While a report submitted by the International Monetary Fund (IMF) highlights the government's success in achieving robust growth, it does note that possible changes in international corporate taxation and reliance on proceeds from the Individual Investor Programme (IIP) could pose risks.
The IMF submitted its annual country report days ago and gave a detailed overview on Malta's economy and how it should proceed in maintaining sustained growth. The report delves into a number of key issues such as the controversial citizenship-by-investment scheme, the housing market, non-performing home loans and the importance for financial supervision in light of Malta's growing financial sector.
In its report, the main message to be driven home was that Malta should work towards building "larger fiscal buffers" to safeguard against shocks while continuing its favourable labour market policies and efforts to attract investment.
In a section highlighting fiscal risks, IMF staff wrote:
"Malta's share of corporate tax revenue in total revenue is much higher than in other EU members. With a large presence of foreign-owned firms and pro-business tax regime, possible changes in international corporate taxation may affect Malta unfavourably, thus calling for further broadening the tax base and increasing revenue collection, including by strengthening VAT compliance.
"The recent measures to combat tax evasion and avoidance, such as establishing the Join Enforcement Unit, strengthening the IT system to monitor tax compliance, and consolidating, streamlining and automatizing services of revenue departments are steps in the right direction. Further increasing female labour participation would also help broadening the base"
Malta offers a generous 6/7 tax rebate to multinational corporations, effectively allowing them to pay just five percent corporate taxation. This is typical of island-states which do not have a huge workforce or natural resources where to generate revenue from.
In terms of the controversial citizenship-by-investment scheme, the IMF report noted 2018 fiscal targets, saying that "the attainment of these targets partly depends on IIP proceeds, which are volatile and difficult to predict. Even with the authorities intention to extend the IIP, it is expected to remain limited in scope, presenting a challenge for long-term fiscal adjustment."
It continued to say that "identifying additional measures would help strengthen the fiscal position, particularly if IIP revenue underperforms".
Other risks
The report called on government to address demographic challenges. This refers to the higher proportion of pensioners when compared with those entering the labour market.
"Age-related spending, particularly pension and healthcare, is projected to increase significantly and faster than in most peers over the long term."
Steps taken by the government to address this issue were highlighted, such as providing incentives for workers to save more of their wages as well as incentives to stop people making use of early-retirement schemes.
"However, further adjustments – as part of the planned periodic reviews – are needed to align the contributory period with live expectancy and better link the life-time incomes to pensionable incomes.
The IMF called on government to ensure that the Malta Financial Services Authority (MFSA) has "adequate resources" in order to safeguard the reputation, integrity and ultimately the success of Malta's financial sector.
"The increasing number of financial firms, the rapid developments of new products and the evolving regulatory environment have put the MFSA under strain, despite its recent expansion. Further pressure emanates from tight labour market conditions, which contributed to high MFSA staff turnover."
It called on ensuring the MFSA has the resources it needs to improve its capacity to retain experienced staff and support the continuation of effective supervision.
In its report, the IMF noted that "strong momentum in the housing market may increase financial stability risks".
While it noted that household balance-sheets are sound on the whole, and financial wealth outperforming peer levels, "high exposure of core domestic banks to property-related loans, a sharp drop in house prices or increases in interest rates may lead to a negative spiral of low lending and investment and adverse macro-financial repercussions".
It noted that a "future unwinding" of real estate investments by successful IIP applicants "may also put downward pressure on housing prices".
While Maltese authorities do not agree with this assessment, IMF staff believes that "housing prices have entered a modest overvaluation territory by several metrics" based on a survey carried out in 2016 which found 80 per cent feel that properties are overpriced.
from The Malta Independent http://ift.tt/2DZGKi7
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