The European Commission has called on Malta to strengthen its overall governance framework, including by continuing efforts to detect and prosecute corruption in its European Semester 2019 Spring Package of 2019 country-specific recommendations published yesterday.

Brussels has also called on the Maltese government to continue the ongoing progress made on strengthening the anti-money laundering framework, notably regarding enforcements, as well as to strengthen the independence of the judiciary - in particular the safeguards for judicial appointments and dismissals, and to establish a separate prosecution service.

The size of Malta’s financial and gaming sectors and the government’s efforts to attract crypto-currency operators require an effective anti-money laundering enforcement, the Commission warned.

“Governance shortcomings, particularly in the fight against corruption, may also adversely affect the business environment and weigh negatively on investment,” the Commission warned. 

“In particular, there is a risk of conflict of interest at various levels of government. Furthermore, the police’s Economic Crimes Unit is currently understaffed. In this context, it is important to couple a strengthened legislative framework with timely and thorough implementation.

“Improving the governance framework and ensuring an effective implementation is a key element to preserve Malta’s attractiveness and protect the economy from reputational risks.”

Along these lines, the Commission added that while the recent increase in the human and budgetary resources of the Financial Intelligence Analysis Unit as well as the enhancement of its procedures and processes are positive steps.

But, the Commission warned, “At the same time, the increasing reliance on sectors that are considered vulnerable to financial integrity risks creates challenges to the governance framework, putting pressure on the supervisory and enforcement capacity.”

In its recommendations, the Commission acknowledged that reforms aimed at continuing to improve independence of the judiciary and the justice system are ongoing. These include, in particular, the establishment of a new prosecution service, independent from the Attorney General and the police as also recommended by the Council of Europe’s Commission for Democracy through Law (the Venice Commission) in an opinion on Malta, adopted in December 2018.

“Moreover, a strengthened governance framework, including effective judicial and anti-corruption enforcement, is a prerequisite to obtaining the full benefits of investment,” the Commission advised.

In terms of pensions, the Commission called on Malta to “ensure the fiscal sustainability of the healthcare and the pension systems, including by restricting early retirement and adjusting the statutory retirement age in view of expected gains in life expectancy.”

The increase in age-related spending represents a risk to the long-term sustainability of public finances, the Commission warned.

“Age-related public spending in the pension and healthcare systems is expected to increase significantly compared to other EU countries, indicating a risk of rising debt in the long term. Several measures aim to increase the adequacy of pensions also through strengthening incentives for private pension savings and voluntary occupational retirement pensions.

“Ongoing efforts have helped to increase the supply of labour and prolong working lives, with a positive impact on employment rates for women and older workers. In 2018, the government made adjustments to include contributions made after pensionable age and allowed self-employed and part-time working pensioners under 65 years to pay contributions proportionate to their earnings, thereby promoting longer working lives.

“However, the statutory retirement age, gradually increasing from its current level at 62 years, is set to remain unchanged after 2027 at 65 years despite a projected further growth in life expectancy. The Pension Strategy Group established in 2018 is expected to publish a report by December 2020, outlining recommendations for improving the adequacy and sustainability of the pension system.

The Commission has also called on Malta to “address features of the tax system that may facilitate aggressive tax planning by individuals and multinationals, in particular by means of outbound payments.”

The fight against aggressive tax planning is essential to make tax systems more efficient and fair as acknowledged in the 2019 euro area recommendation.

“Spillover effects of taxpayers' aggressive tax planning strategies between Member States call for a coordinated action of national policies to complement EU legislation,” the Commission said.

“Malta has taken measures against aggressive tax planning, but the high level of royalty and dividend payments as a percentage of GDP suggests that Malta’s tax rules are used by companies that engage in aggressive tax planning. The absence of withholding taxes on outbound (i.e. from EU residents to third country residents) dividends, interest and royalty payments made by Malta based companies may lead to those payments avoiding tax altogether, if they are also not subject to tax in the recipient country.

“While Malta’s Notional Interest Deduction regime will help to reduce the debt equity bias, the scheme’s anti-abuse rules, combined with a generous rate and a stock-based regime, warrant close monitoring to prevent any misuse for aggressive tax planning.

“Although Malta Individual Investor Programme and Malta Residence and Visa Programme do not automatically grant residence for tax purposes, if requirements are met, income may be exempt under the ‘non-dom’ regime, if income is not remitted to Malta, without substantial physical presence requirements.

“They may facilitate aggressive tax planning practices and have been listed by the OECD as having a potentially high risk for being misused to circumvent the automatic exchange of financial accounts.”

The insurance sector is exposed to risks of passive supervision, according to the Commission’s analysis, where cooperation between domestic and external supervisors is essential.

“In contrast to the banking sector, the supervision of subsidiaries in the insurance sector are subject to home supervision, i.e. insurance companies registered in Malta and writing business in other countries are under direct supervision of the Maltese regulator.

“However, the supervisory capacity has not been sufficiently strengthened yet. In addition, the complexity of insurance business models and products with increased appetite for establishing and expanding specialised insurance vehicles, calls for stringent supervision.”