Cash-strapped developers are complaining they are being faced with hefty fines by the taxman for slashing property prices.

“Developers are being punished for selling properties at a lower price than the market value. We have been alerting the authorities about this problem for quite a while now. We have to find a system that eliminates this,” Malta Developers Association chairman Michael Falzon said.

The tax regime has been unchanged for years, but the slump in the market opened more opportunities than before for serious price reductions, Mr Falzon explained. Moreover, many developers have banks breathing down their neck for money and, therefore, are practically forced to sell out in some cases.

A developer, who spoke anonymously in view of pending appeals against valuations made by government architects, said the situation was costing them serious money, not only in terms of the fines themselves but also because the issue could jeopardise the deal.

He said he recently sold a three-bedroom maisonette in Għargħur for €293,000, which was an advantageous price, considering the locality and the top-notch property it was. Soon after, he had a government architect knocking at his door valuing the property at €350,000 and slapping him with a €3,000 fine.

This is on top of the tax that has to be paid, which stands at five per cent of the property’s value. He said he had to pay €17,500 in tax rather than €14,650.

“This situation is very common in our circles but now it’s hitting harder because the demand for property is on the decline. The architects’ valuation is very subjective because there is nothing to go by. In fact, I appealed and the second architect gave me a different valuation. This is a circus,” he said.

Mr Falzon, an architect by profession, said the system was exasperating an already dreary situation for developers, some of whom had considerable stocks of unsold properties.

The association is proposing to do away with valuations and have property transfers taxed in line with a standard set of rates established by the government. The rates could be per square metre, depending on the area where the property was situated.

“Establishing such an index and using it as a basis for taxation is the only realistic and serious way out. This would avoid the present shambles and uncertainty in the system and the vexation of whoever buys or sells property, as the final amount of taxation due as a result of the sale would be established beforehand,” Mr Falzon said.

While the Finance Ministry said it was willing to consider alternatives to the present system, which it described as an “effective tool to curb tax evasion”, the “proposals made so far give rise to more problems than solutions” because the tax amount could scare buyers.

A ministry spokesman added that “the system is policing developers in what they declare for income tax purposes and, possibly, this is what is really concerning them”.

Mr Falzon disagrees, saying that while it was true that the present system was launched when under-declaring in contracts “was rife”, nowadays this was happening “on a much smaller scale”.

“Since then many measures were taken, including by the government, to curb under-declaring – and the economic situation has also changed. The present system is doing more harm than good,” he insisted.

The ministry spokesman also dismissed any link with the affordability of properties. “The government’s role is surely not that of intervening in the market and prices should reflect demand, a basic economic fundamental,” he said.

He added that the records showed that only a third of properties sold were actually inspected and more than 65 per cent of these were found to be compliant.

“(This) proves that architects’ valuations are close to market realities,” the spokesman noted.