Let us reduce VAT

Government has a new opportunity to cut value added tax (VAT) on a number of services, including restaurants. Will the Maltese government join other governments in the European Union who want to reduce the VAT rate? On June 7 the EU's Economy Ministers will meet to examine this issue.

Eight days ago tax experts from the 25 member states debated whether or not France should be allowed to cut VAT for its restaurants. At present, the VAT for French restaurants is at 19.6%. During his last electoral campaign, President Jacques Chirac promised his electors that VAT would be cut to 5.5% by 2006. For this to be done, as it is a fiscal decision that needs the unanimous consent of all the member states, France is seeking the support of the 24 other member states.

Observers have noted that a cut in restaurant taxes could soften up restaurant owners in France ahead of the country's vote on the EU Constitution on Sunday. They have been threatening to vote No if they do not get their way.

A study carried out by Hotrec, the organisation representing the hotel and restaurant operators in the EU, shows that the Maltese Islands have the highest taxes on the tourism sector. Maltese restaurant owners have to charge 18.5% VAT. Together with other taxes, surcharges and fees, these push up tourism prices and make us less competitive

Local tourism operators are not in a position to shift these costs onto their clients. Tour operators who supply 80% of our tourists have not been giving our hoteliers better rates to match rising costs and hoteliers are being squeezed further.

It is worrying that a growing number of entrepreneurs feel that tourism is not profitable anymore and are moving out of this activity. Banks are reluctant to lend money for tourism projects.

A glance at the bank loans and advances outstanding by the hotel, restaurant and tourist trades published by the Central Bank shows that last year they were the lowest in the last 10 years. They reached their highest levels in 1999 and 2000 (14% and 15% of total bank loans respectively) when tourism was reviving only to decline to 8% last year.

When Government requested no VAT

In the first week of May, the Luxembourg presidency of the EU accepted the French request to cut VAT in restaurants. But some governments, such as those of Denmark and Germany, are still reluctant to reduce VAT for France fearing that they would have to do the same back home. What position is the Maltese government taking?

When I asked Parliamentary Secretary for Finance Tonio Fenech, to state the government's position, he said it is still too early to say as Government is still studying the situation. I told him that I hope Government's refusal to reduce VAT for restaurants in Malta does not make it side with those governments that do not want the EU to review the VAT rate on a number of services. I reminded Mr Fenech that Government had tried to negotiate lower VAT rates or no VAT at all on a number of products and services during the accession talks with the EU and whether it would stick to that position now.

He said that Government needs money from VAT to be able to spend it on education, health, welfare and the environment. He found it convenient not to mention the deficit and that after years of extravagant spending by Government running up an unsustainable deficit, Government has had to resort to public expenditure cuts and higher taxes. Government is going to find it difficult to support lower VAT rates in the EU but still have higher ones in Malta.

Mr Fenech also made no reference to a report prepared by the National Competitiveness Working Committee that reducing VAT on restaurants, not only will not result in a lower tax yield for government, but will in fact generate more economic activity and bring in more revenue: " ...It is calculated that if the VAT on restaurants were to be reduced to 5%, to be comparable with that on accommodation, government revenue would drop by around Lm10 million but the value added generated by the industry would increase by Lm12 million."

Member states have until January 1, 2006 to submit their requests on cutting VAT on a number of listed services.

When Government was negotiating Malta's accession to the EU, it requested that we would be exempt from paying VAT on food, like the UK and Ireland. It requested the same on pharmaceuticals and medical equipment, like the UK, Ireland and Sweden. And also like the UK and Ireland, the Maltese government asked that no VAT be paid on newspapers, periodicals, books and similar educational material. Malta's requests were rejected even though the government argued that VAT on these services would lower the quality of life of our families and pensioners.

Government has now been offered the opportunity to raise these issues once again. Government must also take a strategic initiative to build a coalition with other EU member states who want to cut VAT on a number of services.

evaristbartolo@hotmail.com