A new tourism minister merits a feel-good factor

If a cut in VAT is approved by the younger and invigorated Robert Abela’s cabinet this will certainly boost a feel-good factor now that the economy is showing a slowdown


A quick review of VAT charged on restaurants in Europe shows how in August 2013, Greece – in a bold bid to aid small business, bolster the tourism sector and reduce evasion – reduced its rate from 23% to 13% on a trial basis.

The experiment worked and yielded good results for a two-year period which resulted in higher vat declarations and attracted more visitors.

Similarly, we find that our main competitors for tourists – Spain and Italy – charge 10% on restaurants and on the provision of meals and beverages to be consumed immediately, even if they are made after the recipient’s order, while The Netherlands charged 6% on restaurants (excluding alcoholic beverages), take-away food; as well as in bars, cafes and night clubs.

But it is Luxembourg which charges the lowest rate: 3% on food and 17% on alcoholic beverages.

Needless to say, we ask why Malta charges a full rate of 18% on restaurant business but 7% on hotel accommodation and on meals served on combined all-inclusive (including pre-booked) food and drink packages.

Now that the tourism industry is firing on all cylinders can we follow Greece’s bold experiment and drop the rate on restaurants to 5% to beat the competition?

The dilemma facing restaurant owners is a real one. It is an open secret that with over two thousand eateries competing for business there is a sclerosis in the system that due to high costs and lower quality has pushed some operators to make ends meet by walking on the wide side of the tax evasion.

Talk to many established restauranteurs and they quietly complain about a flawed system plagued with high food cost and low margins of profit due to deep-seated problems.

This may well be anathema and continuing in such an unbridled fashion may lead to tomorrow’s sectorial demise.

This article explains how burning the candle from both ends will cause the sector to implode if remedial action is not taken to tackle challenges lurking furtively under the surface. Few studies are conducted in the restaurant sector.

PKF wrote to BOV to request their support for an ad hoc restaurant study which in fact will cover around 2,300 eateries yet till now there was no green light. In the meantime, PKF as part of its corporate social responsibility has snubbed all negation of support and concluded its study having obtained details of business activity by interviewing a random selection of restaurant owners.

In so doing, it acknowledges the battle cry of established kitchens. In their opinion, these chronic problems – unless remedied – may lead to a cataclysmic downfall of the tourist industry.

The antidote of the problem lurks in tax evasion both on VAT, social and corporate taxes since it is an open secret that a good proportion of kitchen and waiting staff are employed at low rates or sometimes paid under the table.

This tomfoolery continues notwithstanding the decision of the Malta Tourist Authority to invest around €40 million annually promoting the tourism sector.

Sadly, ignoring the problem by papering the cracks will not solve the issue of a dire financial situation facing some catering owners due largely to a fragmented market sector.

PKF’s survey reveals that some owners are facing increasing rents, a severe lack of entry-level staff and last but not least competition from foreigners setting up fast food outlets.

The latter, if owned by non-resident investors can claim substantial refunds of corporate taxes when dividends are repatriated. Such advantages are not available to catering units operated by residents. It comes as no surprise that given the pressures of competition, marred by shortages of qualified staff (this pushes wages upwards) produces a yoke on local owners to either abuse the system or stoically obey the rules and continue to trade on low margins. As can be expected, some are digging their own pit towards failure.

This begs the question - does the landlord in Sliema/St Julians area earn more than the catering operator who risks so much time and energy to meet all the health and safety requirements, keep an adequate number of experienced staff yet is restrained by a glass ceiling? Competition dictates menu prices.

If not solved, the conundrum leads to money laundering by way of undeclared sales thus evading both VAT and corporate taxes. Such an abusive strategy is an inexcusable way to afford paying higher wages - essential for staff retention.

It goes without saying that such abuses do create a bi-polar structure – those who abide by the fiscal rules and suffer a lower return on capital and the rest who in varying degree abuse of the system.

The latter also try to make ends meet by employing non-EU workers at low wages. Naturally, leaders in the industry are aware that abuse exists.

The finance minister is reported to have exclaimed that “this is a continuous struggle... Abuse can be limited, but never eliminated. What we need to do is address the black economy and treat it as a beast on its own. It creates unfair competition and loss of revenue”.

Readers may disagree with such arguments. Some criticise restaurant owners saying they charge high menu rates as if they simulate a Michelin star service.

Unless the situation is diagnosed by way of a scientific study one may conclude that as restaurants are always full then everything is perfect.

Surely mounting affluence generates more diners booking places at good restaurants yet our paradox situation points to more less affluent tourists opting to book private accommodation (alias AirBnB) - they seek to compound savings garnered on accommodation by eating at home.

In conclusion, the study shows that restaurant owners face chronic challenges as mentioned above. If a cut in VAT is approved by the younger and invigorated Robert Abela’s cabinet this will certainly boost a feel-good factor now that the economy is showing a slowdown.

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