Budget 2009 – GRTU Proposal

Introduction

GRTU, as a national representative of the self-employed and small businesses in our country, as well as a promoter of a vast number of proposals and suggestions for the strengthening of enterprises, prefers to convey its proposals in the format of a Manifesto on behalf of small enterprises. GRTU's Manifesto is adjourned each year specifically to meet annual Government Budget targets.

GRTU's proposals are prepared in full and continuous consultation with our members and are continually updated in accordance to current issues, Governmental proposals as well as economic and social circumstances that come up from time to time. This is done in the context of Malta's membership in the European Union and within the framework of the EU Acquis Communautaire.

Our proposals are not targeted for implementation in one single year but are meant to be achieved within a framework of 3 to 4 years. The proposals we present here are aimed specifically at the 2009 Budget.

Localities

An important theme for the GRTU is the Locality.  What we refer to by Locality is the Local Council area together with adjacent localities. We are the only national organization that has a strong presence in all of the localities in Malta and Gozo and this is why we the give utmost importance to economic activities in the localities.  GRTU has excellent relationship with the association of Local Councils and with individual Local Councils. Together we do our utmost to facilitate better traffic management, project building and action that enhances the viability of private services in the Community.  

GRTU notes that Government policies continue to emphasise the zones traditionally associated with enterprise and employment where factories, hotels, Government establishments and the larger private establishment are situated (Harbour area ect…) while very little emphasis is given to promote work and enterprise in the Localities.  GRTU believes that given the multiplicity of problems caused by excessive road transport and the over utilization of Localities like Valletta and the whole Harbour area, Government should, as from 2009, launch attractive incentives so that more work and enterprise is generated in the Localities.

GRTU specifically wants to see an extension of tourism to reach also the Localities. GRTU believes that today's economic, environmental and social needs require a strategy of good incentives, that strengthen enterprises in localities and that create more working opportunities by means of, among others, teleworking.  It makes no sense to bring back office work to Malta from New Zealand, Australia and America when we fail to move back office work from Sliema, Valletta, Marsa and Bulebel to other smaller Localities.

We need the Government to create incentives so that work in Localities is strengthened, spending is done in one's own locality and the locality attracts tourist and other activity, which makes the locality more sustainable.  This will strengthened employment and relieve environmental problems and facilitate the employment of women. Women, women with children especially, most times can dedicate only a reduced working day to salary earning work. The closer the job is to the household the lesser time is spent in travel and also the lesser the costs.   

GRTU proposals are as follows:

• 1. Reduction of 12% final withholding tax to property development geared towards use as office space or facilities suitable for back office work in the Localities, including call centers. This incentive will create new work opportunities in the Locality while also saving the expense of day centers as women will be able to place children under the care of other family members in the Locality.
• 2. Families that accept to house children in the family will be trained and offered attractive financial incentives as childcare within the family has proved to be more rewarding than in standard child care centres.
• 3. Tax credit of up to 50% of expenses to households for improvements that will enable the lodging of tourists where the size of the premises make this possible. The standards will be set by the Malta Tourism Authority and the Malta Standards Authority. This incentive will encourage the extension of tourist residence in the Localities thus providing the necessary impetus for the expansion of city core activities.
• 4. Up to 50% tax credit for the renovation and extension of facilities in the city core such as bars, restaurants and cafeterias to create a leisure focal centre. Local Councils will be provided with additional capital funds to provide the necessary facilities in the city centers for the outdoor extension of these enterprises.
• 5. The adoption of the same tax regime successfully implemented with families hosting English language students to household owners who offer lodging facilities to tourists.
• 6. Additional capital grants to Local Councils to encourage the promotion of private parking facilities to service clients utilizing the new or the extended enterprises in the city core.
• 7. Special allocation of funds coupled with adequate fiscal incentives to promote urban renewal and refurbishment in the traditional village and town core.
• 8. Tax relief on expenditure affected by property owners in the traditional urban centers used on the renovation and restoration of facades.
• 9. Special tax relief and capital grants for the initiation of local taxi/transport services.
• 10. Special financial awards to be given to local councils that support enterprises and economic growth. Local Authority Business Growth Incentive (LABGI)
• 11. Up to 50% tax credit on all initial expenses suffered by businesses that opt to transfer back office work to the Localities. The supportive scheme will also include special electricity and water rates for firms who's back office work functions from the Localities.
• 12. Special tax credit should be provided to business establishment that introduce special crime prevention facilities on a joint cooperative basis such as street cameras and monitoring of commercial and city centers as well as for the organization of neighbourhood watch. Similar schemes will not only act as crime prevention mechanisms but will reduce the public cost for the provision of crime prevention and policing.

