Budget 2021: Wheeling the ship of state

Author: George Mangion
Published on Business Today 22 October 2020

We have just assisted in the publication of next year’s budget which – as always – drew mixed reactions from various sectors.

In his pre-budget comments perit David Xuereb, president of the Chamber of Commerce, said that this exercise could not be a one-year budget but had to present longer-term solutions and measures.

“We want the government to be courageous and to think of the medium and long term, lest we end up looking back in regret at this budget as a missed opportunity to plan ahead,” he said. “The 2021 budget needs to be a particularly formative budget, which will determine the country’s future during and after this pandemic”.

He also told BusinessToday that the manufacturing industry, which is already having to deal with vastly reduced orders due to the COVID-19 pandemic, could suffer irreparable damage and losses if many more workers end up in preventive quarantine. Malta’s largest union, the General Workers Union, said it was pleased with Budget 2021 and has praised the government for combining “economic caution and fiscal discipline”.

The GWU thinks that the country must be ready for the economic growth that is expected in the coming years, not just when the world finds a COVID-19 vaccine but also as a result of the economic stimulus the government has introduced over these past months. The Malta Hotels and Restaurants Association said it values the government’s strong focus on social initiatives in this budget as this will inspire a feel-good factor across all society, in difficult times for all.

Bernard Grech, leader of the opposition, said he was disappointed to hear nothing about electricity and water tariffs or about how to help “the 83,000 people at big risk of poverty”. “We heard nothing about a holistic plan to help local businesses and we heard nothing about Gozo,” he said. Finally, he lamented the fact that this budget planned for today but forgot about tomorrow.

One may comment that the 2021 budget has been vastly impacted by the sudden wave of the pandemic which has decimated one of the pillars of the economy: the hospitality sector.  Last year the island benefitted from a record number of visitors (including about one million day-visitors on cruise liners).

This industry helped immensely to generate mass domestic demand but due to the lockdown has resulted in a drop of 12% in exports. This is a massive drain on the GDP growth which previously created a feelgood factor and resulted in full employment not least due to a runaway building sector that saw mega-developments surge all over the island.

The unprecedented wave of economic destruction that the pandemic has converted a 0.5% of GDP surplus in 2019 to a whopping 9.8% deficit (almost €1,200 million). This monumental deficit has never hit the island so harshly not even in the peak of the 2007/8 world economic crises and it peaks at a time when the number of COVID-19 cases has been climbing at an unprecedented rate.

The cost of monitoring the virus is added to the stress inflicted on workers in the private sector who have been in constant fear of being made redundant.  The stark fact that almost 100,000 workers rely on the government-extended furlough scheme is no joke and must have stressed the finance minister to propose a stable budget which as its main prerogative was the improvement in welfare benefits with special emphasis to help workers in the low-income scale and pensioners.

The fact is that the government has not touched the working conditions of its own employees (almost 44,000) at a time when it has seen its own tax revenue dwindle during the onset of the pandemic. The drop in tax revenue has also been a Damocles sword over its head that must have shaken the resolve of any finance minister seeing that our deficit has exploded and may take a number of years to regain the surplus to be able to repay the deficit (9.8% of GDP – approx. €1,200 million) this year pushing upwards national debt of 58% of GDP.

One cannot but praise the stamina of the finance minister not to resort to imposing extra taxes or new austerity measures but instead paving the way for more wage supplements – now extended to March 2021 (costing €40 million monthly).  One may be excused in describing this is as a generous (aka election) budget that wants to boost domestic consumption and maintain employment at a sustainable rate of 4.1%.

The uniqueness of this budget is exemplified by the granting of a €5 increase weekly for about 93,000 pensioners, and other measures such as improved child allowances and a welcome grant of a one-time cash gift of €350 to elderly reaching the age of 75years. Small traders with total revenue of under €30,000 will now become vat exempt.  The extension of relief of stamp duties on property purchases introduced for first-time buyers and a novel idea to reduce donation tax within family members of up to €250,000 exempt with a 3.5% tax rate thereafter.

A welcome announcement is the building of 1,200 new social housing units over a number of years. A remarkable €450 million will be invested over a seven-year span to build an extended Life Sciences centre, improvement of industrial estates, a new Kordin business centre and a venture capital fund for start-ups (previously a Cinderella concept).

This is a redistributive budget with the repeat of an issue of another tranche of free vouchers to spurn a higher domestic consumption – now extended to be cashed at shops and not exclusively on hotels and restaurants. The budget, as previously announced, included provisions for more free medicines especially for cancer treatment and a new St Michael Centre for palliative care in tandem with Hospice Movement. It also included a social scheme to add more beds for the elderly, including with joint investment from the private sector. This will help in special cases of dementia sufferers, adding telecare improvements and other specialist medical services.

It goes without saying that the island has no mineral assets and therefore it has to continue to improve the educational levels of its workforce.  The main thrust of budget proposals is to strengthen vocational learning and the containment of the high numbers of early school leavers. Free internet is to be offered to students who choose to continue studying beyond the secondary level.

In conclusion, the budget is a pivotal one coming at a time when the country finds itself at a crossroad. It needs to assure investors that the government is serious in creating a level playing field and reducing uncertainty. Only thus can new initiatives be taken by the private sector to rebuild a new horizon with an accent on digital and the green sector that will usher in a new dawn.

George Mangion


Author: George Mangion
Published on Business Today 22 October 2020
Get in touch: info@pkfmalta.com



Malta’s main Budget Highlights for 2021

Malta’s main Budget Highlights for 2021, summarised by our advisory team at #PKFMalta. 

#Social Security measures, #Parents and families, #Elderly & pensions, #Taxes, #Businesses, #Healthcare#Transport#Property#Gozo and #Tourism, #Environmental measures.

