Reaping results in revenue collection

Joe Portelli

VAT head Joe Portelli speaks to RAY ABDILLA about the changing face of tax compliance in Malta

How would you describe the efficiency of revenue from VAT?

Rather than relying on my opinion, I would rather refer to statistics. As you are well aware, however, VAT is relatively new in Malta. It was first introduced in January 1995 under the Value Added Tax Act 1994, was replaced in July 1997 by the Customs and Excise Tax Act 1997, and was re-introduced in January 1999 under the new Value Added Tax Act 1998.

One must bear in mind, therefore, that, apart from having a very short history, the VAT system has gone through various fundamental changes in a very short span of time, and this must have had an important impact on its performance. In fact, the biggest yield during the first four-year period was registered in 1997 when the total net amount of consumption tax (VAT plus CET) collected was Lm84.6 million.

In 1999, it increased to Lm87.3 million, whereas in 2000 total consumption tax shot up to almost Lm107 million. This amounts to a 22.4% increase over 1999. In the same year, Lm105.1 million was collected from VAT only. The amount of revenue collected during January to August this year was Lm73.3 million, which is 6.2% more than the amount of revenue collected during the same period last year and 63.2% of this year's Lm116 million Budget target.
Whether one may consider this as an efficient level of performance depends on the criteria that one uses to measure efficiency. Compared to this years Budget target I would say that the Department is closely on track. If one looks at the amount of VAT collected as a proportion of VAT declared payable, I would say that compliance in this respect is 97.8 per cent or 0.7 per cent higher than last year. On the other hand, if one defines efficiency as a proportion of VAT collected out of the potential tax yield, than one would require a deeper analysis of the relevant data in order to arrive at a fair estimate. Judging by the sharp increase in VAT revenue during 2000 over 1999, I would say that this should reflect a relatively high level of efficiency.
Was it a problem changing from CET to VAT?
I would prefer to describe it as a challenge, and a great one in that respect, especially since it had to be accomplished on so large a scale and in so short a time. The introduction of three different tax regimes within the short span of four years can hardly be described as a normal affair even if one had to ignore external factors.
Suffice it to say that, each time, changing from one regime to the other entailed the preparation of a completely new set of legislation, the development of a completely independent IT system and a complete re-organisation of the Department's organisational structure and methods of work. The task acquires bigger proportions when one considers that the Department had, and to a lesser extent still is, running three tax regimes at the same time, let alone the refund schemes on existing stocks that had to be employed at every stage. In this respect I would say that it was a breath-taking experience and a very exciting one too.
On the other hand, I would also say that it was a healthy experience from which a lot of good has finally emerged. For instance, under the new VAT regime, a number of measures have been taken which make the system more user friendly, and at the same time more effective, something that I believe has made the system more acceptable to business operators as well as the general public. Looking back through this experience I would say that the biggest satisfaction is that the Department has in all instances managed to rise to the occasion and accomplished the task successfully.
What would you consider as the main administrative problems facing VAT?
Again, in my opinion, once a problem is identified and a proper solution is available, than it essentially becomes a challenge. The main challenge with VAT, as in all other taxation systems, is to induce as much as possible voluntary compliance among taxpayers, and an efficient administration is obviously an important factor in this respect. For this reason, during 1999, the Department embarked on an ambitious project to set up a one-stop-shop customer care service area within the department.
This is actually a mini department comprising all the functions relating directly to customers. It is actually housed in a separate section of the building. In this way the Department has not only managed to enhance the quality of service to customers but also to reduce as much as possible the disruption in its proper functioning during public hours.
This initiative was followed, in January of the following year, by the setting up of the Department's Quality Service Charter. Essentially, the Charter establishes the benchmarks by which the Department is expected to render its service to customers.
Is VAT in conformity with EU Directives?
Basically yes. The VAT Act 1998 generally conforms to the main provisions and principles of the EU Sixth Directive. Thus, the VAT is a tax on supplies of both goods and services made for a consideration in the course of an economic activity carried out in Malta. It is charged at every stage in the business chain, from the production stage to the point of sale to final consumers. It is a non-cascading tax since suppliers charge VAT as a percentage of the full sale value of their supplies and claim back the tax charged to them on their purchases. No VAT is charged on exports and on supplies of goods and services consumed outside Malta, whereas input VAT on the cost of such supplies is recoverable so that VAT is charged only on local consumption.
However, since Malta is not yet a member of the EU, the VAT legislation does not yet incorporate the provisions laid down in the EU Directive concerning the abolition of fiscal frontiers within the EU. These provisions apply to EU Member States only. Once they are included in the VAT legislation, this would mean that supplies coming into Malta from other Member States would no longer be considered as imports. VAT on such supplies would therefore no longer be charged at the point of entry but at the point when such supplies are eventually sold in Malta.
Certain other differences between the national VAT legislation and the EU Sixth Directive concern the tax status of a limited number of supplies. These concern mainly the supply of food, pharmaceuticals, printed matter, passenger transport, water and electricity. In this regard, Malta is requesting a derogation from the Sixth Directive to retain their present tax status under the VAT legislation.
