Unfairness makes Maltese businesses ‘second-class’ | Abigail Mamo

Last year started with the high of an economic boom, and ended with the all-time low of a political crisis. What sort of impact, if any, did recent events have on Malta’s economic climate?

I don’t believe we are in a position to assess the full extent of the impact yet. We are talking about something intangible, that will not just affect us in the immediacy. The full impact will be felt in the future: starting this year, and the years to follow.

What we can say, however, is that a certain level of impact can already be felt. There was a lot of turmoil at the end of 2019, which affected consumer spending sentiment… and obviously, it affected business confidence too.

Business sentiment is generally a very relevant and reliable indicator: you get an immediate feel from your customers; and if you work with foreign businesses, you will also get an indication of how Malta is regarded overseas. And we have already started seeing a bit of a slowdown: January got off to a slower start than was originally expected.

Ironically, however, the economic boom was in part the result a policy of deregulation (e.g., the electoral promise to ‘slash bureaucracy’), which weakened national enforcement institutions. Do you share the concern that economic prosperity, in Malta, seems to be dependent on laxity in governance and enforcement?

I don’t agree with that, no. It’s not just lack of regulation that can have negative consequences. Over-regulation can be a problem, too. And the crisis itself was caused by corruption, not just by lax enforcement. Being ‘pro-business’, in itself, had nothing to do with it. Encouraging investment, and putting incentives in place for businesses to work as efficiently as they can… that is not corruption.

No; but having weaker enforcement agencies does make it easier for corruption to take place…

The truth is that enforcement has always been a problem in Malta. When we are a presented with a legislative proposal that relies on enforcement, we always respond, a priori, that it is not going to work. Malta lacks the necessary resources, and an adequate enforcement infrastructure.

This is not a problem that suddenly cropped up in 2018; it’s not as though all government’s enforcement officials were just spending their days having tea. No: the system ran exactly the same as it had always run before.

But because the economy boomed so quickly, we were too slow to upgrade the infrastructure and regulatory framework, and beef up the very limited resources at our disposal.

A similar situation happened with the recommendations of the Venice Commission report, concerning good governance. Malta was not equipped for either the amount or the type of business we started to attract; and as we all now know, there were shortcomings which we were not quick enough to address.

Now, we are making up for lost time. Malta has a long list of shortcomings, and we have a lot to catch up on.

Does the Chamber agree with Environment Minister Aaron Farrugia’s proposal of a register for lobbyists, as well as a public record of all meetings between ministers and stakeholders?

We have no problem with anything that will lead to increased transparency. As I said, we have a lot of shortcomings to catch up on… so at the moment, I don’t believe we should the ones to say, ‘this might be a bit too much’. In fact, we are very far from doing ‘too much’; we are still falling far short of what we need to be doing. So anything in the direction of greater transparency and accountability is to be welcomed.

Obviously, however, certain things should still be discussed: because we can get at the same point of arrival in different ways. So we still expect that stakeholders are consulted, and that things are done in the best way possible… as opposed to decisions being taken on paper, only to create more problems as we go along.

Recent revelations suggest that these ‘shortcomings’ include the proximity of certain businesses (e.g., the Tumas Fenech Group) to the seat of power. Doesn’t the lack of transparency, in questions concerning hidden influences over government, have an adverse effect on your members? 

It does, certainly. We have been feeling short-changed. One of the main things businesses complain about are tendering processes. As I recall, there was even a report on MaltaToday, which revealed the extent to which businesses were aware of corruption. It showed that local businesses experience certain injustices on a day-to-day basis; but also that they do not view corruption as being widespread among all businesses… only among the select few. 

The result is that, while others are given red-carpet treatment, everyone else is simply left to make the best deal possible out of whatever remains…

The Chamber has complained about injustice in other areas: such as a tax rebate system which creates a non-level playing field for Maltese businesses. But isn't the rebate only applicable to businesses which generate their profits outside of Malta?

That is how the tax rebate system was originally devised, when it was first introduced some time before we joined the EU.

The government of the day introduced a new tax system, under which foreign investments traceable to foreign ultimate beneficiary owners – in other words, where the person making the profits is not a Maltese citizen - would at the end of the day only be taxed at 5%. Because while the full 35% is initially paid, 30% of it can later be reclaimed within a number of days stipulated within the law.

This is not unique to Malta; it is common to many small states that need a bigger push to highlight themselves in the eyes of foreign investors.  But when the law was first drawn up, it was limited to businesses that were set up in Malta; paid taxes in Malta; but then, conducted their business overseas, so as not to compete in the domestic market.

When Malta entered the EU, however, we were told that there could be no discrimination between businesses targeting the Maltese market, and others targeting foreign markets. That opened up a Pandora’s Box. Suddenly, there were Maltese businesses operating in the same line as the foreign ones, which – unlike their Maltese competitors - benefited from a 30% tax rebate. It resulted in very unfair direct competition…

Would a foreign-owned supermarket chain like Lidl be an example?

Lidl is an example, yes. But in the sense that it is eligible to claim the 30% refund. It doesn’t mean that Lidl actually claims the 30% refund every year: but the option is always open to them, if they want to take it. And Lidl operates in direct competition with other operators, both large and small…

Prime Minister Robert Abela had made a campaign pledge to address this issue; but Finance Minister Edward Scicluna has stated that it is ‘impossible’ to change the system. So what are Chamber’s expectations?

We have been on a bit of a journey regarding this, to be honest. It is a very delicate issue, and we understand the importance of the implications for Malta… because, at the end of the day, this tax system translates into enormous revenue for the country.

So our starting point for the discussion was Minister Scicluna telling us that the disadvantage didn’t really exist; and that foreign investors were treated exactly like the Maltese. But this only raised the question: why are so many foreign companies investing in Malta? There must be something attracting them here…

Over the years, others took an interest in this matter, and it is now recognized – in a number of reports, including one by Ernst & Young recently – that the tax rebate is indeed one of the main pull-factors for foreign investment in Malta. So I think we have now surpassed the barrier of lack of clarity, concerning who is advantaged and who is not.

Now, we have reached a situation where the new government is telling us that it will not change the system in any way, because it is ‘sacred’ to Malta’s national interest. And really and truly, we are fine with this…

But you have just described the same system as ‘unfair’ and ‘discriminatory’ towards Maltese businesses…

We believe it is not an unflawed tax system; but its flaws can be tackled in other ways. Our position is that, if our tax system is so important for Malta – and the figures show that it is – let’s leave it in place. But we have also put forward proposals on how it can be finetuned.

On the other hand, Prime Minister Robert Abela did say that he wanted to achieve a level playing field, where everyone has to compete fairly. As things stand, Maltese businesses pay 35% tax; so the playing field is clearly not level.

Having said this, there are a lot of other ways the situation could be improved; a lot of complementary measures that can be taken, to make up for this disparity. So we need to come up with a clever way to put Maltese businesses back on a level playing field with their foreign counterparts.

That is what we are asking for… and it is very much in line with what Dr Abela is saying: i.e., that unfairness is unacceptable; and that it relegates Maltese businesses to second-class status.

And besides: if something happens to Malta, foreign businesses will be the first to pull out, at the end of the day. So it is Maltese businesses that we need to take care of; because if we don’t, they will be the first to falter.