All details found here: https://bit.ly/35mln6u

MFSA – independence from Castille power strings

Author: George Mangion
Published on The Malta Independent 13 October 2020

Over two decades since the financial sector was piloted by Professor Bannister as chairman at MFSA, he saw the sector grow from a modest size in 1994 to a vibrant one, which gave birth to a reputable Centre of international business. During Bannister’s watch commentators lament that MFSA’s autonomy from the strings at Castille was paper-thin so it comes as no surprise that the International Monetary Fund and other international organisations are insisting on its operational independence.

The board of governors and the CEO have always been nominated by the government of the day (he who hires the piper sets the tune). The demise of private banks such as Nemea, Sata Bank and Pilatus last year were the fruits of past mistakes in banking supervision and we are all too wise – now blaming that oversight was found wanting.

One welcomes the latest IMF report which has been requested by the government that gives a piercing analysis of the factors attributed to the recent shortcomings in the banking sector.  Pre-COVID pandemic, this contributes 11% to the gross value added and also accounts for more than 10% of employment.  MFSA as a super-regulator employs around 320 professionals (with a wish list for another 200).

This is no small team to oversee approximately 2,300 licensed entities but MFSA envisages the scope for regulation is growing and wants to recruit more trained staff.  In the aftermath of Panama Papers, Venice reports, Greco and Council of Europe revelations, the MFSA now wishes to further tighten the screws by clamping down rules concerning 5th AML i.e. money laundering and terrorist financing. The new CEO at the MFSA wants to be seen as a Colossus fighting the infidels that penetrated the fragile fortress with their Trojan horse leaving in its wake a stigma of AML and terrorist financings decoys.

He claims that Malta needs to grow responsibly and set standards which are in line or better than those of our peers in Europe. Stoically, he embraces technology and innovation, entering the FinTech space with optimism and preparedness.

This is all very grand but it warrants a higher subvention. It is a fact that the annual surplus (circa €10m) mainly posted by the registry of companies (MBR) has always helped fund operations at the MFSA with the balance repatriated to government. Recently MBR has moved to larger offices and does not share its surplus with the MFSA.

There is a rumour that the MFSA is contemplating securing the extra funding needed for a transformation to be sourced partly out of a future increase in fees charged to practitioners.  This is not advisable. The MFSA has long stopped financing promotion of the sector, rightly saying it cannot be seen compromising its impartiality. This is commendable, but then the sector has to be actively promoted by practitioners to compete with other jurisdictions that are actively fine-tuning their laws and financial concessions to lure blue-chip companies.

Practitioners, therefore in the absence of state promotion have to dig deeper in their pockets to fund promotion by touring the globe, attend conferences, seminars and give marketing presentations so that the island stands a better chance to compete. The logic to load practitioners with higher fees may not be a good idea. Practitioners cannot be rendered uncompetitive on the global scene by extra charges expected in the post-COVID recovery.

This extra funding is warranted in a scenario that saw financial institutions constantly changing and adapting to new rules. Quoting an example two years ago, we witnessed Malta’s bold attempt to be rated as the Blockchain island in Europe.

This government-sponsored promotion resulted in the MFSA having to put a lot of effort into drafting cutting edge legislation and set the groundwork for VFA licenses to be issued.  Initiatives by private practitioners are always welcome; therefore, it is opportune for PKF Malta is launching The Bit-Pod online concept.

This is a meeting place for informal discussions among practitioners, engineers and DLT enthusiasts to network and discusses the latest topics on the vast subject of this technology. It is a non-profit organisation as it helps connect entrepreneurs (mainly start-ups) to people, programming engineers and other resources across the DLT and virtual currencies domain.  Whether you are looking to connect, learn, share or work, the Bit-Pod offers a selection of opportunities to network with other start-ups. This may help you to scale the slippery slopes of licensing and running an ICO or a virtual wallet.

Back to Fintech regulation, the fly in the ointment is the need to renovate banking supervision and secure complete independence of the regulator from potential government override. Again, referring to the Financial Sector Assessment programme on Malta’s financial stability, this found that the banking sector was in good health, but warned that high exposure to property-related loans and rising property prices posed a risk to the country’s financial system.

It found that our retail banks face challenges coming from a property and construction boom.  It emphasises that “Core domestic banks’ high exposure to property-related loans, together with the rapid house price appreciation, poses a risk”.

It does not come as a surprise, that in the shadow of the disgraced Pilatus bank (now with its license revoked). The Pilatus bank (last audited by KPMG) was the centre of political controversy ever since a series of leaked FIAU intelligence reports flagged evidence of money-laundering and serious compliance shortcomings four years ago. The ECB investigators identified a lack of checks over accounts held by Pilatus Bank, which was shut after its Iranian owner, Ali Sadr Hashemi Nejad, was arrested in the United States on money-laundering and sanctions violation charges (now freed of all charges).

Despite warnings, BoV kept scant details about the source of wealth of Pilatus’ directors and no documentation was provided when Ali Sadr opened an account in 2014, the ECB report said.

In conclusion, on a positive note, we hope that the 2021 Budget will revisit such weaknesses by formulating a five-year programme to rid banks from non-performing loans and enable them to start upgrading their risk profile to accelerate the issue of credit to deserving start-ups.

George Mangion


Author: George Mangion
Published on The Malta Independent 13 October 2020
Get in touch: info@pkfmalta.com

An ode to transfer pricing

Author: George Mangion
Published on The Malta Independent 15 September 2020

Ever since the launch of BEPS legislation, Malta has complied with all the changes introduced by such rules.

