Tourism problems must be solved within agreed budget - Dalli

Finance Minister John Dalli yesterday referred to recent comments on the tourism sector by the Malta Hotels and Restaurants Association and insisted that problems could not be solved by seeking more funding, but by proper management.

"We have a long term agreement on the financial allocation for tourism over a number of years and it is now up to the MHRA to put its matters in order and to operate effectively with the budget allocated to it," the minister told parliament.

He also warned that the government intended to step up its fight against tax evasion.

The government was already taking measures to fight tax evasion that had never been resorted to before, he said, and more new measures would be adopted.

Tax evasion was anti-social and egoistic and it would be fought on all fronts because it existed in all sectors, such as property, VAT and income tax. All those who were responsible would be held to account, including professionals who were giving advice on how one could avoid paying tax, he said.

Mr Dalli was speaking at the end of a debate on a bill to align the VAT law with EU procedures.

At the opening of the debate, Mr Dalli explained that since Malta would now be part of the EU internal market, where there was the free movement of goods, new regulations had to be introduced accordingly.

The bill includes a schedule of lists and services which are currently not charged VAT but would be so charged by the time Malta joined the EU.

This was a very technical bill and the VAT Department would eventually inform taxpayers of the changes.

Mr Dalli said those who imported from the EU but did not pay VAT at the time of acquisition would be given a new identification number including the prefix MT, which would be quoted for the supplier in the EU and vice versa when a Maltese exported to the EU. This number could be verified by the liaison office which existed in all EU countries, including Malta. Thus the supply would be purchased without VAT.

As from May, imports from the EU would not be charged VAT at customs but at the sales point.

In the case of tax exempt persons, VAT had to be paid like any other consumer, as was the case today. The system for imports from non-EU countries would remain unchanged.

In the case of EU persons and companies involved in distance sales in Malta, they had to be registered with the VAT department here as a supplier when sales exceeded €35,000. This applied also to foreigners providing a service in Malta and vice versa.

In the case of electronic services such as databases and gambling, when the supplier was abroad he could register in any EU country and provide the service from there. Clients had to be charged at the rate of his home base and report with the VAT department according to the rate at the customer's country.

The principle in the EU was that VAT would be paid at the place of consumption.

Mr Dalli said that products which will henceforth be taxed at a date still to be fixed, included: at five per cent, margarine, chewing gum, pastilles, large fruit juices, large ice creams, bandages, books, brochures and other printed material and, at 15 per cent, medical equipment bought by clinics and hospitals.

Mr Dalli said ordinary consumers would be affected by this bill only with regard to the last part on the taxation of products which were previously zero rated.

Opposition finance spokesman Charles Mangion asked the minister to explain if the bill had any retroactive effects.

He also referred to exemptions from VAT on a number of items such as food and medicines and asked whether such exemptions would be retained. Dr Mangion observed that in terms of this bill VAT would no longer be charged at Customs but at the point of sale, something which would help the cashflow of importers. But how would this impact on the government's cashflow?

Dr Mangion said he agreed that no tax loopholes should be allowed on taxable products by way of electronic services. He noted that under the former system, when a Maltese consultant gave a service to a foreign company, he did not charge VAT on that service. Now that he would charge VAT, would it make his service more expensive, and hence, less competitive, or would the client be able to claim VAT back? The same also applied to financial services provided by Malta.

Would this bill lead to increased paperwork, particularly on small businesses? Had the constituted bodies been consulted on the workings of this law and any new compliance costs? Competitiveness remained essential for economic growth, and bureaucracy should be kept as light as possible. Malta's problems regarding competitiveness could be seen in areas such as tourism and ST Microelectronics.

Dr Mangion spoke on the government's financial position, saying it was useless for the opposition to be blamed for it. Debt as a percentage of GDP had been increasing steadily since 1991 when it was 26 per cent. It now reached 67 per cent.

Mr Carmelo Abela (MLP) asked how educational, cultural, sports and religious societies would be affected by the bill. These sectors had a strong bearing on everyday life and in most cases they were not there for profit-making. The MLP in its last electoral programme had argued that these areas should not be burdened with VAT. Mr Abela said he felt that Malta could have been tougher in EU negotiations over exemptions from VAT. EU laws allowed national governments to give exemptions for sports and cultural activities or reduce the VAT rate.

The bill provided for exemptions without credit for sports and cultural activities but how would the system work? Voluntary organisations, in particular, needed to be given whatever assistance possible by the government because of the beneficial impact of their work on society.

Mr Abela insisted that the VAT Department should make sure that all businesses issued VAT receipts. And it was important that inspectors did not discriminate in the way they carried out their inspections, he said.

Winding up, Mr Dalli referred to Dr Mangion's questions on the government's cashflow. He said that as a result of the new procedures, imports from EU member states would not be charged VAT at Customs but at the point of sale. This was expected to lead to a shortfall of Lm15 million in VAT revenue next year until flow resumed as normal.

On competitiveness, Mr Dalli said that once Malta joined the EU, Maltese service providers would be able to provide far more services in the EU than at present and they would be able to do so directly and not through sub-contractors. Competitiveness, therefore, would not be affected by this bill as VAT had already been charged.

Mr Dalli said the EU was currently considering a list of products and services which could benefit from a low rate of VAT or even zero-rating. Maltese officials were in Brussels taking part in these talks. On VAT on sports and education, Mr Dalli said Malta had accepted certain rules which now had to be followed but flexibility would be made use of where it existed.

His appeal was for the government and the opposition to work together to further Malta's interests within the EU.

Mr Dalli said the new arrangements would not increase bureaucracy for importers since the customs declaration for imports from the EU would no longer be needed. Instead of it, for control and statistical purposes, a simple declaration of the imports being made would be required.

Turning to economic arguments, Mr Dalli said one could not ignore the fact that the events of September 11 had had a negative effect on the global economy, including Malta's. The Iraq war and excessive concern over Sars had also had an impact. That was particularly evident for tourist destinations served almost exclusively by air services, as was Malta, Yet Malta had performed better than destinations such as Cyprus.

One also had to consider how the holding of the referendum and the election had a dramatic impact which stopped the economy in the first few months of this year.

Malta, however, was managing its problems, not being terrified by them. Those who criticised the government over the deficit needed to realise that the deficit meant greater expenditure over revenue. Therefore the criticism effectively meant that either the government was not imposing enough taxation, or it was handing out too much money.

After referring to the government's fight against tax evasion, Mr Dalli again turned to competitiveness and said competitiveness had to be measured on the basis of productivity.

Government-induced costs were frequently mentioned, but what the government provided were services, for which it expected to be paid. One could not think that what was provided by the government was for free or should not be paid for.

One could no longer tolerate a situation where, for example, factory tenants felt they should not pay rent, threatening the government with dismissals if it insisted on payments. The government would not be intimated by anyone.

Everyone had to pay what was due. Competitiveness should come from productivity, Mr Dalli said.