The Maltese Tax Law is regulated by the provisions of the Income Tax Act 1948 and is mainly based on UK principles. Surprisingly, the tax system has remained relatively the same in recent years, except for piecemeal adjustments, such as the shifting from offshore to the onshore regime (including the tax refund system) and updating the system with EU directives.
But the business world, society and economies are constantly changing, and taxes must adapt; otherwise, it risks significant revenue losses and potentially harmful distortions. This applies even more to countries like ours that are small and have no natural resources; hence our leaders need to think outside the box about generating the maximum tax revenues without harming the economy.
In October 2021, the international community announced a landmark deal when it introduced a global minimum effective corporate tax rate of 15 per cent for large multinational corporations that exceed an annual revenue of €750 million. Also looming is the EU un-shell directive that will prevent companies without economic substance not to benefit from tax advantages arising from the application of Double Taxation treaties. Moreover, certain income will be attributed to the shareholder and taxed accordingly in the country of residence. These two directives together are a deadly cocktail for tax efficiency regimes such as Malta’s. Furthermore, the IMF advocates for an efficient tax collection system, pushing countries to do the necessary tax reforms and collect their taxes on time. Recently, the IMF had a go at Malta for having billions in uncollected taxes (Including VAT) and with the finance minister declaring that only 30 per cent of Maltese businesses claim to make a taxable profit, with the other 70 per cent reporting losses or break-even situations.
As debt levels rise, coupled with inflation challenges, governments should thread with wisdom and take a long-term view on balancing fiscal sustainability, certainty, and prosperity.
Malta’s tax system is based on 100 per cent imputation, where a company is taxed 35 per cent on profits and the dividends distributed to shareholders are not taxed again. We complemented the system with a tax refund to non-resident & non-domicile shareholders upon distribution of profits, an eight per cent final property tax, a 15 per cent on Personal Rental income and other incentives targeted towards attracting foreigners to reside in Malta or foreign companies to set up in Malta.
One could argue that the current rate structure incentivises more or favours more non-value-added businesses, although, to be fair, the Maltese government and the EU do their utmost to assist trading businesses to re-invest and grow. However, the system needs to be aligned. An imputation system is challenging to monitor, creating many unknowns in forecasting tax revenues. And, when a downturn in the economy occurs, the government still needs to fork out tax revenue related to previous years due to the offsetting of tax losses against dividends distributed from previous years’ profits.
No wonder that most countries have shifted 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). Apart from Malta, a few other countries, such as Canada, Chile, Mexico, New Zealand, and Australia, still use the imputation system. The OECD shows the UK as operating a partial imputation system, but the tax credits provided are not linked to the amount of corporate tax paid; hence, this is not a true imputation tax system.
The countries mentioned above, and others, shifted to a classic tax system, adopting a simpler model and curbing exemptions. In classical tax systems, the 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 shifted to this system, among other initiatives to modernise their laws, processes, information systems and law court procedures. In 2022, Finance Minister Clyde Caruana announced a significant overhaul in Malta’s tax system, including a new structure and rates that will be adopted for the basis year 2025. Nothing has been announced yet, and I hope that this crucial initiative wasn’t placed on the back burner and that it’s just a delaying tactic. A holistic approach must be taken when studying the best options for Malta, analysing and reviewing all tax revenue streams: Corporate, Property related, Personal Taxes and VAT.
As a start, we must aim to have a simpler system based on a classic tax system, aligning the different regimes – one that is fair and not discriminatory. By the latter, I mean a system that rewards value-added businesses and doesn’t differentiate between local or foreign residency. But for any option to succeed, people need to trust their government, which is only gained by transparency in public spending. The right tone must be set, so 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 are associated with greater well-being.
Mark Aquilina is Founder of NOUV, a growing boutique firm servicing clients across six main pillars namely Consulting, Technology, a Learning Academy, Corporate & Tax, Private Clients and Audit & Risk Assurance.