The 2025 budget is rich in details on issues that are of direct interest to most individuals. However, it lacks detail on equally important issues that could affect the economy in the medium term and are mainly driven by international developments beyond our control. One such issue is the impact of harmonisation of tax in the EU.
Last February, Malta transposed the European Council Directive of 2022, which implemented minimum tax rules in the EU. Malta opted to delay the adoption of these rules up to December 2029, presumably to find ways of mitigating their possible impact on the country’s tax-friendly regime.
Still, not much has been said about the potential impact of adopting these rules on the economy.
Last year, Finance Minister Clyde Caruana said Malta would not be required to introduce the new tax rules anytime soon. These new rules are expected to impact around 660 multinational companies with a Malta base. It is estimated that these companies employ some 20,000 people.
Caruana also insisted that the implementation of impending tax changes was not intended to generate additional income. He also said, “The new rules allow countries to introduce incentives, but these would have to apply across the board on all companies and not just those for whom the rules apply,” adding, “This change will be revenue neutral for the country”. If this is the reality the economy is facing, then there is no reason for concern.
Still, in this year’s budget speech, Caruana was economical with details on the simulation models run by the finance ministry to determine how the tax regime change will impact public finances. His terse update was that discussions with the European Commission regarding measures and incentives, such as grants and tax credits, are still in progress, adding, “The aim is to ensure that these measures comply with EU and OECD rules”.
If achieving revenue neutrality through the introduction of the new taxation rules proves challenging, then the minister should define what needs to be done to ensure that non-fiscal competitive advantages enhance Malta’s attractiveness to direct foreign investors. Those providing professional services and the public need to know how the country will address the challenge of mitigating a potential fall in fiscal revenue and attracting new direct foreign investment.
As a country, we must adapt to change that is often driven by international development beyond our control.
Put simply, our policymakers must have a Plan B in case the new tax regime dents the country’s attractiveness in the eyes of present and potential direct foreign investors.
The professional services providers must start considering different services and ideas they can sell to attract investment. These have to be value-added services that are not tax-driven and allow for remote global working, which is becoming more widespread.
Equally important, policymakers must acknowledge the stumbling blocks that may hinder our attractiveness in foreign investors’ eyes. In particular, we must ramp up our efforts to improve the island’s reputation, which has been badly dented in the last decade. We can no longer sell Malta as a low-cost jurisdiction offering a pleasant lifestyle and an abundant supply of highly qualified and skilled professionals who can meet the human resources requirements of the new economy investors.
The country has proven to be very resilient when faced with once-in-a-generation challenges like the acquisition of independence, the transformation of the economy from one based on military support services to one promoting manufacturing and tourism and, more recently, to financial and other services.
Now is the time for another economic transformation.