Finance Malta - new body to promote financial services abroad

The government and the financial services sector have agreed to team up in a public-private partnership to promote Maltese financial services abroad, Parliamentary Secretary Tonio Fenech told Parliament, yesterday.

He said details about the joint venture, to operate under the name Finance Malta, would be announced in a few days' time.

The purpose of the new organisation will be to enable Malta to exploit the benefits of an agreement on company taxation reached with the European Union late last year. That agreement, Mr Fenech said, had preserved the elements which made Malta an attractive jurisdiction for investment, particularly the full tax imputation system.

"Now that Malta's taxation system has received the blessing of the EU and all uncertainties have been removed, the financial sector's already strong potential for growth has improved considerably and Malta must position itself to attract as much investment as possible," Mr Fenech said.

He made his comments when moving a Bill amending the Income Tax Act and the Income Tax Management Act in line with the agreement.

The Parliamentary Secretary explained that although the European Union did not have direct competence on company tax, there were aspects in which the European Commission had a say, notably to ensure that the taxation system did not grant an unfair competitive advantage when compared to tax structures in other EU member states. The EU also wanted to ensure that fiscal systems were not predatory.

Talks with the Code of Conduct Group for Business Taxation and DG Competition had been long and far from easy, Mr Fenech said. Although the financial services industry had continued to grow in the meantime, a climate of uncertainty had existed.

The most important outcome of the talks was that Malta could continue to operate the full imputation system. This was a concept, operated only in Malta among EU countries, where although companies paid tax, this tax was effectively refunded when dividends were taxed so that effectively, taxation could not be higher than 35 per cent. In other countries tax was paid both by the companies and their shareholders after dividends were distributed, meaning that the final amount was higher.

The Maltese system was therefore attractive to companies registered in Malta whose shareholders lived abroad.

The EU had insisted that the system should treat everyone in the same way. Therefore, in terms of these amendments, shareholders resident in Malta could also ask for the tax refund, when it suited them. There would be situations, however, where shareholders in Malta would find it did not suit them to claim the refund because that could raise their tax rate beyond 35 per cent.

Still, the principle under which the system would operate would be the same for everyone and Malta, therefore, would remain an attractive jurisdiction for financial services companies.

Another consequence of these amendments was that what were currently referred to as international trading companies would henceforth no longer be limited to operating only internationally.

Mr Fenech said these provisions applied from last January 1 and did not apply to the property sector. Companies registered under the old regime could opt to stay under that system until 2010.

Mr Fenech also spoke on how the financial services industry had evolved and grown over the years, always in agreement with the opposition. What started off as an offshore financial services centre was now an onshore jurisdiction which, directly and indirectly, accounted for 12 per cent of the GDP and employed 6,000.

The sector now included 32 banks or financial institutions, 90 financial intermediaries and 270 investment service providers who enjoyed passporting rights to operate across the EU. Some 200 collective investment schemes were registered in Malta. The sector also included 466 Ucits and close to 80 insurance operators, which also enjoyed passporting rights. The banking sector alone had some €30 billion in assets registered in Malta.

It was estimated that the sector grew by 30 per cent in two years.

The agreement reached by the EU and this Bill, which would cement it, released the potential for stronger growth.

Malta, however, needed to promote its services effectively so that it could become a financial services centre in the Mediterranean and Europe.

Talks with the private sector on the setting up of a public-private partnership, called Finance Malta, to promote Maltese financial services abroad were concluded recently and more details would be given shortly.

The government was also working to encourage more young people to take up a career in financial services and the MFSA had started a series of meetings with guidance teachers in schools, Mr Fenech said. (See The Times Business, page 3).

Labour MP Jose' Herrera said this was one of the best Bills to be moved in Parliament in this legislature, because of its importance for the financial sector.

Financial services had now become a pillar of the economy, accounting for some 12 per cent of GDP. This was now the best performing sector of the economy and its growth potential was significant. Dr Herrera paid tribute to former minister Joe Fenech for having launched financial services when he was parliamentary secretary.

The sector had since developed, backed all the way by the Labour opposition. The financial services industry was clearly an area where Malta could compete strongly with other countries, along with tourism, especially as the manufacturing sector faced major competitiveness problems.

Malta enjoyed human resources which were second to none in financial services and efforts to attract more young people to this sector, and to maritime services, could not but be lauded.

The Maltese financial services sector was efficient and lacked the bureaucracy which blighted other sectors. This agreement, therefore, had been important for the sector to continue to move forward. Failure would have put the whole sector at risk.

This industry, together with the maritime sector and IT were the future growth areas for Malta and the Labour Party in government would work for their further growth.

Dr Herrera said that however important this Bill was, other issues could not be overlooked, such as the fact that economic growth was currently the slowest in the EU.

Furthermore, however novel the tax system was for financial services, it was also a fact that the tax burden for the Maltese had become considerably heavier under this government. In 1999 tax paid by the Maltese amounted to Lm481 million, now it was Lm851 million. Between 1999 and 2003 the government increased stamp duty and income tax, it extended VAT and raised the cost of a host of services.

Dr Herrera insisted that growth of the financial services sector needed to be parallelled by efficiency gains elsewhere. Bureaucracy was still a problem and government decision-making was slow or lacked proper priorities. For example, an investor may invest in a high value property at Fort Chambray, but then Gozo lacked a proper yacht marina which he might want to use. Recently Malta even lost bunkering advantages for yachts.

Winding up Mr Fenech welcomed the opposition's commitment to the financial services industry. He also praised the MFSA for its efficiency and seriousness, saying it had gained wide respect internationally. The parliamentary secretary also reacted to Dr Herrera's comments on taxation, saying taxation was a necessary evil for more efficient health, education and social services, among others. Although VAT had been raised, much of this increased revenue was the result of economic growth and more efficient tax collection, rather than a direct increase in taxation. And everyone remembered the taxes introduced by Labour, along with the astronomical water and electricity tariffs.

Malta had now seen two successive budgets without any new taxes, with income tax being substantially reduced in the last budget and this process would continue as the economy maintained its growth.

Indeed tax revenue in January and February was higher than projected, despite the income tax cuts. The bill was given a second reading.