Budget day has always been a day of expectations in Malta. The build up to the annual budget speech usually generates various rumours on what incentives, or initiatives one is to expect. There is also much speculation on whether the tax rates will increase, or whether the tax brackets will be altered. Clearly, this year was no exception.
It was indeed interesting to listen to Minister Clyde Caruana deliver his Budget Speech, and one must undoubtedly commend the Minister for introducing a number of sorely needed social measures. These include the increase in children’s allowance, the COLA increase, as well assistance to pensioners and the most vulnerable.
It was also important to hear the Minister note in his speech that certain institutions, such as the Malta Business Registry, the offices of the Commissioner for Revenue, and the Malta Financial Services Authority, will be strengthened further to ensure that the recommendations of the FATF and Moneyval will continue to be implemented, consequently enhancing further both compliance and Corporate Governance. Of significant importance was also the fact that the Minister did not introduce any increases in the price of energy, an expense which would have had a spiralling inflationary effect within the economy.
What, however, appears to be absent from the Budget Speech, are certain important fiscal measures or amendments to our fiscal laws. A country’s budget should not only reflect national development, but should also serve as a basis for new fiscal measures, which would ensure fiscal compliance and stimulate economic growth. It should also seek to address the main challenges which business and individuals are facing in the country. The following are a number of proposals, which if introduced could ensure the attainment of the Budget objectives:
1. Roll Backward loss relief: we do live in a period where companies may have made profits in the past, yet are currently facing economic challenges, suffering losses, and encountering cash flow shortages. Indeed, these companies may be faced with unpaid historic tax bills which cannot be settled in view of current year economic woes. A possible solution to this problem could be that of allowing current year losses to be set off against unpaid tax liabilities due on historic profits. Apart from giving some form of immediate value to these losses, they will also ease the cash flow demands of the company. Moreover, this measure may allow local businesses to put their mind at rest, and worry less about pending tax dues (with the consequent interest charge on the tax liability) and rather focus on ensuring that their business weathers the current storm.
2. Cash flow set offs: a number of companies have paid surplus provisional tax or are due to receive VAT refunds, these same companies could also owe the state balances under the Final Settlement Tax (FSS) system. It is ample time that the Government introduces a system of setoffs whereby tax and VAT refunds due can indeed be setoff against balances owed to the tax authorities under the FSS rules.
3. Reduced rate of tax for small business: it would indeed be interesting if Malta as a country opted to introduce a lower level of taxation on small companies (which would need to be defined). The proposed rate could be a flat rate of 26% on the first €100,000 of profit, which is a rate based on Malta’s progressive rates of tax. It would also be more in line with the average tax rates for businesses in the EU, which currently stand at 21%. Apart from again reducing cashflow needs and a business tax expense, it would also probably contribute towards better fiscal morality. It does seem the case in the economic world, that as tax rates go down, fiscal morality increases.
4. Shared COLA increases: the COLA increase in the current year is way above what it ever was over the past ten years. Whereas this increase is more than justified, it does represent a significant cost to a number of businesses, and could also create an inflationary effect, which would see the desired COLA benefits evaporate. A possible option that could have been adopted in the current year is that the COLA increase would be divided between the employers and the state, with the employers being asked to increase wages by €5.00 per week, accompanied by a government bonus of €5.00 per week being paid. While reducing the burden on businesses, this mechanism would still have compensated employees for the cost of living increase, but would probably not create such an inflationary effect in the economy.
5. Amendment of tax deduction rules: as any person working in taxation is aware, deductible expenses need to be “wholly and exclusively incurred in the production of one’s income” so as to be admissible as a deductible. This does create a number of instances where no benefit is obtained by a taxpayer, where expenditure which is just partly of a business nature is incurred. With the Minister stating that fiscal morality and compliance is to be enhanced, the Budget may have proposed clearer definitions relating to the deductibility of certain expenses.
6. Green economy measures: historically, Budgets have always introduced a number of incentives and tax credits aimed at stimulating investment. The current Budget is not very strong on such measures, with most tax initiatives being based on schemes brought forward from the past years. It would probably have been useful if tax credits and/or accelerated deductions could have been proposed which encourage green investment, home and hybrid working (which certainly reduces traffic and pollution), and investment in energy saving measures within organisations. It could also have been a good idea if the country begins to evaluate proposals which would allow for certain labour intensive companies already set up in Malta, to recruit employees who are however overseas based. The IT and financial services sectors could clearly benefit from such an initiative. Malta-based companies could be assisted via the Maltese embassies and consulates with any administrative burdens this measure would have resulted in overseas. Apart from ensuring an increase in productivity, it would also result in reducing pressure on the country’s infrastructure.
7. Stabilising the reduced rate of duty on inter-vivos business transfers: the reduced rate of duty to 1.5% on inter-vivos transfers of business assets has always created much economic activity. This measure is being extended on an annual basis. The market, however, probably needs some certainty now, and crystallizing this rate within our laws could be another measure which stimulates economic growth.
Although no one possess a crystal ball and can forecast the effect or otherwise of the existing or above-proposed ideas, it is also true that thinking outside the box and challenging the status quo is something which we should all be engaged in, to the general benefit and ultimate well-being of all economic sectors and the citizens of this country.
Read more about the measures announced in this year’s budget, together with an analysis by our tax experts: https://www.mazars.com.mt/Home/Insights/Latest-News/Malta-Budget-2023
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Paul Giglio, Tax & Assurance Partner Mazars Malta.
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