EU report queries lower VAT on electricity

The European Commission is suggesting strategic changes to some aspects of Malta’s taxation policy, including a controversial proposal to raise the reduced VAT on electricity and gas.

Consumers pay a lower VAT rate of five per cent on the two utilities but the Commission believes that, while Malta has a good balance between direct and indirect taxation, there is scope for further reforms.

In a report, Brussels is also proposing revamping the way tax incentives are given to businesses operating on the island.

Released yesterday in Brussels, the report, Tax Reforms In The EU In 2011, comes just weeks before the Finance Minister presents his Budget for 2012.

Noting that support to vulnerable households could be provided more efficiently through targeted welfare payments, the Commission questions the policy adopted by Malta and a few member states to “subsidise” energy through reduced VAT rates. “In the current economic climate, it is important to utilise the taxation framework as efficiently as possible in environmental policy,” the report states.

“Environmentally-harmful tax subsidies should be phased out and environmental taxes need to be properly designed,” the report suggests, specifically referring to Malta, Greece, France, Ireland, Italy, Luxembourg and Portugal.

The technical report also suggests that Malta needs to consolidate its actions against VAT fraud, arguing that VAT efficiency on the island is still lacking.

Earlier this year, the government released the findings of a board set up to conduct a systems audit of the VAT Department in the wake of a massive fraud case that rocked the department in 2009 and eventually led to convictions against several businessmen and a VAT employee. The audit found lack of accountability and risk awareness in the management of the department at all levels, saying this posed a “grave risk” in terms of insider fraud.

According to the Commission report, Malta has one of the lowest general VAT rates in the EU, apart from various reduced VAT rates.

With the exception of Cyprus and Luxembourg, both still applying the lowest possible VAT rate of 15 per cent, Malta and Spain are the only two countries that have an 18 per cent rate.

The Commission’s report underlines the fact that, since the start of the economic crisis in 2009, 11 member states increased their VAT base rates, with the average rate in the 27 member states now standing at 21 per cent, three percentage points higher than Malta’s.

Tackling the need for more VAT efficiency, the Commission’s report, drawn up by the directorates for taxation and economic affairs, also singles out Malta as one of the member states that needs to increase VAT efficiency.

Malta, Greece, Italy, Austria and Slovakia should work on “deficiencies in VAT collection” that are “driven by a high collection gap that is at least partly attributable to VAT fraud” the report states.

Tax incentives under the present corporate tax regime in Malta are also highlighted as a “challenge” in Malta taxation policy.

According to the Commission, the island has to tackle its “debt bias in corporate taxation” because its system subsidises debt-financed investment via the deductibility of interest payments.

“The debt bias creates economic distortions and leads to excessive corporate debt-to-GDP ratios, with harmful economic effects,” the report says, emphasising that Malta, France, Luxembourg and Greece resort to the system.