Tax incentives and the future of the family stores

Author: George Mangion
Published on Malta Today, 5th October 2018

Last month the finance minister gratuitously paid a one-time tax refund to all workers and inter alia this helped generate a better cash flow for village retailers.

A quick review of VAT charged on restaurants in southern Europe shows how Greece five years ago reduced VAT on catering from 23% to 13% in a bid to aid small business, bolster the tourism sector and reduce tax evasion. The experiment worked and yielded good results for a two-year period with higher VAT declarations.

Due to austerity measures, the rate was reverted to 23% in 2015.  Similarly, we find how 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 charges 6% on restaurants (excluding alcoholic beverages), take away food; bars, cafes, and nightclubs. The trophy goes to Luxembourg as it charges the lowest rate of 3% on food and 17% on alcoholic beverages.

Needless to say, it is a jaw-dropping experience when we ask why Malta charges a full rate of 18% on restaurant business albeit a concessionary rate of 7% on hotel accommodation including combined all-inclusive food and drink packages.

Now that the tourism industry is firing on all cylinders and the economy is reporting a small surplus can we follow Greece’s bold experiment and drop the rate on restaurants to 13%? Some commentators disagree, saying that any marginal drop in tax will not feature in lower menu prices.

Why reduce the cost of eating out when more tax can be collected especially noting tourist arrivals are on an upward trajectory (although 80% of the increase book with AirBnB)?

They argue that if any reform is necessary to minimise under declarations of VAT, then a better solution is to stratify the VAT rate according to the type of restaurant – be it high class, medium and fast food category.

This may be another variant of the way the catering industry can be assisted in the next budget in order to regenerate itself and improve the national product. It may start affording to pay better staff salaries and refurbish its faded décor. Moving on to the retail sector one can also meet with a number of complaints from village shop owners.

These toil for long hours and face cost-cutting deals negotiated by mega stores which kill their unique advantage as they open all hours and provide a personal service to the community.

Open all hours” reminds us of a popular TV series written for the BBC about Arkwright a hard-working British shop owner lovingly played by the late Ronnie Barker in a comedy – a unique anthropological series. This TV series set in the seventies may not fully project a true picture of the sacrifices now faced by family retailers in a competitive market dominated with supermarkets – all offering cut-price products in modern fully air-conditioned stalls.

Then there is the curse of unbridled bureaucracy and the reality-check having savvy households increasing buying products ordered online. Banks are also getting risk averse and only lend against top collateral and prefer established businesses. In the run-up to last year’s general election, PN proclaimed that once elected to government it will create a business clinic – a one-stop-shop – to help self-employed persons who currently face untold difficulties to make ends meet.

It also promised to create an ‘Access Point’ within Pieta headquarters for self-employed persons to receive free advice on how to succeed getting access to soft loans, tips on how to be tax compliant, and other marketing ideas. PN also proposed the building of a ‘Data Bank’ –another novel idea.

Once elected, it visualised giving full access to PN clubs in towns and villages to serve as offices so that self-employed can get advice from mentors – a boon to help run their business. An idea was doing the rounds that PN aimed to encourage the growth of start-ups by suggesting a reduction in the next budget of the income tax rate paid by small businesses to 10% on the first €50,000 of operating profits.

With hindsight, one reminisces how seven years ago the mantra of helping SME’s was the hobby horse of Jason Azzopardi (the ex-minister in the PN administration responsible for piloting the Small Business Act – SBA in 2011). The SBA mirrors EU directives which is based on the Competitiveness Council policy on ‘Think Small First principle’. Historically it formed part of the ubiquitous Small Business Act for Europe (SBA) endorsed by the European Council in 2008. Sadly, SBA now rests silently in a library of dead letter legislation which is gathering dust on some nondescript shelf in a colonial building aka the Main Guard – facing the palace in St George Square, Valletta.

Theoretically, it targets the business category employing less than 250, i.e. the overwhelming majority of enterprises in Malta. No prize for guessing that it makes good economic sense to cater to SME’s rather than always accommodate the bigger fish in the pond.

There has been talk that developers risking millions in mega projects of luxury apartments and offices are the flavour of the month at Castille. Certainly, the resulting multiplier effect has created a sustained shortage of workers and pushed rents sky high. Is it true that developers, financiers, and top estate agents may be reaping millions while start-ups labour hard picking crumbs from the rich man’s table?

Readers may say this sounds like a battle cry extolling the plight of the less privileged who ache to see the fat cats tastefully lick their fingers at the banquet – asking for more.  Back to SBA – can we ignore its inimitability now that the economy is firing on all cylinders?

The act proposed the formation of a college of regulators expected to meet to harmonise laws and help remove overlapping rules and cut unnecessary bureaucracy. Sadly, during the past years, there have been few such meetings. Another SBA rule asserts that before any public sector entity introduces new burdens it is obliged to carry out a customer satisfaction survey with the aim to measure its impact.

It goes without saying that such surveys if and when conducted do not always result in mitigation measures.

In conclusion, last month the finance minister gratuitously paid a one-time tax refund to all workers and inter alia this helped generate a better cash flow for village retailers. The government may again rise to the occasion and magnanimously offer a helping hand by introducing a preferential small business tax.


George Mangion

Author: George Mangion
Published on Malta Today, 5th October 2018
Get in touch: | +356 21 493 041

Reflections on a cryptic ‘Malta Files’ story

Author: George Mangion 
Published on Malta Today 8th June 2017

PKF Malta is of the opinion that the entire Malta Files accusations on our tax transparency need to be fought and any innuendos fiercely rebutted in a non-partisan fashion.  Malta, like other EU states, supports the fight against harmful tax competition, and insists on full transparency and exchange of information. But it retains its sovereign rights over domestic tax rules.

