Raising revenue, expecting value: Reflections on Budget 2027

In recent years, it has become customary for the Minister for Finance, the Prime Minister and other government representatives to provide indications in the weeks leading up to the Budget about its likely direction and the Government’s economic priorities.

This year was no exception. Ahead of the Budget, the Minister for Finance indicated that no additional taxes would be imposed in relation to income tax or VAT. At the same time, however, it was already clear that the Government would be looking towards new sources of revenue. Another recurring message was the need for Malta’s economy to move towards higher-value activities that are less dependent on continuous increases in the labour force. This policy direction was also reflected in a number of measures affecting third-country nationals.

Beyond the social and human considerations, these measures raise a broader question about the type of economy Malta wishes to build. Foreign labour cannot be viewed as a single category. There is a fundamental difference between an economic model that relies on continuously increasing headcount and one that selectively attracts international talent to address skills that are simply not available in sufficient numbers locally. This distinction is particularly important for sectors such as financial services and healthcare, where access to qualified and specialised professionals is critical to sustaining growth and service quality. The decision taken few days after the Budget speech to retain preferential work-permit fees for qualifying non-EU healthcare professionals is itself an acknowledgement of this reality. If Malta genuinely wants to move towards a more productive and higher-value-added economy, immigration policy should reflect that ambition by facilitating the attraction and retention of skills that strengthen the country's economic and social infrastructure, rather than treating all forms of foreign recruitment in the same way.

Turning to the tax measures affecting businesses, one of the more notable announcements concerns small companies. The measure introduces a reduced tax rate on the profits of companies considered small, defined as companies with revenues of up to €1 million, provided that the profits are retained rather than distributed to shareholders. This is a positive measure, as it encourages smaller businesses to reinvest their profits and strengthen their operations. Although the detailed mechanics of the reduced corporate tax rate have yet to be announced, I would expect the rules to contain appropriate anti-avoidance provisions, including measures intended to prevent the artificial fragmentation of businesses or the extraction of funds through alternative means merely to benefit from the reduced rate.

Revenue-raising measures were not confined to the business sphere. Another measure is the increase in the eco-contribution applicable to tourists. This appears consistent with the discussion preceding the Budget about moving away from a strategy focused primarily on increasing tourist numbers and towards attracting higher-quality tourism. The objective should be for Malta to attract visitors who choose the country for the quality of the destination and the experience it offers, notwithstanding the higher eco-contribution. I would expect that the additional revenue generated by this measure will be channelled towards maintaining and enhancing Malta’s tourism infrastructure and sites, ensuring that they can be enjoyed by visitors and Maltese residents alike. If the additional revenue is not translated into visible improvements in the tourism product and wider infrastructure, the measure risks becoming simply an additional charge rather than an instrument for promoting higher-quality tourism.

While the Budget contained measures aimed at supporting particular segments of the economy, one area where I had expected to see more was the strengthening of Malta’s attractiveness as a financial services and investment jurisdiction. Foreign direct investment remains extremely important to the Maltese economy, yet there were relatively few concrete measures aimed specifically at improving Malta’s competitiveness in this area.

In particular, I believe the introduction of Qualified Refundable Tax Credits could have been explored in the context of the OECD Pillar Two framework. Properly designed expenditure- or investment-based refundable tax credits could provide an incentive for large multinational groups to undertake substantive activities and investment in Malta while being structured in a manner compatible with the new global minimum tax environment. Such measures could help Malta retain its competitiveness as an investment jurisdiction at a time when traditional tax-based incentives are increasingly constrained by the 15% global minimum tax.

Of course, the debate about raising additional revenue should not focus exclusively on introducing new fiscal measures. It should also consider whether taxes already due are being collected effectively. In the run-up to the Budget, there was considerable discussion about the tax authorities intensifying their efforts to address tax evasion through technology and data-analysis systems. Such systems have been described as capable of assisting in identifying taxpayers with unexplained wealth, as well as businesses or individuals declaring income that appears disproportionately low when compared with other available financial or revenue information.  Although this did not feature in the Budget speech itself, stronger and more effective enforcement should be welcomed. Ensuring that taxes properly due are collected is an important part of maintaining a fair tax system and can also reduce the pressure to raise additional revenue through new or higher taxes on compliant taxpayers.

Ultimately, however, the Budget debate should not be limited to how Government raises revenue. Equal attention needs to be given to how that revenue is spent. Government Ministries and Public Bodies should continue to identify inefficiencies, minimise waste and ensure that public funds are used effectively. Revenue collected should, as far as possible, be directed towards productive investment and capital projects that strengthen Malta’s infrastructure, competitiveness and, ultimately, the quality of life of its residents.

Improving the quality of life of Malta’s residents should ultimately be at the heart of every policy decision. Those entrusted with managing public funds have a moral obligation to ensure that resources are used wisely and directed towards the capital investment Malta needs to create the space, infrastructure and environment in which individuals and families can live comfortably and peacefully, not only today but for generations to come.

Ruth Farrugia is Tax Director at Forvis Mazars in Malta, where she leads a team providing tax advisory and compliance services to local and international clients. She is a Certified Public Accountant and a member of the Direct Taxation Committee of the Malta Institute of Accountants and the IFSP Tax & EU Affairs Committee.

This article was first published on The Business Picture on November 8 and written by Ruth Farrugiua, Tax Director at Forvis Mazars in Malta.