The government should tax all dividends at the same rates as other income as from base year 2013, sources told Times of Malta Business.

The Labour government decided to go ahead with the reduction of the 35 per cent rate to 32 per cent in 2013, 29 per cent in 2014 and 25 per cent in 2015, which will mean an estimated reduction in tax collected of €45 million over the three years.

But shareholders who fall into the new 32 per cent bracket are still going to being taxed at a rate of 35 per cent and are upset at the three per cent shortfall in their refund. And they will be even more upset when the shortfall widens to 10 per cent in two years’ time.

The problem is that there are currently hundreds of millions in the reserves of companies – most of them family-owned private companies – built up over decades, on which tax has been paid provisionally at the rate of 35 per cent.

Although it is unlikely that all the reserves ever would be released, the sources said that a prudent estimate would be €50-60 million could be released as dividends.

This means the government would have to give a refund to any shareholders receiving the dividends who fall into a tax bracket of less than 35 per cent. And the creation of the new 32 per cent tax band will mean the government pays out more than it had anticipated.

“But there is a political solution which would make the situation fairer for shareholders while at the same time ring-fencing government revenue – at least to an extent.

“What if the government were to draw a line and say that only dividends paid out from the reserves set aside prior to base year 2012 would be taxed at 35 per cent, but that as from base year 2013, shareholders would get the full refund on dividends depending on what tax bracket they fall into for their total income?”

Of course, for every action there is an equal and opposite reaction, and the policy could spur companies to retain fewer profits, preferring to pay higher remuneration to employees and directors or to invest in capital expenditure.

“Companies would save on their tax bill in this way. But it will mean more disposable income poured into the economy,” the sources said. “So what the Inland Revenue Department loses from one side, it will gain through economic growth on the other.”

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