This in the past was a non-partisan battle fought collectively in a solidarity approach by Maltese politicians. Then finance minister Edward Scicluna has told European counterparts to focus on “blatant cases of tax evasion and not interfere with domestic issues with little or no effect on BEPS”, but even he fears that Base Erosion and Profit Shifting (BEPS) will go beyond what is necessary to prevent abuse.

Looking back it was three years ago when the OECD embarked on intensive work which recently culminated in 13 reports laying down new or reinforced international standards as well as concrete measures to help countries tackle BEPS.  Both OECD/G20 members are committed to this comprehensive package and pledge to have it fully implemented.

This is no breaking news as practitioners have long grasped the shocking revelations of the Swiss Leaks concerning HSBC branch and later on Luxleaks involving secret tax rulings awarded to multinationals signed by the finance ministry in Luxembourg.  Other shocks came with the cosy tax shelters afforded for 15 years in Brussels in a scheme attracting holding companies of multinational companies, saving the lot about €750 million in taxes. Naturally the hacking of 11.5 million documents of Mossack Fonteca, a law firm based in Panama, has fanned the fire against secret dealings by various international business owners (including 42 local yet not revealed account owners).

All this has strengthened the resolve of the G20 and the OECD as well as protestations from the European Parliament, several Member States, businesses and civil society, and certain international partners to implement a stronger and more coherent approach against corporate tax abuse.  No smoke without a fire yet such practices have been going on unhindered for decades and there is a lucrative legal consultancy industry which advises its clients in tax avoidance – they are constantly on the look-out for loopholes.

Feet on the ground – no one expects offshore havens to disappear anytime soon. The industry is massive, starting with Swiss banks that according to Gabriel Zucman, an economics professor at the University of California at Berkeley, hold about $1.9 trillion in assets not reported by account holders in their home countries. One similar location which provides secrecy is Reno, Nevada in the United States of America.

It may come as a surprise to readers that the US is one of the few places left where advisers are actively promoting accounts that will remain secret from overseas authorities. Typically, one reads how a wealthy Turkish family is using Rothschild’s trust company in Reno to move assets from the Bahamas to the US, while a family from Asia, is moving assets from Bermuda to Nevada.

The argument goes that there is nothing illegal about banks like Rothschild luring foreigners to place money in the US with promises of confidentiality as long as they are not intentionally helping to evade taxes abroad. The Rothschild trust company was set up in 2013 to cater for international families, particularly those with a mix of assets and relatives in the US and abroad.

The sales pitch adds that it caters for customers attracted to the “stable, regulated environment” of the US. That may not be so easy if the bank is found to be helping its clients to evade tax. In 2007, UBS Group AG banker Bradley Birkenfeld in Switzerland, blew the whistle on his firm helping US clients evade taxes with undeclared accounts offshore. Swiss bank Rothschild Bank AG entered into a non-prosecution agreement with the US Department of Justice. The bank admitted helping US clients hide income offshore from the Internal Revenue Service and agreed to pay an $11.5 million penalty and shut down nearly 300 accounts belonging to US taxpayers, totalling $794 million in assets.

In 2010, this led to the promulgation of FATCA (Foreign Account Tax Compliance Act) that requires financial firms to disclose foreign accounts held by US citizens and report them to the IRS or face steep penalties. Furthermore, in other parts of the world there is no rush for tax havens to give up their secrecy and scare away the goose that lays the golden egg. Even in biblical times we read in the New Testament how wealthy Jews were always spartan in their wealth declaration in order to save paying high tributes to Caesar in Rome.

In modern times, the classic approach is for taxpayers to reduce their tax bill by moving their tax residence and/or assets to a low-tax jurisdiction. The mandarins in Brussels object to this, claiming that such practices distort the market because they erode the tax base of the State of departure and shift future profits to be subject to tax in the low-tax jurisdiction of destination. Naturally, given the lack of corporate tax harmonization in the Union one cannot blame consultants to study ways how their rich clients move their tax residence out of a high tax Member State.

But the noose is tightening for tax evaders. A recent EU directive calls for tighter controls. This directive, the Anti-Tax Avoidance Directive versions one and two, lays down rules against tax avoidance practices that directly affect the functioning of the internal market.  It is one of the constituent parts of the Commission’s Anti-Tax Avoidance Package, which addresses a number of important new developments and political priorities in corporate taxation (such as hybrid schemes).

The concept includes mandatory use of country by country tax reporting (CBCR).  This initiative requires disclosure of CBCR information to tax authorities only with the aim to ensure further compliance of multinational enterprises (MNE) with national tax laws.

This reporting will be mandatory to be prepared by all EU and non-EU MNEs with activities in the EU having a consolidated turnover above €750 million. The information should be broken down by EU Member States and aggregated for the rest of the world. The type of information to be disclosed would include income tax paid and accrued as well as other contextual information: the nature of the activities, turnover, number of employees, profit before tax. The measure targets only MNEs that are the best equipped to engage in tax planning activities, that is enterprises whose consolidated turnover exceeds €750 million.

In conclusion, Opposition MP Claudio Grech (currently touted to replace Simon Busuttil as PN leader) told an inter-parliamentary committee convened by the Committee on Economic and Monetary Affairs at the European Parliament that Malta wants to retain its fiscal sovereignty. We all agree that now that the election fever has subsided and the perpetrators of the critical Malta Files are slowly retreating into the woodwork, both political parties need to forget their partisan views and pull the same rope to buttress the financial services industry, which has fallen victim to a barrage of an unsympathetic press in Brussels. Unfortunately the spirit is willing but the political body is weak. As can be expected the landslide victory by Labour will leave its heavy toll on the Opposition’s ego and this takes time to heal.


George MangionAuthor: George Mangion 
Published on Malta Today 8th June 2017
Get in touch: | +356 21 493 041