower tax countries regardless of where their sales are made.

Over the years, we have seen income derived from intangible sources such as patents, software, and royalties on intellectual property increasingly migrate to lower tax jurisdictions, allowing companies to circumvent paying higher taxes in their home countries.

How would a tax rate work globally?

The global minimum tax rate would apply to overseas profits.

Governments are still able to set a local corporate tax rate and if a company pays a lower tax rate in another country, their home government is entitled to raise the rate to the minimum tax rate, thereby eliminating the advantage of shifting profit.

In May, governments had broadly agreed on the basic design of a minimum corporate tax. The G7 accord creates strong momentum around the 15 percent and above level which has also been adopted by the OECD and G20.

What it means for Malta

It is important to emphasize that the proposed global corporate tax reform will not apply to small and medium-sized companies. It is designed for MNCs.

Though it is still too early to predict overall outcomes, the global tax rules create uncertainty which may cause delays in investment decisions. There may not be a standard response across MNCs as certain investments may be categorized differently.

For example, large tech companies can move around more easily compared to those in production or manufacturing, but even so, are dependent on the availability of a skilled workforce. Companies that are seeking to apply strategies such as diversification of supply chains or require proximity to markets may be less inclined to move.

The impact of the new tax rules aimed mainly at MNCs on the tax advantages that Malta offers remain to be seen. Tax experts say that it is too early to tell how this will impact Malta’s attractiveness as a regional business hub and a gateway to the EU.

Malta has a headline corporate tax rate of 35%. However, due to Malta’s attractive tax refund system, the effective tax rate is 5%. This is the lowest effective corporate tax rate in the EU and most of the world.

Aside from the tax considerations, MNCs will also consider the non-tax benefits. Malta’s infrastructure, good business climate, rule of law, stable political environment as well as connectivity to the EU and other regional economies are among the “intangibles” that companies consider beyond the euros.

Looking at past global tax initiatives such as the ‘Common Reporting Standard’, ‘Base Erosion and Profit Shifting Action Plan’ as a benchmark, putting any such program in place takes years. The effective implementation in 2023 is an ambitious goal.

Finally and importantly, the tax reforms will not apply to small and medium-sized enterprises (SMEs), as they fall below the expected threshold. The small and medium-sized businesses represent the majority of economic activity in many jurisdictions and their tax situation will remain unchanged under these proposed rules. Malta will remain a relevant regional hub with its attractive corporate tax legislation.

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