Issue link: https://maltatoday.uberflip.com/i/825117
maltatoday, WEDNESDAY, 17 MAY 2017 4 News PORTOMASOLIVE.COM REGISTER NOW 1 2 3 Register your personal account JOIN DEPOSIT EARN CASHBACK Place your deposit, play & participate in our promotions You're always a winner at Portomaso Live You're always a winner GRTU backs tax cuts, employers lobby calls for caution Malta's economic climate means it's time for a new tax cut, but is the parties' largesse ignoring the wider picture? CONTINUED FROM PAGE 1 Busut- til also says he will reduce tax on part-time workers to 10%, which the PN costs at €3.8 mil- lion a year left in the pockets of 5,485 self-employed part- timers and 23,000 part-time workers. And furthermore, the PN is pledging a 10% rate of income tax on the first €50,000 in profits by SMEs and the self-employed, and a reduced 15% tax rate on re- invested profits of up to €40,000. An electoral wish-list from the GRTU (Chamber of SMEs) has aligned itself with the PN's pro- posals for small business. "The economic climate can afford a redistribution of the wealth be- ing generated, and the reduced tax on re-invested profits will allow this money to be injected into the economy again," direc- tor Abigail Mamo says, explain- ing the GRTU's rationale. The Malta Employers Asso- ciation on the other hand, in a general note not specifically tied to the tax promises, has warned against electoral promises "be- ing thrown in the campaign with disregard to their cost and im- plementation." Less tax, more compliance? Throughout the last ten years, various Budgets saw a tweak in the income tax bands, such as widening the 25% tax band for parents, a measure introduced by the Nationalist administra- tion. In 2013, the newly-elected Labour government took on the tax cuts announced the year before by the Gonzi administra- tion. While tax revenues have in- creased from one year to the other, there is a marked differ- ence in the way they increased between the PN administrations and the Labour administration after 2013. Between 2008 and 2012, rev- enues increased by an average 5.8%, dampened somewhat by the financial crisis of the time – in fact, receipts from personal income tax actually decreased in 2010. After 2013, the tax bands were widened, a proposal in the last Budget by the Gonzi administra- tion that was carried forward by Joseph Muscat – and which al- lowed more people to pay less tax on their incomes. Between 2013 and 2015, tax revenues grew by an average of 9.6%. One of the key drivers of tax revenues is strong economic growth: higher employment, of which Labour boasts much about due to record job creation since 2013, will drive greater di- rect tax revenues. This fact alone is acknowledged by the European Commission's latest country report, which also notes that "despite some pro- gress, challenges concerning tax compliance remain." Joe Farrugia, the director-gen- eral of the Malta Employers As- sociation, is aware that tax elas- ticity – the rate at which more tax is paid even at lower tax rates – has its limits. "It's Christmas come early, basically… without the costings and the full fiscal impact." Calculating the full im- pact of a tax cut is hard, Farru- gia says, nothing that while tax bands were widened in 2013 and more cash came in, it does not always mean that revenue will continue to increase. "Economic growth can be so strong as to compensate a drop in income tax revenues through an increase in indirect taxes like VAT. But parties are issuing pro- posals one by one, instead of the whole package – people should make an informed choice based on the whole set of party propos- als," Farrugia says. Indeed, the European Com- mission noted that after 2013, the average growth rate of tax revenue in Malta reached twice the rate observed in the EU. But there is also a risk. Corporate tax dependence Malta's corporate taxes form a large chunk of the island's to- tal revenues, in 2015 totalling €585 million compared to €595 million in personal income tax receipts according to the Na- tional Statistics Office. A fur- ther breakdown from a finance ministry review of 2015 suggests that of total tax revenues, €247 million were in international tax receipts. "Corporate income taxes have a higher weight in tax revenues than in the rest of the EU, im- plying higher vulnerability to economic shocks," the Commis- sion notes, which means that if international initiatives in the fight against tax avoidance pick up, they could have an adverse impact on Malta's imputation tax system, which grants foreign shareholders up to 85% rebates on tax paid in Malta on foreign- sourced income. "The system is characterised by a large number of foreign institu- tions attracted to Malta also by a favourable tax environment," the Commission adds in its econom- ic forecast, highlighting Malta's dependence on the financial ser- vices industry. This reliance on corporate taxation "has stood out as a sig- nificant and growing source of tax revenue for Malta in the last few years. Risks to the resilience of tax revenues could come from economic shocks or changes in the area of corporate tax policy." Malta remains attractive as a domicile for foreign finan- cial companies as the only EU member state utilising the full imputation system of company tax with a refundable tax credit scheme. The GRTU also says that Mal- ta-based businesses in retail, supermarkets and restaurants – unlike the letterbox companies set up for overseas interests – are also benefiting from the 6/7ths refund on tax paid. "The Commissioner for Inland Revenue told us these businesses don't use the tax rebate system that much," Abigail Mamo says, who however insists it is an indi- cation that there are businesses competing with Maltese opera- tors on an uneven playing field. The GRTU wants these sec- tors of 'market saturation' not to benefit from the tax rebate any longer. "We want fair competi- tion, not a system that puts Mal- tese operators out of business on tax." That much sounds fair, even though it goes against the ac- cepted wisdom of the grandees of financial services: don't touch the imputation system. Here the MEA has its own warning: With the European Commission mounting an of- fensive against tax avoidance, especially after the Panama Pa- pers, an ominous future awaits. "The association has warned of a number of fault lines that can change these positive trends… the possibility that the tax in- centives that were critical in at- tracting financial services and gaming industries will be re- moved or toned down. EU-wide corporate tax reform is a ma- jor threat facing these sectors, which have contributed to 29% of the economy's growth." The prospect that EU pressure flattens out Malta's imputation tax with a single flat-rate system across the bloc could be a night- mare scenario for an island that depends on international tax re- ceipts. So playing the Pied Piper on taxation is not always an easy gig. Abigail Mamo