Malta’s economic success in the last decade has been achieved in large part thanks to three factors: the importation of high- and low-skilled labour, the sale of passports and the maintenance of a low-tax regime. All these factors are now beginning to look ominously unsustainable due to changing economic and political dynamics beyond our control.
European Parliament president Roberta Metsola recently addressed the looming issue of corporate tax during the annual conference of the Institute of Financial Services Practitioners. She reminded our business and political leaders of the impending challenges the economy faces in the coming years and highlighted the need for Malta to do away with the negative stereotypes attributed to low-tax jurisdictions, so as to give credibility back to the financial sector.
The global minimum tax rate agreed by the Organisation for Economic Cooperation and Development may take some time to become effective. But it is undeniably a threat to the package of competitive advantages that Malta can offer to foreign investors.
Malta will be among other EU countries badly hit by this change in how international political and institutional leaders perceive small states trying to siphon off as much tax revenue as they can from larger countries.
Ireland, one of Malta’s competitors in the financial services sector, is adopting a pragmatic stance in the changing global corporate tax scenario. Irish Foreign Minister Simon Coveney said: “Ireland does not want to be isolated in this space but we want to ensure that our view is properly heard.”
His colleague, Environment Minister Eamon Ryan said he was “hopeful and confident” that Ireland will be able to be part of the solution. Malta needs to adopt this kind of attitude as the OECD global tax changes are implemented.
Small island economies like Malta already face formidable challenges of size and insularity, which deny them the opportunities to build on the economies of scale that large mainland nations can exploit. Still, the ingenuity of small island states’ leaders can help overcome these challenges by taking full advantage of niche opportunities.
Metsola argues that Malta needs to “look further at what makes it truly attractive”. There are some excellent examples of what makes a small country attractive beyond offering fiscal advantages. For instance, while reducing the emphasis on fiscal benefits, the Luxembourg government focuses on promoting key innovative industries like logistics, ICT, biotechnology and biomedical research as well as clean energy, space and financial service technologies.
However, there is a risk that economic planners just copy other countries’ innovative strategies without assessing the implications of implementing them in a specific context. Politicians may sound like visionaries when they churn out economic buzzwords that capture the public’s imagination. We have had too many of these buzzwords in the last several years: building a smart technology city, promoting cryptocurrencies through innovative legislation and making the country the mecca for blockchain innovation. Ideas and initiatives like this are no more than wishful thinking unless they are based on solid foundations of feasibility.
One of the most crucial challenges that any policymaker faces when proposing a rethink of economic strategy is the quality of human resources available to launch new activities.
Malta’s underperforming education system means that foreign investors are unlikely to be impressed with low corporate taxation, good weather and friendly people when deciding where to invest.
While the importation of skilled labour will continue to play an important role in our economy, the economic restructuring that must inevitably be undertaken has to be based on upgrading the competence and skills base of our workforce.