Changes in Industrial Development Act explained

Changes in the Industrial Development Act (IDA) which will be implemented in the Business Promotion Act were explained last week at a business breakfast organised by KPMG.
Speaking at the breakfast, economic services minister Josef Bonnici explained the principal changes in the new law. He said the old law was slightly amended during the recent MLP administration but the law has now been given a thorough overhaul essentially removing the discrimination in favour of exports as this is now considered to be discriminatory by such organisations as WTO, OECD and the EU.
The new law divides enterprises into those which are on the high value added sector, both for exports and for the local market; and those that do not generate so much value added.
The tax holiday, he said, which used to be granted to export-
oriented enterprises under the old IDA had now been removed. Instead, the high value added sector now has a graded tax scheme beginning at five per cent for the first seven years but tax credits can be given for high investment.
Those companies here on the old IDA with their tax holiday coming to an end will be granted help due to their legitimate expectations. The accent, Prof. Bonnici said, is on continuity.
André Zarb, Director of Tax
Services at KPMG, gave a presentation on the main provisions of the BPA and on the incentives, which are to be introduced. “The scope of the Act is now considerably broadened as it adds a number of new qualifying activities, and incorporates the facility to introduce incentives in qualifying business sectors of the economy,” Mr Zarb said. He explained that the new approach, of having an enabling law with specific measures being introduced by legal notices, introduces greater flexibility without compromising legal certainty which is of paramount importance to beneficiaries.
“In addition, a major change from the old regime is the fact that the main incentives will no longer be directed at exporting companies. This will bring Malta in line with its international commitments, notably the World Trade Organisation Agreement on export subsidies,” he added.
Accordingly, various incentives available under the Act will remain applicable, for the required number of years, only to companies existing prior to a date to be determined by the Minister. This protects the expectations of current beneficiaries of these incentives, the most important of which are the 10-year
tax holidays which will remain applicable until their expiration and the export and investment incentive schemes which will be available until 2020.
Then turning on to the new incentives, Mr Zarb outlined the main incentives to be introduced, which are mainly directed at companies engaged in manufacturing or certain other activities. Two of these incentives are in turn applicable only to companies engaged in the so-called target activities, which include the manufacture of particular products, software development, research and development and audiovisual
productions. These incentives are the reduced rates of tax of five per cent for seven years (not applicable to existing companies); 10 per cent for the next six years and 15 per cent for the following five years, and the investment tax credit which relieves the payment of the tax calculated at these reduced rates. These credits are calculated at 50 per cent (SMEs 65 per cent) of qualifying expenditure and is increased by seven per cent when carried forward to following years.
Mr Zarb added: “These reduced rates of tax, but not the investment tax credit, are also applicable to companies, not falling within these target sectors, and which increase their value added being the agg-regate of labour costs and profit.” The reduced tax rates are applicable to a part, or indeed a multiple, of the increased profit when compared to a base period. The amount is arrived at by a formula which measures the percentage increase in value added as a percentage of the percentage increase in sales.