Issue link: https://maltatoday.uberflip.com/i/1012451
13 maltatoday | WEDNESDAY • 8 AUGUST 2018 OPINION BUSINESS George M. Mangion gmm@pkfmalta.com The writer is a partner in PKF an audit and business advisory firm RETURNING from a trade visit to Japan, the Prime Min- ister was full of positive vibes saying that new opportunities with Japan may now include improved air links, more stu- dents coming to learn English, facilitating tourism flow and of course new linkages to the blockchain industry. In his opinion, the country is experi- encing economic growth and as the harvest is rich why not give back more benefits to the community. A cornucopia of new ben- efits is being touted, this may consist of improved pensions, social benefits, better govern- ment services such as social housing and rebuilding the fragile road infrastructure. All this while the banking sec- tor has been shocked by the closure of Pilatus bank where millions of depositor monies are still at risk and where the EBA has chided FIAU for not being diligent enough in its investigations. On its part, FIAU has admit- ted that with hindsight more attention was needed where Pilatus bank is concerned yet it followed recommendations provided by internal reports commissioned from the bank's auditors KPMG and a promi- nent law firm. But a swallow does not a summer make, since the Pilatus incident concerned a small private bank and in spite of all its political overtones, the international agency Fitch Ratings has confirmed Malta's credit rating as A+ stable. It says inter alia, "The report noted that banks in Malta have a good rate of capital, while loans are being handled prudently". With a government surplus of 3.9% this gives more im- petus to the finance minister to loosen his tight grip on the public purse. All the more, when one recalls that Fitch experts expect a 5.6% real GDP growth for the coming year for Malta. Definitely, this is the right time for budget proposals to be made to the government via links to the constituted bodies and other social partners. Government is expected to introduce a sec- ond tax annual refund payable to most taxpayers as a way to mitigate tax burden. This averages from €200 up to €340 per taxpayer. This is a classic move since it effectively reduces personal taxation and will generate additional cash flow for about 190,000 taxpayers, however this one-time refund may be further improved if tax on consumption is mitigated. A recent PKF study illustrated the possible consequences on elasticity of demand should the government reduce the VAT rate on food from 18% to 7% and beverages to 13% on a two-year experimental period as was successfully done in Greece. Indeed, competitor countries such as Spain and Italy both 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 Netherlands charges 6% on restaurants (excluding alcoholic bever- ages), take away food; bars, cafes and night clubs. Poland charges 8% on food and 23% on all drinks including coffees. We are more expensive than our competitors in Europe. The sector consists of around 2,000 entities of varying size and employs thousands of workers. It has been resilient throughout the 2007-2013 world austerity cycle and re- ally and truly one can say that it never received any Govern- ment subventions during the downturn as was the case with some manufacturing firms. Guess where in EU you can eat at the lowest tax? The prize goes to Luxembourg as it charges the lowest rate of 3% on food and 17% on alcoholic beverages. Need- less to say, in Malta there is a discrimination in the appli- cation of VAT. This means diners are charged a full rate of 18% albeit a lower 7% on hotel accommodation and on meals served in hotels in case of combined all-inclusive food and drink packages. It is no secret that most restaurant owners are fac- ing problems which include increasing rents, a severe lack of entry-level staff and competition from foreigners setting up fast food outlets. These combined factors may push owners to either abuse the system or trade on low margins while the inevitable happens – quality suffers. It is evident from restaurants located in prime sites that pay high rents so in reality the landlord earns more than the catering operator – the latter risks so much time and energy to meet all the health and safety requirements and to retain an adequate number of experienced staff. It goes without saying that such a scenario creates a two-way 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 by indulg- ing in tax evasion, not declar- ing salaries, or employing non-EU workers at low wages. Naturally the government is aware that abuse exists. Moving on, the PKF study is based on a regression model set to predict future figures for gross value added gener- ated by restaurants of various grades and categories as well as gross value added gener- ated by such eateries under both the current 18% rate and the suggested reduced rates. Due to lack of information in certain areas, a number of assumptions were made to estimate a host of variables. One may argue that reduc- ing taxes on restaurants will render them more viable yet there is a risk this reform may not result in lower menu prices or an immediate and much desired improvement in quality. The answer to this conundrum is that by moti- vating restaurant operators to face external challenges this stimulus will attract larger volumes of tourists and there is a good chance they would improve services and invest in training better staff. The PKF model clearly shows that forfeited VAT revenue is easily recouped by better tax compliance and a healthy multiplier effect on the general economy. It is a sign of times that cost of living is marginally rising – so introducing cheaper food and drink in restaurants will help solve the problems of social exclusion felt by the 60,000 persons on lower income. As a conclusion, I wish to reproduce an extract from an interview of Jesper Svensson, Betsson's CEO published by Vanessa McDonald in the Sunday Times of Malta. Ac- cording to Betsson, which is the largest iGaming company, "We are still attracting and hiring people – quite a few here and in other centres – but Malta is getting more and more expensive." The writing is on the wall that rents and the cost of liv- ing are getting expensive even for the higher paid iGaming workers let alone for those on a lower salary. A copy of the study may be requested by writing to the author. George Mangion A budget proposal: reduce VAT on dining