Better Regulation

Investment and growth of the economy is a very important theme for the GRTU.  GRTU insists that the business owner should be kept satisfied which in turn aids growth, investment and employment.  Unfortunately, after many years of talk, when weighing the burdens of form filling and time wasted on bureaucratic matters, we still find that owners spend more time doing this rather than focusing on their businesses and how to make them better.

Proposals:

• 1. Corporations and departments falling under separate budgetary votes will suffer an annual penalty should they fail to markedly reduce administrative burdens. Similarly additional bonuses will be paid to corporations and accountancy units, within the whole public sector, where measurable reductions of bureaucratic burdens are registered.
• 2. Funds available to departments and corporations for economic impact assessments should be clearly earmarked and departmental heads must, on a 6 monthly basis, publish reports on how these funds have been spent and publicise copies of the resulting impact assessment analysis report.
• 3. The Malta Accounting and Reporting Standard for Smaller Entities (MARSSE) is not simple enough Government had promised to do away with the legal necessity for annual audits of small firms and GRTU continues to insist that this promise should be implemented. Small businesses should be given the option to produce a simple financial statement that tallies with the regular VAT returns. GRTU believes that the returns submitted to the income tax department and the VAT department are sufficient to enable a proper audit trail and all excessive returns should be eliminated.
• 4. Government will, whether for NSO or other, be prohibited from seeking information from businesses when this information is already available in the annual returns for Income Tax and VAT. Enterprise owners will be requested to authorise the use of these returns in spite of the choices they have under the data protection act.
• 5. The principal secretary will publish a quarterly report on all consultation conducted and also publish all mitigation plans resulting from such consultations for every new public service initiative that will infringe on enterprises.
• 6. Government will ensure that all fines resulting from fiscal or administrative contravention will be of a civil and not of a criminal fine, recoverable only through civil juridical action.
• 7. Government should conduct an exercise to ensure that all environmental and planning regulations imposing administrative burdens are rationalised and simplified.
• 8. The multitude of inspectorates and enforcement officers emerging from different legal positions should be unified into one focal inspectorate and enforcement regime. It is no longer feasible, and it is an absolute abuse of free enterprise, to have a multitude of inspectorates and enforcement agencies visiting enterprises and premises with complete disregard to the integrity and rights of individual business owners.
• 9. GRTU is in favour of the empowerment of this unified inspectorate and enforcement agency to act in a professional manner to eradicate all forms of illicit trading and unfair competition resulting from law evasion. GRTU recognises that the licit and professional enterprise owner is under constant and increasing treat as the level of illicit trading, law evasion and standards abuse continues to grow unhindered.

Malta Financial Services Authority (MFSA)

GRTU recommends that MFSA drastically reviews its forms and penalty structures for enterprises that do not meet the stringent deadlines imposed by MFSA. GRTU also recommends that all pending fines become applicable on the new agreed rates.

Investment in Education

Government's programme of investment in new colleges is attractive and needs to be speeded up. GRTU has been recommending since 2005 that Government should have a strategy for all the buildings falling under the Ministry of Education. Some of these buildings have now outlived their purpose as schools of education centers, occupying prime cites in most Localities. Government should devise a specific policy for the reuse of these sites both for social and commercial purposes. Government can generate new funds from the privatization of selected sites and the revenue can be utilized to speed up the building of new collages.

Many of the older buildings cannot be refitted for the standards and class room sizes and facilities of new educational establishments and most of the old sites are bad examples of efficient use of a scarce and costly resource like land in the town and city cores.

