€5.3 billion in income tax and VAT deemed ‘uncollectable’

Almost €1.2 billion in unpaid income tax is considered “uncollectable” in Malta, according to a National Audit Office analysis of tax arrears that says the government is now chasing over €422 million in taxes owing to the State.

And the massive figure of arrears owing to the State grows exponentially when it comes to VAT, with over €4.5 billion left unpaid and at least 92% (€4.1bn) now considered to be not collectable by the VAT department.

The figure includes penalties and relative interest generated when a taxpayer fails to submit a VAT return by the due date.

As reported in previous years, the highest instance of non-collectable taxes relates to that owing by self-employed individuals, with €621 million out of gross arrears of €772 million, or 80%, being deemed uncollectable.

Another €137 million is owing from the pre1999 system of self-assessment (90%), which is also deemed uncollectable.

A further €150 million in FSS income tax (70%) and €170 million in class 1 social security contributions and €119 million in class 2 contributions, are also deemed not collectable.

An audit is currently underway with the eco-contribution approving body, under the ministry for environment, which has yet to collect €5.8 million from accommodation and another €513,000 in eco-taxes related to recycling.

While various government departments had made substantial collection efforts for outstanding debts, the NAO remains concerned on the substantial amount of arrears, approximately 85%, that are estimated as not collectable.

“Whilst prudence is important in the reporting of these figures, NAO reiterates once again that it is also imperative that a true and fair picture is given of the amounts owed to government.”

The European Commission’s latest VAT compliance report finds that Malta loses out on some €270 million each year in non-compliance, which is more than just fraud and evasion and their associated policy measures, but also VAT lost due to, for example, insolvencies, bankruptcies, administrative errors, and legal tax optimisation.

In 2020, Romania recorded the highest national VAT compliance gap with 35.7% of VAT revenues going missing in 2020, followed by Malta (24.1%) and Italy (20.8%).

The smallest gaps were observed in Finland (1.3%), Estonia (1.8%), and Sweden (2.0%).

In absolute terms, the highest VAT compliance gaps were recorded in Italy (€26.2 billion) and France (€14 billion).

As a tourist destination country, Malta experienced a significant decline in GDP of approximately 8.3% during the 2020 COVID pandemic.

Yet, the bankruptcy rate, which was negatively correlated with the VAT compliance gap, declined by approximately 16.1% in 2020.

The deferment of VAT payments and the acceleration of VAT credit refunds was likely one of the reasons behind the improved liquidity and solvency of many economic operators.