What We Think

Seed’s Proposal: A reduction in Malta’s Corporate Tax Rate

In the last few days we have seen a number of proposals being made ahead of tonight’s extraordinary budget. Later today, the Government will be presenting measures to continue to assist businesses and taxpayers as a response to the economic pressures brought about by COVID-19.

During times of crises, survival mode is the first instinct which kicks in – this is true both for businesses and also governments. Whilst it is crucial that businesses are provided with the necessary support to survive in the short term, it is equally important that the Government also focusses on the long-term economic vision of the country.

Seed has already made a number of proposals, most of which are included in our Agile report which was published during the month of April, and some others in our article published yesterday on the Sunday Times. One of the proposals which we touched upon in the Agile report was the reduction in Malta’s corporate tax rate.

Malta’s standard corporate tax rate is of 35%, which is well above EU’s average corporate tax rate being 21.3%. Furthermore, whilst the effective tax rate for the shareholders could be reduced by virtue of the Full Imputation System and the Tax Refund System, this would typically apply when a company distributes profits (bar the changes as a result of the introduction of the Consolidated Tax Groups). In the coming months and years, we would expect companies to re-invest their profits and reduce the amount which is distributed to shareholders. Having a lower corporate tax rate, would incentivise companies to re-invest and would also reduce one of their most material costs, which will be crucial for many of them to survive, and strive, in the years to come.

Our proposal is for the corporate tax rate to be reduced to 25% over a 5-year period with the reduction as follows:

The highest rate applicable to individuals would remain 35%, and the additional tax (being the difference between the reduced corporate tax rate and the highest rate applicable to individuals) will be paid by the shareholder upon a dividend distribution. 

This reduction will see companies continue to invest and create more jobs as it provides a much-needed relief by reducing the corporate tax rate by (almost) one-third. 

Although we are aware that this will affect Government revenue, past experiences have shown that any reduction in direct taxation will create additional investment which will not only recoup that lost revenue but will actually generate more. We believe that this long-term vision will help support local businesses in their growth and investment efforts thus creating new opportunities for Maltese workers and students.

Malta’s continued economic success depends on the private sector and its ability to continue to invest and create jobs. Other countries have adopted similar models and today have created a dynamic private sector which itself attracts further foreign investment thus building a virtuous cycle of investment and job creation. A key example remains Estonia where it imposes a corporate tax only on distributed profits meaning that any profits which are re-invested or retained are not subject to tax. Whilst our proposal doesn’t go this far, the concept is similar. The idea is to allow companies to re-invest by reducing their tax burden, which today is excessively high when compared to other countries, or to the EU average. 

Nicky Gouder