Malta gains in investment rankings but lags in competition

Malta had one of the biggest positive shifts in the UNCTAD inward foreign direct investment performance index last year, climbing to 84 from 107 in 2003, the World Investment Report published yesterday by the UN agency shows.

The other countries to make the largest gains were Tajikistan, Congo, Gabon, Australia, Jordan, Bahrain, Kyrgyzstan, Zambia, Latvia and, after Malta, Romania.

The report does not single out the reasons for Malta's gains, but significantly it points out in the same page that studies show that location of FDI is becoming more sensitive to taxation and corporate income tax rates can influence a trans-national company's decision to undertake FDI, especially if competing jurisdictions have similar enabling conditions.

"For instance, EU investors were found to increase their FDI positions in other EU member states by approximately four per cent if the latter reduced their effective corporate income tax rates by one percentage point relative to the European mean."

Corporate tax was the subject of debate in financial circles in Malta in summer last year after it was claimed by some quarters that local taxes were too high. The government and the Institute of Financial Services Practitioners had pointed out that the situation was actually the opposite.

Malta is the only EU country with a full imputation system of taxation - where the shareholder is credited in full upon receipt of dividends from a company in Malta, with the underlying corporate tax paid by that company. The institute had explained that this, in effect, meant that a Maltese company prepays tax on behalf of a shareholder and, as the maximum personal tax rate is 35 per cent, the same as the corporation tax rate, a shareholder in receipt of a dividend from a Maltese company invariably does not have to pay any further tax on that income and is often entitled to a refund.

Malta's Inward FDI performance index ranking was five in the year 2000, six in 2001 and 48 in 2002 before plummeting to 107 in 2003. The new ranking, although showing a strong gain, still leaves Malta in the bottom half of the rankings of 140 countries. Countries behind Malta include Austria, Italy, Norway, the US, Greece and Denmark but, significantly, the new EU member states which are Malta's competitors for FDI are ahead - Cyprus is 14th, Estonia 16th, the Czech Republic 28th, Hungary 46th, Lithuania 59th followed immediately by Slovenia while Poland is 75th.

The report sees three main trends emerging in FDI inflows to the new EU countries. First, new EU members are increasingly attracting FDI into activities that require higher skills such as precision engineering, design and research and development.

Secondly, small and medium sized enterprises in the EU15 are beginning to invest in the new EU member states and, thirdly, consolidation of some industries and restructuring of certain TNC operations are taking place in the new EU member states.

Poland, the Czech Republic and Hungary received the largest FDI inflows last year, with reinvested earnings accounting for more than half of the flows to these countries.

Inward FDI stock per capita in the 10 new EU countries amounted to $3,079 at the end of 2004. On a per capita basis, Cyprus and Malta lead the country rankings. Both countries have followed market-oriented economic policies for a long time and have reached relatively high income levels, the report says.

Annexes to the report show that FDI inflows to Malta last year were estimated at $421 million from $294 million in 2003. Outflows totalled $9 million last year from $19 million in 2003.. FDI flows as a percentage of gross fixed capital formation reached 37 per cent last year compared to 30.6 per cent in 2003.