The development of Maltese legislation promoting industry throught tax incentives in a historical legal context

Abstract

Most countries in the world offer some form of incentives to stimulate investment and economic growth and yet economists do not agree as to the cost-effectiveness of these incentives. The primary objective of this research is to seek to understand how incentive legislation, and in particular tax incentives, evolved throughout the years so as to adapt to changes in the global as well as local environments. Incentive legislation has been present in Malta since early in the 20th century. Its initial aim was to help the Maltese economy diversify and grow, so as not to remain dependent on the expenditure of the British military forces. Economic independence was seen as a parallel development to politico-social development. The economic development model adopted by Malta since the late 1950s has relied heavily on attracting foreign direct investment. Incentives were deemed as being necessary to off-set the perceived limitations arising mostly from the country's smallness. Throughout the years, the incentives promoting industry have taken various forms; but ever since the introduction of income tax in 1948, tax incentives have occupied a central role in Malta's incentive package. Of particular importance to the progression of incentive legislation has been the impact of European Union membership in 2004. This brought with it several policies that had to be taken into account with regard to existing and subsequent incentive legislation. This research considers the changes made to Maltese incentive legislation, the current state of affairs and considers the way forward in line with the limitations that have been imposed by the EU. The main attractiveness of tax incentives is that they do not represent a direct burden on government's budgetary framework, with the 'real' cost of tax incentives being the revenue foregone and the erosion of the tax base. Maltese policymakers over the years have developed a 'tax management' capability which was subsequently used to further the diversification and growth of local economic activities. This research while highlighting the link between political and social developments and the evolution of industrial and tax incentives still leaves many questions unanswered. Changes in the EU fiscal policies, and in particular the move towards increased tax harmonisation, open new challenges for Malta's economic development strategies. It is hoped that this research has thrown further light on understanding the importance of managing taxation in meeting the economic aspirations of the Maltese people.