The government has finally indicated its readiness to reconsider the airport departure tax, which was increased by Lm10 last year and which on evidence has materially impacted on the residents’ aptitude to travel. Travelling, being a discretionary sort of spending, is very sensitive to pricing and the tax has acted as a serious disincentive which, added to increased security charges for airport use, could in effect be counter-productive as a revenue-generating fiscal measure.
If the government accepts such logic, one wonders whether the promise to reconsider airport departure tax if the current year’s fiscal objectives are met has a smack of electioneering in it. In terms of revenue generation it has been proved to be largely counter-productive, so its revision need not impact upon the fiscal performance to any material degree. Or is it more politically opportune to review such tax in 2007, as it will preserve the feel good factor for the electoral test of 2008?
Bad as it may be, the airport departure tax is at least not discriminatory. If one is a resident in Malta and one opts to travel through the airport one pays the tax, whatever one’s circumstances. However, we have other fiscal measures still at the discussion stage in front of parliament through the bill to implement measures announced in the 2006 public budget which are much more discriminatory and which need to be re-thought out before we bring confusion to our tax system.
This relates particularly to the proposed change in taxation regarding profits, and even non-profits, from the sale of immovable property that this week gave us what is quite an uncommon experience in parliament, that of a government measure being severely criticised by a government’s own member. Former Finance Minister John Dalli, who is the architect of the current tax structure including VAT, FSS and withholding tax system on investment income, was highly critical of the measure hotchpotched at the last budget and amended soon thereafter to change the tax system of sales of immovable property. And with good reason! Because you cannot include a fiscal measure under our direct system of taxation, ie the Income Tax Act, which could involve the possibility of tax being due even where there is no profit on the transaction. Legislation cannot simply take recent commercial experience into consideration and just assume that all property sales are conducted at a substantial profit so that imposing a withholding tax on the declared sales value translates to a straightforward way of taxing profits from such sale. There are, and in future there could be many more, instances where a sale is conducted at a loss even if sold at last more than five years since its acquisition.
The new tax system of imposing a withholding tax of 12 per cent on the sales value of immovable property that is sold after five years since acquisition is wrong in principle, as it discriminates against taxpayers conducting a perfectly identical transaction. Take the case of A and B who are selling an identical property under the proposed legislation for the same sales price of Lm100,000 and which they both bought for Lm80,000, all expenses included, thus each making a profit of Lm20,000. However, while A bought his property within the five-year time limit imposed by the proposed legislation, B bought his just beyond such time-limit.
A has the option of being taxed at 35 per cent on the Lm20,000 profit, incurring a tax charge of Lm7,000, while B is compulsorily obliged to pay withholding tax at 12 per cent of the sales value of Lm100,000 incurring a tax charge of Lm12,000. What tax logic and tax equity can sustain a system that structures such discrimination in its application?
Taxes are generally abhorred but accepted, with or without protest, when they apply indiscriminately among taxpayers. But when taxes start discriminating among taxpayers conducting a perfectly identical transaction because of some backdated artificial line of demarcation, then they become unacceptable as a matter of principle.
And what about sales of commercial property which by all practical measures has not experienced the same price rises as residential property over the last few years. How sensible is it to tax at 12 per cent the sales value of commercial property that has been carried for more than five years incurring substantial interest charges and has to be sold under pressure from the banks who demand repayment of their loans as the margin between the accumulating debt with interest and the market value get too narrow for their liking? A clear case of being constrained to pay taxes even where there is no profit and without the possibility of using the resultant loss against future business profits.
The new tax on sales of immovable profits also brings havoc to the long-term plan to build audit trails to achieve better tax enforcement through complimentarity of the various tax systems. Through the proposed withholding tax on property sales, the inbuilt need to justify costs under the former system is being washed away, opening a disincentive to adhere to VAT legislation in property development with the consequent loss of audit trail on profits declared by contractors and other building services providers.
The measures seem to be a case of the tail wagging the dog. The wish to give fiscal incentives to facilitate the sale and development of long held property is leading to measures that discriminate against more active property owners and compromises the enforcement process of the whole system of taxation through lack of complimentarity between direct and indirect taxation.
And this when the need to give incentives to property hoarders has been very unconvincingly made. What these people really needed was elimination of the provision introduced in a previous budget where the mechanism to tax capital gains made since 1992 when the capital gains provisions were first introduced was washed away and rendered all capital gains taxable since origin – another piece of nonsensical retroactive taxation.
It would be well for the Finance Ministry to take stock of the situation and review the parliamentary debates before deforming our tax structure through the irreparable harm of cash and carry, instant cooking legislative changes.
www.alfredmifsud.com