IMF says Malta must focus on tax collection to build stronger fiscal buffer

The International Monetary Fund has warned that the pandemic’s impact on the Maltese corporate sector must be carefully monitored, due to lasting damage to firms’ balance sheets.

In its latest concluding statement on the Maltese economy, the IMF said that while Malta’s COVID-19 support measures had prevented large-scale bankruptcies, the pandemic may still have caused lasting damage by undermining firms’ capacity to invest for a strong post-pandemic recovery.

It also called on Malta to prepare a holistic review of its taxation system due to the global call for a minimum corporate tax rate.

“It is important to assess the extent of the deterioration of corporate sector balance sheets and consider whether additional measures to support firms are needed, including investment tax credits, subsidized loans, as well as solvency support to viable small and medium-sized enterprises. Public support should be provided transparently, consistent with overall policy goals, and time-bound with a clear exit strategy to minimize fiscal risks,” the IMF said.

The IMF said that once Malta’s economic recovery gains ground, the government should focus on infrastructure spending and tax collection.

Malta’s fiscal income remains vulnerable due to risks from deferred taxes, relatively low tax revenues, and a high reliance on corporate income tax (CIT).

The IMF said Maltese tax authorities must keep identifying loopholes and exploiting digitalization, as well as prepare a holistic review of the overall tax system in light of the global minimum corporate tax proposal.

It also reiterated a call to promote voluntary occupational pensions and personal pensions among citizens, and increasing the effective retirement age to improve the sustainability of the pension system.

Referring to the FATF greylist, the IMF acknowledged that over the past two years, the authorities had made good progress in strengthening the country’s anti-money laundering framework.

“The authorities need to intensify efforts to demonstrate effectiveness by: (i) ensuring the accuracy of beneficial ownership information; (ii) enhancing the use of financial intelligence to support tax and money laundering cases; and (iii) focusing the Financial Intelligence Unit’s analysis on criminal tax offences.

“The authorities should also continue efforts to mitigate financial integrity and reputational risks in high-risk activities, such as virtual financial assets, gaming, and citizenship by investment programme...”

The IMF also said Malta continue efforts to fully meet the recommendations of the Council of Europe’s Venice Commission and the Group of States Against Corruption, including by enhancing the efficiency of the judiciary system.

The fallout from the COVID-19 crisis hit the Maltese economy hard, particularly its large tourism sector. But the authorities took swift actions to support households, businesses, and the healthcare system. With the economy reopened for the summer tourism season, growth is projected to rebound this year.

Tourist arrivals fell sharply to below 25% of pre-pandemic levels, and contact-intensive services were severely affected due to domestic mobility restrictions.

As a result, real GDP contracted by over 7% in 2020, the worst recession in decades.

The IMF said key downside risks include a global resurgence of the COVID-19 pandemic, the uncertain long-term impact of the crisis on the economy, a labour shortage due to reduced inflows of foreign workers, and a prolonged placement in the FATF greylist which could adversely affect correspondent banking relationships and foreign direct investment inflows.