As regards transfer pricing rules pertaining to OECD guidelines there is no such legislation, as yet in Maltese law. Needless to say, we are not completely shielded from this rule because in accordance with Article 5(6) of the ITMA this gives the discretion to the Commissioner to determine the transfer price following the OECD guidelines. One finds reference to transfer pricing (TP) in the published Patent Box Regime (Deduction) Rules, 2019.

Here, there is a specific reference made to the fact that the determination of income or gains shall be made on the basis of a transfer pricing method in terms of OECD’s Transfer Pricing Guidelines. Baring this, taxpayers have so far been spared the rigours of transfer pricing exercises even though there are embedded in the law, general anti-avoidance provisions and brief references to transactions at arm’s length.

There is an unwritten rule that regulates transactions between residents and non-residents which as stated earlier must adhere to the arm’s-length principle. This means that prices quoted between parties ought to reflect the commercial rates usually charged by non-related parties. Having said that, so far there are no fixed rules to establish how such prices can be determined.

In this regard, the law provides that for the purposes of calculating the tax liability of a taxpayer, an arrangement or a series of arrangements can be ignored where it has been put into place for the main purpose of one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law.

One needs to assess whether prices are genuine having regard to all relevant facts and circumstances. The spirit of the law that regulates transfer pricing under OECD rules is therefore somewhat mimicked in our legislation. Effectively, it argues that any arrangement can be regarded as non-genuine to the extent that it is not put into place for valid commercial reasons that reflect economic reality.

In addition, it can be argued that Malta has indirectly introduced TP rules by adhering to international conventions and relevant EU directives and in particular in the following considering that Malta’s double tax treaties use the OECD Model Tax Convention.  Therefore, Article 9 “Associated Enterprises” of the OECD Model Tax Convention is included in Malta’s double tax treaties.

This article provides that any transactions between associated enterprises that are not at arm’s length shall be adjusted for tax purposes in accordance with the ALP. Reading of the Commentary of OECD this refers to the application of the ALP through the OECD TP Guidelines. Further, the majority of the countries following the ALP use as means of application and interpretation of ALP, the provisions of the OECD TP Guidelines. Moving on to other related rules, let us give some background on the journey that took us to adopt ATAD.

It was on 12 July 2016 that the Council of the EU unanimously adopted the Council Directive. Later, Malta transposed ATAD 2, which builds on the provisions of ATAD 1.  Another important rule requires Malta to apply the arm’s length principle in cross-border transfer pricing issues. This can be found in the Associated Enterprises Article of the OECD Model Tax Convention, which Malta accepted in its double taxation treaties.

One may venture to comment on how indirectly transfer pricing rules creep in our legislation. A typical case is the right of a country that is a party to a tax treaty to adjust the taxable profits arising from transactions between related parties and binds the other country to make corresponding adjustments to avoid double taxation. Here comes the rub. Such adjustments must be made on the basis of the arm’s length principle that again refers us back to the OECD standard.

The latter regulates how transfer prices for tax purposes can be computed. As can be imagined, in similar circumstances there may arise disputes in the interpretation of how such prices are determined. In such instances, OECD rules allow for disputes to be referred to arbitration.

This follows in terms of the EU Arbitration Convention, of which Malta is a party. Another remedy is provided by the Directive on Dispute Resolution Mechanism – this was transposed to Maltese law this year. As can be expected, Malta has, so far, not been subjected to such dispute resolution since transfer pricing rules are not applicable.

For most member states, such disputes can be common and arise when exercises are carried by respective countries to ascertain the arm’s-length, that is, the true commercial price. In practice, this means that to prevent double taxation, a primary (upward) adjustment by one tax administration should be followed by a corresponding (downward) adjustment by the other.

Needless to say, no administration takes lightly to a reduction of its tax base. This said it is clear that in the field of transfer pricing, a sincere form of collaboration is paramount. Therefore, it would be expedient to recognise that it is in everyone’s interest to avoid double taxation and double non-taxation hence the reason to invoke the arm’s length principle. To assist in reaching consensus, OECD highly recommends for parties to agree to a joint audit.  The findings of such an audit should be incorporated in a concluding report.

To the extent possible, tax administrations should endeavour to arrive at a common interpretation of how the arm’s length principle applies to the findings of a specific audit based on a scientific analysis of all the facts and circumstances. Such an agreed outcome would give an undertaking that the audit does not result in double taxation. Only thus, can tax authorities reach a common understanding of how a true and fair arm’s length exercise works?

In conclusion, one may relax that the full burden of transfer pricing rules is not yet activated in Malta. How such rules will affect Malta and its financial sector in the future is too early to assess.  What is important is that practitioners avoid taking a head in the sand attitude. There is nothing to halt the introduction of an all-embracing transfer pricing rule which will be applicable to local companies as duly recommended by OECD.

George Mangion


Author: George Mangion
Published on The Malta Independent 15 September 2020
Get in touch: info@pkfmalta.com

Clock ticking for a Brexit talks rapture

Author: George Mangion
Published on The Malta Independent 9 September 2020

The European Union’s chief Brexit negotiator Michel Barnier said he is “disappointed” by the lack of progress and warned that an agreement with the UK before the end of the year “seems unlikely”.  Barnier’s British counterpart, David Frost, described the latest talks as “useful” but also flagged that “there has been little progress”.

Barnier told reporters last month that after the discussions with the UK ended “too often this week it felt as if we were going backwards more than forward”.  What can this mean for the UK, now faced with a 20% drop in GDP and signals of a start of a recession? This is obviously the cause of the lockdown while health authorities are battling the consequences of infections, amid even strict orders for citizens to maintain social distancing.

Measures were taken not only to protect the health of most vulnerable communities but also their quality of life more broadly, including their financial security, mental health, access to resources and social relationships. Even so, the economic and social disruption is clearly visible.

