Making the fiscal system work is a large part of making democracy function. The setting up of the Maltese tax system is important for a variety of reasons, especially since it is a very important source of income for the government. Clearly, one has to know the basic rules governing the reporting of income, the calculation of tax and the enforcement of liability to tax.

Secondly, one ought to be aware of the Commissioner of Inland Revenue’s power to ensure that the basic structure works, including the imposition of interest and penalties under the tax legislation. Tax is, after all, probably the branch of law through which most citizens come into contact with the state, especially if one includes indirect contact through the FSS system.

A liability to tax arises when taxpayers are assessed for tax; today, the assessment is made by the taxpayers themselves, but may sometimes be made by the Commissioner of Inland Revenue. When a taxpayer fails to submit a return, the Commissioner of Inland Revenue issues an estimate; the theoretical position is that the estimate is indeed made on the taxpayer’s behalf and remains valid until cancelled by the delivery of the proper return. The taxpayer is never relieved from submitting a return, even if the taxpayer has not received a return.

Nowadays, the income tax return is in the form of a self-assessment. The self-assessment system was introduced in Malta in 1999 and under it, each taxpayer should calculate his chargeable income and the amount of tax due. This applies unless a taxpayer is entitled to avail himself of a declaration in lieu of a tax return, when the taxpayer satisfies certain requisites.

The self-assessment system gives rise to the important issue of declaring all sources of income in one’s income tax return. People who are resident and domiciled in Malta are obliged to submit an income tax return each year. All income earned on a worldwide basis should be declared, including any foreign source income that was not remitted to Malta. The different types of income are the following:

• Employment income

•Self-employment income (Trading)

• Pensions

• Rental income

• Interest

• Dividends

• Royalties

• Capital gains

• Other income

Taxpayers should be encouraged to submit their income tax returns in a correct manner and on time. There are hefty fines for late payment, late submissions and omissions.

Fines for late payment are in the form of interest which is at the rate of one per cent per month on the amount of tax due from the due date of the income tax return until the date payment is finally affected.

Fines for late submissions are also at the rate of one per cent per month on the tax charge incurred until eventual submission of the return. From year of assessment 2002, maximum fines were introduced where in the case of an individual the maximum additional tax for late filing is Lm300 and in the case of a company a maximum of Lm1,000.

The heftiest fines are those for omissions. An omission in simple terms is the omission of income from one’s income tax return. The fines are as follows:

(a) in the case of a first omission, three per cent per month of the endangered tax;

(b) in the case of a second omission, four per cent per month of the endangered tax;

(c) in the case of a third omission, five per cent per month of the endangered tax;

(d) in the case of a fourth omission, six per cent per month of the endangered tax.

Endangered tax means the difference between the tax declared to be chargeable by the taxpayer and the tax actually chargeable, excluding any additional taxes. Voluntary disclosure of any omissions will incur a fine of 1.5 per cent per month of the endangered tax.

However, lately there has been a reduction in the fines incurred since in most instances, the fines would amount to three times or more the actual tax due in one year. Therefore, from year of assessment 2003, in an instance of voluntary disclosure of omission, the additional tax was reduced to 0.75 per cent of the endangered tax and from year of assessment 2004, in the case of an omission, the additional tax may be reduced by 50 per cent and in certain instances by 90 per cent, especially when the omission is a genuine one.

One should bear in mind that the Commissioner of Inland Revenue reserves the right to check the declarations made by taxpayers. Many items can be verified from internal sources of information. The commissioner also has the power to question the credibility of any income declared. The introduction of a tax audit function is crucial to the proper functioning of a self-assessment system.

The objective of such a function is to ensure compliance by taxpayers in not only submitting their tax returns but also in making correct declarations. In Malta the tax compliance unit and the tax audits section are responsible for carrying out tax audits. Such units are very efficient indeed nowadays, since they are equipped with fully-computerised information and are staffed with qualified people, mainly accountants.

It is crucial that people are aware of the cost of non-compliance. Unfortunately in most cases a taxpayer becomes aware of the hefty penalties once he or she is under an investigation. Conclusions drawn from work carried out in the United States indicate that the presence of audits did not reduce non-compliance naturally. Answers tend to focus on the negative effects of the blanket enforcement of complex laws. This includes the tendency to treat all violators the same, whether they acted inadvertently or intentionally.

It must be pointed out that the self-assessment system was introduced in 1999 and it surely cannot be expected that people will understand such complex rules instantly. One has to ask whether the Commissioner of Inland Revenue has played his part sufficiently in ensuring that the general public has not only understood the system but also the implications of not complying with such a system.

It is clear that the government has realised that a distinction had to be made between different cases. This is evident from the introduction of the new system of penalties and one can only hope that new rules will also be introduced for years of assessment 1999 to 2002.

Also, more emphasis should be placed on making the Inland Revenue more consumer-friendly. As things stand today, if someone needs to raise a query he has to queue for some time, even hours, in one of the various Inland Revenue blocks, and the chance is that he will be passed on to another block and most probably have to queue again. Most people end up taking a day off work to get a simple query answered.

Objections still pending from years gone by should also be processed at a faster rate. Objections raised over 25 years ago are still pending judgement. This is not fair on the taxpayer and in most cases his heirs, especially since once he makes an overpayment on his current tax liability, the amount overpaid is not refunded but transferred to his pending bill to which he has objected.

It is to be hoped that the current Finance Minister, who is also Prime Minister, will tackle all the excess bureaucracy that exists at the Inland Revenue and bring this department closer to the people. Everyone involved will benefit. Decisions and actions taken so far seem to be heading in that direction.

Nikki Dimech

ACCA, AMIT, MIA