Budget thoughts from a financial services perspective

Within our island, the buildup towards the annual Budget Speech has historically always been one of expectation. The Minister of Finance, Hon Clyde Caruana as well as other high ranking Government officials had already announced a number of measures such as the COLA to possibly alleviate this sense of expectation.

The Minister also made a clear declaration before the Budget day, that taxes will not be increased and this again was an important announcement. Yet within the financial services industry, as many practitioners meet and discuss with their clients, the resounding questions being raised is  on what direction the country would be taking in its economic and fiscal measures aimed at attracting and retaining international businesses.

One may feel that the Minister of Finance fell short in his Budget Speech because he did not clearly address this concern. One may also feel confused because the Minister had claimed when interviewed by the Times of Malta editor in chief Mr. Herman Grech, just a few days before the Budget Speech, that media reports of a 6 year postponement towards the introduction of the Minimum Tax Directive (Pillar II) applicable to Multi National Enterprises (MNEs) covering a 15% minimum rate of tax “were not quite correct”, only to state a few days later than Malta will postpone the Introduction of this directive.

The Minister of Finance has no enviable job. The need to balance the country’s books, fall in line with EU rules, control government spending, increase the tax compliance rate, introduce social measures to assist different sectors and give a stimulus to the economy must certainly be no easy task. It is fair to say that the Budget did introduce several social measures, which were certainly needed. As one re reads the Budget Speech, possibly the following points related to financial services, do stick out:

(i)               Pillar II will not be introduced this year. As a small nation, this could actually be an important announcement. MNEs with Maltese presence are aware that this rate of tax will need to be paid in some other jurisdiction, yet do see  that  Malta is not the jurisdiction exercising this right. Being an EU member state, in the medium term, this directive would need to be introduced.  Yet being a small state, adopting a wait and see attitude is not necessarily negative.

(ii)              Prior to addressing the budget, the minister noted that the country will address the influx of labour. Clearly, the Maltese infrastructure is unprepared for this volume of people.. Yet being a financial hub Malta needs to attract talent. Indeed remote working is a reality in today’s world. An incentive to recruit non maltese employees who can work from their country of residence  rather than from Malta should also be something which should be incentivised.

(iii)            The Minister noted that the Maltese imputation system is not to be changed. This system, together with focused tax refunds have served the country and the financial services sector well. Its retention may be temporary but is currently necessary. The Minister noted that the country would strive to introduce several internationally acceptable measures based on tax credits and grants in the future. The quicker we have clarity on this the better. There is too much speculation currently on this aspect and too much talk about it. As a practitioner working in this sector, the restructuring of Malta’s tax system has now been debated for far too long and this does create uncertainty.

(iv)            The Minister’s announcements of changes in our Maritime and Aviation laws are interesting. On these points however the Budget Speech did not include enough detail to allow me to comment further

For the financial services sector to continue to be a relevant and an important contributor to our economy, I personally believe that we should stimulate growth through incentives aimed at attracting non maltese workers working from their country of origin. We should also promote and incentivise ESG practices taken by business. Moreover we should consider Value Added Tax and the rates we have negotiated with the EU as an incentive. We should focus on certain peripheral areas to our main economic sectors, such as tourism.  In fact we may now offer medical tourism for cosmetic surgery at a lower rate of 12%, while we could also create a tourism niche in sky diving on the same lines as underwater diving.  Most importantly the country  should quickly  introduce a system of acceptable  tax credits and grants to replace our existing tax structures. Time does not wait for anyone, and it certainly will not wait for us or the financial sector.

This article was written by Paul Giglio, Tax Partner at Mazars in Malta, and first published on The Sunday Times of Malta on 5th November 2023.

Related content