18 January 2006

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Business Today

SMEs through the wringer

The growth in small owner-managed businesses, as well as the changing nature of employment and contractual relationships, is creating new employment. The need to be helped

The failed social pact had advocated a tougher stance by the tax compliance unit, including an extension of the voluntary tax agreements based on benchmarking to all categories of self-employed persons.
If there is going to be a push for higher fiscal morality let us first start by putting our money where our mouth is.
For a start, the overhead cost of excess labour in the public sector, which carries an unquantified number of surplus unskilled and semi-skilled workers, acts as an albatross across our neck. It is undisputed that a sizeable part of the Lm1.3 billion in national debt is made up of such a payroll. Economists remind us that the burden is being financed out of taxes paid by the productive sector and if unchecked this leads to stagnation. The sanitized bubble that cocoons workers in the public sector will not last forever. Yet there are other constituent parts that make up the deficit such as losses by ailing State agencies albeit a good number have now been restructured. One does not begrudge the propitious signing of a new collective agreement for the public sector; what is lamented is the 'carrot without stick' approach of imposing increased productivity and benchmarking in the sector.
This has been repeatedly promised by politicians but has eluded us so far. One only needs to read the critical observations by the Auditor General in his report for 2004. Given that there are over 11,000 waiting on the dole, how can we ever regenerate enough extra jobs to downsize the service?
This can be achieved once politicians succeed in nurturing a higher level of confidence with the private sector to launch viable commercial joint ventures. Again the myth of trying to absorb excess government workers in their thousands through private-public partnerships based on subsidies is another white elephant. It is an elusive problem; yet we need to bite the bullet to create more jobs. In principle, one hopes that in 2006 the time for rhetoric is over and decisive action takes root. Because of inertia and procrastination by heads of departments, the government has come in for a great deal of criticism. In particular the self employed and the business community are crying out for a fairer and simpler tax system. How is that to be achieved? The 2006 budget promised another study on tax reform by a team of technocrats. Sceptics say this will lead to more delays and discussions without a clear-cut responsibility for implementation. Can we emulate the success story of the UK tax reform?
In 2005, the UK Treasury announced that it intended to ensure "the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company." In a recent announcement, the British Government has introduced a range of measures and targeted tax reductions to support small businesses; including a reform of capital gains tax, reducing the rate of corporation tax for smaller companies and the introduction of a zero rate, stakeholder pensions, and the abolition of advance corporation tax.
Can we not take a proactive role like the Brits to encourage growth rather than intensify measures to benchmark self-employed earnings with a view to extract a higher tax yield? Intensifying the reach of the Tax Compliance unit over SMEs is a disincentive to the creation of more small companies, hindering the morale of self-employed people to incorporate new businesses. Conversely just paying lip service by the announcement of more aid schemes does not reach its objective. As in the past, aid funds remain uncollected as some of the schemes are mired in red tape. This sad situation will not galvanize SMEs into new initiatives that generate job opportunities. Concurrently, the MCESD is expected to bring forward specific proposals for action post Budget 2006, to ensure that the right amount of tax is paid by fat cats so as to combat evasion.
Any improvement in collection of taxes can then be set aside to justify a lower tax regime for small business. As has been the case in other accession countries, the growth in small owner-managed businesses, as well as the changing nature of employment and contractual relationships, is creating new employment. Undoubtedly the driving motor of the economy is the private sector. It generates the GDP growth that creates wealth and prosperity. The sector is predominantly composed of small and medium sized businesses. Definitely in the near future one expects a number of opportunities for small businesses in an enlarged EU community but these are not so immediately apparent to the man in the street.
On a positive note Lawrence Gonzi’s administration has taken a bold step in presenting a tax-neutral budget, although the opposition party disagrees whether the Prime Minister meted out the right dosage of financial stimulus.
The good news for us is that the EU heads of state agreed earlier last month on how to finance the EU budget for 2007-2013.
Let us hope that the windfall allocation of EU funding totalling a gross of EUR853 will effectively gravitate via public tenders to fund domestic projects that will reinvigorate the economic prospects. It cannot come a moment too soon.
Malta was successful in claiming a higher tranche of aid since it pleaded to qualify for objective one status mainly because of its high population density.
German finance minister Peer Steinbruck has urged new EU member states to raise their taxes and ensure "fair tax competition" among the 25 members of the bloc. In his opinion tax cuts in many of the ex-Communist member countries have "nothing to do with fair tax competition and place a burden on German jobs.” The problem must be seriously discussed and a solution found, he added. After all charity begins at home and with over 10% structural unemployment the German minister protested against unprecedented tax cuts in some EU countries.
German finance minister Peer Steinbruck lamented that "it cannot be, that some countries demand more funds from the EU budget while on the other hand failing to improve their own tax basis.”
While the corporate tax rate in Malta is relatively high at 35 per cent that of the new member states does not exceed half of this amount on average. To quote an example Slovakia has imposed a 19 per cent flat tax in order to attract business and create more jobs. By sheer contrast the combined corporate tax rate in Germany is almost 40 per cent. Some economists disagree with this theory. In their opinion there is no guarantee that business will stay in Germany or move in, if other EU countries were forced to raise their tax levels.
Back in Malta we all hope that the tax study will propose a fairer regime. It is high time that we revisit our statute book and come up with a clever solution.

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