For decades, Malta has promoted tax competitiveness as one of its investment attractions. By potentially charging just five per cent corporate tax on profits of foreign companies that set up shop in Malta, the government has managed to boost revenue without significantly increasing taxes on local businesses and individuals to fund its expenditure.
The cost of free public health, education and infrastructure investment is increasing substantially. A reliable source of tax income is one prudent way of financing ambitious public projects.
Smaller EU countries like Ireland, Estonia and Malta rely on low taxation to support their economic strategy. So, for countries like these, the agreement reached by 130 nations in OECD talks in Paris, to back a G7 decision to levy a global minimum corporate tax of 15 per cent on the world’s largest multinationals, is not good news.
This agreement still needs to be ratified by the G20 members meeting in Italy in October. But, as one official from one large G20 country told the Financial Times, “there is no going back” on this issue.
The minister of finance, Clyde Caruana, has told Times of Malta that Malta backed the plan for fairer tax rules. Caruana rightly argued that, had Malta not done so, it would have been left out of the ongoing discussions. This is, in many ways, a change in tactics because the government is tacitly admitting that our low taxation regime is not an article of faith.
The final agreement on the detailed provisions of this global corporate tax development still needs to be hammered out. Countries like the UK, which has a substantial interest in seeing its financial services industry carved out from any tax impositions, was among those countries that, somewhat surprisingly, agreed to US President Joe Biden’s proposal for a fairer global taxation agreement.
Once, as expected, the G20 politically endorse the change in how corporate tax is charged, the horse-trading by individual countries will begin. While introducing the 15 per cent minimum corporate tax is only expected to come into force in 2023, many technical issues will have to be ironed out in the coming months.
These technical issues will include various so-called ‘carve-out’ agreements that would let some countries use opt-outs to encourage investment. Caruana has confirmed that Malta is drafting proposals to protect its corporate tax regime from larger countries’ efforts to introduce a new minimum tax of 15 per cent. These proposals will be sent to the OECD by October.
The government would do well to have a Plan B even if it successfully obtains some carve-outs in the final set of corporate tax regulations.
An excellent place to start is to revamp our competitive package to attract more foreign investment. And a good starting point here would be the creation of a more effective educational system to improve achievement levels and a root and branch reform of our legal system to make it faster in delivering justice.
Malta’s public health and education systems, free at the point of delivery, need to be preserved and improved. But this can only be done if public finances are made sustainable through a more targeted taxation system. Taxing wealth would be one option that would not put the burden of financing public services disproportionately on employers or workers.
The country’s long-time reliance on clever low-tax legislation has limitations which are now being fully exposed. It has become more urgent than ever for the country to address them and look beyond.