What We Think

April 28, 2020

Business leaders in a VUCA environment

Over the past few years, there has been a collective realisation that the global environment is being characterised even more by Volatility, Uncertainty, Complexity and Ambiguity (VUCA). COVID-19 has been the perfect embodiment of VUCA whereby companies all over the world and entire nations have been faced with the all the elements of VUCA. With no clear end in sight, lots of debate is happening as to what do we need to face such a crisis. The answer is VUCA (2.0) too!

 

What is VUCA?

First introduced as a concept by the American War College to describe the global multilateral situation after the Cold War, it draws upon the leadership theories of Warren Bennis and Burt Nanus, and has over the years, been increasingly used in business management and strategic leadership.

Volatility is a situation with unstable changes, and unexpected challenges that could last for an unknown duration.

Uncertainty is a situation where there is a lack of predictability, even though the basic cause and effect might be known.

Complexity is a situation with countless interlinked variables and factors, with some or all of the information available or predicted, but the sheer scale of it makes it challenging to process.

Ambiguity is a situation where cause and effect are not so clear, there is no prior experience to fall back on, and the management faces an unclear reality or future filled with countless unknowns.

These are all becoming known adjectives to describe various situations business leaders and their Boards face. However, what is need is a way to deal with VUCA which is becoming an ever-more common reality.

The answer in dealing with VUCA rests with VUCA 2.0.

What is VUCA 2.0?

Coined by Bill George, a senior fellow at Harvard Business School; Vision, Understanding, Courage and Agility (VUCA 2.0) are seen as the antidote or strategy that companies and countries should adopt to help them navigate an ever-more VUCA environment

Vision is the ability to see through the fog and plan for ahead for a changed future. Business leaders should use this time to stop, evaluate and plan for the post COVID-19 reality. This phase will pass, and if organisations have planned for what to do when the time comes, they will be anticipating and ready to move ahead of others who have not.

Understanding is where leaders first have to truly understand their organization’s strengths and potential blind spots, in order to pick the best strategies that play to their advantages. In this stage, information gathering is crucial, not only within the organization but also outside, from as wide a spectrum as possible, ranging from employees, to clients, and even about the industry and economy. This is especially evident during this period, seeing how increasingly interconnected the globalised economy has become, with no one emerging unscathed from the COVID-19 virus spread. This crucial understanding and wide-spread information gathering will allow your organisation to better understand the challenges the virus pose, and with that be better able to develop strategies to counter them.

Courage is the audacity during difficult times to make decisions based on calculated risks that could go against all common practice and beliefs. Sometimes, organizations have to consider going against traditionally successful techniques and take risks, because in the rapidly changing world of today, being second to take action could be the difference between survival and failure.

Agility is essentially the need for organizations to be flexible to change and adapt. While mid and long-term plans are necessary, strategies do have to be flexible enough to rapidly adapt to external circumstances, without affecting or changing the organization’s overarching vision and mission.

 

Concluding thoughts

COVID-19 embodies VUCA. As the human and economic tragedy continues to unfold, business and national leaders need to embrace VUCA 2.0 to chart a new way forward for their companies and countries.

To this effect Seed has launched Agile. Perspectives on Malta’s economy post COVID-19 and not only presents a toolkit for companies to implement during these challenging times, but applies VUCA 2.0 on a national level providing the framework for a long-term national vision.

What We Think

April 21, 2020

Mitigate against repercussions brought about due to COVID-19: Start-Up Investment Grant Scheme

This pandemic can be best described as a watershed moment for humanity. It has ushered a new surreal world that has caught the world off-guard. What we once all perceived as normality has changed, and we all need to adjust to a new normal. The Measures and Support Division are administering the Start-Up Investment Grant Scheme which is specifically targeted to autonomous enterprises which at the time of the granting of the aid, among other conditions, are unlisted micro or small enterprises less than three years following their establishment.  The Maltese market experienced an unprecedented rise of similar start-ups in the last few years, mainly thanks to a booming economy and a responsive market. Many of these entities up until a few months ago were planning or in the process of implementing their growth strategies. Giving up and retracting investment and operations now is the worst decision one can take, and one which business owners will surely regret in the future.  This scheme seeks to assist start-ups, engaged across different activities, in the form of non-repayable Grants in part-financing their initial productive investment costs in both Tangible and Intangible assets. The aid intensity is of 50% on eligible costs up to a maximum grant value of €300,000.  Eligible costs include:

  1. Lease/rental of private operational premises;
  2. Construction/up-grades of private operational premises;
  3. Purchasing of equipment, machinery and plant;
  4. Patents and licenses.

