The government is proposing:

¤ extending the zero band of income tax;

¤ delaying the onset of the maximum rate of tax by adjusted subsequent income tax brackets; and

¤ lowering average tax rates, including the maximum rate.

Of these, however, the first two options are considered to be preferable. They would potentially extend over a wide section of the population and the labour market, facilitating work and productivity, and stimulating consumption and savings.

They can also be devised in a manner that ensures the benefits accrue to all taxpayers in an equitable, but progressive, tax system. A reduction in the tax burden would, at least in absolute terms, benefit the higher income earners to a larger extent.

The lowering of average tax rates, including the maximum rate, would have repercussions on the corporate tax rate, resulting in a drop in government revenue and would not be widespread across the labour market, which is why it is not a preferred option. Furthermore, the corporate tax system is already considered sufficiently competitive at 35 per cent.

When asked about the possibility of introducing a windfall tax on banks and other sectors in which the key players enjoy a domineering position, the prime minister was non-committal, saying he did not exclude or approve of such a measure for the time being.

Proportional NI contribution for part-timers

For part-timers, the government is proposing a change in the current minimum NI contributions to a proportional system, whereby the contribution paid is linked to the income earned.

The proposal is to maintain the present system, however, giving part-timers the option to apply for a proportionate system should their income be at a level lower then the minimum contribution rates established.

The measure could mean a potential loss of Lm1.5 million in revenue for the government, even though it is anticipated that such a move could encourage people to seek part-time employment - deemed unattractive under the present regime - or come out of the black market.

Energy benefit

The energy benefit being proposed is intended to provide compensation for the surcharge on the consumption of electricity. The measure would be based on the following criteria:

¤ household income;

¤ household size; and

¤ household consumption of water and electricity.

In addition the grant would be extended to people suffering from certain medical conditions that warrant an extraordinary level of consumption of either water or electricity, or both. The measure is estimated to benefit some 17,000 households.

Incentives for funded pension scheme contributions

Based on a report by the Malta Financial and Services Authority, Government is proposing an incentive scheme for funded private pension schemes, a measure that would tie in with the pension reform currently being discussed in Parliament.

The report assesses four different incentive structures and provides an assessment on the possible cost of the incentive for the first year of projections, based on a level of take-up for people at different ages.

In the first year of projection, the take-up rate is expected to be low among young age groups. However, a high take-up is expected for higher age groups, in particular individuals within the 41-45 age cohort. The actual cost of providing the incentive is expected to range between Lm1.6 million and Lm3.2 million.

Second pillar pension

For the mandatory second pillar pension, which Government said it will consider at a later stage of the reform, the report recommends that no tax exemption or government subsidy be applied to any mandatory contributions that would have carved out from the present social security benefits.

It recommends, however, a full tax exemption on investment income and capital gains on the pensions assets accumulated by investing additional mandatory carve-out contributions.

Both pension benefits and any lump sum benefits arising from mandatory carve-out contributions are taxed as earned income.

As for the voluntary second pillar pension contributions, it recommends a government subsidy of Lm1 to every Lm4 of voluntary contributions paid, subject to a maximum subsidy - reviewed annually - on the contributions paid in each year.

The maximum subsidy is expressed as a fixed amount. Under such a proposal no tax exemption is applied to voluntary contributions and any voluntary employer contributions are automatically treated as part of the employees' taxable earned income.

On the other hand, full tax exemption would be given on investment income and capital gains on the pension assets accumulated by investing voluntary contributions, i.e., the accumulation of the fund as these are re-invested. However, pension benefits and/or lump sum arising from voluntary contributions would be taxed as earned income.

Voluntary third pillar pension scheme

The report recommends that no tax exemption or government subsidy be applied to the voluntary third pillar pension scheme contributions, but full tax exemption on investment income and capital gains earned benefits, whether paid in the form of lump sum withdrawals or on a flexible basis.

A maximum limit is reviewed each year and applied to the amount that can be saved as third pillar contributions in each year.

If the government were to consider setting aside 1 per cent from the employees' and employers' contribution respectively (i.e., 2 per cent) towards the introduction of the mandatory second pillar pension and introduce the voluntary second pillar pension scheme, the financial implication on the government is estimated to be around Lm18 million.

This, in effect, would jeopardise the possibility of Government allowing for any sort of tax relief on personal income without having to shift the burden of taxation significantly elsewhere through other taxation forms and not altering in any way the present financial state of affairs of Maltese families.

The government's preference is towards lifting the burden of taxation on income and allowing for choice in the way that extra money available is invested or spent, introducing the incentives related to the third pillar pension to encourage such savings.

Airport taxes

After being warned by the EU over the departure tax, Government is proposing in the pre Budget document to lower the tax.

Travel from Malta, whether by sea or air, is subject to a passenger departure tax. In the case of sea travel the charge is Lm10 but in 2005 Government increased the passenger tax for travellers by air from Lm10 to Lm20.

In 2005, Government raised Lm3 million in air departure taxes, a figure projected to increase to Lm4 million by the end of this year.

The document excludes the complete elimination of the tax, however, something that was recommended by MEP Simon Busuttil.

Total elimination may not be a priority for economic and fiscal policy, as other tax alleviation measures proposed in this document could, at this point, be more preferable within the budgetary constraints being experienced, the document says.

Social housing incentives for landlords

The Housing Authority issued a scheme in March 2005 under which owners of housing blocks were invited to rent their properties to the authority for a period of between five and ten years. The authority made it clear to the owners that their properties would be returned to them after the lapse of the agreed period.

Owners did not participate in this scheme. Only one application was filed. To reactivate this scheme, Government is considering a tax incentive to make the scheme more attractive.

The proposal is to apply a low rate of tax on income generated from such rents of five per cent, provided that the contractual arrangements meet a number of criteria that need to be established, to ensure that such properties are rented for social housing purposes.

The government is also considering granting to owners a VAT refund on expenses incurred on alterations or improvements, to bring these properties up to standard before being rented to the authority.

Spouses in family businesses

Currently, the self-employed cannot declare as costs the wages of their spouse working with their business in a way that prevents them from benefiting from a wider non-taxable income when both individuals declare their income separately.

Government is proposing to do away with this regulation and allow the wages of a spouse to be declared as a cost.

Government is expecting the measure to increase NI contributions as self-employed individuals employing their spouse will have to contribute. It is also expected to encourage part-time and full-time activity by women in the labour market.

Family tax incentive

In a bid to make the taxation system more family-friendly, Government is proposing a Family Benefit by way of a flat rate non-taxable benefit for every child under care, which would be independent of the level of income earned.

This would be in addition to the current system of children's allowance, which is means-tested.

The measure is primarily aimed at addressing the quirks of the current system whereby, while a family with four children whose income exceeds Lm10,000 misses out on children's' allowance, a family with one child, whose income is in the range of Lm9,000 benefits from the allowance when, comparatively, the latter family is wealthier.

Streamlining of company tax

In this area Government is proposing a number of measures aimed at streamlining the taxation system. In principle the changes will not affect local residents or businesses, but are directed towards maintaining the country's attractiveness as a foreign direct investment destination.

As the case in other EU member states, certain anti-abuse provisions will be introduced aimed at distributions received from companies having mainly passive income where this income would not have been taxed at more than five per cent.

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