Tax compliance controls needed to be reviewed and strengthened, finance ministry parliamentary secretary Tonio Fenech stressed yesterday at a seminar on Value Added Tax, organised by the Malta Institute of Management (MIM).
In the EU, indirect taxation was largely harmonised through the Sixth VAT Directive, while member states were able to tweak their national legislations in order to provide for better tax collection.
But such controls needed to be strengthened in Malta. Mr Fenech said: “The compliance rules provided for in our law are relatively simple and straightforward, but it is time to review these provisions and introduce tighter controls.”
The Budget Measures Implementation Act being debated in parliament proposed important amendments to the tax enforcement provisions of the law, Mr Fenech added.
“Taxpayers who do not comply with requests from the VAT Department for the production of records will find it more difficult to contest tax assessments in the Appeals Board,” he said.
“Another measure proposed in the bill relates to the documentation upon which taxpayers may obtain bank loans. We cannot tolerate a situation where taxpayers keep different sets of records for their banks and for the VAT department. Financial institutions will not be allowed to provide credit facilities on the basis of documents that do not comply with the VAT Act.
“The new law will also empower the Commissioner of Inland Revenue to furnish information to the Commissioner for Value Added Tax. This measure is in line with the government’s wish to use more efficiently the resources of the different tax departments.”
Mr Fenech observed how VAT revenue had grown from Lm104 million in 2000 to Lm174 million in 2006 – putting the government into a position in which it could deliver relief to the income tax regime as it had done in the last budget.
The setting up of a tax ombudsman’s office for Malta, meanwhile, would go a long way toward cutting down on unnecessary bureaucracy when it came to businesses dealing with government departments, MIM chairman Reuben Buttigieg commented.
Referring to the number of “injustices” inherent in Malta’s value added taxation system, Mr Buttigieg observed that in most cases it was not the legislation itself, or the policy-makers, that presented hurdles to effective tax management, but rather, the way in which the legislation was implemented by government departments.
“The explanation many times is that ‘this is the way we have always done it.’ It is wholly unacceptable that they go beyond the law and decide upon the procedures themselves,” Mr Buttigieg commented.
Urging for the overall taxation system to be more “entrepreneur-friendly”, he added that the introduction of a tax ombudsman would help rectify this situation to a certain extent, but at the end of the day, a culture change was also required.
The staid example of hairdressers was illustrated as a case in point, where those working from their homes without levying VAT or declaring income had an unfair advantage over hairdressers operating above-board. Additionally, legitimate hairdressing salons were regularly inspected while incognito operations remained unobserved.
Another identified area of abuse was VAT on imports, where traders had found roundabout ways of avoiding taxes and were abusing the EU system, while there was also an amount of discrimination between certain educational facilities in Malta purely for VAT reasons.
“We have to encourage the fight against tax evasion, but it needs to be done properly,” Mr Buttigieg added.
Maltese VAT legislation could also be a tool to attract foreign direct investment, as evidenced by a number of German and Dutch companies setting up shop in Malta, and which have taken advantage of schemes and exemptions and implemented sophisticated VAT planning techniques.
VAT Commissioner Joe Sammut, meanwhile, remarked how Malta has seen an evolution of indirect taxation over recent years leading to a situation in which today, 43 per cent of Malta’s total tax revenue came from indirect sources, half of which was derived from VAT.
As matters stood, he said, Malta needed to take stock of the situation in which some quarters bemoaned the fact that there was not enough enforcement, while others complained of too much enforcement.
As such, Mr Sammut said, “we need to not only see how to collect more revenue, but also how to make life easier for the honest traders and customer service.”
Three main areas to be tackled over the coming years, Mr Sammut said, were the new EU regulations on taxation at the place of consumption, a simplification of procedures for businesses and a stepping up of the fight against fraud. It was estimated that across the EU, some e50 billion were lost every year through VAT fraud, particularly through import and export activities.
Yesterday’s full-house seminar was also addressed by former VAT Department director James Farrugia and the chairman of the UK’s Institute of Indirect taxation, Bob Davies.