The European Commission has sounded the alarm over increased pressure on Malta’s infrastructure, natural resources and the environment, or face threats to one of the most important economic pillars locally – tourism.

Several remarks were made for the European Commission’s Country-Specific Recommendation (CSR’s) on Malta’s 2018 National Reform Programme.

Among the challenges observed, the Commission noted:

“Robust economic growth has increased pressure on infrastructure and natural resources. In particular, the road transport sector faces major infrastructure and long term sustainability challenges. Insufficient transport infrastructure and rising congestion costs are a barrier to investment.

“The increase in the number of vehicles and in traffic leads to rising greenhouse gas emissions and negatively affects air quality. They may also negatively impact tourism, which represents an important pillar of Malta’s economy.”

Serious concern was raised about Malta’s public finances in view of the ageing population, the pension system and the healthcare system. It recommended that Malta increase the pensionable age and discourage early retirement. The government issues a statement saying it is committed to leaving the retirement age as is.

Public Finances

The commission remarked that Malta’s medium term budgetary objective, a balanced budgetary position in terms of GDP, continues to be met with a positive margin throughout the programme period of 2018-2021.

Based on the Commission 2018 spring forecast, the structural balance is forecast to register a surplus of 0.6 per cent of GDP in 2018 and 1.1 per cent of GDP in 2019, above the budgetary objective.

“Overall, the Council is of the opinion that Malta is projected to comply with the provisions of the Stability and Growth Pact in 2018 and 2019.

“At the same time, expenditure developments should be monitored carefully in the short and the medium term, especially in light of possible future risks to the robustness of revenues.”

The fight against aggressive tax practices was highlighted, in order to “impede distortions of competition between firms, provide fair treatment of taxpayers and safeguard public finances”.

The Commission also delivered a thinly veiled remark about Malta by saying “spillover effects of tax payers’ aggressive planning strategies between Member States call for a coordinated action of national policies to complement EU legislation”.

Malta-based companies not being charged withholding tax on outbound (i.e. from EU residents to third country residents) dividends, interest and royalty payments “may lead to those payments avoiding tax altogether, if they are also not subject to tax in the recipient country”.

“While Malta’s new National Interest Deduction regime will help to reduce the debt equity bias, insufficient anti-abuse rules, combined with a relatively high rate and a stock-based regime, may provide opportunities for tax avoidance.”

It also highlighted Malta’s corporate tax system allowing companies that are not domiciled in Malta to pay very little tax is contributing to aggressive tax avoidance practices.

On the issue, the Commission has “taken note of Malta’s commitment to fight against taxpayers aggressive tax planning. Based on recent exchanges, the Commission will continue its constructive dialogue to fight against taxpayers aggressive planning strategies”.

Aggressive tax planning

It is to be noted that the Commission has acknowledged Malta’s efforts to fight aggressive tax planning by taxpayers, meaning individuals, rather than any commitment to mitigate companies’ aggressive tax planning strategies. Malta, together with other small EU member states that offer attractive corporate tax rates continue to defend their systems which were ultimately approved by the EU before gaining accession.

The Commission noted how understaffed the Malta Financial Services Authority continues to be, therefore raising concerns on its “capacity to supervise a large cross-border financial system, in particular its non-bank segment”.

It noted that some progress has been made in improving crossborder cooperation.

Due to the understaffed regulators and the nature of Malta’s growing services sector, in particular online gaming, “this may create challenges to the financial system’s integrity, calling for a strong anti-money laundering framework”.

It could not comment on the implementation of the latest EU antimoney laundering directive because it was recently transposed into national law.