The streets of London, so ever fully populated by Londoners and tourists alive, are now bare and gloomy. This unexpected calamity has exasperated the double whammy of a recession combined with a near possibility of a deal Brexit.

Brexit will undoubtedly bring long-term systemic changes to the UK economy, politics and society, and there continues to be uncertainty about how leaving the EU might affect the lives of the UK’s inhabitants. It is a daunting thought that a government document outlining “reasonable worst-case assumptions” in the event of such a no-deal Brexit, has warned of rising food and fuel prices, disruption to medicine supplies and public disorder.

The UK would have to apply tariffs and quotas to goods coming into the country from the EU and the EU would apply its “third- country” tariffs and quotas to the UK. That means the UK would be hit by big taxes when it tried to sell products to the EU market. The bloc’s average WTO tariffs are 11.1% for agricultural goods, 15.7% for animal products and 35.4% for dairy. The prospect of a trade deal between the UK and the EU in time for the end of the transition period is becoming increasingly unlikely following a stalemate between negotiators. Government sources now believe that no such trade deal will come to fruition and the UK will begin trading on the WTO come midnight on 31 December.

The concern seems to be that the economic costs of abruptly withdrawing from the European Union without a trade deal might be buried by Boris Johnson beneath the damage wreaked by the Coronavirus. Can this strategy be reversed and normality maintained since it goes without saying that vulnerable groups will be affected?

Undoubtedly, there will be unintended consequences. The poisoned cocktail of Brexit and the Coronavirus in the UK will probably badly affect the lower working classes and the disadvantaged, albeit to a different extent. Indeed, Brexit without a trade deal is likely to exacerbate some of the deleterious effects of the virus. It can be argued that leaving the EU without a deal will make it more difficult to fight the pandemic.

The UK left the EU at the end of January and is now being excluded from EU decision-making and any collective support packages, for instance, the EU’s Coronavirus Response Investment Initiative on the pandemic. The British government has stated that it does not plan to take the option to extend the transition period by up to two years. One cannot but lament the loss of some EU nationals working in the health and social care sector since Brexit, at a time when they are most needed. Readers may ask why is there so much fuss about the UK leaving without a deal?

For a start, the consequences of an economic divorce will most probably leave some disadvantaged people with less financial and social resilience, therefore more vulnerable to both Brexit and the Coronavirus. The European Union’s chief negotiator Barnier said progress in four areas of discussion had been “disappointing” while a British statement said, “limited progress was made in bridging the gaps between us and the EU”.  One can never be fooled that having four months till the end of the year is sufficient time to reach a trade deal on complex issues which took over 40 years in the making.

To be realistic, it is pushing it when Boris Johnson reiterates that there will be no extension beyond the end of the year. There are complex matters to be negotiated starting on the critical issues of aviation to fisheries, new customs posts at the border and a new immigration system. As stated earlier, this could result in higher prices, border backlogs and delays, and even shortages of staples, such as food and medicine. When the prospect of a no-deal arose last year, some British companies and citizens began stockpiling goods.

Thankfully, one major hurdle was solved that in case of a no-deal, this will not lead to a so-called hard border between Northern Ireland and the Republic of Ireland, but rather to customs checks on goods traversing the Irish Sea. Last year saw several international firms which shifted their investments from the UK to elsewhere in the EU.

Aerospace giant Airbus is a prominent example, pointing towards a policy of directing funds and jobs away from the UK if there is no trade deal. Such moves could put tens of thousands of British jobs at risk. Without sounding partisan to the EU’s interest, yet one must admit that London’s role as a world finance leader could also be in jeopardy. Previously, as a full EU member, one notes that the UK’s financial services provided 11% of tax revenue; 44% of exports go to the EU. If the majority of economic forecasts are correct and the UK’s economy suffers post a no-deal Brexit, the negative effect will impact all those groups represented in the low-income bracket (that is, ethnic minorities, the disabled, refugees and asylum seekers and people considered precarious workers) who rely more on public services and benefits and have less disposable income and spending power.

One augurs that Boris Johnson takes the bull by the horns and prioritises the immediate damages inflicted by the pandemic and in a pragmatic manner seeks an extension so that the UK is adequately positioned to resolve the tangled web of a hard Brexit.

George Mangion


Author: George Mangion
Published on The Malta Independent 9 September 2020
Get in touch: info@pkfmalta.com

Act XXXII Of 2020: How Can An Estate Agent Become Licensed?

Author: Jurgen Dalli – Junior Legal Associate, PKF Malta
Published on Malta Chamber of Commerce Blog – 11th August 2020

The myth that not every Tom, Dick and Harry, can become an estate agent has been debated since early 2016 when then Parliamentary Secretary Jose Herrera presented a White Paper for consultation. This scope of licensed real estate agents, as well as property brokers and consultants, came into effect by virtue of Act XXXII of 2020. This act aims to have the real estate industry fully regulated by the beginning of 2022, therefore, any person wishing to delve him or herself in negotiating and arranging transactions comprising of acquisitions, disposition or leasing of property.

Anyone caught dealing in a property without a proper license when caught may be penalised. This penalty may go as high as €20,000. The licence in question will serve for 5 years after which the person holding the license, needs to renew it.

In order to qualify for such a licence; an individual would have to attend a course that will be of a level 4 with between 8 and 12 European Credit Transfer and Accumulation System (ECTs). Attendance is not required for those individuals having other equivalent qualifications. Where such qualifications are deemed to be only partially equivalent, the applicant may be subjected to a competence test in order to prove his/ her competence in the areas where it is deemed to be lacking.

Imprisonment was also possible in the first draft of the Act, however, many including Malta Developers Association president held that such a sanction would be too harsh yet all agreed with hefty penalties being imposed. Thus, the possibility of imprisonment has been omitted in the final version.

