With Malta’s public coffers losing out on an estimated €577 million in taxes a year to underground economic activity, amounting to 27.2 per cent of the country’s annual GDP in 2009, the European Commission this week released a package of measures to tackle the estimated €1.3 trillion lost to tax evasion and fraud in Europe.

In addition to concerted action at EU level, the Commission has also underlined the need for individual member states to improve tax compliance and their fight against tax evasion.

Ten member states, Malta included, received country-specific recommendations to this end within the 2012 European Semester in May 2012. Along these lines, the Malta recommendation was for the government to: “Increase tax compliance and fight tax evasion, and reduce incentives towards indebtedness in corporate taxation.”

Taxation and Customs Union, Audit and Anti-fraud Commissioner Algirdas Šemeta remarked this week how such fiscal shortcomings were a “scandalous loss of public income, particularly in tough economic times”.

The Commission’s action plan set out 30 new measures to close loopholes and increase information exchange, and called on EU countries to implement the current EU code of conduct on business taxation as soon as possible.

“In a single market, within a globalised economy, national mismatches and loopholes become the playthings of those that seek to escape taxation”, Commissioner Šemeta said.

The measures address internal taxation as well as cross-border taxation loopholes.

One recommendation suggests ways for member states to address “aggressive tax planning” – the legal technicalities and loopholes companies use to pay less tax.

Another requires member states to take a strong stance on tax havens, going beyond current international measures. The EU executive urged countries to identify such havens, place them on national blacklists and take their complaint to the Commission.

EU countries, according to the plan, should also adopt a common anti-abuse rule, whereby they can ignore artificial tax avoidance schemes and tax the underlying sum of money.

The Commissioner expressed frustration that some companies, such as Starbucks and Amazon, had been exploiting divergences in national tax regimes.

Member states are encouraged to reinforce their double-taxation conventions, to prevent them resulting in no taxation at all. They should also adopt a common general anti-abuse rule, under which they could ignore any artificial arrangement carried out for tax avoidance purposes and tax instead on the basis of actual economic substance.

Other initiatives foreseen in the action plan include a taxpayers’ code, an EU tax identification number, a review of the anti-abuse provisions in key EU directives, and common guidelines to trace money flows.

In order to further improve the work within the EU on harmful tax competition, member states were urged to reinvigorate the work of the EU Code of Conduct on business taxation.

If solutions to remove particular mismatches are not agreed and implemented in a timely and effective way, the Commission will table its own legislative proposals for action. It has also been recommended that the Code of Conduct is extended in scope to include special tax regimes for wealthy individuals.

By way of enforcement, the Commission said it will set up active new monitoring tools and scoreboards, to maintain momentum in the fight against tax evasion and avoidance. A new platform for tax good governance will monitor and report on member states’ application of the recommendations.

 

Malta the EU’s sixth-biggest loser in taxes to underground economic activity

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 GDP, recent research commissioned by the European Parliament’s Progressive Alliance of Socialists & Democrats Group (S&D) has showed.

The study, which the Commission took into account in drafting this week’s recommendations, estimates Malta’s underground economy to be worth €1,686 billion a year, over 25 per cent of the country’s entire GDP, 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 the public coffer’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.

The averages in the first two categories are significantly higher than EU averages (taxes lost as proportion of tax income: 22.1 per cent and taxes lost as proportion of government spending: 17.6 per cent), but Malta seems to fare much better compared to the annual health cheque, with the EU’s average in lost taxes amounting to 105 per cent of health expenditure, most likely in a reflection of Malta’s enormous health-related expenditure.

It would, according to the research, take Malta only 7.4 years to repay its entire public debt of €4,248 billion in 2010 in the Utopian scenario in which tax evasion were completely obliterated. It would take the EU as 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 Malta’s 2009 public deficit of €226 million.