George M. Mangion writes about the
perceived success of the financial assets registration scheme (or the lack of
it)
 Last
week Times of Malta reported that taxpayers were still undecided about the
amnesty granted by government in order to regularise their tax status. The
assumption is that many of these people will not have declared the principal
neither the interest accruing on those assets nor, in many cases, the undeclared
earnings constituting the provenance of money invested in local banks. Of course
there is also a finicky stack of cash under the proverbial mattress.
The funds registration scheme was launched in the run-up to the adoption of the
euro as Malta’s national currency on January 1. It levies a one-time penalty of
four or six percentage on any amount of currency. No questions are asked on
holdings of eligible assets accumulated out of otherwise undeclared income for
income tax purposes. There is an assurance that no back taxes will be levied and
authorities want to calm people who were honest that they had nothing to fear.
As can be expected there is a sting in the tail for those who ignore the scheme.
Anyone who is caught trying to evade large amounts of cash in pseudo investments
could face criminal proceedings.
Knowing that there is a hoard of over Lm 250m in cash one expected a higher
portion of this amount is declared but after the closure of the scheme last
month only Lm30m were registered. The scheme has been extended by another month.
Many feared that a last minute surge of undeclared cash will gravitate into
purchases like property, amid warnings that this would inflate prices. This omen
of spiraling inflation persists even though it is an open secret that banks have
started to tighten their exposure to developers and medium sized building
contractors. Consistent strong performance in the property sector since
independence has yielded almost double-digit house price inflation. The House
Price Index of the Central Bank of Malta indicates that between 1987 and 2004,
average property prices increased by 10.3 per cent, offering an average return
of 7.8 per cent per annum. This inflation does not bode well for first time
buyers now that rates of mortgage interest have increased.
 So
one would have expected that more people would be disclosing hidden assets and
paying back taxes so far. What went wrong? Why has the scheme has again been
extended by a month?
Could the answer lie in taxpayers prefer to take the risk and opt for a
presidential pardon if they get caught?
In 2000, for instance, a Lm700 VAT-related fine was pardoned, after the tax due
was paid. The highest number of pardons - 109 - was granted in 2005 with 108
pardons, 85 of which being VAT related. The next highest number was 45 in 2005,
followed by the 35 pardons granted in 1997.There is a carrot and stick mentality
here.
Pardons apart, government is warning that this is a one-time no frills chance
to ‘clean’ funds before the euro changeover in less than five months time. The
unlimited powers of the Inland Revenue Department to investigate vast
accumulated cash will cease once the declaration is signed.
Although aggressive marketing by banks promised confidentially, particularly on
deposits in ‘trust’ accounts, one cannot ignore the peril that banks have an
obligation, if asked for the purposes of fiscal investigations, to disclose the
identity of trust lodgments.
Of late ,commercial banks have been promoting trust fund services, a new
facility whereby ‘settlors ‘deposit cash to be administered under a total screen
of confidentiality.
Parliamentary Secretary Tonio Fenech was unequivocal when asked about the zeal
of commercial banks or another financial intermediaries who were having a field
day selling investment schemes to hesitant investors sitting on hoards of
undeclared cash.
He advised all and sundry to register their undeclared funds based on
independent advice from the Central Bank rather than simply investing them in
local banks.
Mr Fenech was quoted by the media to say; “I am preoccupied by the campaign
waged by intermediaries about this scheme. They advised against registration
and, instead, encouraged people to invest with them, saying it was safe.
 When
asked why the take-up was low Mr Fenech replied that some who had hoarded cash
could have, for some reason, feared lack of confidentiality at commercial banks.
Tonio Fenech, warned that the advice to deposit undeclared, untaxed cash in
trusts was not necessarily the best advice.
Again one would have expected more fiscal morality from fat cats owing luxury
yachts berthed in local marinas to come forward and clean the slate. Now even
more as the income tax website gives easy to follow information on how the tax
return may be completed.
Taking advantage of the online tax return facility one can easily work out the
new tax liability based on a full disclosure.
A reformed layout makes it more user friendly to; -
• have the tax due calculated automatically;
• receive an acknowledgement immediately;
• pay online (or through Internet banking facilities of both major local banks)
any tax due; and
• view your tax statements, payments and tax return status as from Year of
Assessment 2003.
With this in mind it is surprising that many small and medium sized entities
were reluctant to register under the funds scheme. The GRTU warned that those
who in the past did not declare their money could get into trouble so they
should avail themselves of this one-time opportunity. Initiatives to siphon off
hidden cash into new investment products were put on the fast drive.
Based on new trust law HSBC launched a number of innovative products such as
trust accounts. This type of account works in such a manner to assure complete
confidence by the trustee and is marketed as safe. Ironically government can
still ask whom the funds belonged to and also investigate under the powers of
money laundering act the sources of cash tucked into trust investments. One feel
that there exists a slight admonishment in the words of Mr Fenech who feels that
investors are badly guided by commission seeking financial intermediaries. But
the parliamentary secretary is confident that the take -up will accelerate
towards the end of August.
By comparison a similar scheme was launched by HM Revenue & Customs, to
regularise non-disclosure of offshore accounts. People with offshore bank
accounts have been warned they have two weeks to declare them - or else.
There has been a last minute rush to beat the June 22 deadline but even if the
number signifying disclosure trebles that would still be less than 5 per cent of
the persons believed to hold offshore accounts. If this assumption is anywhere
near accurate there are thousands of tax evaders out there willing to chance
their arm with government .So far it has been reported in the British press that
there are some spectacular disclosures .A typical example was a fish and chip
shop owner with £1million offshore, a retired businessman with over £3 million
offshore and a doctor who had undeclared £3 million in fees. Starting from 22
June tax authority will investigate people who did not come forward.
So far of the 400,000 account holders, a mere 6,600 people had notified the
Revenue they had not disclosed earnings on deposits held offshore. The amnesty
allows anyone with an offshore account to notify the Revenue by 22 June and then
they have until the November 26 to submit the figures.
They will have to pay the full tax owed, going back 20 years in some cases, plus
interest and a penalty of 10% of the tax due. Anyone who has not declared their
position by 22 June will be subject to a penalty ranging from 30% to 100% of the
tax owed and possible criminal proceedings.
 It
is common knowledge that about 200,000 people have received a warning letter
from HM Revenue & Customs over unpaid taxes on their offshore accounts. Using a
carrot and stick technique did not work in UK as to date, only a small
percentage of those who own money in undeclared offshore schemes have come
forward. A sense of déjà vu sets in and we can be no wiser here as in Malta, the
UK authorities admitted that the response to date “could have been higher”. Time
will tell whether the ‘Santa Maria’ holiday will induce errant taxpayers to
repent and come forward with their hidden treasures.
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