Kaizenlog

PC 30/09/2007

Lower tax on small businesses, higher on banks – AD

In a press conference held in Sliema, Alternattiva Demokratika - The Green Party insisted with government that a tax regime in which all businesses, irrespective of size and market power, were taxed at the same rate is unfair and should be revised. Dr. Harry Vassallo stated that “it no longer makes sense to have all companies taxed at the same 35% rate irrespective whether the company makes modest profits or, in the case of the two large banks, tens of millions of liri in profits. Government should have the courage to accept that the banks do not face the level of competition that many small companies have to face.”

Spokesperson for Finance, the Economy and Tourism Edward Fenech added that “during the last three budgets we have made the proposal that a ‘small companies tax rate’ needed to be introduced. In the submissions we made during the pre-budget period this year, we recommended that government introduces a small companies tax rate of 30% and compensates for any drop in revenue by raising the standard income tax rate on commercial banking activities to 40%. We believe that with this measure, as well as better focused tax compliance measures, government revenue may actually increase. This would allow government to consider lowering the small companies tax rate even further in the years to come. Britain adopted this path very successfully during the Blair years and managed to lower the small companies tax rate to 20%.”

In addition Mr. Fenech explained two other proposals made by AD for this budget. The first is a proposal to change the tax system for business start-ups and very small businesses by which these companies would have the option, in the first few years of operation , to pay income tax on “cash” profits rather than their accounting profits. He said that “with this proposal, start-up enterprises who face severe cash flow difficulties in the first few years of operation as they build the business, would to some extent be able to defer the payment of their tax liabilities to future years. This measure would help new business ventures in a concrete way, without affecting government finances over the medium term.”

The other proposal refers to VAT on restaurants and tourist services. Mr Fenech explained that “we also recommended that government explores the possibility of introducing an intermediary VAT rate of 12% on restaurants and tourist activities. Maltese tourism currently suffers a tax disadvantage on VAT, even with developed destinations like Spain which has a VAT rate on restaurants of 7.6%. We however recognise that this measure could result in an unsustainable drop in government revenues, so we therefore also proposed that government steps up VAT inspection on catering establishments. It is an open secret that many catering outlets evade a substantial amount of VAT by not recording their sales. We believe that this measure will improve business and raise compliance, to an extent where government’s fall in revenue will be affordable. This measure would also restore some justice on those businesses who declare their income and have to watch competitors around the corner” get away with
gross evasion because VAT inspections are negligible.

Mr. Fenech retiterated that “we have recommended that if any tax cuts are given, then they must be given in equal fashion to everyone. This should be done by raising the tax exempt portion of income. Government should not repeat the mistake made last year when it gave a tax cut which was so badly designed that those on low incomes received very little or nothing at all.”

Dr. Vassallo concluded saying that “this government has tried to portray itself as the friend of small enterprise, however it has not had the courage to consider the changes we have proposed, not only in this budget but also in the previous two. It is high-time to consider the introduction of a small companies tax rate, even if on a gradual level. It would also be correct to compensate for this by raising income tax on domestic banking activities, to reflect the market domination of the two large banks who operate a duopoly. Government should always aim to collect taxes mostly from those individuals and businesses who can most afford it.”

Ralph Cassar
A/PRO

For comments:
Edward Fenech on 79705032

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