This crisis is a temporary one, and businesses shouldn’t only be thinking about surviving the storm, but about emerging stronger once it’s over.

Should you require any further information or have any queries on this scheme, including on entity eligibility, please contact:

Daniel Attard

What We Think

April 15, 2020

Taxation of the Real Estate Market following the Budget Measures Act

On 20 March 2020, various measures announced in the Malta Budget 2020 speech were transposed into law through the Budget Measures Implementation Act.

Several changes brought about by the Budget Act relate to the taxation of the real estate market. There was also a change relating to stamp duty on the acquisition of immovable property.

Income Tax Measures relating to immovable property

  1. Restricting the applicability of the 5% rate on property transfers

Prior to this amendment, a 5% rate applied on the transfer value of immovable property in Malta where the transfer is made not later than five years after the date of its acquisition, and the property does not form part of a project.

As a result of the Budget Act, the 5% rate is no longer applicable where the transferor, at any time in the five years preceding the transfer of the property, carried out works on the property on which a development permit was required, unless the transferor had acquired the property for the purpose of establishing sole ordinary residence and declared such intention in the acquisition deed.

  1. Withholding tax on assignments of rights acquired under a promise of sale agreement

As from 1 January 2020, tax on assignments of rights over immovable property acquired under a promise of sale agreement is chargeable at a final tax of 15% on the first €100,000. Proceeds over €100,000 are taxed at the rate of tax applicable to the assignor, subject to a provisional tax payment at 7%.

Previously, gains from the assignment of rights acquired under a promise of sale agreement were taxed at the standard rates of tax.

Rules have been published by the Commissioner for Revenue in relation to this amendment, specifying the manner in which the tax is to be computed and the deductions allowable.

  1. Provisional tax on transfers of shares in a property company or an interest in a property partnership

Provisional tax is generally calculated at 7% of the consideration is due upon specified transfers of chargeable capital assets.

With effect from 20 March 2020, the provisional tax due on the transfer of securities in a property company or on the transfer of an interest in a property partnership shall be equal to an amount which will be prescribed, capped at 35% of the higher of the market value and consideration for the transfer.

Stamp duty measures relating to immovable property

Acquisitions by individuals of sole ordinary residence

A reduced rate of 3.5% is applicable to the first €175,000 (previously €150,000) of the value or consideration paid by qualifying individuals acquiring immovable property to establish their sole, ordinary residence.

The amendment was implemented with effect from 15 October 2019.

For more information on the above measures, please contact

Nicky Gouder

Luana Farrugia

 

 

To deliver a better
future, today.

We make the world a better place by consciously improving the lives of our employees, clients, and community.

The bedrock of our business are our employees. At Seed, we are focused on the nature of the people we want to recruit and the professional development we want to give them. Our efforts are in making Seed a great place to work. Our investment in tech empowers our teams to work remotely and we offer all employees a clear career path from day one. Our philosophy is simple, we value and invest in our employees and remain steadfast in our effort to see them grow in every aspect of their life.

Our client work too defines who we are. Drawing from the experience and knowledge of our employees, we see ourselves as trusted advisors. We pride ourselves of always looking beyond the obvious and delivering more than expected. Our ethics, working methods and all-round knowledge are respected by all our clients be they from the private or public sector; local or foreign; large or small; regulated and not. We continue creating an environment where everyone is driven to deliver the highest quality work for clients we really care about.

