George M. Mangion | Wednesday, 30 July 2008

Not so much a silly season

July is usually associated with holidays and a quiet front on the business scene. This July more activity seems to hit the news headlines. Following quite a ruckus on the aftermath of the transport strike we follow with expectation the privatisation of Malta Drydocks. The latter comes with a price tag of about €100 million in accumulated debt which needs to be absorbed by government. According to financial commentators, the government receipts from the EU showed a drop from the amount budgeted. Sadly due to unexplained reasons there was only €12 million received in the first six months while the projection was a much higher sum reaching €115 million for 2008. This could be due to pressure of work prior to elections which worn out government energy and consequently was not fully focused to submit totally subscribed structural fund requests on projects executed on time. This has not helped in the cash flow since we discover that the deficit grew to €256 million in the first six months. Linked to this is the public debt shooting up by nearly €180 million, thereby exacerbating the targeted debt projections by €70 million. Naturally, such a boost to the economy is always welcome even though this comes from borrowed funds. We note how the election fever has turned the taps open on recurrent expenditure in the past six months. There was in fact an extra injection of €123.2 million compared to the period of six months last year. All this extra expenditure would contribute to an artificial sense of feel good factor when one considers that the debt cost augmented by €44.1 million to reach a staggering annual cost of €93.6 million. (higher than the cost of running Mater Dei).
But not everything is doom and gloom as public debt has gone down to 62.4 per cent of GDP in 2007 from 64.1 per cent in 2006 which is quite an achievement given the turbulent times tarred by rises in oil prices. In a recent article written by the minister of finance in the Times of Malta he was quoted to say that in the first quarter of this year, the economy grew by 3.5 per cent. This is much higher than the European average of about 1.9 per cent. Factors that contribute to more good news are the resilience of the domestic market, which has absorbed more workers. This is manifested by unemployment dropping to 4.3 per cent, the gainfully occupied have increased by over 3,000 jobs and wholly generated by the private sector. Tourism is also expanding. The general government attitude towards improving the productivity of its loss-making entities now seems to take root. Notice how resolute is the minister’s attitude to tackle the long overdue restructuring of the transport industry. Yet, the malevolent inflation rate is hovering around the 4 per cent mark which is a tiff worrying.
There is a silent undercurrent of opinion which is fuelling scepticism about the future inflation spiralling due to higher oil and cereal prices. Cost of living is already perceived as comparatively high as reflected by an inflation rate, which is biting into our purchasing power. It goes without saying that unbridled inflation will also nibble into our competitiveness edge. The N.E.C.C is putting a brave face saying that it has engaged over 70 assistants to monitor pricing and tackle abuses. Certainly the patient is taking the prescribed medicine through the bitter pill of a 95 per cent domestic energy bill surcharge. Sceptics also ask about the possible collapse of the property bubble, as happened in Spain and in the UK. One can never tell, yet the construction barometer already is showing some slack and this is also reflected by tightening of credit by banks on speculative building projects. Banks are feeling the pinch and are reporting lower profits. Again if Smart City plans are approved by MEPA this year this will tip the scales in favour of a five year building project which is expected to boost the construction industry. This will be a counterbalance to the heightened level of uncertainties that an election year brings. So what’s in store for us in this silly season when tempers cool down and mothers take some time to check holiday schedules for the kids while scrupulously buying the right sun block creams for all? The future beckons yet it is relevant to recall how at a packed hall in a five star hotel on the eve of the election Dr Gonzi predicted good times. Then, addressing the financial practitioners, he sounded bullish on the economy and did not hesitate to predict that there will be a shortage of qualified workers in the financial services sector. Dr Gonzi pointed to a party manifesto packed with more than 300 new measures. All groomed to improve on our financial incentives to attract more wealth. One suggestion that was gathering momentum is the idea to overhaul incentive legislation to attract more retired high net worth individuals. This needs to be followed up in earnest. Those my age will remember how the ‘sixpence in the pound’ scheme was blatantly successful in attracting untold wealthy applicants in the late sixties. This scheme afforded retirees practically tax free living in Malta. This was overhauled in the seventies by the incoming Socialist government who reasoned that it was anti-social to discriminate between residents paying the normal rates and other so – called retired people with deep pockets. Naturally we suffered a drain of such retirees who migrated to other tax havens such as Andorra, Dublin and Madeira. With the change of government in 1987 there was a new act, which again started to try to lure them back. Over the years the 1988 law worked well but essentially such applicants were barred from taking employment or engage in business unless authorised by the competent authorities. Interestingly, however, there were meagre attempts in modifying Government policy in this regard. The broad consensus was to try attracting settlers brimming with overseas expertise and ideas in the tourism, manufacturing and catering sectors. But this did not materialise. So, how attractive is the current law?
Non-residents pay tax at a flat rate of 15 per cent only on income brought into or generated in Malta and not on a worldwide basis. At all times, the minimum tax payable each year is €4150 but this increases based on income repatriated. Many consider the concessions as ineffective, and outdated. This scheme has only met with modest success in attracting high-flyers. Let us compare the situation in Britain, which up to recently enjoyed a vast number of non-residents who were not taxed on their world-wide income except on a remittance basis. Prior to recent amendments introduced by Mr Darling the exchequer, non-doms ‘with links abroad, but living in the UK can declare another country as their real home, or “domicile”, regardless of where they actually reside. As a result they pay no UK tax on their earnings or capital gains outside the UK. It means in simple terms that non-domiciled are wealthy people with links abroad who declare another country as their home or “domicile” as a result pay no UK tax on their earnings or capital gains outside Britain. This has encouraged many rich foreign businesspeople to live in the UK. This clever scheme has over the years lured many Greek shipping tycoons, Saudi princes and wealthy American bankers to take advantage of the laws. Now is the time for Malta to strike while the displeasure from non-domiciled persons in Britain is mounting and many are looking for second homes. What is stopping us from upgrading our fiscal schemes? Can Malta act in time. Can our experts emulate Britain and start providing a similar tax concession aimed to attract such settlers. One only hopes so. This will surely short circuit the dearth of good news prevalent during the so called silly season.

George Mangion
Partner at PKF – an audit and business advisory firm
[email protected]