2005 was the first full calendar year since Malta became a member of the European Union. According to Joseph Sammut, director general and commissioner of the VAT Department, EU membership has provided a challenge.
"During the years of pre-accession we focused on restructuring the department to cope with the changes in legislation and procedures," he told The Sunday Times last week. "That phase is over. Now as members we need to consolidate and strengthen what we have achieved and learn more from this new experience."
Looking back on the transition to the new procedures, Mr Sammut said this had proved successful both for business operators and the department. "Before May 1, 2004 (the date of Malta's EU accession), VAT on goods brought into Malta was paid at the point of entry at Customs," he recalled.
"Now, a distinction has to be made between goods from inside the EU and goods from outside. For goods from the EU, VAT is collected at the point of sale and approximately 85 per cent of goods sold in Malta come from inside the EU."
So, co-operation with the Customs Department is "very important" to the VAT Department. Since persons bringing goods into Malta from other EU member states do not pay VAT at Customs, Mr Sammut explained that procedures had to be created to ensure that persons bringing these goods into Malta are actually declaring them in their VAT returns and to strengthen the controls to ensure VAT is accounted for and paid to the department.
"Each month the Customs Department sends us information on persons bringing goods into Malta in commercial quantities. We then analyse this information according to risk, and investigate cases to ensure that the persons who are selling these goods are:
¤ registered for VAT;
¤ declaring all such merchandise in their VAT returns; and also
¤ declaring the merchandise in their Eco-contribution returns (if applicable).
"This co-operation has already resulted in a number of assessments running into thousands of liri of VAT - with over Lm100,000-worth of these assessments having been issued."
Apart from co-operating with the Customs Department, the VAT Department liaises closely with the Inland Revenue Department and the Tax Compliance Unit to ensure that all revenue that is due to the Government is collected, according to law.
The consumer end of all transactions is the fiscal (or VAT) receipt. Mr Sammut said his department "deploys considerable resources on daily visits to business operators just to ensure that the fiscal receipt is being issued". The table below illustrates the department's track record for last year.
However, Mr Sammut conceded, "VAT inspectors cannot be in all places on all days all the time. Therefore, the public should co-operate more and adopt the culture to ask for a receipt in the same way one asks for correct change."
Although Malta has strict legislation on the issuing of fiscal receipts - and last year Malta's legislation was amended, doubling the compromise penalties and court fines for non-submission of the fiscal receipt - this is just one facet of the global picture.
"We introduced the concept that failure to have a fiscal cash register or a manual receipt booklet at your business outlet is in itself a criminal offence," he said. "In that case, there is no need for an inspector to witness a sale to report you."
Failure to issue a fiscal receipt does not mean the trader will necessarily get off the hook either - and it is mainly small outlets that do this. Mr Sammut was the first to admit that the vast majority of outlets did issue these receipts. However fiscal receipts are only one means of VAT enforcement. Other tools used by the VAT Department are outlined in "VAT Department's investigative powers", below.
The current complement of inspectors in the VAT Department is 62, Mr Sammut said. There are also seven ex-Revenue Security Corps personnel performing duties as inspectors.
Inspectors' responsibilities
Among the inspectors' responsibilities are:
¤ performing investigations, credit controls, audit trails, validations and reviews of assessments;
¤ performing outside inspections and surveillance visits;
¤ prosecuting or giving witness in court criminal proceedings against fiscal receipt defaulters or persons who do not submit a VAT return;
¤ assisting in cases before the Board of Appeals;
¤ performing daily customer care duties on a roster basis;
¤ answering written queries; and
¤ enforcing the Eco-contribution.
The VAT Department is in the process of introducing electronic auditing, Mr Sammut said. "This is an important tool, enabling the department to perform electronic analysis on whole data sets rather than samples of data from taxpayers' records.
"We will be training our inspectors in these techniques and eventually purchase the necessary analytical applications."
In addition, the department is also working closely with the Inland Revenue and Customs departments, the Tax Compliance Unit (TCU) and the Benefit Fraud Directorate to effect the necessary amendments in relevant legislation to make possible the sharing of information between these departments. "This would consolidate the powers of investigation of each entity," Mr Sammut said.
The revenue collected by the VAT Department in 2005 compared to 2004 is:
¤ In 2004, gross revenue was Lm164.6 million. Taking out refunds of Lm22.9 million, net intake was Lm141.7 million.
¤ In 2005, gross revenue was Lm197.5 million. Refunds were Lm29.3 million, leaving a net intake of Lm168.2 million.
The increase of Lm26.5 million is due to some Lm15 million in deferred payments of VAT on goods that were not paid at Customs on point of entry in 2004, but were reflected in the sales of these products in 2005. The balance includes VAT earned through increased economic activity, from projects financed by the EU and the Italian protocol, and from increased enforcement by the VAT Department and TCU.
On top of this, the VAT Department collected Lm4.4 million in eco-contributions. This was no easy task because, when the department was charged with the competence and authority to collect and administer the contribution, in September, 2004, no additional staff was allocated.
"The department had to manage its resources and start a system of collection from scratch," Mr Sammut said. "This, in my opinion, has proved successful and enforcement will be further enhanced this year after some new inspectors have been recruited."
EU dimension
Yet it is within the dimension of EU membership that the VAT Department truly comes into its own. The applicable law is the 6th VAT Directive, which establishes a minimum standard rate of VAT of 15 per cent. "The EU does not interfere with enforcement but assists member states to fight VAT evasion and fraud," Mr Sammut explained.
To ensure each member state collects all the VAT due and to fight transnational organised crime, fraud and any other illegal activity that could prejudice the Community budget, the EU set up the Anti-Fraud Office (OLAF) on June 1, 1999.
