Reaping results in revenue collection
VAT head Joe Portelli speaks to RAY ABDILLA about the changing face
of tax compliance in Malta
How would you describe the efficiency of revenue from VAT?
Rather than relying on my opinion, I would rather refer to statistics.
As you are well aware, however, VAT is relatively new in Malta. It was
first introduced in January 1995 under the Value Added Tax Act 1994,
was replaced in July 1997 by the Customs and Excise Tax Act 1997, and
was re-introduced in January 1999 under the new Value Added Tax Act
One must bear in mind, therefore, that, apart from having a very short
history, the VAT system has gone through various fundamental changes
in a very short span of time, and this must have had an important impact
on its performance. In fact, the biggest yield during the first four-year
period was registered in 1997 when the total net amount of consumption
tax (VAT plus CET) collected was Lm84.6 million.
In 1999, it increased to Lm87.3 million, whereas in 2000 total consumption
tax shot up to almost Lm107 million. This amounts to a 22.4% increase
over 1999. In the same year, Lm105.1 million was collected from VAT
only. The amount of revenue collected during January to August this
year was Lm73.3 million, which is 6.2% more than the amount of revenue
collected during the same period last year and 63.2% of this year's
Lm116 million Budget target.
Whether one may consider this as an efficient level of performance depends
on the criteria that one uses to measure efficiency. Compared to this
years Budget target I would say that the Department is closely on track.
If one looks at the amount of VAT collected as a proportion of VAT declared
payable, I would say that compliance in this respect is 97.8 per cent
or 0.7 per cent higher than last year. On the other hand, if one defines
efficiency as a proportion of VAT collected out of the potential tax
yield, than one would require a deeper analysis of the relevant data
in order to arrive at a fair estimate. Judging by the sharp increase
in VAT revenue during 2000 over 1999, I would say that this should reflect
a relatively high level of efficiency.
Was it a problem changing from CET to VAT?
I would prefer to describe it as a challenge, and a great one in that
respect, especially since it had to be accomplished on so large a scale
and in so short a time. The introduction of three different tax regimes
within the short span of four years can hardly be described as a normal
affair even if one had to ignore external factors.
Suffice it to say that, each time, changing from one regime to the other
entailed the preparation of a completely new set of legislation, the
development of a completely independent IT system and a complete re-organisation
of the Department's organisational structure and methods of work. The
task acquires bigger proportions when one considers that the Department
had, and to a lesser extent still is, running three tax regimes at the
same time, let alone the refund schemes on existing stocks that had
to be employed at every stage. In this respect I would say that it was
a breath-taking experience and a very exciting one too.
On the other hand, I would also say that it was a healthy experience
from which a lot of good has finally emerged. For instance, under the
new VAT regime, a number of measures have been taken which make the
system more user friendly, and at the same time more effective, something
that I believe has made the system more acceptable to business operators
as well as the general public. Looking back through this experience
I would say that the biggest satisfaction is that the Department has
in all instances managed to rise to the occasion and accomplished the
What would you consider as the main administrative problems facing VAT?
Again, in my opinion, once a problem is identified and a proper solution
is available, than it essentially becomes a challenge. The main challenge
with VAT, as in all other taxation systems, is to induce as much as
possible voluntary compliance among taxpayers, and an efficient administration
is obviously an important factor in this respect. For this reason, during
1999, the Department embarked on an ambitious project to set up a one-stop-shop
customer care service area within the department.
This is actually a mini department comprising all the functions relating
directly to customers. It is actually housed in a separate section of
the building. In this way the Department has not only managed to enhance
the quality of service to customers but also to reduce as much as possible
the disruption in its proper functioning during public hours.
This initiative was followed, in January of the following year, by the
setting up of the Department's Quality Service Charter. Essentially,
the Charter establishes the benchmarks by which the Department is expected
to render its service to customers.
Is VAT in conformity with EU Directives?
Basically yes. The VAT Act 1998 generally conforms to the main provisions
and principles of the EU Sixth Directive. Thus, the VAT is a tax on
supplies of both goods and services made for a consideration in the
course of an economic activity carried out in Malta. It is charged at
every stage in the business chain, from the production stage to the
point of sale to final consumers. It is a non-cascading tax since suppliers
charge VAT as a percentage of the full sale value of their supplies
and claim back the tax charged to them on their purchases. No VAT is
charged on exports and on supplies of goods and services consumed outside
Malta, whereas input VAT on the cost of such supplies is recoverable
so that VAT is charged only on local consumption.
However, since Malta is not yet a member of the EU, the VAT legislation
does not yet incorporate the provisions laid down in the EU Directive
concerning the abolition of fiscal frontiers within the EU. These provisions
apply to EU Member States only. Once they are included in the VAT legislation,
this would mean that supplies coming into Malta from other Member States
would no longer be considered as imports. VAT on such supplies would
therefore no longer be charged at the point of entry but at the point
when such supplies are eventually sold in Malta.
Certain other differences between the national VAT legislation and the
EU Sixth Directive concern the tax status of a limited number of supplies.
These concern mainly the supply of food, pharmaceuticals, printed matter,
passenger transport, water and electricity. In this regard, Malta is
requesting a derogation from the Sixth Directive to retain their present
tax status under the VAT legislation.
