PKF suggestions for 2016 Budget
These proposals can be implemented individually or as part of other reforms that may be in the pipeline
PKF wishes to contribute its part towards the next budget implementation and for this purpose it has researched new areas which in its opinion warrant attention by the government during the public consultation period. The proposals are headed under separate titles and can be implemented individually or as part of other reforms that may be in the pipeline. PKF is a medium sized audit and consultancy firm and prides itself that it is agnostic of political affiliations so it hopes that due consideration is taken by the budgetary officials to seriously evaluate the merits of each proposal.
It is encouraging to note that the government debt is expected to end this year at 69% (as a % of GDP), a reduction of 1.1% from last year. If the deficit targets will be met in the future, government debt will fall to 67% and 62.7% in 2016 and 2017 respectively, this being marginally short of the recommended maximum threshold of 60%.
Credit rating agencies and IMF
Standard and Poor’s in its 2015 report noted high economic growth prospects to continue in future years, alongside budget consolidation measures to reach the targets. S&P notifies of the high costs of borrowing that the government is incurring, being the interest paid on its bonds. On a positive note, the majority of bonds issued by the government are purchased by locals, hence this serves as a transfer of income from one group to another.
Moody’s in the October 2014 report highlighted the fact that there are three main factors that affect Malta’s growth: Inefficiencies in the labour market; Inefficiencies in the energy sector; Facilitate access to work (mostly women and youth).
Some measures to reform the barriers to growth were implemented in 2015, although there are doubts whether they are sufficient.
Suggestions: The government is advised to invest further in education and combat ‘early school leavers’ through training programmes in order to develop their skills. In doing so, it helps reduce the “skills gap” about which employers complain they face when recruiting in Malta. The ‘Youth Guarantee’ programme had been successful in the previous year and further spending on this programme is advisable.
Attracting more females in the labour market had been noted both by Moody’s and S&P. After last year’s success of the ‘free childcare programme’, being a relief for women to enter the labour force, there are still barriers that lead women not to work or not getting employed. In this context, PKF is undertaking a scientific study in collaboration with the ETC, NSO, GRTU and Chamber of Commerce to analyse the problem and come out with practical solutions.
It is recommended that no effort be spared to realign the time schedule for after schools hours during which pupils/ students will be given extra curricular tasks and for example they can choose to play or learn new cultural topics or better still how to extend their skills in foreign languages and computer science.
More parking in city centres can be released if parking meters are installed to run against an hourly fee in a scheme administered by local councils.
S&P in its 2015 report said that, “The low corporate tax rate has attracted significant foreign investment into Malta’s banking, insurance, and gaming industries.”
Cyprus, having the financial services industry as one of its pillars has recently undertaken tax reform programmes, aimed at attracting Foreign Direct Investment (FDI). Cyprus’ tax refunds are aimed at attracting wealthy individuals to invest in their economy.
Suggestion: To conduct a study on the impact of Cyprus’ tax refund system on Malta’s IIP. If it is found that there has been a substantial drop, it would be ideal to revise the IIP conditions, hence making it more competitive in the global market. This may possibly extend the concession of tax refunds to IIP holders if they invest locally .
In Malta, a 12% capital gain tax is levied on the sale of property when in contrast we find how Cyprus has revised it and there is no capital gain tax on property, aimed at boosting the property market. In any future tax reform one has to keep in mind the disincentive of this ad valorem tax on the thousands of vacant properties which lie idle and abandoned in core city centres.
Suggestions: Reintroduce a proper capital tax on gains and remove the ad valorem scheme on vacant properties in order to boost the real estate market, hence reducing the thousands of elderly people registering to stay in State run private homes.
Infrastructural assistance through transfer of income to those individuals opting to purchase a property which had been vacant for a good number of years over newly built ones. This incentive is to mitigate additional expenses that an old vacant house brings along, acting as a barrier for individuals in deciding whether to choose between renovating an old house or building a new property. In doing so, the government slows down the pace at which new houses are constructed on virgin land thereby releasing pressure on ODZ land and slowly leading towards re-activating city centres
Base erosion and profit shifting (BEPS)
Base erosion and profit shifting is a global problem which ultimately requires a global solution. BEPS relates to the activity of engaging in tax planning strategies with the sole aim of exploiting gaps and mismatches in tax rules in order to ultimately shift profits to low tax locations resulting in little or no corporate tax being paid.
Quite often gaps can be found in national tax laws which could be easily exploited. The aim is that profit is taxed where the actual economic activity generating the profit is performed. BEPS aims to avoid any double taxation for companies operating in different countries.
Suggestions: Increase resources for the Tax Compliance Unit and International Tax Unit within the ministry of finance, which oversees tax evasion/avoidance and vets applications for eligible tax refunds.
Increase criminal investigations on complex tax crimes: Be able to access more data to identify businesses that are not currently declaring or paying tax. Clamp down on organized activities in relation to unregistered tobacco, gambling and alcohol trades. Increase sanctions and penalties. (Publishing the names of the people who are repeated users of tax avoidance schemes.)
P2P Lending and tax advantages
One of the country-specific recommendations given to Malta in the latest report of 2015 is to ‘improve small and micro-enterprises’ access to finance in particular through non-bank instruments’. The P2P lending is an innovative way how lending and borrowing can take place while bypassing the banking system, the latter acting very risk adverse on start-ups.
Although loans from P2P might attract higher interest rates than suggested by ECB on conventional loans from a bank, these are likely to be less bureaucratic and should qualify for lower loan execution fees.
Suggestions: The activity of P2P lending should be promoted and facilitated through legislative measures which are to be updated to encourage venture capital to specifically promote P2P lending whilst safeguarding borrowers and investors.
Further to this the government should offer tax incentives to investors so that they will be incentivized to lend money via new platforms, e.g. crowd funding.
P2P may be used as a way of complying with specific recommendations, such as promoting shadow banking finance and establishment of a Development Bank for long term capital projects such as aircraft financing, film production and even sustainable land reclamation ventures.