A Licensing Board is established by virtue of Article 5 of this Act whereby it will be responsible for keeping a register of those employees who have a licence. The Board has the discretion of refusing to renew the licence if the licence is found to be in breach of any provision specified in the Act. Moreover, the renewal will be refused if the licensee has admitted other persons other than a licensee to act as his/her agent in the exercise of such activities. If the licensee after the 5 years becomes unfit and improper, the Board will refrain from renewing such licence.

Finally, the Licensing Board will refuse renewal if the licensee is found to have failed to undertake a minimum of hours of continuing professional development during the preceding five years. It is a possibility for the licensee to have a decision being taken against him/ her subjected to an appeal, even for decisions refusing to renew licenses. An Administrative Review Tribunal shall be bestowed with the competence of hearing and determining objections made by any person aggrieved by a Board decision.

A licence is not required for occasional traders; i.e. those individuals who conduct not more than two transactions in a 12-month period. Nonetheless, their services must be provided without resorting to the advertisement, without having any person being employed or engaged to assist them in the performance of their services.

Apart from requiring the candidate to submit him/herself to a course, the individual in question must be at least 18 unless the applicant has been emancipated to trade as per Maltese law; Commercial Code Article 9. The academic certificate will bestow the applicant with knowledge vis-à-vis real estate in a holistic manner, in the sense that it will comprise of legal, financial, technical and communication understanding whilst also taking into account the marketing and sale aspect of the sector.

The applicant submitting an application ought to have his or her application processed within 2 months of it being submitted. The Board is vested with the duty of ensuring that the name being used by the agent or broker to operate his or her business must be reserved with the Authority.

This Act has also imposed a number of disqualifying criteria. The first disqualification is that where an individual is bankrupt or has not obtained his order of discharge, or, has obtained such an order but is suspended for a term not yet expired or is subject to conditions which have not been fulfilled. Following this is the disqualifying criteria of an applicant’s conduct and repute, financial position and to the interest of the public, the applicant is not fit and proper person to conduct property-related activities.

PKF Malta has invested a number of resources in the immigration sector, so we work closely with our realtor partners who we can recommend as being well-versed in the VIP client sphere and who are capable to source detailed real estate options targeted to your specific requirements, with the entire process from the review, selection of property to the final conclusion of an acquisition, being coordinated by our team at your convenience. Become our priority, contact us for more information today on info@pkfmalta.com or visit our website: www.pkfmalta.com.


Author: Jurgen Dalli – Junior Legal Associate, PKF Malta
Published on Malta Chamber of Commerce Blog – 11th August 2020
Get in touch: info@pkfmalta.com

COVID recovery – a fiscal remedy is smarter than cash handouts

Author: George Mangion
Published on The Malta Independent 11 August 2020

A recent meeting with the Prime Minister by the Chamber of Commerce discussed the best recovery plan post COVID − this has revealed interesting topics. One of the topics advocates a fiscal remedy. It was suggested by the Chamber to lower VAT on travel and hospitality services. At present, the VAT rate of 18% can be reduced to 7% and the wage subsidy retained until a COVID-19 vaccine is found.

This major recommendation (costing millions) was the fruit of a consultation exercise carried among the members of an elite industry think tank. Obviously, there were other recommendations forming part of a wide-ranging document drawn up to map out an economic strategy in the wake of the COVID-19 pandemic.

Such a bold fiscal measure is not a unique one, since both Germany and the UK have already introduced lower VAT rates at 5%. There were other interesting proposals such as the regeneration of depleted areas in towns and villages, incentives for digital smart manufacturing, and the creation of a rapid mass transit system.

This document kicks in a stark reminder to the government that an immediate reduction in the cost of living could be the antidote for a revival of a subdued “feel-good factor”. There are many other recommendations, but in my opinion, the stabilisation of the demand lost due to COVID-19 lockdowns and a severe drop in tourism needs to be given top priority.

The recent issue of free cash vouchers (some are still to be collected) was but a knee jerk tactic. It gives lower-income workers a chance for a couple of free meals but will not necessarily guarantee a permanent solution to restaurants, hotels, and the travel sector, which are facing low occupancy.

It is a smart solution to achieve parity in VAT rates, reducing them to match those charged in other Med. countries. Really and truly, there exists sclerosis in the system that so far has blinded operators not to take up arms and protest that they are being charged a higher rate of VAT than similar businesses in other EU countries, which compete to attract quality tourists.

The writer fully concurs with the lowering of tax since this smart initiative is one which, if well supervised (by linking all cash registers to a central unit), can boost demand. One acknowledges that sections of this industry are known to under-declare VAT returns in an effort to meet increasing overheads and fierce competition from foreign packaged tour operator rates. This anomaly is not being tackled and perhaps is pushing operators to indulge in tax evasion, possibly trade in the black economy to mitigate losses arising from steady cost escalation in catering products, mainly food, drinks, and rents.

Conversely, there is a silent majority which says that it is better not to rock the boat − let sleeping dogs lie, don’t push for a tax reduction. This ostrich-like attitude is dangerous. Some fear we spent millions in the first wave only to have to dig deeper in our pockets, top-up more debt − should God forbid a severe second wave hits us this autumn.

Therefore, it is not rocket science to argue that in order to attract more tourists and help the hospitality and restaurant sector, an island-wide embellishment road map plus a drop in VAT is essential. This concept has been wholeheartedly accepted by Germany, a country which in the past always refused to give any fiscal incentives even during the peak of the last global financial crisis but now deeply feels that palliatives won’t work.

The latest MHRA studies show a dismal low occupancy rate and some hotel owners are mulling over the idea to close for this year and reopen for business next Easter. This, therefore, calls for added state aid to furlong idle workers. Critics have repeatedly turned down the merits of reducing tax.

