Issue link: https://maltatoday.uberflip.com/i/1482386
maltatoday | SUNDAY • 23 OCTOBER 2022 9 INTERVIEW investor for instance – it could be by pushing for a better 'quality of life'; by focusing more on the environment and infrastructur- al problems that we've already mentioned. But there's another factor that comes into play: as I said earlier, one of the areas where Malta is losing its 'attractiveness' con- cerns the skills of its workforce. People are no longer finding the skills they are looking for, among the local population, when deciding whether or not to invest here. Bearing in mind that we have full employment, anyway… is the current economic objective to 'create more jobs', the right one for Malta at the moment? Or should we focus more on 'upskilling' the workforce… and potentially, Malta could start outsourcing other functions, to other countries, like others are doing? Ultimately however, it boils down to the same question of 'quality' versus 'quantity'… On the subject of labour, though: part of Malta's attrac- tiveness to foreign investors, is surely the fact that their wage- bill would be a lot lower here, than in other parts of Europe. Doesn't this create a contra- diction? On one level, we are attracting investors here on the strength of our 'cheap labour'… and on the other, we expect the quality of those workers' lives to somehow 'improve' (with- out also improving their sala- ries….) To be honest, our survey didn't ask that question, in so many words. The most relevant an- swer is probably the one about 'labour costs'; and what emerges is that we are actually NOT all that competitive, on that score. Malta is in fact, becoming ex- pensive, when compared to oth- er jurisdictions. If you just look at Eastern Europe, for example; the wage-bill will be higher in Malta, than in a number of those countries. Partly because wages here have gone up, over the years – relative to other jurisdictions - but partly because the cost of living has also increased…. and this, of course, is an issue that is affecting not just Malta, but all of Europe. All the same, Malta can prob- ably no longer be regarded as a 'low-cost destination', today. We certainly can't compete on labour costs, alone. But that on- ly means that we have to look at the other advantages that we still have... Before turning to those advan- tages, however: the 'elephant in the room', so to speak, re- mains taxation. For several years, Maltese governments (of all political hues) have been battling an international drive towards 'tax harmonisation' – which would effectively nulli- fy any competitive advantage Malta currently enjoys, on that front. How serious a threat is this, to Malta's investor-attrac- tiveness? First of all, I think there are a lot of misunderstandings, with respect to what 'tax harmoni- sation' means. For instance, we need to establish which initia- tives we are talking about; be- cause there are at least four in- itiatives, which all fall under the 'harmonisation' umbrella. Let's start with the [proposed cap of] 15%: that measure, known as the 'Pillar 2 direc- tive', is aimed only at multi- national corporations – com- panies with a turnover of over E750 million. As such, it won't hit all Malta's investment sec- tors; but only those groups which, at global level, exceed this threshold. Then, there's another initiative called the 'Unshell Directive' – also known as 'Anti-Avoidance 3'. This is aimed at all com- panies, which lack 'significant person-functions' in their host countries: in other words, com- panies which don't have a very large local footprint. This second proposal may raise matters which need to be understood more deeply than the first; because it will hit more or less every single company, under the sun. This proposal blackballs' these companies, by saying: 'They are not entitled to the benefits of double-tax treaties; they are not eligible for the protection of European tax directives'… and what's worse, their profits will be 'recaptured', in the country of the sharehold- er. So if, for argument's sake, there is a German company with a presence in Malta: in any case, the profits of the Maltese company will be taxed again, in Germany. The most they will get – if anything at all – is a deduction, on the tax paid in Malta. On top of that, there is another proposal: the so-called 'DEBRA' directive. This one's a bit more complex – it's mostly about tax deductions – but again, it will probably place a limit on the deductions that can be offered in Malta. The real problem, however, is this. Put yourself in the shoes of an investor: to make your Maltese presence work, you will have to think about all the current directives, and also the ones being proposed. And there are many more than the ones I've already mentioned. Already being enforced, for instance, is 'DAC 6' – and there's a 'DAC 7' and 'DAC 8' in the pipeline. Then, there's 'ATAD 1', 'ATAD 2' and 'ATAD 3'… I'm assuming all these are taxation directives which will likewise affect Malta's com- petitiveness; so I won't bother asking what any of that stands for… … the point, however, is that there are already overwhelming obstacles that investors have to deal with - and as times goes by, there will be even more – before they even take their first trip to Malta. And as the Italians say: 'il gioco vale la candela'? [Is all this hassle, worthwhile?] Because even if those companies do manage to 'tick all the boxes': the process itself is so long, and so exhausting, that they might still conclude it's not worth their while anyway. And this, I think, is the main concern here: it's not so much the one individual proposal – the Pillar 2 directive – that everyone is so concerned about. It's that there are so many of these proposals, all at once, that it makes multi-nationals lose their appetite, to relocate to countries such as Malta. When government officials talk about the same concerns, they tend to project it is an ex- ample of how other European countries are 'jealous of our economic success'. They argue that – having been so success- ful, at attracting companies from, say, Germany… the rest of Europe wants to put a stop to it, once and for all. Is there any truth to that perception? Well… it is an issue about 'competition', at the end of the day. Tax has always been used to attract foreign direct invest- ment, all around the world. But what we need to be conscious of is that there are other jurisdic- tions which use the same forms of tax-incentives, as Malta – such as Luxembourg, Belgium, and the Netherlands – and my concern is that some of these measures grant much more protection to those jurisdic- tions, than to jurisdictions such as Malta and Cyprus. For example: in practice, the Unshell Directive may not im- pact Belgium, Luxembourg and the Netherlands, in the same way as Malta; because it is eas- ier to shift people around, on mainland Europe. One may question whether there are in- deed additional implications for peripheral island nations, which do not enjoy that luxury. At the same time, however: we need to remind ourselves that we are, in fact, on the periphery of Europe. And for all the disad- vantages this brings… we tend to forget, sometimes, that being a small island state also has its advantages. This is why, ultimately, I think we should also focus on all the aspects which DO make Malta more attractive: our people; the 'social stability' of the country… all the qualities which we, our- selves, appreciate as a 'good life in Malta'. Naturally, we also have to look into those areas where we are no longer as attractive, as we used to be. Some of those – like taxa- tion, and labour costs – may be difficult to address, right now. But others – like labour skills, or improving the quality of our built environment – are clearly within our reach, as a nation. Which brings me back to the question of 'what makes Mal- ta attractive', in the first place: it's a jigsaw puzzle, really. Tax is certainly one of the pieces, but… do we want it to be the most important one?