While there are several strategic reasons why international investors decide to invest abroad, the more essential drivers are related to seeking markets, efficiency and resources. Small countries, especially islands, try to carve out a niche of foreign direct investment (FDI) by offering attractive taxation, a stable political environment and reasonable costs for highly qualified human resources.
Malta has long aimed to attract FDI by enacting favourable tax and pro-business legislation to exploit loopholes in other countries’ tax systems. Still, like Ireland, Luxembourg and Cyprus, Malta’s tax-friendly strategies are being challenged with increasing vigour by the EU and other international institutions.
The EY Malta Attractiveness Index for 2022 reveals interesting developments in how 120 foreign investors and companies in Malta assess the current state of the country as an attractive investment destination. The headline statistic from this survey is that, following the closure of the greylisting saga, foreign investors are no longer as worried about the reputational risk of being based in Malta as they were last year.
But other slow-burning issues continue to worry potential investors. Not surprisingly, the survey participants believe that the most significant threats they see on the horizon are those of “international tax policy developments”.
Ronald Attard, EY managing partner, argued: “As in previous years, our strong point for FDI remains our tax regime. Survey respondents are clearly aware of the risks of this changing.”
He also pointedly asked: “If our biggest pull factor is potentially coming to an end, what is our attractiveness offer going to be in a new global environment?”
After years of arguing that Malta’s economic model is sustainable, the government is beginning to indicate that we must start recalibrating the drivers of the economy. The broader economic context is a cause of concern for all those who define economic success in terms of diversification, sustainability and social advancement.
The highly liberal labour market policies adopted in the last few years have stimulated above-average economic growth. This growth did not come mainly from productivity growth but from the activities of offshore companies that must increasingly rely on imported skilled labour – the local skills shortages are now too obvious to ignore.
While accountants, corporate lawyers and other service providers have benefitted from the demand for professional services, the benefit to the rest of Maltese society is, at best, dubious.
Attard argued that the consequences of skills shortages and increasing labour costs present formidable economic challenges.
He asked another vital question: “With the island being so small, with bottlenecks in infrastructure cropping up and virtually full employment, is (importation of more foreign labour) the wisest of moves?” As Times of Malta has been arguing for some time, Malta’s economic model needs to be re-engineered.
This will not be easy but the starting point will have to be a sincere acknowledgement by policymakers that the threats to economic prosperity can no longer be underestimated or played down.
Malta’s economic model is too dependent on growth brought about by construction, private and public consumption and by government revenue from the flow of FDI payments.
While changes in international taxation will not come about within the next few months, Malta’s reputation as an EU tax haven – just like the reputations of Ireland, Cyprus and Luxembourg – will not go away until the government comes up with a more sustainable economic model.
Economic sustainability will come with productivity improvements as a result of educational excellence.