€375m in tax arrears collected in 2023

Malta’s tax and customs administration has collected over €375 million in tax arrears in 2023, Tax Commissioner Joseph Caruana has told The Corporate Times.

In an exclusive interview a few weeks after his second anniversary at the helm of Malta’s revenue body, Caruana acknowledges that the fight against uncollected taxes, the VAT gap and other forms of non-compliance remain significant but is keen on major progress on this matter.

“By adopting Compliance Risk Management principles and putting them at the centre of the organisation, while engaging in the necessary Business Process Reengineering this brings, we are confident that compliance rates are and will continue to improve,” Caruana explains.

While previous reports have indicated larger amounts of arrears running into billions of euros, Caruana insists that: “The large uncollectable amounts of tax reported is a largely misleading legacy that goes back to decades past.”

The merger of the three key revenue departments, income tax, VAT and customs, is described as fundamental towards improved compliance, particularly as risk analysis allows for improved data combination, and better insights into taxpayer behaviour, trends and compliance risks, allowing for more informed decision-making and policy development.

Short of a year following the merger, the strategy is showing early signs of success, with a 12 per cent increase in the number of taxpayers who file their returns online and 53 per cent of individual taxpayers are now making their payments online in 2023. Improvements in corporate tax compliance have also been reported.

Asked about the key reasons behind this improvement, Caruana points out the push towards online submission of returns and electronic payments, as part of the strategy of integrating compliance requirements into the design and operation of the tax and customs administration’s processes and procedures.

“This helps us track transactions more effectively and alerts us more efficiently to cases of non-compliance,” he adds.

For Tax Commissioner Joseph Caruana, a change in the mindset of taxpayers to understand their obligations to be tax compliant is not enough. “Transformation is key and this means a change in how the tax and customs administration operates and engages with taxpayers to meet their expectations.” Transformation has been a key word in your first months as Commissioner ....

We started with the merger of the major revenue-earning departments into one organisation, the Malta Tax and Customs Administration. For the first time, we launched a three-year strategic plan to transform the administration into a functional design organisation, by investing in the latest technology and the people, to become an employer of choice.

Taxation and customs operations are no longer a static function of government so the old way of doing things is no longer sufficient. Digitalisation is key for transforming the way we operate, collect and manage tax revenue, alongside effective enforcement and control – a transformation that is being supported by the EU Commission and the International Monetary Fund, as well as local stakeholders, including professional bodies. Over €1 million in EU funds were secured through the Technical Assistance Programme to modernise our business processes.

We are now approaching a year since the formal merger between the revenue authorities. What has been the experience so far?

Several duplicate processes have been eliminated and synergies and efficiencies gained including the integration of shared resources such as HR, finance and administration, technical, legal and international affairs. Synergies are also being achieved when it comes to risk analysis in the area of the reporting of taxes (declarations), since the expertise and information available with regards to taxes and now customs, is being used. Today, our Risk Management Unit is equipped with better analysis capabilities and data from different sources is giving us better insight into taxpayer behaviour, trends and compliance risks, allowing for more informed decision-making and also policy development.

Our implementation of a unified negotiation process for arrears collection offers taxpayers a comprehensive overview of their VAT, Income Tax, and FSS liabilities. This facilitates a cohesive repayment plan, enhances cash flow management, and emphasizes customer-centric service by enabling prompt settlement during one meeting.

Can the ‘uncollected tax’ battle be won?

While the notion of ‘large uncollectable amounts of tax’ is a misleading legacy that goes back decades, the fight against uncollected taxes, the VAT gap and other forms of non-compliance remains challenging. Having said that, the past two years have seen significant improvement in our compliance rates thanks to new policies, different enforcement measures and increased outreach to taxpayers. In 2023, these efforts have yielded us over €375 million in tax arrears.

Can you share more about your idea of compliance by design?

This concept entails a re-engineering of our systems to decrease human intervention with tax compliance obligations, minimising human error and therefore guaranteeing better outcomes for taxpayers. We believe that data-driven procedures not only reduce bureaucratic costs to taxpayers but allow us to share data with other regulators which helps make Malta a more attractive and competitive jurisdiction.

Our strategy is in line with the Malta Financial Services Advisory Council’s 10-year strategy where 80 per cent of their strategy on ‘taxation’ is covered.

Part of this strategy includes the integration of compliance requirements into the design and operation of our processes and procedures that not only encourage electronic payments but also help us track transactions and cases of non-compliance more effectively.

As a result, last year we witnessed a 12 per cent increase in taxpayers who file their returns online and 53 per cent of individual taxpayers are now making their payments online.

When it comes to the filing of returns by individual taxpayers, compliance improved from 60 per cent to 90 per cent whereas filing by corporate taxpayers improved by 15 per cent.

In light of the rise of remote work and digital service-based revenue generation, how is the MTCA approach to revenue collection changing?

This challenge is being faced and tackled by jurisdictions and international tax fora worldwide. As a result, the automatic exchange of information is being extended to platform economies and crypto assets in terms of direct taxation. The European Commission’s proposal ‘VAT in the Digital Age’ (VIDA) is also proposing digital platforms operating in the shortterm accommodation and passenger transport undertake new reporting obligations to ensure collection and payment of VAT on transactions they facilitate.

In collaboration with the EU Commission, we are also exploring the implementation and the impact of real-time reporting which would allow businesses to report transactions to tax authorities in real- time or near real-time. The instant electronic transmission of data related to invoices, sales and purchases to the tax authority will create a system that not only enhances tax compliance and reduces fraud but also improves efficiency and provides timely and accurate transactional information.

How is technology helping you streamline tax processes and improve efficiency, considering the increasing reliance on digital platforms?

Last year, we invested in a €3 million project on Artificial Intelligence software with a powerful risk management component. This is a data analytical tool with machine learning that will support the Tax and Customs Administration to analyse and produce reports using a risk-based approach. The tool will include all the functions from the technical, registration, filing payments, inspections, verification, and audits. Although this two-year project is still in its first phase, results are encouraging in terms of efficiency and effectiveness in employing our resources. Our key objective is to get taxpayers to be compliant and to strengthen our enforcement capabilities.

We also want to replace the current standalone legacy system with a tried and tested Integrated Tax and Customs System (ITCAS), for which an international tender for its procurement was published last week. This compliance-by-design system will involve a comprehensive business process reengineering process that meets the needs of different taxpayers. This is €68 million project reflects the commitment by the Ministry for Finance and Employment and the Government to invest in more efficient and effective regulatory functions.

“In 2023, these efforts have yielded us over €375 million in tax arrears”

Joseph Caruana, Tax Commissioner