Malta the EU’s sixth-worst in tax
losses to underground economic activity
David Lindsay
Malta’s public coffers are losing out on as much as €577 million in taxes a year to underground economic activity on which taxes are not collected, or 27.2 per cent of the country’s annual tax income, research commissioned by the European Parliament’s Progressive Alliance of Socialists & Democrats Group (S&D) shows.
A study published by political group extrapolates “consistently credible sources”, including recent figures published by the European Commission, which estimates Malta’s underground economy to be worth €1.686 billion a year, over 25 per cent of the country’ entire Gross Domestic Product, meaning that over one-quarter of all economic activity in the country takes place under the figurative table.
Moreover, Tax Research London, the firm commissioned by the S&D to carry out the study, shows the percentage of tax lost as a proportion of Malta’s total tax revenue at 27.2 per cent.
In these terms, Malta was in joint sixth place with Poland, and is only losing out on less tax revenue from the ‘shadow economy’, proportionately speaking, than Bulgaria (35.3 per cent), Romania (32.6 per cent), Lithuania (32 per cent), Latvia (29.2 per cent), and Greece (27.5 per cent).
Moreover, the taxes being lost on the shadow economy, according to the research, amounts to 20.8 per cent of total annual government spending and 56.4 per cent of government spending on health.
It would, according to the research, take Malta only 7.4 years to repay its entire public debt, which stood at €4.248 billion in 2010, in the Utopian scenario in which tax evasion were completely obliterated. It would take the European Union a whole 8.8 years to reach the same target.
Taxes being lost on an annual basis also amount to 255.2 per cent of the country’s 2009 public deficit of €226 million.
In a statement this week, the S&D remarked that €1 trillion is being lost in potential tax revenue every year across the European Union, which is playing a substantial part in the deficit and debt levels being faced across the bloc and which, in turn, negatively affects public investment levels, growth and employment.
The report says that tax evasion in the European Union is costing the bloc approximately €860 billion a year. It says that estimating tax avoidance is harder, but gauges an additional €150 billion could be saved across the EU and that, as a whole, over €1 trillion a year could be saved in the EU if both evasion and avoidance were entirely stamped out.
Moreover, the S&D group observes that a large part of this non-taxed liquidity is feeding into financial trading activity rather than into private or public consumption and investment.
The group calls on the EU as a whole to “forcefully address” the issue and for the European Council to cut what it refers to as this ‘tax gap’ in half by 2020, and recommends that the EU takes action at European and at national levels simultaneously.
By moving towards this target, the S&D says member states would gradually achieve new tax revenue without raising tax rates.
The target can be reached, according to the group, by ensuring action on reforming the accounting rules and corporate accounting disclosure; upgrading and extending the scope of the European Union Savings Directive; ensuring a compulsory Common Consolidated Corporate Tax Base; introducing country-by-country reporting for cross-border companies; and strengthening regulation of company registries and registers of trusts.
Such action, the S&D says, will have to include adequate EU-wide agreements with key non-EU countries currently providing platforms for financial institutions facilitating tax fraud and evasion activities from within the EU, such as Switzerland.