The Business Promotion Act: A step in the right direction?

by a staff reporter

The new system of incentives that are being introduced in the draft Business Promotion Act should be as transparent as possible in order to instil a sense of fair play and that the allocation of incentives will operate in a coherent, serious and reliable way, President of the Federation of Industry, Joe Zammit Tabona said last week.
He was speaking on the draft Act that is expected to be discussed in Parliament next month when addressing The Malta Business Weekly –
Le Meridien Phoenicia Business Breakfast.
In his address, the FOI President put the new act under the spotlight as he described the development of industry in Malta and the benefits that are expected from the new incentives being proposed by government in the act.
Mr Zammit Tabona said industrial development in Malta is an ongoing miracle that is managed by sheer hard efforts to promote the possibilities offered by a small country with its absolute limitations of size; the absolute limitations on the availability of land for industrial activities; and the absolute limitations of infrastructural possibilities.
There are also absolute limitations of manpower availability and absolute limitations of public funds for promoting and assisting entrepreneurs to set up new industrial projects, he said.
“Industrial development has never been and will never be an easy task for our country. That is exactly the reason why we have had incentives over the past 40 years to encourage entrepreneurs to set up new projects or expand their current activities in our country and why we need a market-oriented revision of the basket of incentives we propose to launch in the coming years,” Mr Zammit Tabona said.
Malta’s economic successes have been based on a diversification of activities, of which manufacturing has become an important pillar in spite of the adversities. It contributes more than 23 per cent of GDP and directly providing employment to over 30,000 or about 22 per cent of gainfully-
occupied persons.
These figures do not take into account several thousands more employed in a number of services directly connected with manufacturing activities.
Mr Zammit Tabona said that when the Industrial Development Act (IDA) was approved in 1988 the world presented a much different scenario than the present one. Malta’s task to attract investment is therefore made tougher with more odds piled against it than those it faced in the 1970s and 1980s.
“There are several countries that have been targeted for investment outside the EU because of raw materials availability, because of attractive incentives, labour availability. and a home market ready to be exploited, among other factors. Countries in Central and Eastern Europe have attracted billions of dollars of industrial investment.
“There are also other countries nearer to us in the Mediterranean offering incentives that are also managing to attract investment. We must also not forget that companies in the EU bloc are also investing across borders in the various countries within Europe,” he said.
Mr Zammit Tabona said the IDA of 1988 provides encouragement to new investment and expansion of existing investment in Malta. The scope of the Act was broadened over the years in an effort to keep up with these changing circumstances.
For this purpose a number of amendments were made but the most important occurred in 1993 when qualifying manufacturing activities were supplemented by aquaculture, horticulture, a number of export and support services, and research and development programmes.
“The other important amendments were implemented in 1997 when a step in the right direction was made to introduce the Investment Incentive Scheme, the extension of the Export Incentive Scheme and the extension of the applicability of the benefits to all types of Maltese and foreign commercial partnerships,” Mr Zammit Tabona said.
The FOI President said the bill has four underlying principles. It updates and widens the scope of incentives to enable Malta to cater for niche situations that are best suited to
our environment, and for which tailor-made and flexible-incentives must be available
“Another principle is the need to conform to World Trade Organisation guidelines on State aids and to the rules of State aid requirements under the EU Acquis. The law includes new provisos for the assignment of debt in commercial transactions to facilitate the process and to improve the cash flow of commercial undertakings. It includes new regulations for ‘legal interest’, recovery procedures and actions by associations for small businesses regarding the late payment of defined debts.
“In reality, therefore, the proposed law starts by changing the name of the Industrial Development Act which will now be called the Business Promotion Act. It will eliminate the distinction between local-oriented and export-oriented activities,” Mr Zammit Tabona said.
There are both new incentives and schemes as well as a limitation on export-linked incentives. The idea here is to have a level playing-field for foreign-owned and local investment. This principle recognises the importance of encouraging local investment on the same terms as any foreign investment. At the same time the concept of the “qualifying company” is being maintained but the qualifying activities are being widened to include Freeport activities, operations in catering, hotels and other types of holiday premises, besides projects of benefit to the tourism industry and the production of films of a varied type. This
is indeed a welcome move that
could draw even more diversified investment.
The FOI President added that the draft law makes safeguards to protect the legitimate expectations of current beneficiaries of incentives under the IDA so that they are assured of retaining current benefits. He said the minister will however be specifying a cut-off date for the termination of benefits arising from these incentives such as “export-related” benefits such as tax holidays and investment incentive schemes that will continue to apply for a defined period of time.
“I believe that the government should be clear in the sense that a reasonable deadline be now given to allow a start by those entrepreneurs who had projects approved by the Malta Development Corporation. From my interpretation tax holidays will expire by no later than 12 years from the date set by the minister,” he said.
“I consider this to be an occasion for government not only to curtail but also to make some adjustment to certain incentives granted in the past in an effort to render them more accessible to qualifying companies. In particular it is felt that the thresholds for applicability of the Investment Incentive Scheme should be reviewed downwards in the light of experience gathered. Everyone admits that the norms fixed in 1997 were too onerous and we call on government to ease up on the thresholds.”
The Business Promotion Act, Mr Zammit Tabona added, aims at removing, from tax basis year 2000, the discrimination against foreign-owned companies on the reduced rates of tax for re-invested profits. The income tax rate reduction that will now apply is
to be at least 19.95 per cent for
foreign-owned companies, thus bringing them on the same footing as locally owned companies.
In the bill under consideration there is an extraordinary amendment to the original aids to industries ordinance which will give the President of Malta the possibility of granting a 10-year concession for reduced rates of tax rather than a total tax break.
Concluding his address, the FOI President said certain amendments to the IDA had to be made once the government is committed to achieve EU membership and to conform to WTO requirements.
“We are sure that government is doing its utmost through this legislation to encourage more foreign direct investment towards Malta in an effort to strengthen the manufacturing sector – a very important pillar of Malta’s economy.”
He added that it is important that clear and fair time-frames are established about the phasing out of certain incentives which have been enjoyed so far by foreign firms established in Malta. Similarly, Mr Zammit Tabona said he believes that the new system of incentives should be as transparent as possible in order to instil a sense of fair play and that the allocation of incentives will operate in a coherent, serious and reliable way.
While making his intervention after Mr Zammit Tabona’s speech, Prof. John Harper of the Chamber of Commerce stressed the importance of human resources development, especially in the IT sector. This point was echoed also by John Degiorgio, who owns an IT company. They emphasised the need for provisions in the IDA which would promote certain skills, especially in the technical and IT sector.