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 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.

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.