Issue link: https://maltatoday.uberflip.com/i/695268
maltatoday, WEDNESDAY, 22 JUNE 2016 13 T he Republic of Esto- nia and the Republic of Malta are two small countries in Europe. Malta enjoys a strategic location in the centre of the Mediterranean and because of its central location attracts substantial Foreign Direct Investment (FDI). The island has been known as a business and cultural hub of the Mediterranean since the ancient times of the Phoenicians, and now as a full EU member plays an active role in international diplomacy. It will assume the presidency of the EU next year. According to Eurostat data, in 2015 Malta's Gross Domestic Product (GDP) at market prices was €8,796.5 million. Income Tax rates for an individual in Malta are in the range of 0% - 35% with a capping of 25% for salaries up to €60,000. The taxation of an individual's income increases with progressive income brackets, the higher the income, the higher the tax rate, which conforms to the equitable taxation theory that could be described as the following: the more benefits an individual derives from the activity of the state, the more he or she should pay to the common fund. This principle is commendable and the government has over the years introduced the concept of a flat tax, for example 15% on a number of revenue sources such as bank interest, and a flat tax of 8 to 10 % on property gains. Economists tell us that as a rule, the strength of the country can be measured through the factors such as growth of the GDP, people's affluence, exploitation of natural resources, territory, etc. Since Malta is a small country with no natural resources (as yet), then the economic growth potential and sustainability of its contributors (tourism, remote gaming, financial services and manufacturing) play a crucial role for its long- term progression in a competitive globalized market. So, why doesn't Malta bite the silver bullet and overhaul its incentive legislation and in particular its complex tax code? Perhaps in the light of BEPs and other related pressures verging on tax harmonisation, now is the time to look into exemplary tax structures that have proven to be successful. Estonia enters the main stage. It has been 22 years since a flat tax rate system has been introduced; economic reform changed every sector of the state development and now boasts that GDP growth hovers around 6% annually. It should be mentioned that a flat tax significantly simplifies collection and this in turn improves tax compliance and reduces scope for aggressive tax planning, avoidance, and evasion. Since adopting a flat tax rate, the Republic of Estonia appeared on the European market as an economically sufficient and sustainable European member; the country earned the nickname "The Baltic Tiger" reflecting its significant economic growth rate and the way it buttressed the forces of recession. Therefore, a rhetorical question could be raise: Malta as a Mediterranean country can change its imputation system (being the only state in Europe using it) and adopt an innovative and fully tested Estonian tax system (with amendments). Malta could be a pioneer of the economic tax reform in the Mediterranean region. By taking this opportunity to simplify its convoluted tax process it could jettison the old and tired refund mechanism currently counterattacked by the Commission. According to the data published by the US-based tax foundation, the Republic of Estonia has the most competitive tax system in the OECD (the organisation for Economic Cooperation and Development). The foundation stated unequivocally: "Estonia currently has the most competitive tax code in the OECD. Its highest score is driven by four positive features of its tax code. "Firstly, it has a 20% tax rate on corporate income that is only applied to distributed profits. Secondly, it has a flat 20% on individual income that is not applicable to personal dividend income. Thirdly, its property tax is only applicable to the value of land rather than taxing the value of real property or capital. "Finally, it has a territorial tax system that exempts 100% of the foreign profits earned by domestic corporations from domestic taxation, with few restrictions." Therefore, numbers speak for themselves. Estonia presents itself as a strong, sustainable economic system for decades and has successfully faced the turmoil during days of economic crisis in 2007/8. Advantages of its flat tax system (such systems can have different structures and design) could be following: increase of labour supply and employment level, a simplification and transparency of the tax system, lower compliance costs and administrative costs could be gained from the flat tax systems. However, in political and academic environments of many countries, including Germany and USA, debates have been going on for many years whether flat tax systems should be hailed as the panacea or conversely viewed as a conservative and regressive tax system. This is because the middle-class tend to feel prejudiced lamenting that they share a larger portion when everyone pays the same tax rate. Therefore, let's assume that an income tax rate is 13%: for an individual who earns annually €170,000 it would make a significant difference compared to an individual who is on minimum wage. Accordingly, an equitable flat tax system needs some tweaking to cater for such anomalies. Changes in the tax ideally should be introduced after a wide public consultation exercise. For this reason, a holistic reform should be viewed as interconnected and as one organism, as changes targeting particular sectors automatically affect cultural dimensions of its social cohort. In general, from the economic perspective a flat-rate tax regime provides a scope for improving the efficiency, equity, and simplicity of our existing tax system. Alternatively, the flat tax system can undoubtedly bring positive effects on the employment situation and reduce red tape. A good reference source when comparing the Maltese and Estonian tax systems is the Worldwide Tax Guide 2015 (PKF International Limited publication) which states inter alia the following: • Malta operates the full imputation system where dividends paid by a Maltese company carry a tax credit equivalent to the tax paid by the company on the distributed profits; shareholders are taxed on the gross dividend but are entitled to tax credits of the tax paid by the company on the profits so distributed; tax payers (both individuals and companies) who are ordinarily resident and domiciled in Malta are subject to income tax in Malta on their worldwide income and certain capital gains; Malta operates the "remittance basis". • Estonian resident companies do not pay tax on their profits until they are distributed to shareholders; there is no separate capital gains tax; while value added tax applies to most goods and services; income tax applies to individuals at a single, flat rate. In conclusion, it should be said that the Estonian taxation scheme comprises a complete set of tax options, rules and conditions. Therefore, there is a need to set up an ad-hoc 'think tank' in Malta to design a simple and beneficial set of the tax options, rules, and conditions favourable to citizens and make them attractive to foreign investors. In his seminal book "The Theory of Moral Sentiments", Adam Smith teaches us how to live a good life which in turn arms us with a capacity to reach an understanding of sympathy directly and indirectly with other people: the correlation of morality and justice. Thus, morality and justice should be a guiding principle in introducing processes of essential reforms to our system. As always, the early bird catches the worm. Roksolana Burianenko is a Research & Development Associate at PKF Malta, an audit and consultancy firm. She is an MA/ MS graduate in Conflict Analysis & Resolution and Mediterranean Security as well as a holder of the BS in International business. Ms Burianenko can be contacted at rburianenko@pkfmalta.com or on +356 2148 4373. Business Today Mirroring Estonia's tax transformation Roksolana Burianenko Table retrieved from the US-based Tax Foundation website illustrating the 2015 International Tax Competitiveness Index