Supporting Families

Government spends €2,600 per student in state aided education. Parents who send their children to fee paying private schools are given only a maximum of €700 per child. GRTU recommends that families in fee paying schools receive the full educational charge of €2,600 as taxable deductions.

Pensions

Government should now move on to the second stage of the pension reform and hold discussions with GRTU and other private sector organizations to ensure that the self employed and workers employed by the private sector can contribute to the second pillar taxation schemes, in addition to the basic pension scheme under the national pension service.

Government must be willing to provide all the necessary tax relief to encourage the growth of new stakeholder's pension schemes.

Construction and Property Investment

The current situation in the property market requires specific action by Government to ensure that the available properties on the market reach property buyers at affordable prices and ensure that there is no collapse of this sector. The Maltese are more than 80% property owners and when the value of property falls drastically, effectively families suffer a devaluation of their main asset. In the case of younger families buying on mortgage, this prices create additional problems as payments due on property purchased when the prices where high may be less than prices currently available for the purchase of similar properties. Government should at all costs avoid a heavy dislocation of the market as the pain will be suffered by many and not just by the developers.

The property developing and construction industry is in Malta a major employer, directly and through many services auxiliary to the property market. Action is needed to ensure that this employment and income generation is not threatened. The situation today is already very serious and GRTU wants Government intervention as of 2009.

Current Situation Affecting the Development Industry

The GRTU, through surveys amongst its members, notes that the current situation in the development industry exhibits areas of concern in spite of a healthy employment scenario and a buoyant, still fragile tourism industry. This scenario begs a concerted effort by all the stakeholders involved. GRTU notes that the issues involved, although widespread, can be split into 3 main categories:

1. Oversupply in the residential component targeted for first time buyers
2. Stringent banking conditions
3. Indecision by prospective buyers although market correction is taking place

The Oversupply Issue

The current oversupply resulted from different factors:

• Height relaxation and rezoning into higher densities by MEPA
• Repatriation of money
• Low interest rates
• Entry into the property market by inexperienced developers (mainly attributed to forced bartering practice)

Stringent Banking Conditions

GRTU notes that the loaning situation vis-à-vis the local banks has drastically changed from a relaxed approach into a very cautious one contributing to a lower affordability across the board, also driven by high interest rates.  This reflects the global turmoil in financial sectors.

GRTU recommends that Government issues the necessary safeguards to the commercial banks on home loans schemes to ensure that no action is taken by the Bank that will create a situation where people are forced to place their properties on the market, irrespective of the lower redeeming prices.

Government should also seek to establish with the banks means of safeguarding property investors who may face difficulties resulting from the reduced activity in the property market forcing property owners to dump property on the market as a result of pressure from the banks and an extremely bad economic message that in a small inter-related economy like Malta should be avoided.

Indecision by Prospective Buyers

GRTU notes that the downward market situation is sending out wrong signals to prospective buyers. Many prospective buyers are postponing their buying decision expecting Government to act or the market to settle this is a normal when the prices are falling and budget 2009 is the appropriate time for Government to halt a potential negative spiral.

Recommendations to Avoid Hard Landing

• 1. Given the available housing stock Government should grab the opportunity to redirect public money (approximately Lm9 million) envisaged for the construction of 300 odd social housing units to more appropriately targeted incentives.

The provision of social housing constructed by Government or by the housing authority should not be understood as some form of dogma. Government intervention in this field is necessary when there is a shortage of supply of housing units. The situation in Malta today is that of an abundance of empty residential units. Some of these are in the older towns and village cores. An intelligent programme of urban renewal would encourage developers to invest more in this type of construction work rather than the building of new units in newer areas or the demolition of existing business. GRTU proposes that developers are given reduced tax rates as a form of encouragement to invest in urban renewal. Developers and purchasers will similarly be fiscally assisted so that refurbished city core buildings become more affordable whether on purchase, rent or emphyteutical lease.

GRTU feels that enough buildings for social housing have been constructed and that currently there are good prices on the market for new apartments and their availability will continue for the next 3-5 years. It is not the right time to devote more public land for the construction of buildings for social housing since abundant supply for is already available.  In certain cases the prices given by the Housing Authority are even higher than those given by the private sector.

