Doubts being aired internationally about our tax regime will not go away. Although our critics do not have any moral high ground to stand on, the criticism levelled is one we should have addressed years ago.
The long and short of it is that our tax system does, by the results it produces, discriminate in favour of foreigners, or against Maltese people, depending which way you choose to look at it. In spite of this, the industry and government, head in sand, carry on as if it were business as usual on the grounds that our tax regime is EU and OECD approved.
Our tax system is perfectly legal of course, however it is not all about the pretence of legality, nor is it ‘just politics’, as we are expected to believe.
About a year ago, on November 27, 2016, I wrote an article on this newspaper called ‘Lower Taxation: Good for Business, Jobs and Country’. In this article I made the case for Malta to reduce its maximum tax rate to 17 per cent for foreigners and Maltese, individuals and companies alike.
This, the proposal goes, would be done by instalments over seven years. The main arguments being that a 17 per cent level of taxation is a fair and equitable tax level; it is a level that will bring the black economy into the tax net; it is a good tax rate for foreign direct investment; it provides greater liquidity to business resulting in continued job creation and investment in productive capacity; it leaves employees with more money in their pockets, thereby increasing the standard of living of many; it would assist start-ups and innovation without having to provide special incentives.
The proposal contemplates a period of transition.
Maltese-owned companies are taxed at the highest company rate in the EU – 35 per cent
Because of our current tax rules, we need to be concerned about the efficacy of our double taxation treaty network, as high tax countries are demanding a higher onus of proof on tax residence when dealing with lower tax countries, such as Malta is perceived to be in relation to foreign-owned business. The irony is not lost on the fact that Maltese owned companies are taxed at the highest company rate in the EU – 35 per cent.
The part that offends the international community is that foreign-owned companies are paying tax at an effective rate that is far below the standard 35 per cent. There are also international measures coming into force whereby treaty shopping, profit shifting (transfer pricing) and controlled foreign corporation regulations are to be more rigidly enforced. We would be well advised to come in line before being made to do so.
Moreover, Maltese-owned companies are now being hard hit as we try to compete for resources with foreign-owned companies that have the advantage of a substantially lower tax burden.
The argument that we cannot lower taxes for the Maltese and raise the taxes for the foreigners and still meet the social costs of pensions, education and health services, is fallacious. The management of our tax monies and government borrowing is not an esoteric art – it is plain common sense. You would have the money for the essentials unless you spent it on something else.
The 21st century economic model is one that seeks sustainable balance and not growth; one that seeks quality and collaboration rather than quantity and exploitation; one that demands that we live within our country’s ecological means; one which allows for regeneration and protection of precious natural resources and not one that is based on their depletion to the point of extinction.
If we do opt to change our tax system, our economy would settle at a lower level. Foreign company owners who do not wish to pay the socially acceptable tax of 17 per cent for the privilege of enjoying our hospitality and using our infrastructure will go elsewhere – which is not a bad thing.
There will still be jobs for all the Maltese, maybe some of the expatriates may go back home. It will be irrelevant whether the economy grows or not, so long as it is balanced and provides for the well-being and economic and democratic independence of the Maltese people who are the citizens that our political elite have been elected and paid to serve – lest we forget.
David Marinelli is a professional engaged in financial services.