We aim to make a positive impact on society through various means. First and foremost, by creating and maintaining a working environment and culture that supports and values people. Secondly, we provide our consultancy services to voluntary associations and causes on a pro bono basis. We also support the communities where we live and work by contributing to causes that make a difference to people’s lives and to the wider community. Seed cares.

Seed is a consulting firm with people at its heart, focused on delivering value and making an impact with sustainability as a benchmark of our success.

What We Think

April 10, 2020

It’s all in the implementation now

On April 2 2020, the European Commission has approved Malta’s aid package under the temporary state aid framework. This was much awaited news following the announcement of the measures earlier last week.

This set of measures has given a proportion of affected people some hope that they are not alone in facing the crisis. The cash injection will alleviate some of the hardships that some employers are facing. The first priority must remain workers and securing their employment. Although ambitious, the package has targeted specific sectors. Though still early days, the ramifications of this economic crisis will go well-beyond these specific sectors. There are many other businesses feeling the brunt of the crisis and they too need reassurances from Government that if and when needed, support will be available to them. Shoring up the confidence of economic operators is critical for the economy.

A modern globalized economy is a complex web of interconnected parties: employees, firms, suppliers, consumers, banks and financial intermediaries. Everyone is someone else’s employee, customer, lender, etc. If one of this buyer-seller links is broken by this crisis, the outcome will be a cascading chain of disruptions which if not halted can quickly turn a recession into a protracted depression.

It is therefore critical that these measures are implemented swiftly. Literally nothing should stand in between the support being given out and the intended beneficiaries. Given that the banking system is going to be the main conduit of aid in the economy, processes and procedures need to be streamlined. We cannot have a situation whereby approvals and onboarding take months as is current practice. These are extraordinary times and every day becomes crucial for a firm’s survival. Deployment of digital tools wherever possible is essential for the flow of funds to happen.

Government, through the Malta Development Bank, can contribute significantly to ensure that such financing permeates throughout the economy. A development bank has a key role in such circumstances by leveraging state guarantees and accessing low-interest funds from European institutions. Development banks have made a resurgence in the past few years following the financial crisis especially given their role in providing counter-cyclical financing. One can identify a number of key roles that the development bank can play in this regard. First, to provide direct finance or provide it on better-than-market terms; this should be a main priority at this point in time to ensure that affected firms, including start-ups, have access to much needed funds. Second, to fill gaps in the supply of credit especially in commercial banks will not take on the risks. Third, to promote economic stability, by playing a counter-cyclical role, to ensure that the economy does not seize up in terms of a crisis.

Our economic survival depends very much on flattening the economic recession curve too. For this to happen, in parallel with a robust set of measures we need to ensure that their implementation is swift. Otherwise, it can be too late. Government and the Malta Development Bank need to take a leading role in ensuring that the financial services sector provide the lifeline the economy requires.

For further information on the above kindly contact:

JP Fabri

On April 2 2020, the European Commission has approved Malta’s aid package under the temporary state aid framework. This was much awaited news following the announcement of the measures earlier last week.

This set of measures has given a proportion of affected people some hope that they are not alone in facing the crisis. The cash injection will alleviate some of the hardships that some employers are facing. The first priority must remain workers and securing their employment. Although ambitious, the package has targeted specific sectors. Though still early days, the ramifications of this economic crisis will go well-beyond these specific sectors. There are many other businesses feeling the brunt of the crisis and they too need reassurances from Government that if and when needed, support will be available to them. Shoring up the confidence of economic operators is critical for the economy.

A modern globalized economy is a complex web of interconnected parties: employees, firms, suppliers, consumers, banks and financial intermediaries. Everyone is someone else’s employee, customer, lender, etc. If one of this buyer-seller links is broken by this crisis, the outcome will be a cascading chain of disruptions which if not halted can quickly turn a recession into a protracted depression.

It is therefore critical that these measures are implemented swiftly. Literally nothing should stand in between the support being given out and the intended beneficiaries. Given that the banking system is going to be the main conduit of aid in the economy, processes and procedures need to be streamlined. We cannot have a situation whereby approvals and onboarding take months as is current practice. These are extraordinary times and every day becomes crucial for a firm’s survival. Deployment of digital tools wherever possible is essential for the flow of funds to happen.