They say (and not without merit) that a reduction indirect taxes will go straight to the pockets of owners as in practice, they will never reduce the menu or travel prices. This may be true and studies in Ireland have proved that without adequate surveillance (a familiar local trait) consumers saw a little drop in prices. It goes without saying that poor compliance and surveillance on the sector by the fiscal authorities does scupper the desired advantages of lowering direct taxes.

Therefore, the situation creates a dichotomy – those who appeal for reform in taxation to lower the cost of living and enhance demand against those who prefer the status quo − by continuing to abuse the system. It is estimated that unrecovered tax revenue is substantial. In the past, the finance minister had admitted that abuse exists. He is reported to have exclaimed, “this is a continuous struggle. Abuse can be limited, but never eliminated. What we need to do is address the black economy and treat it as a beast on its own. It creates unfair competition and loss of revenue”.

The writer advocates a number of smart initiatives as recommended by the Chamber of Commerce to achieve a level playing field. One acknowledges that the travel and hospitality industry is known to suffer from low profitability on capital employed and high risks faced.

They habitually fight to meet increasing levels of overheads, reduction of tables due to COVID rules and fierce competition from cheaper destinations. The problem is not being solved by simply opening all the ports (done on 15 July) and trying instant schemes by MTA to attract masses. This in practice includes paid international adverts to lure low-paying youths to join us in three-day pool parties of deafening techno music, a vodka fest, and love.

These gatherings helped increase the number of infections which at the time of writing exceed the numbers registered at the peak of the first lockdown. The energetic tourism minister acts nonchalantly to protests from doctor, nurses, social organisations and other unions which demand a complete ban over such mass gatherings, as logically youths dancing in pools cannot easily maintain a social distance or wear protective face masks!

Authorities changed tack and issued new guidelines against Ibiza-styled mass gatherings. Naturally, there is a strong argument that jobs need to be protected and the ministry of tourism was advised that taking a measured risk to attract foreigners for mass pleasure events (currently banned from other countries) is a money-churning opportunity; too good to be ignored. Such a short-sighted attitude exacerbates the dire long-term health risks inflicted on the community and leverages the cost of medical care.

 George Mangion

Author: George Mangion
Published on The Malta Independent 11 August 2020
Get in touch: info@pkfmalta.com

Gearing Up For New Screening Measures For FDI

Author: Jurgen Dalli – Junior Legal Associate, PKF Malta
Published on Malta Chamber of Commerce Blog – 15th July 2020

Foreign Direct Investment or better known as FDI basically comprises an investment affected by either a legal or a natural person in one jurisdiction into corporate interests situated offshore. Mostly, this occurs when an investor sets up operations offshore or acquires foreign assets in a foreign entity. Nonetheless, FDIs are not to be treated as portfolio investments since in the latter the investor only acquires equities.

The EU takes a similar approach and argues that an FDI entails an “investment which establishes or maintains lasting and direct links between investors from 3rd country nationals including State entities, and undertakings carrying out an economic activity in a Member State”.

On the 25th of March of 2020, the EU released new FDI measures. Whilst the EU encourages foreign investment and in many ways, foreign investment falls within the remit of the freedoms of the Union, the novel virus pandemic proved to have pervasive ramifications on the economy, thus, the European Community felt the need to implement new FDI screening measures which will become fully applicable from 11th October 2020, however, Regulation 2019/452 has entered into force on the 10th April 2019. Hence, the UK will not be considered an EU member for the purpose of these new measures. The primary scope behind these implementations rests on information sharing in order to promote safer practices and ease foreign direct investment.

These measures will apply holistically and independently of the value of the transaction; however, its ambition is not to scare away foreign investment but to ensure the safety of each Member State within the community. Malta enjoys an advantage in this situation because it has established a national FDI office thereby allocating screening privileges to the national authority. Nonetheless, the national FDI office must adhere to a host of conditions. Therefore, it goes without saying that holding companies do not fall within this remit and are automatically barred. The last requirement is that the activity in question necessitates some discernment.

In a nutshell, the Regulation can be dissected into six implementations. This framework will allow for a cooperating mechanism where Members of the Union and the Commission itself will interchange data and raise fears vis-à-vis particular undertakings in the form of investments. The Commission will be vested with the prerogative of issuing opinions when a particular investment constitutes a threat to the security, order, or interest to the multiple Member States, or else, where an investment may hinder a project appertaining to the EU as a unit, a case in point being Horizon 2020 or Galileo. This Regulation is not only intended for information sharing but also promotes experiences sharing and the unification of states on common concerns.

This Regulation will set up a host of requirements for Members of the community who want to maintain or adopt a screening mechanism at a national level with the final say laying with the Members of the Union whether an investment should materialize or not. Another implementation of this instrument is taking into account the need to operate under short business-friendly deadlines and robust confidentiality needs. Lastly, one must issue basic requirements for the Member States that wish to implement a screening mechanism domestically, especially; transparency and non-discrimination between 3rd parties, established timeframes, protection of confidential data and the possibility of judicial redress against the Member State’s decisions.

One must distinguish between screening and evaluation. The former refers to the disclosing of all relevant information thereby having in place transparent rules and procedures which avoid discrimination amongst foreign investors, exchange of confidential information, recourse against screening dictums and measures to identify and prevent circumvention by foreign investors. This is not in place at the moment in Malta, however, from October of this year, Malta will have to initialise a framework which will allow it to perform these requirements. As a matter of fact, Malta will be required to identify the UBO (Ultimate Beneficial Owner) in order to conform with AML regulations.

