Paying up front
A number of government departments and entities are realising the wealth of information being collated by the Tax Compliance Unit (TCU), which can help them in their efforts to curb abuse.The TCU collects an extraordinary amount of data, relating not...
A number of government departments and entities are realising the wealth of information being collated by the Tax Compliance Unit (TCU), which can help them in their efforts to curb abuse.
The TCU collects an extraordinary amount of data, relating not only to individuals' and companies' income but also to their spending habits, such as luxury cars, yachts and stamp duty paid on property. All this helps to flag anomalies between what they claim to earn and what they actually spend, important indicators not only for the various revenue-collecting departments but also for the Social Security Department and the Employment and Training Corporation, which are both being careful to ensure that benefits only go to those who genuinely deserve them.
In 2004, only 2,400 reports were issued by the unit. Between January and April of this year, over 31,000 were sent out - not counting the requests by the Customs Department, TCU head Carmelo Conti said.
Mr Conti, who took over from Paul Barbara when he retired last January, believes that this is an important evolution of the unit's role, with as much emphasis on compliance as on investigation.
Over the six years since the unit was set up, it has gradually settled into its niche, investigating larger and more complex cases - usually companies rather than individuals - than those carried out by the tax audit section of the Inland Revenue Department.
This has resulted in a higher average adjustment for each case. The unit has concluded 287 cases, resulting in higher declared income of Lm55.4 million and a corresponding increase in tax of Lm12.4 million. This works out to an average of over Lm55,000 additional tax paid per case, over and above which would be fines and interest probably exceeding this figure. (Two years ago, this figure stood at Lm38,000.)
Over and above these investigated cases, the unit also reached a number of three-year forward tax agreements with various sectors of the self-employed, which has also increased the tax and social security contributions paid by these individuals.
However, no new sectors have been benchmarked in the past two years, perhaps an indication of the unit's preference for other ways to improve compliance.
Mr Conti was too tactful to comment, admitting only that benchmarking was not underway at the same levels as the past (there are only two employees dedicated to these agreements).
"I don't think they are the best option but they did help to raise the level of declarations, which were admittedly dismal.
"You have to decide whether you want to allocate your resources to these agreements or to large taxpayers - and we have gone increasingly for the latter. Our 26 staff are all professionals and this is a better way to use their skill and expertise," he said.
The unit also intends to pay more attention to the property sector, which has grown considerably over the decades.
"We cannot reveal all the tools that we have at our disposal but we could find indications of undeclared income. There could be a lot more blinking red lights," he warned.
In spite of the unit's success - or perhaps because of it - Parliamentary Secretary Tonio Fenech is talking about integrating the revenue-collecting departments. A task force chaired by Inland Revenue Commissioner Adrian Chetcuti made its recommendations and it is now up to Mr Fenech to decide the various models suggested.
At the heart of the integration is the fact that while the Inland Revenue Department and the VAT Department are given their powers by their one respective law, the TCU gets its power from all the laws governing income tax, VAT, social security and customs.
If the departments were to be integrated, the new entity would probably inherit all the power the TCU has now.
"It would be a practical move because the taxpayer would only have to deal with one entity rather than having to face the IRD one day and the VAT department the next!" Mr Conti said.
The unit is trying to go for quality rather than quantity but obviously needs to handle enough cases for the deterrent factor to work on its behalf.
Not all cases result in an upward adjustment of the tax due - some of the taxpayers are genuinely innocent; other cases are dropped because of insufficient proof.
The major gap in the TCU's database at the moment is information related to bank accounts and insurance companies.
Mr Conti would much prefer the new entity to have even more powers.
"It would be very useful to know what people have insured and what the stated value is," Mr Conti said.
"We would obviously also like the restriction on access to bank accounts to change, but the 1994 amendments, at which period the Malta Financial Services Authority was set up, established these safeguards because they were needed in the context of that time.
