Malta may be obliged to tax the supply of new buildings and water when it remains the only member state within the European Union to allow exemption without credit of input VAT, according to Christian Amand, chairman of the Indirect Tax Fiscal Committee of the Confédération Fiscale Européenne.
Dr Amand is guest speaker at the first International Tax Conference organised by the Malta Institute of Taxation at the Westin Dragonara Resort, St Julians, tomorrow.
Malta currently enjoys derogations from the VAT Directive on the transfer of immovable property and water supply from VAT.
“This VAT exemption on the transfer of new buildings without credit of input VAT is unusual in Europe. Apparently, Malta has opted for a system that does not allow the deduction of input VAT on the construction of buildings. This contributes to an increase in the price of new buildings and this cost is included in the production of exported goods and services,” says Dr Amand.
“In all countries, there is a lot of fraud in the construction of new buildings. Generally, building constructors are small companies that go bankrupt easily. When the sale of such new buildings is subject to VAT, the immovable property contractors are frequently collecting VAT from their customers; it is sometimes not transferred to the tax authorities. Most of the time, the solution to this problem is a national reverse charge, where VAT is paid by the customer.
“In Malta, the supply of water is also VAT-exempt without credit of input VAT. This can seriously increase the cost of construction of infrastructures. In both cases, this is a pure national issue because no provision of European law obliges the Maltese Parliament to maintain such provisions. However, both VAT exemptions depend on what other member states are doing and the day Malta will be the last country exempting such operations, it will be obliged to tax the supply of new buildings and water.”
The European Commission is also currently working on a directive on financial services, one of the strongest sectors in the Maltese economy. This may have an impact in countries where this sector is important, like Malta, the UK, Luxembourg, Ireland and some other countries.
“The fact that some financial services are concentrated in some countries is probably not due to VAT only, but VAT probably plays an important factor. The most critical issue is the fact that it leads businesses to structure their activity according to tax-driven objectives which creates other problems, in particular the transfer of pricing and outsourcing. However, there are currently no sufficient factual evidences available to challenge this situation which is based on European treaties,” Dr Amand added.
During the preparation of a directive, there are channels in place to ensure a member state voices its opinion and concerns. In tax matters, the adoption of a directive requires unanimous agreement of the 27 member states. Public consultation is the first step that allows every citizen and business to express their problems, views and solutions.
The European Commission has opened a public consultation on the creation of a more robust VAT system for easier cross-border business and to protect ‘good faith’ businesses from fraudulent customers or tax authorities. In such a process, the content of the suggestions is more relevant than the size of the business or the member state where it happens.
In the case of an infringement of a directive by, for example, the Maltese VAT authorities, the taxpayer may seek judgment from the European Court of Justice. The first step may be to ask the mediation of “Solve It”, or lodge a complaint before the General Secretariat of the European Commission, or a petition before the European Parliament.
Another way is to use business federations who may contact the European institutions directly. The European Commission may ask the Maltese authorities to justify their position and in the absence of a satisfactory answer within two months, there could be an infringement procedure before the ECJ and even financial sanctions against the member state.
Another method would be to convince the Maltese tribunals that there is a violation of the European law. The first judge of the European Law is the national judge. If the national judge has doubts about the way how to implement the European law, he may require a preliminary ruling before the ECJ which may take about 18 months. The tax authorities or a tribunal cannot impose the community law against a taxpayer.
More information is obtainable by contacting the Malta Institute of Taxation at mit@maintax.org or on 2131 4653.