The clock on Malta’s tax reform
Maltese Tax Law is governed by the provisions of the Income Tax Act of 1948 and is based mainly on United Kingdom principles. Surprisingly, the tax system has remained relatively the same in recent years, except for fragmented adjustments, such as the change from an offshore to an onshore regime (including the tax refund system) and updating the system with EU directives.
But the world of business, society and economies are constantly changing, and taxes must adapt; otherwise, you risk significant revenue loss and potentially harmful distortions. This is more true for countries like ours that are small and do not have natural resources; therefore our leaders need to think outside the box about generating maximum tax revenue without harming the economy.
In October 2021, the international community announced an important agreement when it introduced a global minimum effective corporate tax rate of 15 percent for large multinational corporations exceeding an annual income of €750 million. It also appears the EU un-shell directive that will prevent companies without economic substance that do not benefit from fiscal advantages resulting from the application of Double Taxation treaties. In addition, certain income is attributed to the shareholder and taxed accordingly in the country of residence. These two directives together are a deadly cocktail for tax efficiency regimes like Malta’s. In addition, the IMF promotes an efficient tax collection system, which pushes countries to make the necessary tax reforms and collect their taxes on time. Recently, the IMF had a trial in Malta for having billions in uncollected taxes (VAT included) and with the finance minister declaring that only 30 percent of Maltese businesses claim to make a taxable profit, with The other 70 percent report a loss or break. -even situations.
As debt levels rise, along with inflation challenges, governments must be wise and take a long-term view on balancing fiscal sustainability, certainty and prosperity.
Malta’s tax system is based on 100 percent imputation, where a company is taxed 35 percent on profits and dividends distributed to shareholders are not taxed again. We have complemented the system with a tax refund to non-resident and non-domiciled shareholders on the distribution of profits, a final property tax of eight percent, 15 percent on income from Personal Rentals and other incentives aimed at attracting foreigners to reside in Malta or foreign companies to set up in Malta.
One could argue that the current rate structure further incentivizes or favors non-value added businesses, although, to be fair, the Maltese government and the EU do their best to help commercial businesses reinvest and grow up However, the system needs to be aligned. An imputation system is challenging to monitor, and creates many unknowns in forecasting tax revenue. And, when a downturn occurs in the economy, the government still has to release tax revenue related to previous years due to the offsetting of tax losses against dividends distributed from previous years’ profits.
It is no wonder that most countries have moved away from imputation systems, including the United Kingdom (1999), Ireland (1999), Germany (2001), Singapore (2003 ), Italy (2004), Finland (2005), France (2005), Norway (2006) and Malaysia (2008). Besides Malta, a few other countries, such as Canada, Chile, Mexico, New Zealand, and Australia, still use the imputation system. The OECD shows that the UK is operating a partial imputation system, but the tax credits provided are not linked to the amount of corporation tax paid; therefore, this is not a true imputation tax system.
The countries mentioned above, and others, switched to a classical tax system, adopted a simpler model and reduced exemptions. In classical tax systems, company profits and dividends received by shareholders are taxed, thus providing an incentive to retain profits. That is why many countries reduced their corporate tax when they entered this system, among other initiatives to modernize their laws, processes, information systems and court procedures. In 2022, the Minister of Finance Clyde Caruana announced a significant revision in Malta’s tax system, including a new structure and rates that will be adopted for the base year 2025. Nothing has been announced yet, and I hope that this l -a crucial initiative has not been put on the back burner and that is just a delaying tactic. A holistic approach should be taken when studying the best options for Malta, analyzing and reviewing all tax revenue streams: Corporate, Property related, Personal Taxes and VAT.
As a start, we want to aim to have a simpler system based on a classic tax system, which aligns the different regimes – one that is fair and non-discriminatory. By the latter, I mean a system that rewards businesses with added value and does not differentiate between local or foreign residence. But for any option to succeed, people need to trust their government, which can only be achieved through transparency in public spending. The right tone must be set, so that people see the value of paying the right taxes.
After all, different studies show that paying taxes triggers brain activity in areas where rewards are processed and associated with greater well-being.
Mark Aquilina is Founder of NOUV, a growing boutique firm servicing clients across six core pillars namely Consulting, Technology, Learning Academy, Corporate & Tax, Private Clients and Audit & Risk Assurance.
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