"I think their time is past. I am not advocating that we should approach the bank every day but when cases are being investigated, there should be a way for the information to be requested - as is possible when the investigations involve money-laundering. Obviously this would have to be authorised from a very senior official, say myself or the Commissioner of Inland Revenue.
"I stress that we should not revert to the pre-1994 situation when we used to be able to request everything. But investigations do sometimes come up against a brick wall and access to this additional information might help us make progress."
Surely, though, this fear may encourage people to shun banks, driving black money underground - just after a massive effort to encourage people to bring it out and regularise the past?
Mr Conti sees it in the context of why people pay tax in the first place.
"If the budget said that the government should bring in a certain amount from taxes so that it can offer services, then the Commissioner will try to bring in that amount. You have to remember that tax is not an end but a means.
"Is it fair for people to live on other people's money? For example, is it fair to collect VAT from someone but not pass it on to the government? It is the same with FSS that is deducted from employees' salary and not passed on. That is a clear case of misappropriation."
While the TCU works to catch the tax-evaders, the government amnesty - the Currency and Bank Deposits Registration Scheme - has let a number of fish off the hook, possibly including the few individuals among the 70 cases currently being investigated by the TCU and the numerous ones being investigated by the IRD.
Mr Conti viewed the amnesty pragmatically.
"In general terms, revenue departments would never in principle be in favour of an amnesty as it is, in a way, saying that tax evaders will eventually find some amnesty to let them off the hook.
"But you have to see it from the practical aspect. The Investment Registration Scheme, for funds invested overseas, was in itself an amnesty. The government had a choice: It could have carried out investigations to try to find out what there was and whose it was - which would have been nigh on impossible in practical terms.
"Or it could have - as it did - try to get some income through a scheme. It is true that the evaders were given an advantage but at least the government got something out of them. So you have to strike a balance.
"The important thing is that the government gets something in from the defaulters. Another thing is that once the amnesty has been given, there should be more enforcement and investigations so that there is no need for another amnesty in the future.
"The people who avail of it should start with a clean sheet and remain on that track. The bottom line is that tax evasion is socially unjust. Even in developing countries, children are taught that taxes are something you must pay in order to receive services."
While the unit waits to learn what its future role will be once the integration model is decided, it continues with its work. Mr Conti admitted that he sometimes found it hard to understand why some taxpayers fought it out to the bitter end.
"These are thankfully in the minority. If the taxpayer agrees with our findings, we make an adjustment and that is that. So far this year, all the cases were concluded satisfactorily in this way.
"However, if the taxpayer objects, then we make an assessment, to which he again usually objects and it all goes to the Appeals Board and then to court.
"There are many advantages for the taxpayer who opts for an adjustment. As soon as they agree, the clock stops ticking with regards to the fine - while the interest accrues till the date of payment.
"If the case goes to assessment, the fines and interest accrue for a maximum period of 60 months. So if you had to pay an additional Lm100 tax, you would also have to pay Lm180 as a fine and another Lm60 in interest accrued after five years.
"This is something that I cannot understand. The penalties are so heavy. If you are in the wrong, why don't you try to conclude matters as soon as possible? Believe me, we wish that there were no penalties and interest but the way to avoid them is to pay what you should."
Mr Conti is uneasy about the fact that the Commissioner of Inland Revenue has been able, since last July, to pardon fines and interest.
"This has introduced the element of discretion, which is admittedly quite common overseas. The Commissioner has been put in an awkward situation as he might be expected to justify why he has not accepted an appeal, just as much as why he accepted one. It is quite a burden. How can you establish a set of criteria? What could these be? For example, how long things dragged on, whether you cooperated, the amount involved... This is quite difficult.
"I would prefer it if the fines were less and there were no discretion; of course, not everyone would agree with this."
As a parting shot, Mr Conti recalled a motto often used in tax auditing circles: Plucking the feathers without making a hiss.
"Without making a hiss refers to the way in which the investigation should be done, with velvet gloves, with the least possible disruption, with the least possible cost to all concerned.