Government, through the Malta Development Bank, can contribute significantly to ensure that such financing permeates throughout the economy. A development bank has a key role in such circumstances by leveraging state guarantees and accessing low-interest funds from European institutions. Development banks have made a resurgence in the past few years following the financial crisis especially given their role in providing counter-cyclical financing. One can identify a number of key roles that the development bank can play in this regard. First, to provide direct finance or provide it on better-than-market terms; this should be a main priority at this point in time to ensure that affected firms, including start-ups, have access to much needed funds. Second, to fill gaps in the supply of credit especially in commercial banks will not take on the risks. Third, to promote economic stability, by playing a counter-cyclical role, to ensure that the economy does not seize up in terms of a crisis.

Our economic survival depends very much on flattening the economic recession curve too. For this to happen, in parallel with a robust set of measures we need to ensure that their implementation is swift. Otherwise, it can be too late. Government and the Malta Development Bank need to take a leading role in ensuring that the financial services sector provide the lifeline the economy requires.

For further information on the above kindly contact:

JP Fabri

What We Think

April 10, 2020

Whatever it takes

As health authorities continue with measures to flatten the curve, so are governments trying to flatten the recession curve. Focus is now on protecting people and their jobs and ensuring that the imminent economic recessions do not transform into deep depressions. The risk is real, yet over the course of the past weeks we have seen international governments declare post-war like budgets with large fiscal injections. The threat is real, the war is here. It is now a question of economic survival.

Earlier this week, Prime Minister Abela launched the third set of measures to cushion the economic blow. This set of measures has given a proportion of affected people some hope that they are not alone in facing the crisis. The cash injection will alleviate some of the hardships that some employers are facing. The first priority must remain workers and securing their employment. Although ambitious, the package has targeted specific sectors. Though still early days, the ramifications of this economic crisis will go well-beyond these specific sectors. There are many other businesses feeling the brunt of the crisis and they too need reassurances from Government that if and when needed, support will be available to them. Shoring up the confidence of economic operators is critical for the economy.

A modern globalized economy is a complex web of interconnected parties: employees, firms, suppliers, consumers, banks and financial intermediaries. Everyone is someone else’s employee, customer, lender, etc. If one of this buyer-seller links is broken by this crisis, the outcome will be a cascading chain of disruptions which if not halted can quickly turn a recession into a protracted depression.

As more sectors will start feeling the brunt, they too will have to start benefit from direct financial assistance before their financial buffer will too dry up, seriously undermining their ability to invest further in the future. In the interim, the package consisting of deferrals and soft loans will be of support. However, should the effects of the virus extend, much more direct measures will be needed in the coming months.

This will undoubtedly increase government debt. Even though government has the fiscal space to manoeuvre, the direct financial package together with the deferral programmes will definitely require the raising of additional debt. Luckily, we are living in a low interest environment and the European institutions have issued further funds and initiatives to support governments in extending their balance sheets. Government needs to therefore ensure that the additional liquidity reaches the firms that need it. It is the mechanics of such schemes and incentives that will determine their impact and success.

The critical link will be the banking and financial sector. Delivering the much-needed liquidity through soft loans and overdrafts needs to be swift. The lag between measures being communicated and them being implemented needs to be minimised. Application processes and on-boarding procedures by the banks, too need to be shortened and made much more efficient. This is especially true for start-ups that were still in the process of opening bank accounts or obtaining financing. Banks need to come together at this critical time of our economy to protect individuals, today’s companies as well as the companies of tomorrow. The Malta Development Bank has a critical role to play in this time.

This further highlights the importance of having a holistic national social pact that goes beyond the social partners but includes all banking and financial players, including the capital markets. Government needs to ensure that nothing stands in the way of the announced measures.

This is not a cyclical or normal economic downswing. This is a multi-layered and multi-faceted crisis which requires a new mindset to deal with it effectively. Government’s response is going to be critical together with a firm commitment to do whatever it takes.