GRTU proposes that rather than spending money on new construction, thus further reducing the land available for building and furthering the already excessive supply of property available on the market for housing purposes, Government should utilise moneys available to provide schemes that encourage people to rent, buy or lease on emphyteutical basis, and partly lease property which is available on the market.

This option would also give a greater choice to people seeking affordable housing and, since the available units are spread throughout the islands, people will be better served without time delays. Government should direct its resources for the creation of work to sustain building contractors and the self employed to the areas that offer greater economic potential such as port projects, the building of factories and the provision of back office facilities in the localities.

• 2. Allocate funds for the introduction of the pre-electoral promise re: shared ownership scheme.

There are sufficient housing units available on the market that can be sold for less than €100,000 provided Government incentivises buyers. GRTU proposes the granting of up to €25,000 to first time buyers who are willing to purchase properties of up to €150,000. Government will still have a positive return on a scheme like this as the total taxation due to Government on properties of this value surpasses the grant figure. GRTU proposes a scheme for first homebuyers that will make available up to 750 units in one year, or a lesser figure depending on the availability of funds.

It is important to note that Government will effectively not loose anything as currently the market is not reporting particular changes, implying that the full tax potential of Government cannot be forthcoming, so that a reduced tax return will still signify additional revenue.

• 3. Incentivise the rental and emphyteutical concessions by introducing a flat tax rate to owners.

GRTU has been emphasizing the importance of this concession for a long time as it is the way forward for movement in the rental market.  There is a fear in government that there will be a precendent of revenue from Income Tax, if the scheme proposed by GRTU will be introduced. Government must separate revenue on investment from revenue on income or trading. Revenue from property is revenue from investment and not trading.

The argument is misconstrued as the issue is one of revenue on investment and not revenue on income or trading. What GRTU is proposing is a reduced rate of taxation on investment income due on investment in property and not a reduction of taxation due from income derived from the trading of property. Income tax from rents remains very low so reduced preferential rate on rental income will not only encourage more renting but will also make this form of income more easily declarable for income tax purposes. GRTU also proposes that those seeking new housing units who prefer to rent, rather than buy, should also enjoy a tax relief on their rent payments.

GRTU further recommends that potential buyers will be given a market option of co ownership where the property owner will continue to hold part of the property under emphyteutical lease agreements. Buyers will have the option to redeem the emphyteutical lease at a later stage. Land owners should be encouraged to offer these emphyteutical leases

• 4. Incentivise the rental and emphyteutical concessions by introducing tax credits to first time buyers for a given number of years.

GRTU proposes a 5% final withholding tax on rented properties that are taken up by persons who are either first time on the market or normally qualified social housing. Persons renting are given a 50% tax allowance on the value of the rents and rents payable by families that qualify for social housing will be subsidised up to the level of social housing rents on equivalent social housing properties.

• 5. Extend the 5 year option granted on final withholding tax to 8 years. This is intended to save substantial numbers of developers from a serious credit crunch.

Before entering the EU there was a boom in property prices which affected prices in land. The market situation has now changed and GRTU is therefore recommending that the 12% final withholding tax should now be reduced to 10% while for those who are paying 25% on the project revenue GRTU recommends an extension of the allowable period form 5 years to 8 years. These proposals reflect the current deflationary situation in the market and would avoid a credit crunch for a number of developers who acquired land at a very high price.

It is important here to note that the current 12% tax rate and the limited 5 year period are having a negative effect on the sale of property to foreigners. It is extremely important that this market is revitalised not only because foreign direct investment in the property market has clear, absolute, positive, economic advantage but also as a relief for the current abnormal stock situation in the property market with the resultant negative impact on bank finance and general economic activity in the sector.

• 6. Elimination of double taxation in connection with final withholding tax on VAT payments.

Developers pay VAT on furnishings and improvements in addition to another 12% on them when selling. This double taxation is unfair and should be removed, in accordance with European Law. This amendment will also go a long way to ensure a better audit trail in this sector and thus avoid VAT and Income Tax evasion. The overall tax returns to Government should improve and not diminish as a result of this amendment.

