How not to do Things

27^th April 2007
The Malta Independent - Friday Wisdom

Tax amnesties are tricky mechanisms. They should be used with utmost caution as they could well backfire and cause grave injustices to those who are regularly tax compliant. If overused, they could indeed foster the culture of tax evasion, as offending tax-payers can be tempted to wait for the next amnesty to regularise their position.

As a matter of principle I am against tax amnesties. Yet less than a year ago I had published a contribution entitled A Unique Opportunity (TMIS, 14 May 2006), in which I advocated the launch of a tax amnesty on the lines of the Currency and Bank Deposit Registration Scheme 2007 announced out of the blue last week. Is this a contradiction on my part?

It is not. Matters cannot be judged in isolation. The government had given three amnesties to tax offenders who kept their non-compliant funds in overseas investments, in the process breaking tax laws, exchange control regulations and possibly also making undue claims for undeserved social security benefits. How could the government, therefore, deny the opportunity to those who kept their non-compliant funds in Maltese liri without infringing exchange control regulations, to come clean? How can we offer amnesties to major offenders and deny them to smaller offenders?

I had argued that the fusion of our national currency with the euro on 1 January 2008 presents a unique opportunity to give one genuinely final tax amnesty to permit cash hoarders and the owners of undeclared bank deposits protected by confidentiality, to become tax compliant and, in the process, smooth the process of euro conversion.

I made three important provisos regarding the implementation of such a scheme. Firstly, that it should be launched very early to permit a long time for the necessary due diligence exercise of those declaring cash hoardings to ensure that provenance of such funds did not infringe money-laundering regulations.

I had suggested that such cash declarations should not be covered by confidentiality and should be formally informed to the authorities, who can keep a wider view to combat money laundering infringements. And finally I had suggested that the scheme should include a mechanism for the declared funds to be sterilised by freezing them on deposit for a number of years to ensure that there is no damaging rush of a dormant wave of liquidity into the real economy, which could spur demand for consumption and assets, thus giving a stimulus to inflation just at the time we are committing ourselves irreversibly into a rigid monetary union.

Others came out with similar or variant suggestions but they were met with official declarations that the government had no intention of launching any such amnesty scheme. This was repeatedly stated by the Prime Minister, who doubles as Finance Minister.

Last week there was a damaging change of heart. It is damaging because, after so many denials, it undermines credibility to launch yet another tax amnesty scheme out of the blue. Without such credibility, the scheme starts to look like just another fund-raising exercise, lending credence to the theory that from time to time, as the governments run out of money, it will launch yet another amnesty. So why come on board the tax compliance bus now, if another bus will be passing later?

It is damaging because it allows very little time, just three months, for the appointed registration agents to conduct due diligence regarding the provenance of undeclared funds, especially those in cash form.

There is more than Lm500 million in the form of cash in circulation supposedly for transactional purposes. A per capita quota of Lm1,250 proves that 90 per cent of this is, in reality, hoarded money out of circulation. Can registration agents be realistically expected to handle the registration of some Lm450 million in cash with the due diligence for money-laundering purposes in the space of three months, especially when dealing with new clients who have never had banking relationships as they always kept their savings in cash form?

And if investors of such cash registrations are to continue to be offered anonymity, who is going to have a central overview to ensure there is no structuring of cash funds that becoming collectively suspicious but are not so suspicious at the micro level of individual registrations?

The announced scheme has no serious mechanism to protect the economy against the risks of excessive liquidity migrating suddenly from the black economy to the declared economy. The provision for cash declarations to be blocked in an interest-free account for one year sounds more like a move to protect the Central Bank’s profitability for one more year than a serious attempt to protect from such macro-economic risks.

The Currency and Bank Deposits Registration Scheme 2007 is a typical example of how a sensible idea is poorly executed. It is a case study of how not to do things