Getting serious about tax evasion

This article was published in The Malta Independent on Sunday - 15.12.2013

It is quite shocking that reliable studies put the size of Malta’s black economy as high as 25% of the GDP. The black economy can never be fully eliminated, and perhaps in small doses it is beneficial in getting things done by oiling the wheels of the measured economy.

But at 25%, Malta ranks among the highest in the EU and reaches a level that becomes socially offensive and economically unacceptable.

We have had every newly elected government promising war on tax evasion. We have had several amnesty schemes offering tax offenders a chance to come clean and turn over a new leaf. On each and every occasion such amnesty schemes were described as the last opportunity to redemption before offenders faced the rigours of tax enforcement with all its consequences.

I remember the tax year holiday given by the first Labour government of the seventies when it introduced the PAYE and Provisional Tax mechanisms.  There was the tax amnesty given to businesses before the introduction of VAT in 1995 where they could declare their under-reported stock in trade. Between 2001 and 2003, there were several versions of a scheme permitting undisclosed registration of undeclared overseas investments against the payment of a meagre penalty of between three and five per cent of the declared value.

In 2007, before joining the euro, a similar tax amnesty was offered to local investments and undeclared holding of cash to facilitate the conversion from Maltese lira to euro.

The fact that the new Labour government has announced through the Budget speech for 2014 yet another such tax amnesty under the heading of Investment Registration Scheme, is perhaps the biggest proof that such past amnesties have not delivered on their objective of achieving better tax compliance.

While it has not yet defined the assets that will be eligible for registration under the new scheme, one struggles to think of any type of assets that has not had ample opportunity to come clean through past amnesties. One is therefore tempted to argue like Einstein that it is insanity to try the same thing over and over again and expect a different outcome.

Perhaps the only asset that has not benefited from past schemes represents private loans given to commercial organisations by way of directors’ or shareholders’ loans. There may a valid argument to offer these types of assets the opportunity to benefit from a tax amnesty as other types of assets have benefited through past amnesty schemes, in the interest of equitable and fair treatment and to avoid discriminatory treatment of tax offenders.

There is a serious risk however that such schemes work against creating a culture of tax compliance and fiscal morality. It portends to tax offenders that they can live with the comforting knowledge that they can come clean about their tax evasion by paying a small fraction of the taxes they should have paid in the first place; that immediately after registration they can start using the funds in the normal economy without any risk of tax consequences; and that they can continue with the old games of tax evasion on future earnings as at some point in time in the future another new administration will again offer another amnesty and they again will be able to catch a future bus paying a cheap fare to tax compliant destination.

Indeed, such schemes could be very offensive to compliant taxpayers as they are made to look like fools for abiding by the law. It gives incentives to switch from being compliers to becoming evaders rather than the other way round.

This would go against another initiative announced in the Budget Speech where a tax evasion awareness campaign has been promised in the first quarter of 2014. This campaign, apart from increasing awareness about the good causes to which taxpayers funds are applied in order to sensibilise taxpayers that their contribution is a fair price to pay for living in a civilised society, is meant “to highlight the initiatives which Government plans to take to address tax evasion and tax avoidance”.

Unless government wants to send conflicting objectives where it massages tax avoidance through yet another run of the mill amnesty scheme with one hand and launches a campaign to instil fear in tax offenders with the other, the new tax amnesty has to be different from its predecessors’ versions. Otherwise the insanity charge Einstein made would apply to us fairly and squarely.

It has to be different in these ways:

a.     A good portion of the funds raised by the Registration Scheme has to be directly allocated to beef up the investigative resources of the Revenue enforcement structures.

b.     The Registration Scheme has to be on a fully disclosed basis so that the Revenue Authorities are fully aware of who registered what. Otherwise too many of the scant resources at Revenue Enforcement gets wasted as it is spent chasing tax misdeeds that had already bought, on the cheap, a tax amnesty on an undisclosed basis.

c.      Tax revenue structures which protect anonymity need to be re-visited to take account of present realities where the risk of capital flight from full disclosure is practically non-existent given that moving capital across borders is difficult because of stringent money laundering regulations and is still captured by global tax co-operation schemes like the EU Savings tax directive. Why should the state promote non-disclosure of people who are actually paying their taxes at source in full compliance with the tax laws?

d.     The tax charge applicable to benefit from the amnesty has to do justice to compliant taxpayers rather than motivate them to move in the opposite direction.

If we are to get serious about tax enforcement and tax compliance we cannot have yet another scheme meant to produce some instant revenue while jeopardising future tax flows. This one must be seriously structured to persuade taxpayers that there will never again be another tax amnesty scheme and that Revenue authorities are being given the tools and resources to trace, capture and punish tax offenders.

We can only afford to keep our deficit targets, sustain our social programmes, and reduce tax burden on fully compliant taxpayers if the State collects what is actually due and reduces the black economy to a level, I would say not exceeding 10% of the GDP, where it is not socially offensive and where it would be counter-productive to force it down further.

If government succeeds in this objective, the revenues it expects from the IIP scheme can either be done away with completely or the IIP could be subjected to very restricted quotas which would completely remove the perception of launching the indiscriminate sale of Maltese citizenship to plug some unbridgeable budget hole. It would help to emphasise that the main benefit of the IIP is the networking and potential for inward direct investment not the upfront payment.