Reduced tax rates exclude income from dividends

People receiving dividends from publicly listed shares will not be eligible for tax cuts announced in the last Budget

Edward Scicluna (centre) with his ministry officials finalising Budget 2014 (Photo: Chris Mangion)
Edward Scicluna (centre) with his ministry officials finalising Budget 2014 (Photo: Chris Mangion)

Thousands of shareholders in publicly listed companies like HSBC Malta, Bank of Valletta or GO plc will not be benefitting from a Budget 2013 proposal to cut income tax from 35% to 25% for those earning less than €60,000 a year.

While the tax cut is still being rolled out – this year it has been reduced to 29% – the Labour government has decided that the measure will not be applied to income derived from dividends.

According to Finance Minister Edward Scicluna, the loss of revenue from this measure is a cumulative €12 million per year, totalling a permanent loss of over €40 million.

“These estimates were based on the assumption that the same amounts of refunds are given to shareholders as in previous years,” Scicluna said.

Arguing that the Inland Revenue does not have a solid database “to estimate” the loss of revenue if the income tax cut is extended to income from dividends, the minister said dividends would be refunded under the old tax brackets.

He confirmed that those entitled to refunds would continue receiving them as before.

In order to justify why the government chose to leave dividends out of the tax cuts, Scicluna said exercises based on various assumptions were “giving too wide a range of tax leakages from possible refunds”.

“In this case, extending the tax cut to dividends could come with an estimated loss of €400 million under a worst case scenario. Until a more accurate picture is derived, government cannot responsibly extend the tax cut to dividends.”

But Tonio Fenech, the former finance minister, disagreed with the position taken by his successor. According to the Nationalist MP, it was “very strange” that the tax reduction would have cost €12 million.

“The income tax collected last year was higher than actually budgeted, which therefore means that the government has no moral justification from denying families the benefit originally intended by the Nationalist government and which Labour had pledged to maintain,” he said.

Fenech accused government of backtracking on its promise by denying the fbenefit to the middle class families that could have benefitted from this measure.

During the parliamentary committee, Scicluna argued the government was trying to curb the abuse that could have been carried out by individuals operating their own company. It was argued that these self-employed would not distribute past profits taxed at 35% in the coming two years to get a refund on that portion, a portion on which they would pay 29% or less.

However, Fenech said that such a risk was minimal and this fear “had not yet materialsed”.

Moreover, the MP argued, the self-employed could easily find a way around this restriction by converting past dividend into a salary or a remuneration of up to €60,000. This way, the self-employed could still enjoy the full benefit.

“Because of this amendment, what the taxpayer gained last year is being taken back and the benefit that should accrued this year and next year is being denied. The taxpayer will have to pay €350 in tax for €1,000 in dividend.”

Reducing tax of rental property to 15%

A series of amendments proposed by the government at committee stage this week in parliament were described as “discriminatory” by the Opposition.

Among these was the introduction of a final withholding tax rate of 15% for the rental of residential property, and a special tax rate to footballers of 7.5% on their income.

At committee stage, it was decided that the 15% final withholding tax rate would exclude commercial property rental.

Contrary to the previous 35% schedule, there is no tax credit on the current rental income schedule. The current rental income is an optional final withholding tax being offered to those who rent out residential property.

Scicluna told MaltaToday that the measure was being applied to fight tax evasion. “Like with VAT, tax evasion occurs where there is collusion between the seller and the buyer of a service. It is an open secret that tax evasion in this area thrives, placing the onus on government to monitor and enforce,” Scicluna said.

Scicluna argued that several governments opt for lower rates in order to secure more compliance.

“In Malta, we have had successful results with the 15% withholding tax on interest from bank deposits. We feel that the renting of residences, especially by individuals, is another such area where it would be beneficial to introduce a 15% withholding tax,” Scicluna said.

He said the 15% tax would lead to more compliance and less tax evasion.

Refuting Scicluna’s reasoning, Tonio Fenech accused government of granting tax cuts to evaders, as opposed to honest taxpayers. “This measure will create anomalies and distortions in the property market, as owners will prefer renting property for private purposes than commercial.”

Opposing the PN’s argument, Edward Scicluna insisted that commercial rentals was a separate market. “The government was advised not to include it in the scheme as it would end up losing revenue. We are committed to continue to monitoring all areas sensitive to revenue collection and act accordingly.”

More in Budget 2014