The Organisation for Economic Cooperation and Development recently published a report on the level of tax in a number of countries. The discussion that we have had in this country as to whether Malta is a tax haven or not dovetails easily with this report. Comparing the level of tax in various countries makes an interesting analysis.
The OECD report states that Denmark is the country, among those surveyed, with the highest level of tax as a percentage of the gross domestic product, with 45.9 per cent. Denmark is followed by France (45.3 per cent), Belgium (44.2 per cent), and Finland and Sweden both at 44.1 per cent. Italy is in sixth place at 42.9 per cent, followed by Austria (39.4 per cent) and Hungary (38.8 per cent).
The level of tax in Malta is 32.6 per cent of the gross domestic product, at the same level of 2013. The average for the 35 countries surveyed is 34.3 per cent, just 1.7 per cent above Malta. Therefore Malta fits in very well within the average level of tax in the 35 countries analysed by the OECD, countries that cannot be described as tax havens. The countries with the lowest level of tax as a percentage of the GDP are Mexico (17.2 per cent), Chile (20.4 per cent), Ireland (23 per cent) and Turkey (25.5 per cent).
A country’s tax system and eventual level of tax burden is very much a reflection of the country’s economic structure as well as its economic and social policies.
A country that believes in the benefits of a tax and spend policy is likely to have a higher level of tax burden than a country that does not adopt such a policy.
A country’s tax system and eventual level of tax burden is very much a reflection of the country’s economic structure
Similarly a country that believes strongly in a fiscal policy based on demand management strategies is likely to have a higher level of tax burden than a country that seeks to promote more supply side strategies in its fiscal policy.
Let us give a concrete example. Malta can afford the current level of tax burden while giving its citizens free education and free health services from the cradle to the grave.
On the other hand the maximum rate of the state pension is lower than the minimum rate in a number of countries with a much higher level of tax burden. This is the social system we have chosen for ourselves and the tax burden required to pay for it is, as a result, lower than that of other countries.
It should also be accepted as fact that a lower level of tax incidence does not necessarily mean more wealth for a country. If this were the case, then Mexico and Chile would have much stronger economies than they actually have. It is one of the tools that the government of any country has to generate wealth in the economy.
Such tools could include, for instance, natural resources, the size of the market and technological advancement. They would also include intangible elements that inspire confidence in investors that encourage them to invest in that country.
Unfortunately Malta has no natural resources and no domestic market to offer investors. However, we have been able to offer investors a lower tax burden and an investor-friendly environment. This is our competitive advantage.
There is another consideration to make. We have had the current tax structure, especially that for companies, for a number of years, after agreement had been reached with the EU about it, prior to membership in 2004. Therefore, to call Malta a tax haven after so many years is not exactly appropriate.
This tax comparison tells us three important things. Objectively, Malta cannot be considered a tax haven. Moreover we also need to recognise that we must strengthen our positioning as an investor-friendly location and, third, that we need to make sure that our reputation does not get tarnished.