7 - 13 June 2001

Impact of taxation on fringe benefits:Companies asked to increase wages

by Ivan Brincat

Employees are feeling the pinch after seeing a good part of their salary deducted in fringe benefit taxation and their employers are now being faced with requests for salary increases to compensate for the losses.
Federation of Industry secretary general Edwin Calleja told The Malta Business Weekly that feedback they have from managers in various companies shows an increase in requests from employees for wage adjustments.
The income tax on fringe benefits which came into force on 1 January 2001 was introduced after the publication of a legal notice in May.
Employees receiving their May salary found themselves paying higher tax rates as they had to pay fringe benefits tax backdated to January.
Mr Calleja said this was not a “nice” situation and companies were being faced with unnecessary friction because of this tax.
“These taxes were introduced at a time when everyone is looking at the bottom line and people in general have got a raw deal.”
Meanwhile, the Chamber of Commerce said that while reiterating its firm stand in favour of measures aimed to curb evasion, the implementation of the Legal Notice 124 will contribute in no small measure towards disturbing and extracting further funds from the tax abiding public while still failing to bring the underground economic operators to the book.
“The latter situation is not only detrimental to the public finances predicament but also distorts fair competition,” the Chamber said.
The Chamber said it intends to continue to lobby with government to adjust those above-mentioned recommendations which to date have not been accepted.
A lot of board of directors are being faced with requests for salary adjustments which would at least compensate for the loss in take home pay. “These are not nice times especially after the tax bands were changed a year before,” Mr Calleja said.
The FOI was also very critical of the way in which the government increased the fringe benefits for employees between scale 1 and scale 4.
Employees in scale 1 had their allowance increased from Lm1,000 to Lm1,500, those in scale 2 from Lm800 to Lm1,200, those of scale 3 from Lm 600 to Lm900 and those on scale 4 will get an increase of Lm250 from Lm450 to Lm700.
It seems as if the only entity which can afford such luxuries is the government, the FOI said.

Mr Calleja said the government was not justified in saying that the allowances had not been revised since 1991 because the salaries in these scales had increased by a staggering 27 per cent last January.
The FOI secretary general said allowances have now increased tremendously and this showed inconsistency.
“On the one hand, the government claims that it cannot afford salary increases in the parastatal companies and on the other hand it doubles fringe benefits for scales 1 to 4 in the public sector. There
is clearly no consistency,” Mr Calleja said.
A financial controller who spoke to The Malta Business Weekly said the government should have introduced this tax during the months of March and June so that it would have been neutralised by the government bonus.
The financial controller said that the Lm500 exemption for the use of car is a meagre figure if one were to include the value of the car, the petrol used, maintenance costs as well as insurance.
The worst off are the sales persons who have to use their cars for work and who end up spending much more than the non-taxable allowance for the use of the car.
Even the Chamber of Commerce said that the tax-free portion of the car-cash allowance was unrealistically low.
Kevin Borg, executive of the Chamber of Commerce told The Malta Business Weekly the Chamber will continue to stand firm by its proposal that the tax-free allowance be increased to Lm900 (equivalent to Lm75 per month) which it perceives to be very realistic and
reasonable.
He said that the publication of the legal notices late last month had led to uncertainty and frustration among most employers who until 15 May were still not in a position to communicate with their employees the final net position of their salaries.
Since the turn of the year, the Chamber participated in several rounds of discussions on the subject with the relevant authorities including the Commissioner of Inland Revenue, the Minister of Finance (on more than one occasion) and the Prime Minister.
The Chamber also criticised taxation on measures aimed at enhancing productivity through employee motivation as those related to Share Option Schemes. This measure is perceived to act against the principle of employee participation and hence as a disincentive.
Furthermore, the Chamber feels that provisions related to insurance in general should be eased because of the benefits accruing from the service itself and the importance of having an ever growing proportion of insurance cover for business operators across the country.
This argument is augmented by the vast quantity of small business in the local economy. These businesses are characterised by their dependence on financial input of key persons who is usually the owner.
The Chamber considers that taxing the prudence shown by these people when insuring against premature death or for saving for a worthwhile purpose such as family welfare or old-age pension is unfair.
The attribute of prudence is part of the foundation upon which the prosperity of the individual and of the nation is built. It is for this reason that life insurance and savings/retirement plans should be exempt from taxation.