• 7. Final withholding or capital gains should be paid on the real selling price ad not subject to Government's architects' valuation.

GRTU notes that architects representing the CIR are on many occasions inflating property values and causing buyers to suffer unnecessary fines. There are many circumstances where the vendor is forced to place the property on the market at heavily reduced prices, as a result of either bank pressure and adverse economic situations affecting the business or the sector in which he/she operates. It is not fair that the parties to such property deals are castigated as the CIR property evaluators disregard such situations.

GRTU is recommending that, unless specific and clearly identified indications lead to a contrary judgement, the taxable values should be those as in the deed of sales. CIR should conduct random investigations and in cases where clear evidence of fraud is established judgement will be held in the appropriate tribunal. 

• 8. Set up task force made up of the relevant stakeholders to examine practical ways of addressing excess supply of housing units through the introduction of mixed use zoning given the current demand for commercial/office uses.

There is an increasing demand for property that can be used for back office work or other commercial activity that does not disturb areas that are normally residential. GRTU recommends that MEPA releases the current stringent conditions for the use of properties in residential areas for office and other low key economic activity in order to further sustain economic activities in the Localities. We also suggest the release of more available property to meet the increasing demands for properties for economic rather than residential use.

• 9. Tap the buoyant tourism market to promote the investment of foreign money in targeted areas of housing surplus.

GRTU strongly believes that more properties in the localities should be made available for foreign buyers as foreign residents in the localities provide economic activities in the localities and make commercial activities in the localities more viable

GRTU also recommends that Government should provide fiscal incentives to owners with large homes and empty properties to convert these places for tourist accommodation purposes. The scheme successfully negotiated by GRTU – the favourable income tax assessment scheme- on behalf of families hosting students seeking to learn English, should be extended to households and property owners to convey properties wholly or in part for tourism accommodation purposes.

• 10. In view of the Energy Directive, the Government should set up a fund to aid stakeholders in its implementation.

GRTU furthermore recommends that expenditure effected by developers and property owners in investment that fulfil obligations under the Energy Directive in respect of energy saving and use of alternative energy, including also the cost of energy audits on properties, be subsidised through a combination of grants or tax credits (where taxation is due from owners) of up to 70% of actual costs. The subsidy is paid over a pried of 3 years in the form of 50% tax credit or subsidy and the other 50% on the form of reduced electricity tariffs. 

• 11. To tackle indecision by prospective buyers, GRTU strongly recommends a 6 month moratorium on the payment of stamp duty on property purchased by first time buyers.

GRTU recommends that Government gives a 6 month concession period to first-time buyers including foreigners so that they are exempt from stamp duty on prices up to €150,000.  This would effectively kick start the economy in property transactions, tempting buyers get out from the waiting game thus removing fear and uncertainty.

Rent Reform

It is worth mentioning the serious mistake that was done in this subject in the proposals of the White Paper for the Reform in Commercial Rent Laws.  GRTU has already presented its proposal, based on facts, case studies and consultation with members.  Unfortunately, this cannot be said for the way the White Paper was drawn up.  This White Paper is a big disappointment for GRTU especially at a time when the European Union is implementing the Small Business Act aimed primarily at issues safeguarding the interests of small enterprises in relation to other economic factors that hamper their growth and development, which gives major importance to enterprises and the emphasis of each Directive is built on the "think small first principle".

The 1995 reform gave Malta the most liberal rent law in the whole of the EU. Today however, while other Member States fought first and foremost to safeguard the interests of enterprise owners, thus recognising that security of tenure is important for the encouragement of entrepreneurship and the generation of productive work, the Maltese Government accepted that the rights of property owners are superior to those of investors in enterprise whether commercial, craft, services or manufacturing.

GRTU has studied the rent laws for commercial establishments in other countries, including that of the country presently holding the EU presidency, France.  The rent law in France is a good one and of advantage to all the parties concerned.  While France's Act provides just protection for all those who rent, it also provides specific protection for those who rent.  For this reason, we appeal for the study of France's law because many of its essential measures are missing from the White Paper.

GRTU believes that the approach adopted by the French Government and by other G