Collecting what is collectible

In a modern, democratic society a very legitimate demand made by law-abiding citizens is often a desire to understand how the taxes being paid out of their hard-earned wages are being used. Gradually, there is a better understanding that taxes are essential because they are the government's major source of funding out of which it can keep supporting children's education, free healthcare and a social security system and also sustain and improve all infrastructural needs, from energy provision to roads and communication cables.

More than actually paying taxes per se, it is the feeling of paying more than some "others", whoever they might be, that really gets on people's nerves. Hence, once again, I reiterate that, as a tax-paying citizen, I can share the feeling of frustration that accompanied the launch of a scheme targeted at regularising tax-payers' positions with the Inland Revenue Department through a reduction in late payment interest.

However, I must clarify two important facts related to this scheme. First, contrary to some perceptions, the scheme itself is not a tax amnesty: the government's intention is to collect all the tax due to it. The only reduction being offered is in relation to the penalty and interests.

Secondly, although the €600 million figure of tax still uncollected at first glance may seem to be of extensive proportions, it is worth noting that this amount is the sum total of more than 60 years of tax collection and is considerably less than the government's revenue from income tax in one single year. Indeed, it is made up of three main components: 40 per cent of it refers to tax balances in respect of the old system, that is, for the years up to basis year 1997.

Every year, a lot of effort is made by IRD personnel to enforce collection, particularly where amounts are still in dispute, through long-winding reviews, assessments, objections, tribunals and, when the amount is crystallised through judicial letters, garnishee orders and warrants of seizure. This is very costly, is paid for by tax-payers' money and is time-consuming, meaning that we are losing resources on chasing dues of 20, 30 or even 40 years ago while losing sight of the evasion happening today. Through such a scheme, the government, and thus, the tax-payer, will make significant savings in cost, time and resources in collecting the tax due.

Moreover, 40 per cent of what is estimated as due refers to tax balances resulting from estimations, that is, tax statements issued to persons who have not submitted their tax returns for any of the years 1998 to 2007. Most of these returns, when submitted, will not actually increase revenue but will simply reduce the overall tax balance due. This means that most of this part of the tax arrears will be wiped away not by being "forgiven" but by being "cleaned" because the actual amount of tax due might have already been paid.

Only 20 per cent of the estimated amounts due refer to tax balances in respect of the more recent years, that is, 1998 to 2007. These constitute the more collectible component. Once again, while not condoning any sort of inefficiency in enforcement, one must acknowledge that the balance referring to the last 10 years constitutes slightly more than two per cent of the global gross tax of €3.5 billion assessed by IRD over the same period.

Clearly, tax evasion must be fought with all our means. These means include an omission tax charged for under-declarations of income and interest for late payment of tax. Yet, penalties should be commensurate with the default. Until a few months ago, the omission tax could reach up to 360 per cent. At one per cent per month, the interest rate was often criticised by some, even opposition spokesmen, as "institutionalised usury". I did indeed subscribe to the belief that such amounts were not tantamount to a fair and just penalty and, hence, last January, the government cut the maximum omission tax to 90 per cent while capping interest so that it can never exceed the tax itself. Through this scheme, we are ensuring that older balances will also be able to benefit from these fairer penalties.

I would like to stress that, contrary to what the opposition is claiming, that law-abiding citizens are being treated unfairly, over the past three budgets the government significantly reduced income tax to the tune of €154 million a year, which, over 10 years, would mean €1.5 billion in people's coffers; that is nearly three times the uncollected amounts estimated over 60 years.

Over the years, the government has strengthened the investigative and enforcement arms of the various revenue departments. We have acted without compromise in the face of abuse and with every budget introduced anti-abuse provisions to continue strengthening the departments' ability to catch tax avoiders and defaulters. So we intend to continue doing and we are already well advanced in the measures we plan to introduce in this coming budget to further combat tax evasion.

Mr Fenech is Minister of Finance.