Many used to say that VAT refunds were being mishandled. Have the necessary steps been taken to address this problem?
I don’t know of so many people who used to say that VAT refunds were ever mishandled. As regard the refund of excess credit on inputs, I can assure you that any refund which is due is paid within the due date established by the VAT Act 1998. That is, by not later than five months from the expiration of the time allowed for the furnishing of the tax return for that tax period or from the day on which the said return has been furnished, whichever is the later. During 2000, the monthly average of excess credit paid out by the Department under the VAT Act 1998 was in the region of Lm1.65 million. Between January and August this year, it was Lm1.77 million.
Doubtless to say, the Department regularly monitors claims for refund of excess credit and where it suspects that an over claim has been made, the Department withholds that refund until proper investigation is carried out in terms of the VAT law. Whether monitoring such claims could be described as mishandling is a matter of opinion. As far as the Department is concerned, regular monitoring of claims and investigating such claims if and where required is a matter of duty.
How many VAT inspectors are working day and night to check evasion?
The duties of VAT inspectors need first be explained as one may have the wrong impression that the duties of VAT Inspectors rest with the checking business operators regarding their obligation to issue fiscal receipts. In actual fact, the duties of VAT Inspectors are much wider as they also include the regular auditing of business records in connection with any under declaration of output VAT or over declaration of input VAT. During 2000 alone, the number of cases covered by VAT Inspectors alone was over 4000, resulting in more than 1,400 assessments together amounting to Lm1.06 million. Needless to say, there is a whole spectrum of tasks connected with such work, ranging from the regular monitoring of tax returns and the sifting of cases where tax is suspected to be at risk, to defending the Department's decisions before the VAT Appeals' Boards or at Court.
At present the complement of VAT Inspectors is around 60. A group of inspectors are assigned outside duty regarding the proper issue of fiscal receipts, the proper functioning of fiscal devices and the proper keeping of tax records by businesses. Another group is engaged in conducting audit investigations and raising the relative assessments. Other inspectors are concerned with the registration of businesses, the maintenance of the taxpayers' register, the sifting of suspected cases, customer service, the review of objections regarding assessments and procedures concerning Court action.
Has the businessman come to terms with VAT or are there still a good number who try to evade this tax?
It is not easy to quantify the extent of evasion unless the proper data is available in good time, although with the benchmarks now being established by the Tax Compliance Unit, this information should be more readily available.
Yet one could have a fair picture of the situation by referring to compliance indicators. Briefly, the Department receives and processes around 300 new applications for registrations of new businesses each month. It also carries out about 200 interventions monthly in the IT system for the maintenance of taxpayer's data. This is in itself an indication that persons who decide to set up a business normally come forward to register their business with the Department. In any case, any permit to open a business normally requires that the new business be registered with the VAT Department in the first instance.
Another indication of compliance is the number of returns which are actually submitted to the Department by due date as a proportion of the number of returns which are due to be submitted. In 2000, the average ratio taken as on due date was 84.5 per cent. After say six months from due date, the ratio would normally increase to around 96 per cent, and this is mainly the result of the enforcement measures the Department would have taken by that time, which action would very often include Court action. The residual four per cent of defaulters is mainly due to businesses that become inoperative and would therefore have normally submitted an application to be cancelled from the Department's registry.
Compliance in terms of actual tax receipts as a proportion of the amount of tax declared payable is in the region of 98 per cent.
Considering the above, one can safely say that the Department manages to attain a relatively high level of compliance. Yes, I would therefore conclude that more and more taxpayers have come in line with VAT regulations since VAT was introduced for the second time in January 1999.
Does VAT deter people from starting new businesses?
No, I don’t think so, and definitely it should not. VAT is a consumption tax and under normal circumstances it is neutral to businesses. On the other hand, one may have the impression that the system may impose a heavy administrative burden on businesses because of their obligation to collect tax and account for it.
In this regard, a number of measures have been introduced in the new VAT legislation in order to simplify procedures as much as possible. I can mention, for example, the Small Businesses Scheme which exempts small businesses operating below certain turnover thresholds from their obligation to collect VAT. Another scheme gives the option to certain businesses (retailers, professions and contractors) to account for VAT on a cash basis, thus ensuring that VAT is not a burden on their cash flow. The Compromise Fine Scheme, whereby defaulters may be given the option to pay a reduced fine in lieu of a Court sentence, is yet another useful measure.
Another recent measure which merits particular mention concerns large development projects wherein the developer may be given permission to account for VAT in lieu of the contractor engaged on that project in the same manner as the reverse charge mechanism is applied in the case of foreign service providers.
The primary objective in this case is to reduce as much as possible tax in danger, but the scheme also serves to relieve the developer from cash flow problems since any refund of excess credit would immediately be set off upon the submission of the relative tax return.
Measures aimed at simplifying procedures in the indirect taxation system is a continuous objective of the Department as we believe that such measures would encourage a higher level of voluntary compliance on the part of businesses.