For further information on the above kindly contact:

JP Fabri

What We Think

April 10, 2020

Time to act fast and big.

The coronavirus pandemic is triggering an unprecedented combined negative supply and demand economic shock. The interplay of these shocks will definitely have a deep and significant impact on production, consumption, employment and incomes. The risk is that the expected downturn will turn into a self-perpetuating and ever-deepening recession.

We have already started seeing calls from the private sector for governments to intervene and to think big in their economic reactions. A number of governments in the EU, including Malta’s, have launched so called mini budgets with headline figures running into the billions. Malta’s fiscal stimulus package amounts to €1.8 billion, or around 12% of our GDP. However, upon closer inspection, the bulk of most stimulus packages, including Malta’s is anchored around guarantees, credit lines and tax deferments.

Such packages reveal a serious misunderstanding of the nature of the crisis. This thinking shows that European policymakers did not learn from the euro crisis a decade account and, to Winston Churchil’s dismay, have let a crisis go to waste. In fact, it is the same misunderstanding that powered the euro crisis a decade ago. Now, as then, companies and households are facing insolvency, not illiquidity. The only way out is for governments to think big and to launch fiscal expansion programmes.

Malta’s package, as announced by the Prime Minister, includes a liquidity injection through a deferral of tax payments and bank guarantees amounting to €1.6 billion, or 84% of the total package. Providing liquidity can help businesses and laid off workers weather the storm, but this policy is insufficient given the current pandemic. Loans do not compensate businesses and workers for their losses; loans just allow them to distribute costs over a longer time horizon. Keeping businesses alive through this crisis and making sure workers continue to receive their wages is essential, especially for those businesses and workers that have to remain idle due to social distancing. What is therefore needed is to think outside of the box and to devise a new temporary and targeted form of social insurance.

The reasons that such a policy is needed and would work in the current circumstances are twofold. First, the driver of the shock is not of an economic or systematic nature. It is a health crisis which is temporary in nature. Second, different industries are affected differently especially those directly affected by social distancing.

Governments need to therefore devise a scheme that directly targets and works through effected businesses. One such way of doing this is for the government to act as a buyer of last resort, replacing the evaporating demand so that businesses can keep paying its employees as usual. This should happen as a free-for-all cash programme but on the basis of conditionality. Such conditions need to be structured that not only guarantee the retention of staff but more importantly support the transformation of the businesses in question. Such programmes, and also through the availability of soft loans, need to be tied to investment upgrades, investment in digital platforms and e-commerce capabilities and green technologies. More importantly, especially for workers with idle time, such interventions need to be conditional on investment in human resources through training programmes to help them acquire new skills.

For further information on the above kindly contact:

JP Fabri

What We Think

April 10, 2020

The economic woes of coronavirus

Being a living structure, an economy is always affected by events that occur. The coronavirus is no exception and it is bound to impact local and global economies alike. As the WHO increased its status to a pandemic, the economic effects can no longer assumed to be negligible or contained but we are facing a severe threat to an already fragile global economy.

From an economic point of view, a pandemic of the scale of coronavirus is bound to impinge on both the supply and demand side of an economy as well as on confidence and decision-making.

The supply-side of economics looks at the production capacity of an economy. In this case, we have seen that various shutdowns and lockdowns which halted factories and businesses are disrupting global supply chains. This means that we can face shortages of certain goods and a slower provision in services. As a result, such firms will demand less labour with the end result of lowering spending power too. On the other hand, the demand-side of the economy looks into the spending patterns as well as the demand for goods and services. As we have seen from supermarkets there currently is a surge in demand for necessities which in turn their supply might be affected due to the disruptions in supply chains mentioned earlier. Also, given the restrictions that are being implemented and the actual fear of the pandemic, travel is being curtailed and this will have an effect on the tourism and hospitality sectors. All these factors together are impacting both consumer and investor confidence and will lead to postponing of investment decisions too which will further add to the depressing effects on the economy. The free-fall in stock markets across the world evidences this decline in confidence levels. This cycle can trigger an economic recession and most growth forecasts have already been downscaled further due to this risk.

