Possible impact of Tax Harmonisation measures in Malta

Our own Tax Partner Paul Giglio talks with the Malta Business Observer about tax harmonisation and its possible impact in Malta.

Q: Malta is consistently opposing EU tax harmonisation rules stating that its tax regime had been approved prior to accession and is necessary considering the size of the island. To what extent will the EU proposals on tax harmonisation harm business in Malta?

PG: Whereas the introduction of tax harmonization could be problematic to a country like Malta, it is hard to determine the exact effect and magnitude that the introduction of a system of tax harmonization within the European Union would have on the Maltese economy. The reasons are various. At the outset Malta manages to attract Foreign Direct Investment (FDIs) from different countries in the world and not only from EU based investors. These investors could possibly still consider Malta as their country of choice even after the introduction of tax harmonization. Secondly, Malta based FDI is not solely tax driven. There are various other factors which have contributed to the generation of such business and these include regulation, a pool of professionals who are able to give a personalised service to their clients, the euro currency, economic stability, as well as less bureaucracy in the manner in which business is established.  Moreover, Malta has introduced, over the course of time, different areas of specialization where the country has clearly taken a lead. Examples here include the gaming and maritime sectors.

What Malta clearly has to work on is enforcing the notion that it is indeed a financial centre, providing different advantages and areas of specialization, not merely tax advantages.

Q: How do you expect this issue to affect the MEP elections, both locally and internationally, if at all?

PG: I do not believe the local MEP elections will in any way be affected by tax harmonization. The Maltese electorate appears to express his electorate preference more on the basis of party loyalty or personal relationships with the candidates rather than anything else. Moreover, the main local political parties have long contended that Malta should be entitled to use its tax systems to attract legitimate business and thus I don’t believe that the voter, will be considering tax harmonization in the local polling station.

It would also be very presumptuous of me to try to forecast the effect that this method of taxation would have in the MEP elections in the international sphere.

Q: Are there benefits for Malta in terms of EU tax harmonisation?

PG: Human nature has always feared and opposed change. This has been the case throughout Maltese history too. Whereas I did not live the period when Malta was seeking independence, there must have been much fear back then that the change which Malta would experience as a result of independence could have had very far reaching effects on the economy. I did live the “forecasting doom" statements by many prominent people in the build up to EU membership. Again, change was feared.

History has however shown that Malta and the Maltese have somehow always manage to positively adapt to change. Thus, the introduction of a system of Tax harmonization must at the outset be accepted. It’s a question of when and not if we shall have this method. As professionals working in the field of international taxation, we should start to think in terms of different products and ideas to sell, which are not tax driven. These should be value added services, which allow for remote global working. The products could also include innovation hubs, renewable energy using water rather than solar farms which may need too much land, new international financial products amongst other things.  If our authorities start to give this direction now, it is possible that Malta will again re-invent itself even in the face of this new challenge.

Q: A concern expressed on the EU level relates to the behaviour of companies, which can exploit differences between tax rules and tax rates in different countries to reduce their tax bills. In this regard, Malta has been described as ‘having the characteristics of a tax haven’. What can be done to mitigate such criticisms and, thus, to minimise the risk of larger countries wanting to push harmonisation through?

PG: A tax haven is not just a country which has a very low tax rate. It is usually a country where secrecy and lack of international corporation is also ingrained within its laws. Yet unfortunately international scandals in various countries, including Malta, has certainly led to this notion that we are more a tax haven then a financial centre. To mitigate such criticism the following could be useful:

a) We need to strengthen our regulators and eliminate the perception that regulators are also marketers

b) We have to ensure that aggressive methods of selling Malta in international conferences are eradicated at inception. Too many times Maltese professionals have advertised Maltese products wrongly, and little or nothing has been done to stop this.

c) We also need to attract only that business which clearly will result in tax substance being in Malta. All professionals involved in this sector should refuse any business where such substance is missing.

d) A very strong attempt must be made to improve the islands reputation. Far too many times professionals working in financial services attending international conferences and receiving uncomfortable looks when they note they are form Malta. This must stop, once and for all, because it is extremely unfair on those who have invested time and money in an attempt to provide a professional service.

e) Each organization involved in financial services should take a look at its client base and decide what percentage of its clients should be encouraged to leave the island. It will then give that organization time to focus on its triple A clients which would be a pleasure to work on and also prestigious clients for Malta as a financial jurisdiction. The notion less is more is clear here.

If as a country we take the initiative in all the above, we may actually manage to be in the forefront of the changes to come, managing change rather than allowing it to manage us.

Q: It has been said that Britain’s exit from the EU will result in Malta losing a powerful ally in the vote against EU tax harmonisation. What would change – in concrete terms - if this is approved by the European Commission and institutions?

PG: The United Kingdom has undoubtedly been a large country in EU fora which has always tried to provide a balance in financial services. In my eyes, Brexit is unfortunate for all involved including the United Kingdom but also the European Union. I believe that those countries in the EU which consider financial services to be important to their economy to gather together and create a common front. Here I am referring to different countries such as Ireland, Netherlands, Luxembourg, Cyprus, Belgium and Malta. This group of countries includes 3 founder signatories to the Treaty of Rome and thus they certainly have much more experience than Malta in how to understand EU politics and how best to find a compromise. Malta will indeed lose an ally with Brexit, when it comes to EU tax harmonization, yet it may gain a network of countries within which to push for fair taxation solutions.

An abstract of this article first appeared in The Malta Business Observer April 2019 issue and on the Malta Chamber of Commerce Business Portal