24 - 30 May 2001

Those dreaded income tax returns

Adrian Chetcuti, Commissioner of Inland Revenue, talks to Blanche Gatt about recent changes at the IRD

No matter how streamlined and simplified the forms become, filling in an income tax return remains one of the most hated tasks of all time. And this is precisely the time of year when this dreaded chore has to be done – we’ve all received our forms, and in households like mine these sit menacingly on the hall table, taunting, teasing and tormenting – you may put it off today, you may put it off tomorrow, but eventually – and before the June deadline, you’re going to have to do it.
Unlike other government departments, the Inland Revenue Department retains something of a faceless character. Few people know the name of the signatory, the Commissioner of Inland Revenue, to their correspondence with the IRD, and though announcements of new taxes, or new processes are widely broadcast, the individuals who run the Department maintain a low
profile.
I went to meet Adrian Chetcuti recently to learn about the face behind the form, as well as to find out a bit more about the way this highly complex and enormous system operates.
He has been Commissioner of Inland Revenue since 1999, but this veteran civil servant’s experience of the IRD goes much further back than that. He was first posted to the IRD in 1967, from the Customs department. After five years he was posted to another department, but returned to IRD in 1982 for another five years. Again he was posted away for four years in 1987, but returned to Inland Revenue in 1991 as assistant director, director of operations and, in 1999, Commissioner.
“No one likes paying taxes,” he said, when I asked how he feels about the unpopularity of his position. “But,” he added, “since the introduction of the recent reforms, compliance rate has gone up tremendously to well over 90 per cent. When we compare this with pre-reform rates of no more than 70 per cent, it shows an impressive leap of around 20 per cent.”
Statistics show that in 2000 there were 229,705 registered taxpayers in Malta, including individuals, companies, expatriates and others. The overall compliance rate was 90.6 per cent, though for individuals the rate was 95.4 per cent. Of the 194,342 individuals in that year, 104,814 chose to fill in declarations, while 80,537 sent a self assessment return. “The compliance rate now is very satisfactory,” said Mr Chetcuti. “A great improvement on the past – imagine, we are still chasing returns from 15 years ago!”
And, it appears that the majority of taxpayers are not as reluctant as I am to get down to the job of filing their declarations or returns; in 2001, 65.2 per cent of this year’s 202,575 individual taxpayers have already done their fiscal duty. The IRD has already received 120,592 valid declarations and 11,569 self assessment returns.
The deadline for companies to file their returns is not till September, which would perhaps explain why only 10.2 per cent of them have sent their documents in – but compliance on the part of companies is generally lower; 61.9 per cent in 2000 and 62 per cent in 1999.
“The new process of self assessment returns has spurred many people on to comply with income tax rules,” commented Mr Chetcuti.
“First of all because of the penalties for late filing of documents, which can include a penalty of one per cent of gross tax per month until the returns are sent in, as well as one per cent interest on any monies owed to the Department. And these penalties are not discretionary, they can never be forgiven, as used to happen in the past, so this is a deterrent to non-compliance. Besides, in self assessment we accept what the taxpayer says.
“However, we carry out random tax audits on taxpayers picked out by the computer, or we receive anonymous letters about taxpayers, or we glean information from other tax returns, or we receive information from the VAT department, or the Banks, and so on, that would alert us to carry out an audit. If after the tax audit, which we are allowed five years to carry out, we find some omission, then the offender is liable for three per cent per month of the endangered tax for a first omission, four per cent per month for a second omission, five per cent for a third and six per cent for a fourth or more. The penalty is calculated from the date of filing onwards, so if an audit has lasted five years the taxpayer could be liable to three per cent, or more, per month for up to 60 months. If, however, the taxpayer comes forward of his accord, he only pays a penalty of 1.5 per cent.”
The introduction and enforcement of the self assessment system has had a number of ramifications – not only on the rate of compliance, but also on the revenues collected. Prior to its introduction, in 1998, Lm109.98m was collected in income tax. In 1999 the figure increased by 19.82 per cent to Lm131.78m as a direct result of the new system, and in 2000 it grew again by 25.81 per cent to Lm157.59m, as a result of the introduction of the new Provisional Tax rules.
It has also meant new working practices for the 250 civil servants employed by the IRD. New software, and electronic processes as well as the newly introduced work flow management system is inten-ded to bring the department closer to the Quality Service Charter. “The idea,” explained Mr Chetcuti, “is to improve relations with the public, offer them a rapid and efficient
service in any issues they may have. So, for example, in the first five months of this year, we have already received about 11,000
letters – using the newly introduced system, we have already settled over 7,000 of them.”
Issues taken up with the IRD could range from queries about tax calculations to official “objections” to an assessment. However, though new enquiries may be resolved speedily, there is an enormous backlog of “objections”, some of them dating back to the1960s. “There are 50,766 outstanding objections, some very trivial,” elaborated Mr Chetcuti. “We are trying to solve the ex-officio issues that remain first.”
Unresolved objections lead to unpaid tax – Lm150m is owed in total in unpaid tax. “This figure, however, includes bills based on the ex-officio of the 1970s and 1980s,” said Mr Chetcuti. “My feeling is that around Lm30m of this can realistically be collected.”
Financial penalties have proven to be effective in facilitating the collection of taxes from would-be evaders, but stiffer penalties are envisaged for those committing tax fraud. Specifically, those companies who do not pass on income tax deducted from employees’ salaries are committing a criminal offence, and risk prison sentences as well as financial penalties.
“Our system will identify taxpayers who do not comply with the regulations and laws of Malta,” said Mr Chetcuti. “Besides, we often receive anonymous information about such issues, which is followed up rigorously through the subsequent tax audit process.”
“The results achieved from tax audits/enquiries and other enforcement action taken by the department during the last 12 months on the self assessed tax returns furnished by taxpayers in respect of income received in 1999 and 2000 have been very satisfactory,” continued Mr Chetcuti. “2,907 taxpayers agreed to increase their declared income by Lm2.199m yielding additional tax and penalties of Lm913,932.
“There is no doubt that the positive results achieved during the past two years, notably the significant increase in revenue, higher compliance by taxpayers, early processing of tax returns by the department, can all be attributed to the re-engineering exercise of the IRD that was initiated in 1999 and to other enforcement initiatives taken by the department.
“The re-engineering exercise launched by the Minister of Finance aims at increasing efficiency of tax collection, reduce tax evasion, increase operational efficiency by streamlining systems and processes, and improve the level of service offered to the taxpayer.
“This exercise includes also the development of a new organisational setup that will be capable of performing to the required standards of work output, timeliness, quality and customer satisfaction. As a result of this new reorganisation, the department will be strengthening its investigative resources by the deployment of additional staff. A new post of director responsible for tax audits has been created recently and the successful applicant is expected to be appointed soon.”
While many are disgruntled about the enforcement of the Fringe Benefit Tax that was announced during the last budget and that is expected to yield a further Lm3m to IRD’s revenue, their plans for the future also include measures designed to facilitate the public’s dealings with IRD. E-government will allow for electronic income tax return, as well as correspondence, advice and customer service over the Internet. This should be introduced by the beginning of next year. Nothing can make income tax fun, but perhaps this will at least make the process of taxpaying less taxing on the public.