It is for this reason that governments need to design targeted and temporary support and stimulus packages to mitigate the expected impact. Countries such as Malta, with a significant financial buffer, should be able to support impacted businesses. In fact, the Government has already announced that it will be launching such packages and the local Banks have already launched a number of initiatives in this regard.

Such unexpected events underscore the importance of having strong economic fundamentals, including public finances, in order to sustain such extraordinary expenditure. Unfortunately, countries like Italy which need to invest heavily due to the pandemic will have to address its rising deficits and debts after the crisis passes.

From an economic point of view, the most important thing at this point in time is controlling the spread of the virus as otherwise the impact will also grow exponentially. It is therefore important for governments to be proactive and take all needed measures including lockdowns. The short-term loss will minimize the longer-term impacts from a medical, social and economic point of view as the case of Hong-Kong strongly shows.

For further information on the above kindly contact:

JP Fabri

What We Think

April 10, 2020

Malta – Notional Interest Deduction Rules

Through the introduction of the Notional Interest Deduction Rules (‘NID’), Malta has brought the tax treatment of debt and equity on equal footing. Prior to these rules, debt financing was more favourable from a tax perspective, since the return to the investor (the interest) is tax deductible, whereas the return to an equity investor (dividends) was not.

These Rules provide for a tax deduction for sums that are deemed to be payable by way of interest on risk capital. For a company resident in Malta, ‘risk capital’ includes:

  1. Share Capital;
  2. Share Premium;
  3. Positive Retained Earnings;
  4. Interest free loans;
  5. Other reserves resulting from a contribution to the company.

The deemed interest is worked out using the following formula: Y = A x B.
Whereby ‘A’ represents the interest rate, which is the risk-free rate set by reference to the yield to maturity on Malta Government Stocks with a remaining term of 20 years, plus 5% and ‘B’ represents the risk capital, which includes the items listed above.

The total deduction cannot exceed 90% of the entity’s chargeable income for the year, and if the amount of interest on risk capital exceeds such amount, any excess may be carried forward to subsequent years.

Where a company claims such a deduction, the shareholder(s) are deemed to have received interest income equal to the amount of interest on risk capital claimed by the entity, according to their proportions of the nominal value held at the end of the year.

For further information on the above kindly contact:

Nicky Gouder
Luana Farrugia

What We Think

April 10, 2020

Reduced rate of Duty on donations of shares and property

The reduced rate of duty of €1.50 on every €100 or part thereof, in accordance with the Duty on Donations of Marketable Securities and Immovable Property Used for Business (Exemption) Order, applicable on transfers of certain assets, will apply on transfers which take place prior to 31 December 2020.

In accordance with the above-mentioned Order, transfers by gratuitous title of marketable securities by an individual to persons referred to in article 5(2)(e)(i) of the Income Tax Act (ITA), will be subject to the reduced rate of duty of €1.50 on every €100 or part thereof. The persons referred in the above-mentioned ITA article include: the transferor’s spouse, descendants and ascendants in direct line and their relative spouses, or in the absence of descendants, to his/her brothers or sisters and their descendants.

The reduced rate of duty, of €1.50, would also apply where an individual transfers by gratuitous title immovable property, being a commercial tenement as defined in article 1525 of the Civil Code, that has been used in a family business, as defined in the Family Business Act, for a period of at least 3 years preceding the transfer. For the reduced rate of duty to apply, the property must be transferred to the same individuals mentioned in the previous paragraph.

Any transfers claiming this reduced rate of duty shall be made by public deed. A report by a certified public accountant or an individual holding a practicing certificate in auditing would need to be provided to the notary, for transfers of immovable property. Such report would give assurance that the business property being transferred has been used in the family business for a period of 3 years.

The relief shall be forfeited if the individual to whom the transfer was made, transfers (inter vivos) the marketable securities or property, within a period of 3 years immediately following the date of transfer by gratuitous title.

For further information on the above kindly contact:

Nicky Gouder
Luana Farrugia

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