Lack of clarity on new minimum company tax regime causing unease

Lack of clarity on EU-mandated changes to Malta’s company tax regime is causing unease with some of the largest employers bracing themselves for the hardest hit.

Industry sources who spoke to MaltaToday said the lack of information on how the new tax regime will be structured is contributing to the uncertainty.

Malta will have to overhaul its company tax system in the next two years to introduce a minimum effective tax rate of 15%, effectively losing its low-tax jurisdiction status.

The new global rules set by the OECD, an international organisation, will be adopted EU-wide by 2025 and will apply to companies with an annual group turnover of €750 million.

The high turnover threshold means that several companies employing hundreds in manufacturing and gaming will be impacted, according to a senior practitioner with one of the big four financial services firms.

The senior practitioner, who chose to remain anonymous because of involvement in ongoing talks, said the companies are among the largest in Malta and are crucial for the export economy.

“Malta’s current system of refunds means companies pay an effective tax of 5%, which means that the companies that do fall within the threshold of the new rules will have to be charged at 15%, denying them the tax advantage of being in Malta,” the practitioner said.

Details of how the new company tax will look have not yet been made public with Finance Minister Clyde Caruana saying last month that a draft proposal was being run through simulations to determine its impact on government revenue and the economy.

Finance Minister Clyde Caruana says the new tax regime is still a works in progress

Asked to comment about the unease among foreign investors, Caruana told MaltaToday that work was still ongoing to establish the way forward and “any conclusions at this stage are premature and potentially damaging to the process”.

He said the government is working with all stakeholders, including practitioners, to transition to a corporate tax system in line with the agreements reached at the OECD and the EU.

“The international agreement on the 15% minimum tax has a global effect and the government is consulting relevant companies that are in scope; companies forming part of groups of companies with a consolidated turnover that exceeds €750 million,” he said.

Without elaborating on how the tax system will change, Caruana said the work being carried out is “consistent with the aim of Malta remaining a competitive and attractive jurisdiction where to invest”.

But practitioners are concerned over the impact the new tax regime could have on the country’s ability to attract foreign investment by large reputable firms.

“It will pose a huge challenge for an island economy on the periphery of the EU,” the senior practitioner said. “It will make it harder to attract companies seeking a foothold in the EU.”

His sentiment was shared by a financial services practitioner, who chose to remain anonymous to protect client confidentiality.

“I am not privy to the confidential talks between Finance Ministry officials and key stakeholders but the EU’s insistence on introducing the new rules by 2025 despite the OECD allowing for a transition period is causing jitters in the market with clients asking what will change and how,” he said.

Companies know the new tax system will be introduced globally but lack of clarity from the government is causing uneasiness across the board.

In the absence of fiscal advantages, Malta will have to find other incentives to retain and attract new business, which is why government has to have a strategy, he added.

“A comprehensive 10-year strategy for financial services has been drawn up by the Malta Financial Services Advisory Council and it includes more than 175 initiatives but getting there will require time, which is why a transition period is important,” the source said.

Lower tax, higher revenues

But not all practitioners have a negative outlook. A senior practitioner with another of the big four firms is confident Malta will find solutions to attract new investment like it did more than two decades ago with the tax refund system.

He said the financial services strategy unveiled in March by the advisory council outlined various initiatives that could offer new investment routes.

Telling MaltaToday that he is not privy to the details of what the government is considering, he said the new tax regime if applied to domestic businesses as well could actually incentivise Maltese companies to declare higher earnings because they will be paying less tax.

“It makes little sense for companies that are already based in Malta to move to another EU jurisdiction, or anywhere else for that matter, because they will face the same minimum tax rate. But for Maltese companies that never benefitted from the refund system, a lower tax regime could serve as an incentive to declare higher earnings to the benefit of the public purse,” he said.

He noted that in the gaming sector, which is traditionally very tax-sensitive, Malta has managed to create a successful cluster that goes beyond the advantage of paying low taxes.

“It is true that tax incentives may have been an attraction but the gaming cluster is strong and Malta is the jurisdiction to be in because of its regulatory regime and good reputation, among others,” he said.

Losing the 5% tax rate

As things stand today, Maltese companies are liable to the top tax rate of 35% just like personal taxes.

However, Malta applies an imputation system that affords companies generous refunds on profits that are taxed here. This system effectively reduces the tax rate for companies to 5%.

Companies in Malta that form part of multi-national chains and which today benefit from an effective tax of 5% on profits will have to start paying 15% (File Photo)

EY’s attractiveness survey last year showed that corporate taxation, as in previous years, was viewed as the parameter that most (71%) existing foreign investors think is attractive. 

The second-strongest parameter was the stability of the social climate (69%) with telecommunications infrastructure (68%) placing third.

The tax imputation system was cleared by the European Commission when Malta joined the EU. But over the years, larger countries like Germany and France applied pressure to have corporate taxes harmonised across the EU to stop large companies from shifting profits to low-tax jurisdictions like Malta.

Taxation within the EU is a national competence and any changes to this require unanimous support at Council level. Unanimity was achieved last December as the EU settled for the global minimum tax of 15% agreed at OECD level.