Is the underground economy thriving?

The truth is that in the 2022 budget, the government faces a Herculean task to collect income tax, vat or stamp duty because loopholes are wide 


Reading the glossy pages of the pre-Budget document, one is regaled with a picture of a smiling woman casually dressed in blue jeans and a hippie-styled man having a pierced left ear endowed with a steel ring and an open shirt sporting a heavy tattooed chest. Quite an ominous choice of personalities to grace such a sombre document, I thought (but perhaps it is a sign of the times).

Could it reflect the delicate balancing act that the budget minister needs to conjure a deficit of 12.5% of GDP and a €3billion debt mountain incurred during the past two years. Many will stand up and challenge any criticism against prolific spending by Malta Enterprise needed to buttress the scourge of covid induced recession.

The document is full of rhetoric trying to be an assessment of what needs to be done in the year ahead to balance the deficit, encourage economic growth and deal with the various challenges facing the country. One can only hope the hunt for tax evaders will not be achieved at the cost of further tightening of bureaucracy on small and medium sized enterprises.

They are the usual suspects when the screws of compliance are tightened. Perhaps banks also need to slack their stiff risk averse attitude. Otherwise, we must address environmental degradation, avoid the easy solution of reducing cost of production by importation of low-skilled labour from low-cost countries.

Issued at the doorstep of an election, the pre-budget booklet is laced with a rich dose of superlatives. For example, no party apologist will dare question the validity of issuing two tranches of free cash vouchers (about €100m) to all those over sixteen years of age. The plan included locally registered foreigners and a £300 gift to unvaccinated students of English.

The mantra of saving 100,000 jobs via furlough schemes has been wired deep in ram of both One and TVM TV stations.

This equates to nearly one half of the working population (barring state employees). Still nobody wondered why with such a gallant splurge of tax payers monies targeting the hospitality sector, yet there is an enigma, a shortage of skilled workers.

Granted the mystery thickens given that hotels this year registered another bleak season as over 82% of travellers in July preferred to book rooms in private accommodation.

The question then arises, how can our economy thrive when tax revenues were truncated (due to deferrals) while half the workers were living on modest wages via furlough schemes? Could the answer be the burgeoning shadow economy. This activity which averages about 26% negatively affects economic growth in Malta and reduces tax revenues, putting pressure on the government’s ability to provide the services and benefits.

Left unchecked, the UE would erode people’s faith in the integrity and fairness of the tax system, undermine the competitiveness of honest businesses, as well as cause honest taxpayers to bear the tax load of those who gain from money laundering. Activities in the hidden sector include skimming, unreported construction-related activities, hidden rent income, and unreported trade-related activity.

The example given by Castille that not all members of cabinet declare their tax returns speaks volumes of the lackadaisical attitude of the Commissioner for tax. The public disclosure of an ex-Cabinet member not declaring commissions from brokering of a €3 million property deal is still pending examination by the authorities.

Add to this upward struggle by the new minister of finance who promised unequivocally that no new taxes will feature in the 2022 budget. He hopes to fill the coffers by fighting the underground economy.

Other challenges include the grey listing this year by FATF. The Government is currently working on addressing the three recommendations flagged by the FATF: These are quite a tough nut and reflect the excesses of “l-Aqwa Zmien” living, when caution was thrown to the wind and profligacy reigned.

Certainly, the failure to prosecute those holding secret accounts in Panama and surreptitiously selling of three State hospitals for one euro, certainly does not add much credibility to the statement that this administration will curb tax evasion more successfully than in the past. We wish it well.

The FATF wants us to demonstrate that beneficial ownership information is accurate and that, where appropriate, effective, proportionate sanctions, commensurate with the ML/TF risks, are applied to legal persons if the information provided is found to be inaccurate. This intensifies a shower of fines following increased inspections of gatekeepers.

Finally, as if this needs mentioning, FATF wants to see a sharper operation by FIAU to detect law infringement and investigate cases in particular to the sea of cash backing speculative million dollar luxury building projects.

The cherry on the cake is that FIAU will be the first renters of a 4,000 square meters office at the luxury Trident House complex. The race to the bottom by FIAU’s drive to cut evasion may be anathema to the barons running the underground economy. This is no minnow.

One recent study by the Central Bank, estimates how the size of the shadow economy increased from 9.6% of GDP in 2000 to 21% of GDP in 2019. Others assess that Malta has one of the highest levels of shadow economic activities in Europe – at an estimated 26 per cent of GDP, its shadow economy is even more active than those of Greece or Italy.

The truth is that in the 2022 budget, the government faces a Herculean task to collect income tax, vat or stamp duty because loopholes are wide. What are the hallmarks of a burgeoning shadow ground economy? It steals honest business from law-abiding citizens.

As can be expected, the furlough scheme covered all and sundry. It nurtured zombie companies which due to the severe hit by Covid have lost customers and could not support its workforce. Logic dictates that as the furlough support ends this year there will be companies with severe cash flow difficulties and face redundancies. The challenges of grey listing will test Malta Enterprise’s prowess to attract multinationals next year.

24 foreign companies have already surrendered their license this year and moved to greener pastures. The dearth of FDI can be gauged by the razzmatazz on state TV pompously announcing the news of a local printer which intends to increase production and engage 100 extra workers. The benign aspirations of the Pre Budget document to recover under declared taxes and hidden hordes of ill-gotten millions in obscure havens to repatriate them sounds like a magician hat trick.

Evil tongues will tell us such lofty aspirations often end up being little more than public relations stunts, yet the party in power is embolden by an overwhelming majority in the next election. Perhaps this will turn the tables in its favour. Fortune favours the bold.

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