Malta pushes to delay minimum corporate tax rate

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Malta is pushing for a two-year extension to the introduction of a new minimum corporate tax rate which, if introduced, would seriously reduce the island’s attractiveness to foreign investors

Government sources said talks were also underway with foreign investors in Malta to see what could be done to keep them in the country once its tax regime changes.

Described as one of the top concerns on the government’s agenda by political insiders, the new minimum global tax rate of 15% is imposed by the Organization for Economic Co-operation and Development (OECD).

The new rates are an attempt by the OECD to crack down on countries like Malta competing to offer the lowest rates to attract foreign direct investment. They could spell the end of the island’s lucrative economic sectors.

Exclusions and Concessions

On paper, Malta has one of the highest statutory corporate tax rates in the world, taxing 35% of company profits at year-end. However, the country attracts foreign investment by offering foreign companies a series of discounts and advantages that allow them to reduce their corporate tax rate to an effective 5%.

While Malta has accepted the OECD plan, the issue is still under discussion at EU level, where the island hopes to negotiate “exclusions and concessions” that could limit its exposure.

Sources working on the government’s contingency say their priority is to try to delay the introduction of the new rules for as long as possible.

“If this materializes by January 2023, as some are proposing, it could be quite problematic for Malta,” said a senior source working on the matter.

The reform of the minimum rate could be put to the vote in the last days of the French presidency of the Council of the European Union, which ends at the end of June.

Two-year period

Malta is among a group of low-tax jurisdictions that are pushing to delay the introduction of the new corporate tax rate rules until at least January 2025.

This, according to the countries, would give them the necessary two years to revise their respective tax systems.

“In reality, the window could also give Malta enough time to find ways to maintain the country’s attractiveness,” the government source said.

The source explained that during recent meetings with large foreign groups based on the island, the “wish list” of investors was mentioned.

This is what government officials call “plan B” and includes the possibility of reducing other taxes or introducing new financial incentives, to try to limit the rising cost of doing business here.

“If there are workarounds that are legal and can be agreed to by all parties, then that’s something worth exploring and that’s what we’re doing,” the source close to the Premier said. Minister Robert Abela.

What is the OECD reform?

The proposed OECD reform includes two pillars to prevent companies from locating in low-tax countries to maximize profits elsewhere.

Pillar 1 would give countries a share of the taxes on profits made there, although the tax would still be levied where the company has its tax base.

Multinationals operate in many countries – oil giant BP is present in 85 – but generally only pay taxes on profits in their tax home. This provision would initially apply only to the hundred largest companies, before extending after seven years.

Pillar 2 is a global minimum corporate tax rate to end competition between countries over who can offer companies the lowest rate – what critics call a “race to the bottom”.

The OECD agreement has set a minimum rate of 15%. Although this is supposed to be an “effective tax rate” – companies pay this amount of tax – the OECD agreement considers the possibility of countries retaining certain investment incentives that would reduce payments.

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