Malta was one of almost 140 signatories to an Organisation for Economic Cooperation and Development agreement in 2021 to reform the way big corporations are taxed. The OECD aims to stop big multinationals from moving their profits worldwide and slashing tax bills to very low levels. 

The EU agreed to introduce groundbreaking rules that came into effect this year, introducing a minimum rate of effective taxation of 15 per cent for multinational companies in EU member states. A new legal notice has transposed the EU directive into Maltese law. Malta will have up to six years to adapt to the new fiscal regime.

The fiscal authorities now focus on minimising the impact of the new rules, which are expected to affect as many as 660 multinational companies with a base in Malta and employing some 20,000 people. Still, the big challenge facing policymakers is updating the incentives package to prospective direct foreign investors to convince them that Malta is an ideal destination for their projects.

The EU has been a front runner in translating the OECD decision into hard law. By lowering the incentive for businesses to shift profits to low-tax jurisdictions, the “race to the bottom” – the battle between countries to reduce their corporate income tax rates to attract investment – will be curbed. 

An updated short-term fiscal impact assessment of the new corporate taxation changes has not been published. Whatever the projected figures, the breakthrough the new minimum corporate tax model will bring will be much more significant. Put simply, competition on tax rates will no longer make sense. This may seem unfortunate as tax competition has promoted economic growth for years in small jurisdictions like Malta by helping to attract foreign direct investment. 

However, these changes will bring greater fairness and stability to the tax landscape in the EU and globally while making it more modern and better adapted to today’s globalised digital world. The new taxation rules will also change how the most profitable multinationals define their business models by limiting their ability to do business without a physical presence in a particular country.

Policymakers must avoid a severe risk linked with replacing tax competition with tax harmonisation. If a country can no longer compete on taxes, it may use subsidies to attract foreign investment. Such a tactic could distort the market as targeted subsidies create an opaque economic environment where success depends on preferential policy treatment rather than on the ability to offer the best goods and services at the most affordable price in the market.

The government insists there is no need to revamp the economic model that is showing clear signs of stress. The ability to attract new direct foreign investment to replace those economic operations that may find the new tax regime too burdensome must be based on better investment in the local workforce skills base and modern technology. 

The education system keeps underperforming, and this is arguably the worst obstacle to offering attractive incentives for potential foreign investors. The proliferation of economic operations based on intensive, low-cost imported labour does not bode well for society’s future prosperity.

While some government ministers, like Finance Minister Clyde Caruana, have made their views on the need for change in economic planning, there is no publicly available plan for managing this change. 

We have a lot of eggs in a few baskets. The country needs transformational political and business leadership to help people understand what needs to be done to compensate for the significant changes in the global economic environment.