The impact of the interest limitation rule on companies in Malta

Abstract

Purpose: This research study aims to achieve three main objectives, namely the assessment of the implications and degree of significance of the various components making up the Anti-Tax Avoidance Directive’s (ATAD) Interest Limitation Rule (ILR) as domestically transposed, the nature and degree of impact of the ILR’s domestic implementation on companies in Malta, and the response, if any, of companies in Malta affected by the ILR. Design: The achievement of the research objectives entails the adoption of a mono-qualitative approach, namely the use of semi-structured interviews to collect the views of eight tax experts. Findings: The findings indicate that although the erosion of the Maltese taxable base is a non-significant issue, the ILR was deemed desirable for the purpose of improving Malta’s reputation. In spite of the significant change to Malta's interest deductibility regime, the ILR's impact on companies’ interest deductibility was very limited overall, with only a minority of affected companies. Nonetheless, a number of concerns arose with regard to the ILR’s potentially unfair impact, namely its unnecessarily broad scope of application implying a degree of over-restrictiveness. Conclusions: the study concludes that the least-restrictive ILR possible was transposed, the de minimis rule exemption being its most significant component. In fact, as a result of the exemption’s high applicability, most companies are exempted from the ILR, in turn making the ILR's restriction on interest deductibility – and hence its identified direct impact on profitability, cash flow and potentially capital investment – very limited in practice. Correspondingly, the degree of achieved curtailment of interest-related Base Erosion and Profit Shifting (BEPS), as well as an indirect reduction in the debt bias, was low. Instead, the main impact was the significant increase in companies' compliance costs. Furthermore, except for a limited number of observed debt-to-equity conversions and asset-splits, a general lack of direct response by affected companies was observed, although expected to significantly increase in the future. Value: This early-stage qualitative study provides an important contribution to the local impact assessment of the newly-introduced ILR and its implications for the future of Malta’s interest deductibility.