11 May 2005

The Web

Undeclared investments - fight or flight?

A lot has been said of late about the latest investment registration amnesty. Banks, investment brokers and advisers have been agog with the offer of free advice to would-be investors who have not yet registered their undeclared holdings in the two amnesties issued in previous years.
The first amnesty issued in September 2001 showed a global value of foreign assets to the tune of Lm291.5million, of which Lm55.1million were repatriated. Due to the success of the first amnesty it was extended for a restricted period between 1 September and 15 November, 2003. This time the floodgates for inward investment narrowed somewhat since only Lm132.5 million were registered which netted the exchequer a cool Lm6.6 million.
Now in the light of the EU Savings Tax directive which commences on 1 July the minister of finance reasoned that Maltese investors may be tempted to repatriate their holdings in order to save the 15% withholding tax. Under the directive, there will either be an automatic exchange of information between countries or a withholding tax on the interest accruing from funds in the country where the savings are kept. The directive applies to all income from savings deposits, corporate and government bonds and other negotiable securities. EU countries Belgium, Luxembourg and Austria have opted for the withholding tax, as have Switzerland. Malta like most EU countries will adopt the exchange of information system.
But is there a bottomless pool of undeclared funds?
Unreliable sources calculate there is as much invested in local banks as there is offshore. Domestic deposits roughly equate Lm2 billion, so as far as repatriation goes we are still scratching the surface. So what triggered the extension of the registration scheme given that this in itself is a measure which ought to have been used sparingly as it hits at the heart of fiscal morality?
The answer is not easy to fathom. Could it have been unconfirmed rumours of a devaluation with the Central Bank witnessing a flight of capital? Or could it be the EU savings tax directive is creating a pincer movement thereby closing any elbow room for manoeuvring for tax evasion?
The official reason given was that in the wake of the EU directive, the government extended the investments registration scheme for Maltese residents to June 16. Under the scheme, registration is open both to eligible foreign assets that are repatriated to Malta and assets that continue to be retained abroad.
For the purposes of these regulations, any income arising from eligible assets which is received after March 31, 2005, and reinvested outside Malta before the date of registration, shall be deemed to constitute eligible assets existing on March 31, 2005, and shall be eligible for registration under these regulations. A resident of Malta may register under this scheme any eligible asset which was held outside Malta on the applicable date and which should have been declared in terms of the Exchange Control Act as in force on July 1, 2003. Other undeclared assets include deposits as defined in the Banking Act such as securities including shares and stock in the capital of a company, debentures, certificates of deposit, bonds, notes and any other similar instrument acknowledging indebtedness, units in a collective investment scheme, precious metal bullion, warrants, options, futures and other derivatives as well as any other financial instrument entered into for investment purposes. Naturally we also find that definition of assets include life and annuity long term insurance policies whether index linked or not and any immovable property situated outside Malta.
It goes without saying that repatriation of undeclared capital is a boost to the local economy if such capital is reinvested and eventually taxed locally at the 15% final withholding tax rate. But is it morally right for a select group of tax evaders to be given three amnesties in a span of four years when at the same time taxes for law abiding citizens have been increased and there has been a renewed vigour in administering penalties and interest on late payers?
In truth we find that egotistical considerations, greed and unwillingness to lose money are important ingredients in the corporate or individual decisions regarding their resistance towards taxation. Tax-related decisions take two broad forms: Tax evasion and tax planning, both of which are aimed at withholding the tax levied from the authorities. When draconian measures to penalise evasion fail then it appears that a pragmatic approach to lure back such capital blessed with the promise of no back duty or penalties is again de rigeur.
One may question whether the exchequer is morally justified to extend another amnesty when law abiding citizens including SME’ s and other sectors have been protesting against unbridled investigations into past tax declarations The moral dilemma is that one ought to give Ceasar that which belongs to Ceasar.
This too is not an economic decision but rather an ideological decision, namely the unwillingness to be a party to unfair distribution of taxes and an objection to public sector wastage.
In general the taxes levied by the government are used to fund the activities of the public sector in providing welfare, security and infrastructure to the citizens. The degree to which the taxpayers approve of the efficiency by which the state resources are accounted for in financing capital projects will in a large measure determine their willingness to share in the costs of such services through the tax mechanism. Taxation is seen as a prior social mortgage over the person of the citizen, a sort of floating pre-eminent domain over all that he earns or possesses. Tax evasion is a criminal offence and under the circumstances one may ask whether it is equitable for the state to close one eye to tax evasion in an attempt to generate higher revenues.
The answer depends on the examination of our tax statutes and the complex penal system which we built in the system to attack tax evasion. Locally we follow the British dictum in income tax collection which was first introduced just after the Second World War. In terms of fiscal morality, to identify tax evasion with common law fraud is therefore historically and logically questionable. The morality behind granting an amnesty to a select group of tax evaders is questionable but is seen as a pragmatic measure to justify the wider objective of augmenting the State coffers particularly in times of a recession. Moralists dispute that there is a definition of what constitutes a just tax since the tax base and the tax rates used are not the product of some empirical economic mechanism, but rather are the product of an ideology.
This ideology has over the past years prompted governments to fight against flight of capital by giving generous amnesties to tax evaders …it has worked in the past the question is will it work again.

The author is a partner in PKFMALTA an audit and business advisory firm

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