"There is a negative view of tax auditors. We often hear the phrase 'they are hounding us'. We would definitely like to dispel this image. We need to ensure that we do not call someone in more often than necessary or ask them to produce more documents than necessary."
The TCU collects an extraordinary amount of data, relating not only to individuals' and companies' income but also to their spending habits, such as luxury cars, yachts and stamp duty paid on property. All this helps to flag anomalies between what they claim to earn and what they actually spend, important indicators not only for the various revenue-collecting departments but also for the Social Security Department and the Employment and Training Corporation, which are both being careful to ensure that benefits only go to those who genuinely deserve them.
In 2004, only 2,400 reports were issued by the unit. Between January and April of this year, over 31,000 were sent out - not counting the requests by the Customs Department, TCU head Carmelo Conti said.
Mr Conti, who took over from Paul Barbara when he retired last January, believes that this is an important evolution of the unit's role, with as much emphasis on compliance as on investigation.
Over the six years since the unit was set up, it has gradually settled into its niche, investigating larger and more complex cases - usually companies rather than individuals - than those carried out by the tax audit section of the Inland Revenue Department.
This has resulted in a higher average adjustment for each case. The unit has concluded 287 cases, resulting in higher declared income of Lm55.4 million and a corresponding increase in tax of Lm12.4 million. This works out to an average of over Lm55,000 additional tax paid per case, over and above which would be fines and interest probably exceeding this figure. (Two years ago, this figure stood at Lm38,000.)
Over and above these investigated cases, the unit also reached a number of three-year forward tax agreements with various sectors of the self-employed, which has also increased the tax and social security contributions paid by these individuals.
However, no new sectors have been benchmarked in the past two years, perhaps an indication of the unit's preference for other ways to improve compliance.
Mr Conti was too tactful to comment, admitting only that benchmarking was not underway at the same levels as the past (there are only two employees dedicated to these agreements).
"I don't think they are the best option but they did help to raise the level of declarations, which were admittedly dismal.
"You have to decide whether you want to allocate your resources to these agreements or to large taxpayers - and we have gone increasingly for the latter. Our 26 staff are all professionals and this is a better way to use their skill and expertise," he said.
The unit also intends to pay more attention to the property sector, which has grown considerably over the decades.
"We cannot reveal all the tools that we have at our disposal but we could find indications of undeclared income. There could be a lot more blinking red lights," he warned.
In spite of the unit's success - or perhaps because of it - Parliamentary Secretary Tonio Fenech is talking about integrating the revenue-collecting departments. A task force chaired by Inland Revenue Commissioner Adrian Chetcuti made its recommendations and it is now up to Mr Fenech to decide the various models suggested.
At the heart of the integration is the fact that while the Inland Revenue Department and the VAT Department are given their powers by their one respective law, the TCU gets its power from all the laws governing income tax, VAT, social security and customs.
If the departments were to be integrated, the new entity would probably inherit all the power the TCU has now.
"It would be a practical move because the taxpayer would only have to deal with one entity rather than having to face the IRD one day and the VAT department the next!" Mr Conti said.
The unit is trying to go for quality rather than quantity but obviously needs to handle enough cases for the deterrent factor to work on its behalf.
Not all cases result in an upward adjustment of the tax due - some of the taxpayers are genuinely innocent; other cases are dropped because of insufficient proof.
The major gap in the TCU's database at the moment is information related to bank accounts and insurance companies.
Mr Conti would much prefer the new entity to have even more powers.
"It would be very useful to know what people have insured and what the stated value is," Mr Conti said.
"We would obviously also like the restriction on access to bank accounts to change, but the 1994 amendments, at which period the Malta Financial Services Authority was set up, established these safeguards because they were needed in the context of that time.
"I think their time is past. I am not advocating that we should approach the bank every day but when cases are being investigated, there should be a way for the information to be requested - as is possible when the investigations involve money-laundering. Obviously this would have to be authorised from a very senior official, say myself or the Commissioner of Inland Revenue.
