€5b in uncollected tax: Legal Notice is way to start changing mentality – Caruana

Last Updated on Tuesday, 23 November, 2021 at 1:10 pm by Andre Camilleri

Finance Minister says government has been used as an overdraft by businesses

A Legal Notice that allows tax defaulters to offset their dues against property sales tax is not an amnesty but the first step towards a change in mentality and towards starting to recoup some €5bn the government is owed in tax, Finance Minister Clyde Caruana told The Malta Independent on Sunday.

This newsroom spoke to Caruana about Legal Notice 419, which has been dubbed by the Opposition and some constituted bodies as an “amnesty”. They say the scheme discriminates against law-abiding citizens who pay their taxes on time.

But Caruana insisted that this is not an amnesty and neither is it intended to favour some sector or the other. Instead, he says, this is a way of incentivising people and companies to pay money that has been owed to the government for years.

Caruana said he was surprised by the recent criticism, saying he had already announced plans to help government collect tax arrears way back in March.

“Back then, I had said that government was aware that some companies were having liquidity problems and we introduced a number of measures, such as the tax deference scheme. I had also said that some of these companies with cash flow problems were rich in assets, like property and land. We decreased the tax on property sales in a bid to incentivise them to sell off some of their assets and generate the cash they need to settle their tax bills.”

Caruana said that, despite this measure, not much enthusiasm was shown, with individuals and companies owing money to the taxman showing “no real interest” in paying their dues.

In a bid to get things moving, government announced in the 2022 Budget that the tax on arrears will increase from 3.6% to 7.2%.

‘Incentive, not amnesty’

“In no way are we writing off their tax dues, penalties or interest. When amnesties used to be given in the past, tax arrears were written off. I am not doing that. What I’m saying is that we are giving an incentive to those who are asset-rich but have cash flow problems. This is an incentive, not an amnesty.”

Caruana argued that this was a win-win situation, where government would be recouping tax dues and those paying the tax would not end up in an even more precarious financial situation.

“Simply put, if they do not sell their property they won’t be able to pay their tax dues and government will not collect a cent from the money owed to it,” the finance minister said, adding that he is “not cancelling anything from the government balance sheet”.

Caruana was asked to explain in more detail how the scheme works.

Generating cash to pay tax

“Let’s say someone owes half a million euros to the government and they sell a plot of land for half a million. Government takes its half million, but it doesn’t charge the person the tax owed on that property sale.” He added that the tax owed in such a case, would be a small percentage of that €500,000 transaction, so the amount being “forgiven” would be much less than the amount being paid in arrears.

“If we don’t do this, the tax owed to government will never be collected. Some companies are a bit cash strapped right now, so collecting their dues would take a very long time. And there’s a cost to that – if government doesn’t collect tax, it would in turn need to borrow more and pay interest on those loans.”

On the argument that this scheme discriminates against people who pay tax on time as well as on cash-strapped companies that have no assets to sell, Caruana remarked: “So should we give an amnesty to everyone? In any case, this is not amnesty. We are simply helping those who have assets to dispose of them in order to generate the cash they need to pay their tax dues.”

Caruana again noted that this was not a new idea. Government had embarked on the first step in March when it decreased property tax. “We wanted to test the waters to see what willingness there was to pay due taxes. We dangled a carrot, but this did not have any results. It was clear that those who owed to the government had no interest in doing so. This is why in the Budget we decided to increase interest on arrears from 3.6% to 7.2% in 2022.”

“I hope that people don’t start complaining that we are doing too much to get people and companies to pay their taxes. We have to decide what we want. The Opposition has accused me of discrimination in this case, but had labelled us as a party of usury when we increased the interest rate on due taxes. They need to decide what I am.”

In comments to Times of Malta this week, the Finance Ministry said the social partners who are complaining now, had not complained when they had been consulted in March. Pressed further on this, Caruana said the Chamber of Commerce had quoted him on its own website and his speeches had been reported in the press. “I was very clear back then. I did not try to hide this and it is unfair to say that this scheme was introduced in a hush-hush manner. Back then, no one complained.”

Asked why the complaints were coming in now, Caruana said that “it was either that no one was paying attention back then or else there is a political agenda”.

Government ‘used as an overdraft’

Caruana said that, over the years, government has been used as an “overdraft” for business.

“If you don’t pay tax, the penalties and interest are much lower than what they would be if you would default on your loan or bank overdraft. So they ‘borrow’ money from the government instead.  Some people racked up huge tax bills but at the same time became asset rich.”

The tax due can include income tax, National Insurance and Value Added Tax. Asked why government was introducing a scheme that helps individuals and companies who have potentially defrauded the state and their employees by not paying their N.I. contributions, Caruana said: “I understand what you’re saying, but there is a choice to be made. We can either look the other way and fail to collect dues like previous finance ministers did, and just forget the five billion euros, or we actually do something; not only on what should be collected from now onwards but also on what should have been collected in the past.”

“Some people might argue in favour of a more hard-line approach and tell you to start jailing people over uncollected tax. If we were to go for that approach, arresting people and confiscating assets, there are so many people involved that everything would come down. I have to decide between this terror approach, which leads us nowhere, as tax will remain uncollected or start a process that will start to change the way this country thinks.”

More to come on tax collection

The Opposition has said it will file a Parliamentary motion to have the Legal Notice withdrawn. Asked if he was adamant on keeping this scheme in place, Caruana expressed his conviction that the scheme is the right approach.

“There will be strong attempts to stop us from changing things in this country, so that due tax will not be collected. It’s easy to speak up in favour of tax evasion, but when you actually come to it, people will start attacking you because it affects them. I’m standing my ground on this.”

“Before the budget, during the consultation, some people called for an amnesty. But I said ‘no way’; I will not give an amnesty to people who want to pay their tax dues. I want to see that dues are collected.”

Caruana said he is sure that there will be future attacks on other efforts by the government to collect tax arrears but assured that there is “more to come on tax collection”.

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