A key survey shows how business activity in the eurozone contracted for the first time in seven months in September, as France lost momentum after the end of the Paris Olympic Games.
Consider another index, the preliminary composite eurozone Purchasing Managers' Index, compiled by S&P Global. This plunged to 48.9 from 51.0 in August. The activity measure fell below the 50 level that separates growth from contraction for the first time since February of this year. Back home, quoting economist Marisa Xuereb, she feels that our economy is unsustainable, heavily reliant on third-country nationals who work mostly in construction and tourism.
As regards aesthetics for the construction and environment in general the quality is low. Equally sanguine were the comments from sustainability strategy consultant Gabby Grech Larsson. She is convinced that watching how climate change and nature degradation are reshaping economies globally, Malta, being a small island, is highly vulnerable and therefore, sustainability must be embedded across all national policies and must take a central role in decision-making.
The tiny island is over 33% built up and one of the main problems is not only availability of "natural areas" but the ability of the land to take on "forests" - with lesser rain expected as an outcome of climate change in the coming decades. Malta will soon become an arid country which will increase the process of desertification. So in the end, one wonders what are the essentials to attract FDI to invest in Malta?
The answer is mixed; but corporate tax incentives remain high. It is one of the most significant sources of revenue at almost 15% of its total tax income. Malta still has the highest top statutory tax rates on business profits at 35%, followed by Portugal (31.5%) and Germany (29.9%), while the lowest can be found in Cyprus (12.5%), Bulgaria (10%) and Hungary (9%). But our statutory corporate tax rate masks the rebates that lead to an effective tax rate of 5% for companies that are owned by non-residents or by residents without domicile in Malta.
In Europe, various "tiny" jurisdictions reported a very high number of companies per adult population, suggesting their preference for legally shifting profits from high-tax regimes to lower tax countries. To avoid taxes, multinational enterprises (MNEs) can use complex tax structures with entities in these jurisdictions to shift profits to subsidiaries where they will be taxed less.
A 2022 study, cited by the EU's taxation report, identified Puerto Rico, Ireland, Luxembourg, Hong Kong, Switzerland, Singapore and the Netherlands as the main destinations for profit-shifting. How does Malta compare? It has refunded over €13bn in income tax to corporate shareholders in the last 14 years under its refundable tax imputation system.
Every year since 2008, Malta refunded an average of 14.2% from the tax owing from such eligible companies. The number of companies benefitting from the refund has grown exponentially. Currently there are 8,012 companies actively registering for tax refunds under the refundable tax credit system. Over €276m in tax owing was whittled down to €39m, to 2022, when a sheer €1.5bn was whittled down to €216m after refunds.
Pillar 2 tax is a new OECD system of a universal 15% tax, which will come into force in five years. It stands for MNEs earning over €750m. This will be a game-changer for local foreign subsidiaries. But currently discussions with the Commission are underway for approved discretionary tax credits which will sugar the pill. Regrettably, there is a high skill shortage and a lingering reputational concern following the lifting of the Grey Listing. Both pose risks to foreign investors, according to a major annual business survey by EY.
In its annual Malta Attractiveness Survey, EY found that of the companies surveyed, 61% were concerned about pending tax reform brought about by changes in international taxation policies (predominantly pillar 2). The survey revealed pressing concerns about Malta's readiness for future population increases, with 86% of respondents saying they were concerned the levels of planning and preparedness were inadequate. While 37% rated the country's readiness as "inadequate", 49% rated it as "very inadequate". The EY report noted that, had it not been for immigration, "in the last years Malta's working age population would have declined by 1% instead of rising by 3%".
While in 2000 foreign workers contributed just 2.4% of all social contributions, in 2014 this share had risen to just over 10%. But the Central Bank Quarterly Review in 2016 comes to the rescue for Castille. It showers praise over the astute contribution by foreign workers. In its assessment, these have contributed significantly to both economic growth as well as the state of its public finances.
The bank found empirical evidence that foreign workers were paying more tax than before while using relatively fewer hospital and educational resources. Revenue from direct taxes on foreign workers had shot up by nine times during the same period, as per the Central Bank's survey. The report also lays bare job disparities among foreign workers, with EU workers on one end of the labour market and third-country nationals on the other. So now that TCNs are found everywhere, what is the opinion of the budget minister and how will this vast labour supply reflect on the 2025 budget. He floated the spurious idea that labour-intensive, low-productive sectors should pay higher taxes, as a way of encouraging a shift to higher value-added activities. Another unusual statement involves the University of Malta.
It should start to depend less on public funding and like other foreign institutions generate fees. It was Caruana's declaration that the University of Malta should start to generate deeper flows of funds for its own success, particularly in top notch research and development.
To conclude and comment on the topic of growth one harkens to heed the advice of Minister Miriam Dalli responsible for sustainable economy and energy. She stoically called for an ambitious economic plan that would reshape the attractiveness of a post-pandemic era to sustain and enhance our chances for more multinational investors.
George M. Mangion is senior partner with PKF Malta
gmm@pkfmalta.com