Many used to say that VAT refunds were being mishandled. Have the necessary
steps been taken to address this problem?
I dont know of so many people who used to say that VAT refunds
were ever mishandled. As regard the refund of excess credit on inputs,
I can assure you that any refund which is due is paid within the due
date established by the VAT Act 1998. That is, by not later than five
months from the expiration of the time allowed for the furnishing of
the tax return for that tax period or from the day on which the said
return has been furnished, whichever is the later. During 2000, the
monthly average of excess credit paid out by the Department under the
VAT Act 1998 was in the region of Lm1.65 million. Between January and
August this year, it was Lm1.77 million.
Doubtless to say, the Department regularly monitors claims for refund
of excess credit and where it suspects that an over claim has been made,
the Department withholds that refund until proper investigation is carried
out in terms of the VAT law. Whether monitoring such claims could be
described as mishandling is a matter of opinion. As far as the Department
is concerned, regular monitoring of claims and investigating such claims
if and where required is a matter of duty.
How many VAT inspectors are working day and night to check evasion?
The duties of VAT inspectors need first be explained as one may have
the wrong impression that the duties of VAT Inspectors rest with the
checking business operators regarding their obligation to issue fiscal
receipts. In actual fact, the duties of VAT Inspectors are much wider
as they also include the regular auditing of business records in connection
with any under declaration of output VAT or over declaration of input
VAT. During 2000 alone, the number of cases covered by VAT Inspectors
alone was over 4000, resulting in more than 1,400 assessments together
amounting to Lm1.06 million. Needless to say, there is a whole spectrum
of tasks connected with such work, ranging from the regular monitoring
of tax returns and the sifting of cases where tax is suspected to be
at risk, to defending the Department's decisions before the VAT Appeals'
Boards or at Court.
At present the complement of VAT Inspectors is around 60. A group of
inspectors are assigned outside duty regarding the proper issue of fiscal
receipts, the proper functioning of fiscal devices and the proper keeping
of tax records by businesses. Another group is engaged in conducting
audit investigations and raising the relative assessments. Other inspectors
are concerned with the registration of businesses, the maintenance of
the taxpayers' register, the sifting of suspected cases, customer service,
the review of objections regarding assessments and procedures concerning
Has the businessman come to terms with VAT or are there still a good
number who try to evade this tax?
It is not easy to quantify the extent of evasion unless the proper data
is available in good time, although with the benchmarks now being established
by the Tax Compliance Unit, this information should be more readily
Yet one could have a fair picture of the situation by referring to compliance
indicators. Briefly, the Department receives and processes around 300
new applications for registrations of new businesses each month. It
also carries out about 200 interventions monthly in the IT system for
the maintenance of taxpayer's data. This is in itself an indication
that persons who decide to set up a business normally come forward to
register their business with the Department. In any case, any permit
to open a business normally requires that the new business be registered
with the VAT Department in the first instance.
Another indication of compliance is the number of returns which are
actually submitted to the Department by due date as a proportion of
the number of returns which are due to be submitted. In 2000, the average
ratio taken as on due date was 84.5 per cent. After say six months from
due date, the ratio would normally increase to around 96 per cent, and
this is mainly the result of the enforcement measures the Department
would have taken by that time, which action would very often include
Court action. The residual four per cent of defaulters is mainly due
to businesses that become inoperative and would therefore have normally
submitted an application to be cancelled from the Department's registry.
Compliance in terms of actual tax receipts as a proportion of the amount
of tax declared payable is in the region of 98 per cent.
Considering the above, one can safely say that the Department manages
to attain a relatively high level of compliance. Yes, I would therefore
conclude that more and more taxpayers have come in line with VAT regulations
since VAT was introduced for the second time in January 1999.
Does VAT deter people from starting new businesses?
No, I dont think so, and definitely it should not. VAT is a consumption
tax and under normal circumstances it is neutral to businesses. On the
other hand, one may have the impression that the system may impose a
heavy administrative burden on businesses because of their obligation
to collect tax and account for it.
In this regard, a number of measures have been introduced in the new
VAT legislation in order to simplify procedures as much as possible.
I can mention, for example, the Small Businesses Scheme which exempts
small businesses operating below certain turnover thresholds from their
obligation to collect VAT. Another scheme gives the option to certain
businesses (retailers, professions and contractors) to account for VAT
on a cash basis, thus ensuring that VAT is not a burden on their cash
flow. The Compromise Fine Scheme, whereby defaulters may be given the
option to pay a reduced fine in lieu of a Court sentence, is yet another
Another recent measure which merits particular mention concerns large
development projects wherein the developer may be given permission to
account for VAT in lieu of the contractor engaged on that project in
the same manner as the reverse charge mechanism is applied in the case
of foreign service providers.
The primary objective in this case is to reduce as much as possible
tax in danger, but the scheme also serves to relieve the developer from
cash flow problems since any refund of excess credit would immediately
be set off upon the submission of the relative tax return.
Measures aimed at simplifying procedures in the indirect taxation system
is a continuous objective of the Department as we believe that such
measures would encourage a higher level of voluntary compliance on the
part of businesses.