Unlike screening, Malta does indeed have in place evaluation procedures. In conclusion, screening is triggered when the activity complies with the qualification listed in Article 4 of the Regulations thereby necessitating the influencing of public security, order, or health. These activities must inherently comprise a long-lasting relationship in Malta, hence why there is the need to have a factor of production such as labour or putting in machinery in order to form such an enduring rapport. As things stand at the moment, 143 applications have been received by the Maltese office for evaluation, 9 of which required some amendments to their Memorandum & Articles of Association whilst only 2 needed screening.

It is wise to wait for further guidelines in order to decipher as to what screening will exactly comprise of, however, some have suggested that the approach taken will consider the activity to require screening where such activity falls within the remit of the criteria articulated above.

Author: Jurgen Dalli – Junior Legal Associate, PKF Malta
Published on Malta Chamber of Commerce Blog – 15th July 2020
Get in touch: info@pkfmalta.com

Post-COVID Tourism new wine in old bottles

Author: George Mangion
Published on Malta Independent 7 July 2020

Pre-COVID, the island was basking in the glow of an artificial sense of hedonistic living. This made us believe that the party will never stop – but it did with the discovery last December of a lethal virus in Hubei China.

This week marked the long-awaited opening of the airport and seaports with a trickle of tourists arriving to join us in the land of milk and honey. Gone are the days when the low-cost airlines attracted millions of budget tourists (mainly accommodated in Airbnb units) who roam our streets and tour the concrete jungle adorned by tower cranes that reach out like mechanical monsters clanging their way delivering building materials. Nostalgically, we all remember how the dream of having an upper-class tourist resort never materialised yet tourism secured us a multiplier effect that gently percolated in the lower echelons of the economy.

Historically, some may remember how it all started in the 1960s when the island was facing British services rundown and the ex-colony was trying to build up an alternative source of income to sustain jobs. The government was advised to incentivise local entrepreneurs to risk their capital and build a welcoming tourist infrastructure by way of hotels, restaurants and beach amenities.

To this end, millions were poured into improving access to scenic spots such as beaches, places of interest and historical monuments. Various incentives were granted by the government to budding hoteliers, starting with granting of seafront sites at fire-sale prices, 10-year tax holidays and training grants for catering staff. Banks were also pulling their weight and gingerly took the risk to fund projects connected with the industry. This sector reached a consolidating point with the setting up of a national airline in the early 1970s.

Advertising helped to place Malta on the destination map for sun, sand and sea where beer is cheap and public transport on rickety “boneshakers” buses (quaintly painted in rainbow colours according to destination) attracted the British tourist in droves. Then, food and drink were cheap and the Mediterranean was being discovered by the masses which booked their place in the sun for bargain holiday resorts in places such as Spain, Cyprus, Greece and Malta. Back to Malta, the hotel lobby grew strong and influenced public opinion towards endearing the sector.

The gradual rise in job openings in hotels and restaurants over the past 50 years contributed significantly to attract vacancies for part-timers. Politicians hailed the way; the sector started reducing the unemployment queues and generated direct and indirect benefits to the economy. Bella Malta was the slogan that contributed handsomely to help balance the annual budgets (mostly in deficit) and give a multiplier effect to ancillary sectors involved in the importation, transportation, travel agents, agriculture and fisheries.

All lauded the milk cow even though tourism is a volatile industry and wages on offer are not stellar. Having spent decades trying to attract tourists, the Malta Tourist Agency is now surreptitiously compensating low-cost airlines when they develop new markets and niches. The idea was hatched to create a fund aimed to improve beaches, roads and other public amenities; a nominal day tax per tourist is levied on all arrivals.

It comes as no surprise that the World Travel and Tourism Council, proudly remarks on how tourism directly accounts for nearly 3% of the world’s GDP. McKinsey, a consultancy, reckons that one in five new jobs is generated by tourism. As a general rule, whereas the manufacturing sector employs relatively fewer people, tourism employs legions. There are side benefits, since policies designed to attract tourists, such as quality inspections on hotels and restaurants, improving general health and safety standards, also lure foreign investors.

The fly in the ointment is overcrowding. This brings hidden health costs, which are borne by local residents. Look around you and you will see that in the summer months, pavements, roads and cycle lanes are clogged. Armchair critics warn us that we should upgrade the sector to attract more upmarket tourists and stop subsidising low-cost arrivals which prefer booking Airbnb for cheaper accommodation. Quoting the NSO, one observes that arrivals for the whole of 2018 rose by 14.3% to reach nearly 2.6 million while total expenditure per capita stood at €809, a decrease of 5.5% when compared to 2017. Employment in food and beverage service activities based on 2016, showed 5,902 full-timers with over 7,000 low paid (mostly non-EU) part-timers. Restaurants saw an average spend per tourist of a mere €104 (our VAT rate on food and drink is almost double that charged by neighbouring countries).

Now after four months of COVID lockdown with zero visitors, one had hoped that no effort is spared to mend broken pavements, fill potholes and enlarge sandy beaches. Quoting, the president of the Malta Hotels and Restaurants Association, Tony Zahra he emphasised the need to turn Malta into a destination built on quality and not just numbers. This seems like the panacea that over the years has eluded us. We all enjoyed better air quality during the lockdown but alas gradually unless electric buses/cars are in circulation, we shall see a marked deterioration as 700,000 visitors are anticipated in the next four months.

Tourists fan the appetite for more luxury hotels being built or extended and this results in the island looking more like an open construction site. We need to ask ourselves, can we expect high-quality tourists when there are obtrusive tower cranes and unsightly debris in tourist zones?

In pre-COVID days, we forecasted an increase to three million visitors ushering in more carcinogenic fumes, cruise liners sludging the Grand Harbour and aircraft noise. Europe has witnessed CO2 emissions, which increased by about 80% between 1990 and 2014, and it is forecast to grow by a further 45% between 2014 and 2035. Needless to say, NOX emissions have doubled between 1990 and 2014 and are forecast to grow by a further 43% between 2014 and 2035.