"I stress that we should not revert to the pre-1994 situation when we used to be able to request everything. But investigations do sometimes come up against a brick wall and access to this additional information might help us make progress."
Surely, though, this fear may encourage people to shun banks, driving black money underground - just after a massive effort to encourage people to bring it out and regularise the past?
Mr Conti sees it in the context of why people pay tax in the first place.
"If the budget said that the government should bring in a certain amount from taxes so that it can offer services, then the Commissioner will try to bring in that amount. You have to remember that tax is not an end but a means.
"Is it fair for people to live on other people's money? For example, is it fair to collect VAT from someone but not pass it on to the government? It is the same with FSS that is deducted from employees' salary and not passed on. That is a clear case of misappropriation."
While the TCU works to catch the tax-evaders, the government amnesty - the Currency and Bank Deposits Registration Scheme - has let a number of fish off the hook, possibly including the few individuals among the 70 cases currently being investigated by the TCU and the numerous ones being investigated by the IRD.
Mr Conti viewed the amnesty pragmatically.
"In general terms, revenue departments would never in principle be in favour of an amnesty as it is, in a way, saying that tax evaders will eventually find some amnesty to let them off the hook.
"But you have to see it from the practical aspect. The Investment Registration Scheme, for funds invested overseas, was in itself an amnesty. The government had a choice: It could have carried out investigations to try to find out what there was and whose it was - which would have been nigh on impossible in practical terms.
"Or it could have - as it did - try to get some income through a scheme. It is true that the evaders were given an advantage but at least the government got something out of them. So you have to strike a balance.
"The important thing is that the government gets something in from the defaulters. Another thing is that once the amnesty has been given, there should be more enforcement and investigations so that there is no need for another amnesty in the future.
"The people who avail of it should start with a clean sheet and remain on that track. The bottom line is that tax evasion is socially unjust. Even in developing countries, children are taught that taxes are something you must pay in order to receive services."
While the unit waits to learn what its future role will be once the integration model is decided, it continues with its work. Mr Conti admitted that he sometimes found it hard to understand why some taxpayers fought it out to the bitter end.
"These are thankfully in the minority. If the taxpayer agrees with our findings, we make an adjustment and that is that. So far this year, all the cases were concluded satisfactorily in this way.
"However, if the taxpayer objects, then we make an assessment, to which he again usually objects and it all goes to the Appeals Board and then to court.
"There are many advantages for the taxpayer who opts for an adjustment. As soon as they agree, the clock stops ticking with regards to the fine - while the interest accrues till the date of payment.
"If the case goes to assessment, the fines and interest accrue for a maximum period of 60 months. So if you had to pay an additional Lm100 tax, you would also have to pay Lm180 as a fine and another Lm60 in interest accrued after five years.
"This is something that I cannot understand. The penalties are so heavy. If you are in the wrong, why don't you try to conclude matters as soon as possible? Believe me, we wish that there were no penalties and interest but the way to avoid them is to pay what you should."
Mr Conti is uneasy about the fact that the Commissioner of Inland Revenue has been able, since last July, to pardon fines and interest.
"This has introduced the element of discretion, which is admittedly quite common overseas. The Commissioner has been put in an awkward situation as he might be expected to justify why he has not accepted an appeal, just as much as why he accepted one. It is quite a burden. How can you establish a set of criteria? What could these be? For example, how long things dragged on, whether you cooperated, the amount involved... This is quite difficult.
"I would prefer it if the fines were less and there were no discretion; of course, not everyone would agree with this."
As a parting shot, Mr Conti recalled a motto often used in tax auditing circles: Plucking the feathers without making a hiss.
"Without making a hiss refers to the way in which the investigation should be done, with velvet gloves, with the least possible disruption, with the least possible cost to all concerned.
"There is a negative view of tax auditors. We often hear the phrase 'they are hounding us'. We would definitely like to dispel this image. We need to ensure that we do not call someone in more often than necessary or ask them to produce more documents than necessary."