George M. Mangion | Wednesday, 23 April 2008

Welcome start-ups not upstarts

Six weeks after the election results and there is a feeling of anticlimax among small and medium sized enterprises that hoped for reforms to improve their lot.
Granted that the winning party has stretched its list of promises to cover over 350 items, some of which may take years to flourish while others can happen soon.
One of the items hitting the newsstands is the training aid framework launched by the Employment and Training Corporation. This was announced recently at a seminar for Gozitan businessmen. What is new here?
We heard politicians promising a long list of structured aid programmes in the past most of which failed to reach their goals mainly due to the excessive barrage of bureaucratic rules. This time we are putting our money where our mouth is and there is an allocation of €13 million spread over a seven year period, which, as can be expected, is partly financed under the EU’s Structural funds.
Is this what we have been waiting?
The answer is definitely in the affirmative since the cry for assistance from beleaguered SME’s is growing louder in intensity. Matters have been exacerbated by the inordinate increases in fuel and the electricity surcharge amidst a domestic run to dip into an ever shrinking cash lake.
The ETC scheme did not arrive a moment too soon. It is designed to encourage job creation with direct aid to employers who employ and train existing or new employees. Has it worked in the past? It seems so since the year ending September 2008 training programmes were availed of by 804 workers with a range of course subjects starting from office skills to basic skills.
Since the old Socialist days we all remember the battle cry from politicians to woo mega industries. In the mid seventies the slogan was the wonder Chinese designed companies employing a thousand. Now we have the drums rumbling high on the SmartCity mega project. The kudos and admiration is all for the big and mighty. SME’s can wait while the multimillion dollar projects take precedence in the hall of fame.
Yet the time to reconsider the small and medium sized is the next item on the EU agenda. Brussels is piloting a Small Business Act. Triumphantly Minister Tonio Fenech has embraced the law agreeing that about 95% of local businesses are medium or micro enterprises.
A sense of déjà vu sets in when one is reminded that the EU aims to reduce the administrative burden and cut red tape. Have we really cut deep in our ingrained bureaucracy or did this behemoth grow back its severed tentacles to arise from our feeble pruning.
How many times we were promised that SME’s will be exempted from VAT form filling and granted a reduced and simple corporate tax rate that will encourage better disclosure and combat evasion. Instead the recent tax amendments to the new sources of income has exacerbated matters particularly the desire by the exchequer to collect data on small traders involved in the plastering, electrical, plumbing or other trades even remotely connected with immovable property. To be more specific one reads in a recent legal notice that when any person is registered in terms of article 48(4 a) of the Act and this for the purpose of claiming his or her right of a tax refund then new rules apply. These rules are complex but their main aim is to segregate the allocation of profits previously allocated in the Maltese Tax and/or its Foreign income account from any distribution so as to ensure that it equates to the correct percentage entitlement. There are further twists to the new rules which shall not add much joy to entrepreneurs trying to cope with more pressing production, marketing and cash flow issues.
Starting from 1 January of last year there shall be born to the stable of tax accounts two new thoroughbreds. These shall be christened the final tax account and the immovable property account. To add to the brew of alien concepts one now needs to segregate any profits derived up to 31 December 2010 by an existing shop owner which would have been allocated to the pre-2007 ‘foreign income account’ had such profits been brought to charge in the year of assessment 2007.
Taxpayers can thank heavens that they can opt to skip all this misery if they elect to be treated as a new ‘company’, one registered after 1 January 2007. So one may ask why all this computational chore not been left to start as from next year thus giving time to the hapless SME’s to gain time and confidence with the labyrinth system.
The answer is not so heart warming as in fact the five chapters are now all encompassing. Expect fire and brimstone to be evoked if profit allocations get into a twist. The order of allocating distributable profits now preempts the Final tax account and than the immovable tax account, next marshes the foreign income account and finally but not least the repository untaxed account.
For those who ask what the immovable tax account would encompass the official definition says it is the taxed account to which distributable profits which have suffered tax and which are not allocated to the final tax account calculated in such a manner as may be prescribed.
If one gets further baffled and wishes to be enlightened as to what does the ‘Final’ tax account holds in store then the answer is not so simple. Final means income which has been subject to 15% FWT together with any rents subject to the 5% FWT (Housing Authority schemes) alongside with - ITA/ITMA LN49 of 2005- Sale of Agricultural Produce rules, 2005 with income arising under - ITA-Article 5A-profits subject to 12% FWT (immovable property), any investment allowances, exempted income and finally any income relieved by tax credits.
Have a gasp of air before you choke and the hackneyed advice not to burden small enterprises with rigid regulations sounds hollow. I wonder how GRTU has not caught up with this law. One expects them to voice their concern at least to apply for a dispensation not to apply the law retrospectively. So moving on with the subject of helping start-ups we can look around us and compare the dire position of SME’s in Italy struggling within its beleaguered economy.
Following the election of the centre-right party led by the ebullient Berlusconi we read in The Economist that a lot of water has run under his bridge. Will he be brandishing his magic wand to evoke the first miracle of Italian medium enterprises which was evident in the early 1950’s?
That epoch gave birth to the golden era of an industrial boom that brought prosperity to the country’s northern and central regions. Family-owned firms developed capital-intensive steel, automobile, tire, and chemical industries, among others. Entrepreneurs focused on textiles, machinery, food processing and the State built the massive infrastructure of transportation and energy.
During the 1980s, Italy enjoyed its second economic miracle. There was a drive to kick-start Italy’s export-driven economy. Small and medium sized companies producing clothing, leather products, shoes, textiles, furniture, jewelry, and machine tools for export, led the boom. By the early 2000s, inflation and social tension were escalating. Violent protests erupted as trade unions and university students demanded more benefits from the political establishment.
The parallel with Italy’s woes is compelling. In our case medium sized entities are feeling the chill of the oncoming global recession. Once assisted they can maintain their existence and even possibly add marginally to their number of employees. They need proactive help and not rhetoric alongside unfriendly banks asking for collateral.
This looks like a paradox without a solution. On the surface last year the local economy was booming thanks to increased productivity, more tourists and a feel good factor.
But this façade of prosperity hid the truth of a weak macroeconomy. Like Italy we need to roll up our sleeves and greet start-ups. The sad truth is that very slowly our internal inflation and labour costs will soar due to external factors and redundancies will follow. We must watch out for upstarts and weed out our garden.

George M. Mangion
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