2 JANUARY 2002

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NEWSMAKERS 2001
From taxation to benevolence

It was a rough awakening in January last year for a sizeable segment of Malta’s middle class, as the year signalled the end of their non taxable fringe benefit

For years, middle management and senior management had benefited from a loophole in the tax law. Finance Minister John Dalli, under great pressure to address the deficit, was in no position of introducing new taxes, so he opted for the ‘new approach’.

Put our house in order, was his battle cry, as he designed and worked arduously to patch up the holes in government revenue.

The backlash was significant as traditionally friendly press cast shadows on his measures. But John Dalli had one target in mind: to reduce government deficit in the shortest time possible. He had other things on his mind too, when asked if he would consider running for the Nationalist party leadership, he chose to be forthright and end speculation, by stating that he did not see a vacancy but if one did arise he would consider running for the post.

He may well turn out the better candidate in the long run, but only time will tell.

Parallel to his efforts to stabilising his revenue, he empowered the tax compliance unit (TCU) with a brief, with the intention of setting a yardstick for registered income for some of the self-employed and professionals.

The news of the TCU sent shivers to the professional classes, who are renowned for their gross tax evasion. Yet in the end comparisons to a witch hunt were quashed.

To inject more diversity into the economy which was suffering from a slowdown, the Qormi born minister announced more plans for privatisation. The Malta International Airport and the Kordin Grain Terminal, together with Public Lotto and others were top of the list.

Not unexpectedly, the intentions to privatise were earmarked by the Labour opposition as proof that the government was unable to raise funds and was seeking an easy route out of the ‘economic stagnation’ facing the country.

But in the end the sacrifices started to pay off and as early as mid-summer, the Finance minister was signalling that things were actually looking better.

The no nonsense minister worked incessantly to ensure that Malta had a solid reputation for its legislative and regulatory framework, at par to that of the most prestigious jurisdictions.

In doing so, the idea that Malta could serve as a money laundering zone was quietly but surely annihilated.

He announced that the economy excluding the electronics sector, showed an increase in real terms of over 5%.

He argued that it was previously expected that the targets for reducing the deficit would be reached in 2004. However, the sacrifices of the past three years had brought this date forward.

Mr Dalli explained that after his party was elected in 1998, the government prepared a detailed plan of how the country would reduce its deficit by 2004.

"Where we projected we were going to arrive at the end of our legislature, we achieved in half the time. Yes, the past three years have not been easy but the sacrifices we have endured have brought about these results," he said.

When budget 2002 did come on 23 November, the general reaction was: "It was a good budget because it did not affect us badly."

At the beginning of this legislature, he had said that the government projected that by 2002 the deficit would go down to Lm117 million. However, it was actually reduced by a further Lm35 million, and it now lies at just Lm82 million.

Mr Dalli continued to forward the argument that the number of gainfully employed had increased by 4,700 while the MLP in office had only managed to create 77 new jobs. The number of those registering for work had risen by over 1,000.

The deficit, which had once stood at about Lm150 million under Labour, had now been brought down to just over Lm82 million.

With the budget the Finance minister aimed to shed the perception of being a tax man.

The income tax measures proposed in the 2002 may well turn out to be potentially far-reaching and are likely to influence the understanding of new tax concepts and practices.

A number of crucial budget proposals were also directed at small companies and self-employed persons. New measures will apply to different categories of small companies according to their size. The Companies Act, the VAT Act and the Business Promotion Act already provide for special treatment for small businesses, but there is no standard definition of a small business.

One important measure is that certain small companies will not be required to keep audited financial statements. This measure is not directly relevant to income tax legislation but it is indirectly linked to the proposal for the introduction of a scheme of agreed assessments

Certain small companies and self-employed persons will be able to qualify for a scheme of taxation based on agreed amounts. The main objective of the scheme is to simplify compliance requirements for small businesses under the Income Tax Act and under the VAT Act.

It could also be an incentive for higher productivity, since it would be clearly in the taxpayer’s interest to ensure that his actual profits for the period covered would exceed the agreed amount.

In the budget speech the Finance minister said the scheme would apply to companies and self-employed persons in the service industry, whose turnover or gross income was less than Lm50,000. This will cover a large number of taxpayers, and the minister hinted that the scheme might even be open to other taxpayers in the future. The development of this scheme to taxpayers in general could result in a tax law that rewards, rather than penalises, increased profits.

Certain special tax deductions and exemptions will be available to small businesses for the three-year period of 2002 to 2004. The businesses qualifying for these incentives are companies and self-employed persons whose turnover does not exceed Lm100,000, and who employ an average of five employees.

The first incentive is a deduction for capital expenditure on information technology. Rather than writing off the expenditure over a number of years, eligible businesses will be allowed to claim the full cost as a deduction in the year when it is incurred. This measure will therefore offer a cash flow advantage.

The second incentive is an exemption on profits utilised for the expansion and development of the business. This is subject to certain conditions, including the condition that the business must keep audited accounts. Certain comparable incentives are already available under the Business Promotion Act, but that law applies only to companies operating in qualifying sectors.

In 2000, that’s only last year, the total tax revenue was Lm541 million. This year it stood at around Lm600 million. In 2002, it is expected to shoot to Lm659 million.

At the same time, government’s recurrent and capital expenditure has continued to increase, from Lm617 million and Lm90 million respectively in 2000 to Lm675 million and Lm82 million this year, to Lm717 million and Lm95 million next year.

Mr Dalli had kept his commitments. And with this he hopes to be in pole position for more benevolent changes in the coming months.



The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
Tel: (356) 382741-3, 382745-6 | Fax: (356) 385075 | e-mail: editorial@networkpublications.com.mt