Absurdities of the Investment Registration Scheme

Maltastar

I kept back my criticism whilst the scheme was open for subscription. I did not want to be interpreted as attempting to sabotage a scheme that was permitting tax evaders to come in line and start paying their dues.

But now that it is closed for public subscription I feel at liberty to criticise the scheme as just another attempt by government to raise tax revenues from wherever it could lay its hands upon them.

The scheme had no logic in it. If the intention was to start taxing revenues, which previously went untaxed, there was no need for such a scheme. All that was needed was the adoption of the mechanism introduced in the last few months obliging local licensed nominees to deduct withholding tax at source on any interest paid to local residents.

“Clearly the scheme was intended purely as a fund raiser”

If the intention was to give an opportunity for capital formed from untaxed sources to regularise its past by paying a one time fee of between 3% and 5% then why was the scheme only applicable for such capital existing in the form of overseas investment as at 1st September 2001? Why was such capital laying within our own banking system excluded from such a scheme?

Many investors had repatriated their capital well before the cut-off date of 1st September 2001 and such capital has been undeclared protecting behind our bank secrecy rules paying 15% withholding tax. Why were the people who repatriated their capital and brought themselves in line, at least in so far as current taxation, discriminated in favour of those who kept their money abroad much longer to evade payment of tax? Why were the offenders positively discriminated over the ‘pentiti’?

Clearly the scheme was intended purely as a fund raiser, in the process scaring people with undeclared foreign capital that the government could get to know about their fortunes and would impose heavy penalties unless they bring themselves in line through the scheme.

A significant percentage obliged and the government reached its revenue targets. A far more significant percentage did not oblige. Government is seeking to bully these tax offenders by veiled threats of removing the secrecy protection even for those who pay current tax at source but have elected not to pay the penalty fee to regularise their past.

“Government cannot solve its fiscal deficits purely by delivering damaging threats”

Great care is necessary in delivering such threats. If the government were to execute such threats, there is a grave risk that undeclared capital within the local banking system, capital that could not avail itself of the investment registration scheme, would be scared to fly away. It is obvious that investors will take out their capital and put it as far out of reach as possible of local tax authorities to avoid the risk of similar measures being taken to lift the secrecy protection on such funds in the banking system on which 15% withholding tax is regularly deducted.

The impact on the local financial system, if this were to happen, would be catastrophic. It could cause very unpleasant shocks to the economy. It must be avoided.

A new Labour government must tackle the issue with great care. There is no space for bullying. There is ample space for reasoning and providing a fair opportunity for everyone to come on board.

I would wish to see Labour re-launch the investment registration scheme within the following parameters.

1.       It is to be open to all undeclared capital in whatever form it is held, whether in Malta or abroad.

2.       Taxpayers may elect to pay a one-off fee of 3% - 5% of the capital to regularise the past and keep paying a final withholding tax on all future income.

3.       Collective investments schemes listed on the Malta Stock Exchange investing a major part of their assets in local equities will be rendered tax free vehicles to give opportunity for such declared investments to be channelled in a way to generate new interest in the illiquid Malta Stock Exchange.

4.       Taxpayers who do not elect to pay the one-off penalty fee but who wish to register their undeclared assets may do so provided they keep their assets in financial assets generating taxable income and pay a final withholding tax at 25%. These assets have to be kept in such form for 10 years from registration failing which a penalty tax is to be paid on withdrawal or the protection of the registration will be lost.

5.       Tax-payers who do not elect to register will keep paying the 15% withholding tax but this will not be considered final from a tax point of view and will have to pay the difference with penalties if the Tax Authorities get hold of the information.

6.       Professional Secrecy provisions for withholding tax payers will not be changed.

Government cannot solve its fiscal deficits purely by delivering damaging threats. When the 15% withholding tax concept was introduced together with professional secrecy provisions, a lot of capital was repatriated and (partly, in so far as current taxation) entered the local tax net. No threats were used, just simple logical incentives. It is these that work, augmenting tax revenues, repatriating capital, enhancing confidence and generating growth.

Desperate as it is with self-created fiscal problems this government cannot even build on one of the few successes it has had over the years.