Malta in the 15% Global Minimum Tax World

Over the past four years, more than 140 countries agreed to enact a two-pillar solution to address the challenges arising from the digitalisation of the economy, through the OECD BEPS Inclusive Framework. Pillar Two is the second prong of this solution aimed at ensuring that multinational groups (‘MNEs’) with revenues exceeding €750m are subjected to a minimum level of taxation, set at 15%, on the income arising in each of the jurisdictions in which they are located. Where the 15% rate is not reached, top-up tax becomes leviable mainly through one or a combination of three mechanisms in this order (i) a ‘domestic top-up tax’ (or DMTT) that is optional for countries to adopt, (ii) a top-up tax leviable by the ultimate parent entity and/or intermediate parents in the chain of ownership of an entity (through an ‘Income Inclusion Rule’ or IIR) and/or (iii) where the 15% effective tax rate (ETR) is still not reached, the ‘Under-Taxed Profits Rule’ (or UTPR) applies such that the shortfall is collected by other group members.

The OECD’s Pillar Two project is unprecedented in terms of its global reach and effect in the tax world. While its aim of achieving a per-country minimum ETR is clear, the process and rules to achieve the aim are inherently complex, necessitating expertise, systems, and cross-border interaction at all levels – between and with group members, advisors and tax administrations alike. Intricacy is partly driven by challenges to adopt the rules in the body of laws of jurisdictions, each with their own political systems and fiscal policies, some with long-standing tax regimes and others without one to start with. Indeed, while several countries have enacted the Pillar Two rules, others are in process or simply made related announcements, while some have made no move altogether. Complexity is accentuated by the design of the rules themselves which require extensive computations, starting off from the accounting figures and adjusting same, including through a series of deferred tax adjustments, to arrive at the country ETR. This is in addition to the fact that the rules are to be applied by MNE Groups, each with their own legal structures, internal systems, geographical presence and own nuances. While the OECD seeks to publish administrative guidance to help in the interpretation of the rules, with each tranche of guidance that is published, any local or group positions taken in the interim may need revision. And auditors need to beware!

Malta’s Position

Malta is not immune to these developments, it is a signatory to the OECD Agreement of 2021 and it is also bound to transpose Directive 2022/2523 (‘the EU Minimum Tax Directive’), which seeks to implement the Pillar Two Model Rules issued by the OECD. In 2023, it was reported that Pillar Two is expected to impact around 660 multi-national companies that also have a base in Malta and that employ around 20,000 people ^[1]. Navigating through the policy options for the Maltese Government must have its own challenges. While it is likely that many of the currently in-scope companies benefit from Malta’s tax system, the extent of their contribution to Malta’s coffers (with knowledge that around 80% of total tax collected in Malta comes from ‘large taxpayer(s)’ and high net worth individuals ^[2]) can play a role in the process.

1. At least until 2025, Malta has opted for a delayed adoption of the IIR and the UTPR as allowed for by Article 50 of the EU Minimum Tax Directive, which option is available until the end of 2029 to EU Member States with no more than 12 ultimate parent entities located in their territory. Accordingly, Maltese constituent entities will not be subject to any top-up tax in Malta on the profits of other entities of the group in these two years.

2. Separate statements by the Minister of Finance and the Commissioner for Tax and Customs confirmed that no DMTT will be introduced in 2024 and 2025 thereby freeing Maltese entities from any local exposure to domestic top-up taxes even when their effective tax rate is below 15%. This does not necessarily mean that there will be no top-up tax elsewhere on the Malta profits – much would depend on the group structure and where the group members are located.

3. The Government is in discussions with the EU Commission regarding incentives which Malta wishes to introduce in the form of grants or Qualified Refundable Tax Credits (QRTCs) to retain Malta’s competitiveness [³]. QRTCs are tax credits which are so designed that they must be refundable in cash or cash equivalents within four years from the year in which the constituent entity satisfies the conditions for receiving the credit. When compared with non-QRTCs, QRTCs have the advantage of being treated as income in the ETR computation of an entity i.e. an increase in the income denominator rather than a decrease in the tax numerator of the ETR formula, thereby leaving a lesser negative impact on the ETR result. Relevant considerations in the design of a QRTC regime include the implications on public finances if they involve cash outlays, the limitations imposed by the Pillar Two Rules themselves, and the boundaries set by EU State Aid laws, whether they should be limited to certain sectors/activities and the potential of abuse of such incentives. QRTCs may however be one of the few tools left for Malta to exploit to maintain its attractiveness to the larger MNE Groups.

4. When a company claims a grant of QRTC, the tax refund will be reduced from 6/7ths to 4/7ths [⁴] for companies that could possibly benefit from QRTCs, thereby resulting in an effective rate of 15%.

The government’s approach so far has been a cautious one, but while this may have been welcome by some MNE Groups, others would prefer (and demand) certainty to enable them to assess implications and plan their affairs better.

The speed with which this global change has been implemented, has caused more than a headache for significantly larger jurisdictions than Malta. Some of these are still struggling to determine how to implement the OECD’s rules and the ever-evolving Administrative Guidance. In addition, the US has recently announced that any commitments made with respect to Pillar 2 by the previous administration, are not binding on it. This only increases the uncertainty. The Maltese government’s choice to benefit from a delayed adoption of the rules may be unique, but it allows the country the time to see how all this uncertainty will evolve.