Will the tiny island be spared this poisoned chalice? Can the MTA plan a five-year policy to regulate the market possibly reversing the damage to the environment by going for quality rather than quantity? One waits and hopes for new directions from the young minister of tourism.

George Mangion


Author: George Mangion
Published on Malta Independent 7 July 2020
Get in touch: info@pkfmalta.com

New filters how to screen FDI into Europe

Author: George Mangion
Published on Malta Independent 30 June 2020

Malta is now an enforcer of regulation EU2019/452 to create the first EU-wide framework for the screening of foreign direct investments. One notes that the overriding criteria are that such screening is only applicable for any FDI where the owner, titleholder, or ultimate beneficial owner originates outside the 27 member states.

This regulation was originally presented by President Juncker during the 2017 State of the Union address. In Malta, it entered into force on 1 April.  Why is this screening important?  The answer is that the EU has one of the world’s most open investment regimes, as acknowledged by the OECD in its investment restrictiveness index.

The EU is the top destination for foreign direct investment in the world: foreign direct investment stocks held by third-country investors in the EU amounted to €6,295bn at the end of 2017. This new investment is a godsend since it has created the much-needed 16 million direct jobs. The regulation does not require member states to have an FDI screening mechanism, but only to cooperate in sharing information.

There is a set of minimum criteria where a member state chooses to have an FDI screening mechanism assessing FDI’s effects on “security or public order”. In theory, it is expected that all member states cooperate with one another and with the European Commission in this activity. Thus, simply stated, one member state needs to seek information from the foreign investor and investment beneficiary to share with other EU counterparts and to provide relevant information especially on the potential impact of FDI on security and public order.

This requirement is obligatory before and also for up to 15 months after the FDI is secured. The European Commission will not shy away from using its power to provide ex-post advice within 15 months after the FDI has been completed. This could lead to ex-post investigations by member states able to retroactively review deals under their national legislation and possible orders to unwind or adopt mitigating measures post-closing. The European Commission will monitor investment structures that aim to circumvent FDI screening.  The current Guidelines indicate that certainly in the COVID-19 context, the goal of protecting the EU’s security (specifically healthcare) is the priority.

Member states are encouraged to consider reviewing portfolio investments relevant to security or public order: for example, where a small shareholding (for example 5%) may confer relevant rights on the investor. By comparison, in the US, there has been increasing focus in recent years on so-called “critical infrastructure”, which is understood to encompass aspects of the economy related to healthcare, pharmaceuticals, and related supply chains – and ad hoc regulations already call for heightened scrutiny of foreign investments in critical infrastructure. Malta recently set up a new agency – the National Foreign Direct Investment Screening office. The sectors that fall under the screening regulation are as follows:

a)         critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;
(b)        critical technologies and dual-use items as defined in point 1 of Article 2 of Council Regulation (EC) No. 428/2009 (15), including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;
(c)        supply of critical inputs including energy or raw materials, as well as food security;
(d)       access to sensitive information including personal data or the ability to control such information; and
(e)        the freedom and pluralism of the media.

This is another burden (possibly unpaid) for practitioners, lawyers, notaries, and corporate service providers that after extensive marketing succeed to attract FDI to Malta. They must submit critical data with clearance from the Office to the Malta Business Register prior to filing the customary documents when registering companies, foundations, partnerships, and so on. The screening office, therefore, vets the new forms that need to be submitted and give or refuse clearance. Without clearance, the FDI cannot seek shelter in Malta. It is unclear whether an appeal against a refusal to an independent tribunal is allowed. The list of additional information is exhaustive. Officially the screening agency requests authenticated documentation from the business introducer. The guideline states that forms need to be filled stating inter alia:

  • the ownership structure of the foreign investor and of the undertaking in which the foreign direct investment is planned to be made or has been made, including information on the ultimate investor and/or beneficial owner and participation in the capital;
  • the approximate value of the FDI;
  • the products, services and business operations of the foreign investor and of the undertaking in which the FDI foreign is planned or has been completed;
  • the jurisdictions, including member states in which the foreign investor and the undertaking in which the FDI is planned or has been completed to conduct relevant business operations;
  • the funding of the investment and its source; and
  • the date when the FDI is planned to be completed or has been completed.

One may question, whether this is another level of bureaucracy intended to slow down the new business to Malta which comes at an awkward time when the COVID-19 pandemic has created havoc in the global business sphere and there are a lot of countries seeking an elusive business to their shores. One hopes that the screening office (possibly at a nominal fee) will be super-efficient and understands the dire need for FDI even though it is not coming from Europe but other continents such as Asia.

In fact, China is the world’s second-largest economy giving it enormous leverage to shape the world economy and politics. It is still lagging behind the EU in many areas of technology but has ambitious policies of promoting technology upgrading including outward FDI. It is interesting to note that in response to the COVID-19 pandemic, Spain had decided to block all FDI coming from outside the EU or the European Free Trade Association (including state-owned companies).

In particular, exclusions include healthcare, energy, finance, for reasons of public safety, and public order. Other countries such as France, Germany, and Italy are contemplating to introduce further restrictions for non-EU investments. There is some concern to ensure that no sell-out of EU strategic companies occurs in the current volatile market as these businesses will be crucial to rebuilding the European economy post the COVID-19 crisis.

In conclusion, one hopes that the recovery plan for the global economy will be aided by bona fide investors who truly wish to revive the sagging GDP of the recipient country.

George Mangion


Author: George Mangion
Published on Malta Independent 30 June 2020
Get in touch: info@pkfmalta.com