It is not only the EU budget that is affected by VAT fraud, he said, but the EU's very credibility, apart from distorting competition.
So the VAT Department co-operates with its counterparts in other member states and to ensure this administrative co-operation it:
¤ receives requests from other member states to investigate cases under the Administrative Co-operation rules (eight requests were received in 2005);
¤ makes similar requests to other members states (seven were made in 2005);
¤ exchanges information with other member states through the VAT Information Exchange System (VIES);
¤ participates in multi-lateral controls; and
¤ participates in Fiscalis seminars and Standing Committee on Administrative Co-operation (SCAC) meetings to discuss ways to tackle fraud, especially carousel and missing or fictitious trader fraud that affects cross-border trading.
Among the commitments of the VAT Department following EU accession are participation in meetings in Brussels of the: VAT Committee, Working Party Number One, SCAC, the Recovery Committee and the Fiscalis Committee.
The VAT Committee is an advisory committee set up in terms of Article 29 of the 6th Directive to examine issues of the application of VAT. Working Party Number One discusses issues before a new directive is proposed. Such new directives are referred for discussion and approval in the Council Working Party on Tax Questions.
In the other committees, the Commission discusses issues of administration, operations, enforcement and training with member states. Different VAT officials, usually at senior level, participate in all these committees.
A lot of the department's time is taken up with the consultation process to enact new directives. The latest VAT directive issued by the Council was that on Reduced Rates of VAT on Labour Intensive Services.
"We participate actively in these technical fora and raise valid issues," Mr Sammut said. "We recommend our position to the government after we discuss the issues internally, and we never say 'yes' unless it is also to our advantage.
It is highly time-consuming but if you are not there, your voice is not heard. In this job, you have to be fully committed.
"Even though Malta is a small country, we enjoy a lot of respect and our word has a lot of value."
Although, on the one hand, the EU encourages member states in the fight against VAT fraud, on the other hand, it is committed to simplify VAT procedures for genuine operators to encourage cross-border trading, in line with the Lisbon Agenda.
"To this effect, new directives are currently being discussed at the Council Working Party on Tax Questions, in particular those regarding the One-Stop-Shop for VAT Compliance and the simplification procedures of 8th Directive Refunds.
"The one-stop-shop will provide simplification for business operators who are registered for VAT in one member state and who effect cross-border trading. They will comply with VAT obligations in the other 24 member states through the Website of the tax administration of the state in which they are registered.
"The 8th Directive Refund Simplification will make it easier for business operators to reclaim VAT incurred in other member states where they do not operate, showing that VAT is not there to stifle trade."
The VAT Department and the TCU are also benefiting from technical assistance through a UK-Malta twinning project financed by the EU transition facility.
This project - a training agreement with HM Revenue and Customs - aims to strengthen the department and the TCU in the fight against VAT evasion and fraud.
Before looking ahead, Mr Sammut had a word of thanks to all the dedicated officials in the department who are "committed to their work and always strive to obtain good results. We are here to serve the public, to collect fair taxes and to provide support to our customers."
He went on to quote from an ongoing survey, introduced last May: 94 per cent of respondents say that they are happy with the service given by the Department's Customer Care Unit.
"It is important that taxpayers realise their responsibilities and obligations in charging VAT and passing it to the department," he said. "Otherwise they cannot expect leniency. Sometimes taxpayers themselves show appreciation for the way VAT officials treat them."
He mentioned a taxpayer who, after being served with tax assessments last year, wrote to the Prime Minister to thank and praise the VAT inspector's professional and ethical behaviour. "The Prime Minister himself wrote to this inspector and thanked her for such work and example," he said.
2006 presents a bigger challenge to the VAT Department, with the target for revenue going up to Lm182.2 million, plus Lm5 million for the eco-contribution, yet Mr Sammut is confident that this target will be reached.
Career profile of Joseph Sammut
Joseph Sammut started his career in the Public Service in 1978 at the Treasury Central Supplies Section. In 1988, he was appointed administrative officer at the Health Department.
He moved to the Inland Revenue Department in 1990. He was appointed senior principal in 1995 and assistant director, Final Settlement System, in 2000.
In 2002, Mr Sammut was appointed director, Operations, at the VAT Department. He was appointed director-general and commissioner of VAT in February, 2005.
2005 VAT Department track record
¤ VAT inspectors carried out 12,989 spot checks
¤ 398 persons, who failed to issue a VAT receipt, accepted to pay a compromise fine - Lm31,000 was collected from these fines
¤ 294 persons were arraigned in court
¤ 190 cases were decided
¤ 152 persons were found guilty and fined a total of Lm24,100
¤ 38 persons were acquitted
¤ 280 investigations were concluded, resulting in the issuing of assessments amounting to Lm2.24 million
¤ 710 credit controls were performed, resulting in the issuing of assessments amounting to over Lm800,000
VAT Department's investigative powers
¤ a risk analysis system, which compares individual submissions with the average submissions of the same sectorial businesses and with other criteria of evaluation;
¤ the performance of audit trails and validation of data;
¤ the analysis of information on intra-community acquisitions coming from other member states through the VAT Information Exchange System (VIES);
¤ access to Intrastat information and Customs Importations information;
¤ surveillance visits and obtaining samples, which are used to corroborate declared turnovers; and
¤ the power to obtain any information from anyone necessary in the course of a VAT investigation.
New VAT registrations
2003 - 3,101
2004 - 4,394
2005 - 4,431
The VAT lottery
This is a means for the VAT Department to encourage the public to ask for a fiscal receipt. "If you had to ask the public if they wish to keep the VAT lottery, I think the majority would opt to keep it," Mr Sammut said.
The VAT lottery is not administered by the VAT Department and Mr Sammut said categorically, the employees involved in the VAT lottery scandal were not VAT Department employees.