Malta shelves corporate tax reform

Finance Minister says global appetite for minimum corporate tax has waned and Malta ‘will not jump the gun’

Corporate earnings in Malta will continue being taxed as they are today after a planned overhaul to remove the generous imputation system has been put on hold
Corporate earnings in Malta will continue being taxed as they are today after a planned overhaul to remove the generous imputation system has been put on hold

A planned overhaul of company taxation has been shelved with Clyde Caruana attributing the decision to waning international appetite for a global minimum corporate tax.

The Finance Minister said on Friday “Malta will not jump the gun” given that the international momentum for a minimum corporate tax has been lost.

Earlier this year, Caruana had said the tax authorities were testing proposals for a new corporate tax regime to ensure revenue streams remain healthy. The change was intended to align Malta with international efforts to introduce an effective minimum corporate tax rate of 15%.

The European Commission proposed a directive in December last year for a minimum effective tax rate for the global activities of large multinational groups. The proposal delivered on the EU’s pledge to be among the first to implement the historic global tax reform agreement reached internationally.

However, the commission’s proposal requires unanimous agreement between the member states to become law and Hungary is vetoing the move.

Caruana said that his Hungarian counterpart told him during the last meeting of EU finance ministers that Hungary will not waver on its veto.

“With Hungary insisting on its veto and with the US, which was a main proponent of minimum global taxation, facing mid-term elections in November that can shift the balance of power in Congress, the momentum for change has been lost,” Caruana said when asked by MaltaToday on the status of Malta’s reform.

“We were drawing up our plans to align ourselves with international efforts but with the possibility that nothing will happen for now, it will not be wise for us to jump the gun before the big players clarify their positions,” he added.

Malta does not have a distinct corporate tax regime and the top tax rate for companies is 35% just like personal taxation. However, Malta applies an imputation system that affords companies generous refunds on profits that are taxed here. This system effectively reduces the tax rate for companies to 5%.

The system was cleared by the European Commission when Malta joined the EU. But, over the years, larger countries like Germany and France have applied pressure for harmonised corporate taxes to stop large companies from shifting profits to low-tax jurisdictions like Malta.

Taxation is a national competence and any changes at EU level require unanimous support at Council level.

Malta has always opposed any move towards tax harmonisation at EU level but lost a significant ally when the UK left the bloc.

Eventually, Malta acquiesced to the less radical stand adopted by the OECD for the introduction of a global minimum tax of 15% on company profits. This would have necessitated an overhaul of the current system.

EU efforts to be the first to go down that road have so far been scuppered by Hungary’s veto.

And now, Malta is adopting a wait and see approach. “We will wait for more clarity to emerge at an international level and when it is time for us to act we will do so,” Caruana said.