Taxes are a pain. Most people want to enjoy maximum tax relief and pay as few taxes as possible. However, many, either out of fear of sanctions or because of a genuine civic commitment, avoid breaking the laws against tax evasion.
Unfortunately, Malta has one of the worst records in the EU for tax evasion and tolerance of the shadow economy – two phenomena that are closely related.
Those working in the shadow economy do not pay national insurance. Their employers often do not charge VAT and do not declare their full income.
The Johannes Kepler University of Linz in Austria conducts regular studies on the shadow economy within the EU and other countries. They rank Malta in the eighth place in the world for the size of its shadow economy. With our shadow economy accounting for 24.3 per cent of GDP in 2015, we are ahead of other southern European countries like Italy, Spain and Greece.
The European Commission’s latest ‘Taxation Papers’ – Estimating International Tax Evasion by Individuals – reveals other aspects of the Maltese allergy to paying their tax dues. According to the data in this paper, Malta’s loss to international tax evasion in 2016 amounted to €230 million.
We have the unenviable record of topping the list of countries with the highest ratio to GDP of the level of revenue lost to international tax evasion. The same report estimates that the Maltese have a staggering €5.2 billion of undeclared money in offshore centres.
The Panama Papers scandal raised consciousness in the corridors of power in Brussels for the EU to tackle this problem with more determination and commitment to bring about change. The same cannot be said about the commitment of the local authorities when they closed both eyes to attempted tax evasion by senior political figures still serving in this administration.
The laissez-faire attitude of the government led to more collateral damage as international institutions like Moneyval and the ECB increased their scrutiny on Maltese banks and their inadequate anti-money laundering processes.
One needs to ask the question why northern Europeans in countries like Sweden, Norway and Ireland have a lower propensity to evade tax than their southern counterparts. This is a complex issue. Cultural attitudes could be one reason. Sweden has one of the highest tax regimes, but they have some of the best social services in the world.
The Swedes pay their taxes because they know that they finance the excellent public services they cherish. A more plausible explanation is that tax evasion proliferates where the political and regulatory authorities have little appetite for enforcement of anti-financial crime legislation.
In Italy, the present coalition government is squabbling about whether to impose harsher prison sentences on those who evade tax on a massive scale.
Another tax amnesty is arguably not a useful tool to make tax evaders realise the heinousness of their crimes against society. This solution amounts to a moral hazard where people take risks today by not paying their taxes in the hope they will soon be rescued from severe sanctions by paying a fraction of what they should have paid in the first place.
Rather than increasing vigilance in the Nothing-To-Declare gate at the airport, the government should focus on catching and sanctioning the big-ticket tax evaders by modern financial crime detection techniques.