Issue link: https://maltatoday.uberflip.com/i/1205928
30.01.2020 12 OPINION George Mangion A new tourism minister merits a feel-good factor George Mangion is a senior partner of an audit and consultancy firm, and has over 25 years experience in accounting, taxation, financial and consultancy services. His efforts have seen PKF being instrumental in establishing many companies in Malta and ensured PKF become one of the foremost professional financial service providers on the Island A quick review of VAT charged on restaurants in Europe shows how in August 2013, Greece – in a bold bid to aid small business, bol- ster the tourism sector and reduce eva- sion – reduced its rate from 23% to 13% on a trial basis. The experiment worked and yield- ed good results for a two-year period which resulted in higher vat declara- tions and attracted more visitors. Similarly, we find that our main com- petitors 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 or- der, while The Netherlands charged 6% on restaurants (excluding alcohol- ic 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 restau- rant business but 7% on hotel ac- commodation 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 competition? The dilemma facing restaurant own- ers is a real one. It is an open secret that with over two thousand eateries competing for business there is a scle- rosis 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 restauran- teurs 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 con- tinuing in such an unbridled fashion may lead to tomorrow's sectorial de- mise. This article explains how burning the candle from both ends will cause the sector to implode if remedial ac- tion is not taken to tackle challenges lurking furtively under the surface. Few studies are conducted in the res- taurant 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 responsi- bility has snubbed all negation of sup- port 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 prob- lems – 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 se- cret that a good proportion of kitchen and waiting staff are employed at low rates or sometimes paid under the ta- ble. This tomfoolery continues notwith- standing the decision of the Malta Tourist Authority to invest around €40 million annually promoting the tourist sector. Sadly, ignoring the problem by pa- pering the cracks will not solve the is- sue of a dire financial situation facing some catering owners due largely to a fragmented market sector. PKF's survey reveals that some own- ers are facing increasing rents, a se- vere lack of entry-level staff and last but not least competition from for- eigners setting up fast food outlets. The latter, if owned by non-resident investors can claim substantial re- funds of corporate taxes when divi- dends are repatriated. Such advantag- es 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 require- ments, 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 unde- clared sales thus evading both VAT and corporate taxes. Such an abusive strategy is an inexcusable way to af- ford 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 contin- uous 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 ar- guments. 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 con- clude 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 accommoda- tion (alias AirBnB) - they seek to com- pound savings garnered on accommo- dation by eating at home. In conclusion, the study shows that restaurant owners face chronic chal- lenges 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 show- ing a slowdown.