PN insists SMEs tax cut won’t cost more than €85 million

The Nationalist Party Policy for Retailers, which among others proposes cutting the income tax burden of traders to 10% (from 35%) on their first €50,000 of operating profit, would cost the government a maximum of €85 million in reduced income from tax, the PN insists.

Those calculations were based on 6,800 traders, each declaring a profit of at least €50,000 and paying only 10% tax instead of 35%. The government intake from the income tax from those 6,800 traders would therefore be €34 million instead of €119 million, hence a loss of €85 million.

A day after the policy was released, the PN published another document explaining who would benefit from the reduction in income tax to 10%.

In it they give some examples, such as grocery shops, butchers, bars, restaurants, clothing and apparel outlets, stationeries, printers, travel agencies, hairdressers, self-employed professionals such as lawyers, doctors, consultants, and many other kinds of traders.

Then they added: Any other commercial sector, both self-employed and those registered as a company.

While recognising that very few businesses in Malta pay income tax – only around 22,000 self-employed and 9,000 corporates – MaltaToday confirmed with the National Statistics Office that there are actually 6,546 registered retailers in Malta (as the PN in fact quotes in its document), but there are also 37,312 Small and Medium Enterprises (SMEs) employing from 0 to five employees, and a further 24,842 sole traders.

If all those were in fact operating and they all declared – today – at least €50,000 in profits, they would be collectively paying €1.21 billion in income tax.

Under the PN’s policy – and again, if they all were in operation and declared at least €50,000 in profits – they would collectively only pay €345.8 million in income tax.

In Thursday’s edition of the current affairs programme Xtra, broadcast live on TVM, MT managing editor Saviour Balzan presented these figures to PN leader Simon Busuttil and suggested that the government could stand to lose up to €864 million if, indeed, all those registered traders and companies declared a €50,000 profit.

Busuttil refuted those claims and stood by the figure of €85 million, saying the calculations had been worked on companies and traders paying income tax.

A PN spokesman told MaltaToday afterwards that “the €85m projection is indeed the highest possible amount of revenue foregone under the proposed tax credit. This is the maximum cost (based on the latest financial figures available) that would be foregone in terms of revenue, when it is applied to all SMEs (i.e. excluding large companies).”

The spokesman explained that the €85 million would not be a cost for the government; rather, an injection in the economic activity of the small operators which would generate “a manifold return” in terms of growth and tax revenue for the government.

“Moreover, if we had to take into consideration also those companies which do not pay any income tax today, in the event that such trading companies start paying income tax, that would mean that the government would receive more tax revenue, not less,” he said.

As stated earlier, it is well-known that very few SMEs or sole traders pay income tax, because very few declare profits, many choosing to reinvest any profits in the business.

The PN is therefore right that should more companies start declaring a €50,000 profit, government revenue from tax would actually increase.

The same spokesman told MaltaToday: “If today a company (for one reason or another) is operating but not paying any income tax and under this scheme starts benefiting from the tax credit and pays income tax, the government would be receiving more (and not less) revenue since it will be receiving the €5,000 on the first €50,000.

But it would be considerably less than if those same companies were incentivised enough to declare their profits even today, with an income tax rate of 35%.

So some questions still remain: Why, then, did the PN – in its retail policy document – clearly quote the number of businesses operating as retailers at 6,546 (exactly as quoted to MaltaToday by the NSO) but made no reference to all other sole traders and SMEs, if the policy was open for them as well?

Did they round up the number of retailers to 6,800 and base their workings solely on them, excluding other SMEs and sole traders?

Was the second document published by the PN, explaining who could benefit from the scheme – and including SMEs, self-employed, professionals, etc. – merely an afterthought once the party saw just how much positive feedback the policy had generated?