There is a huge difference between the amount of value added tax lost to evasion, as quoted in a European Commission report for 2012, and the sum which, according to the Maltese finance ministry, was actually lost.
According to the Commission’s report, the amount lost in 2012 was a staggering €241 million, whereas the finance ministry’s estimate is €34 million. And for last year, the ministry is estimating a loss of €11 million.
The very wide gap between the two figures suggest a serious break in communications. However, with Malta’s tax collection mechanism being described in the EU Commission’s report as one of the most inefficient in the EU, it is no wonder that the finance ministry reacted so quickly to the most uncomplimentary remarks passed on Malta.
What is the reason for the discrepancy? The ministry explains that the Commission has included, as from this year’s report, all exported services supplied by the online gaming industry as non-recoverable VAT when, in practice, the industry is, up to now, exempted from charging VAT.
This sounds quite a valid reason, but how is it that the compilers of the Commission’s report were unaware of such an important matter? Or were they indirectly referring to this when the report referred to “the potential” to raise an additional €241 million.
In the ministry’s view, Malta should actually be at the top end of the list among the most efficient collectors of VAT. Last year, said the ministry, Malta collected 8.1 per cent of gross domestic product in VAT revenues, a record percentage. Even so, the ministry is admitting that “this high level performance does not mean that there is no tax evasion”. Although the amounts which the ministry says are being lost to evasion are not large, no effort should be spared to check abuses.
Many go to great lengths to circumvent established government procedures or any State mechanism regulating behaviour or compliance, especially when these concern the raising of tax or the charging of fees. Tampering with electricity meters is just one example of such errant behaviour.
It is one of the most serious cases of fraud, but there are numerous instances of petty fraud in everyday life, such as when, for example, a route bus driver fails to issue a ticket on the payment of a fare. Such petty cases of fraud are almost taken as par for the course today, hardly worth commenting upon.
The non-payment of value added tax on the purchase of goods and services is perhaps one of the commonest forms of fraud. Large establishments may be easily controlled, but how is the administration going to control the small trader, particularly people who provide home services, such as electricity installation and plumbing? Many of these generally issue two quotations for their work, one of which is VAT free. When the purchaser of the service opts for the VAT-free quotation, as many would, the purchaser is as guilty of fraud as the provider is.
It is not just these service providers that resort to VAT evasion. Restaurants and small outlets do it with impunity as well. Abuse appears to be more rampant in countries where the standard of living is low, or relatively low, compared with that in affluent members of the European Union.
Removing the slur passed on Malta’s tax collection system in the EU report is important, but checking abuse in the system remains well in order.