Finance Minister Edward Scicluna.

A Bill has been drafted changing a number of fundamental aspects of the penalties for VAT defaulters. The changes were announced in early June by Finance Minister Edward Scicluna, who said that an enabling law would be drafted allowing changes to be made through legal notices rather than through new legislation. The way in which fines and interest accumulate has resulted in the penalty sometimes becoming higher than the tax due, making it very difficult for defaulters to ever catch up.

One of the main changes he announced would be that any payment made by individuals or companies in default would be apportioned towards the tax due first and only once that is cleared would it be used towards fines and interest, reversing the current system. The minister also extended the VAT amnesty to November 2013.

Robert Attard, EY’s Tax Policy Leader for Central and Southern Europe, explained why major changes are necessary.

Do you think that the Maltese pay a fair share of taxes?

From a purely legal angle, our tax rates are fair. The top marginal income tax rate is 35 per cent, compared to Belgium’s 50 per cent. Our stand-ard VAT rate is of 18 per cent, against Sweden’s 25 per cent.

The tax rates are not confiscatory and, unlike that of other countries, the Maltese tax system does not contemplate wealth taxes. At the same time, our tax rates conceal draconian penalty regimes which tend to create an excessive burden on taxpayers.

What about penalties?

I am aware of tax bills where the administrative penalties and punitive interest account for well over 100 per cent of unpaid tax. Criminal penalties resulting from VAT can shoot up to 1,000 per cent.

A person who fails to issue a VAT receipt is liable to pay a penalty of 10 times the tax which should have been charged on the supply. This severity is compounded by the fact that infringement triggers two or more sets of penalties.

And of course penalties can be administrative as well as criminal, so basically a person who falls foul of the law faces two penalties for the same offence. Worse still, in the case of VAT, payments made are appropriated to interest before being appropriated to tax due. I am aware of a number of cases in which lawyers for taxpayers have used the term ‘usury’ to describe the current penalty system.

Such draconian laws are creating a legal regime which is irreconcilable with the legitimate right to run a business

But isn’t the rationale behind high tax penalties to deter and punish tax evasion?

Of course, tax penalties are necessary. It is the dose which can turn medicine into poison. Tax penalties have a tendency to be disproportionate and retributive. Furthermore, tax penalties are currently imposed in a one-size-fits-all fashion, ignoring the good faith of certain taxpayers.

Are our courts equipped to deal with current challenges?

I believe that they are and I am favourably impressed by recent judicial efforts trying to make the system fairer, but you cannot expect the judges to rewrite a tax adjudication system. That is the legislator’s job.

So you are quite critical of the law but full of praise for the judiciary which applies it. Can you elaborate?

The Administrative Review Tribunal works very efficiently and its decisions are widely seen to ‘make sense’. The Constitutional Court has been very creative in finding solutions and has deve-loped a number of principles which make the system fairer, but the law is what it is.

Can the courts solve all the problems?

No, they cannot. The Administrative Review Tribunal is working extremely well but the laws need to be changed. Directors’ personal respons-ibility in income legislation, for instance, is defined too strictly. Company directors who fail to pay tax due on salaries should not be found guilty if they prove that they were not involved in the mismanagement of funds. Such draconian laws are creating a legal regime which is irreconcilable with the legitimate right to run a business.

At a glance

The law currently sets a fine of 0.75% of the amount due for each month or part thereof. This is to be changed, giving the minister the discretion to set the rate.

The administrative penalty has been capped at €250 or 20 per cent of the excess of the output tax over deductions, when the excess is under €2,000 or over this amount respectively. These caps also apply to tax chargeable on intra-community acquisitions and services received.

The daily fine for failure to provide returns etc. will be reduced from between €5 and €20 a day to €5 a day.