Veteran Maltese economist Lino Briguglio held the view that “there is no need, really, for AI to reduce tax evasion,” and that an effective way to discourage such behaviour would be “a strong message with serious follow up in terms of enforcement and penalties”. He commented that this would, “in fact, discourage tax evasion”.

He was asked to comment in the wake of a Government announcement earlier this month where Finance and Employment Minister Clyde Caruana revealed that AI technology will be employed to combat tax evasion in Malta.

For starters, Prof Briguglio emphasised with that for taxpayers to perceive taxation as worthwhile the Government must use, and must be seen using, tax revenue satisfactorily. “In this way,” Prof Briguglio added, “taxpayers do not begrudge their contribution.”

The Professor cited Denmark and Sweden as example of countries that have relatively higher tax rates, but where taxpayers get value for money. “I think in Malta this is not the case,” he added. 

Emphasising the importance of enforcement, he stressed its importance as “otherwise taxpayers would perceive the system as soft on tax evaders and in turn certain taxpayers, particular those whose income is not taxed at source and rogue companies, will be prone to take more risk in under-declaring or even not declaring their income.”

Indeed, Minister Clyde Caruana has shared some stark figures implying the scale of tax dodging in Malta. In an interview he shared that in the last year before COVID hit, 2019, just 35-40 per cent of Malta’s businesses were declaring a profit. The rest were declaring breakeven or loss, while some were continuing to employ staff despite the purportedly troubling financial position.

The Professor also thinks that AI-powered measures could be perceived as a new tax, but the benefit is that it will result in higher tax revenue as it will track tax evasion. “It will not be welcome by tax evaders of course,” he added.

The need to reduce tax evasion was also emphasised by Tax Commissioner Joseph Caruana who in a recent interview with the Times of Malta explained that the tax department would not turn into “big brother” and that the goal of these new methods was to try and get everyone to be compliant.

Yet, such a novel measure inevitably produces questions related to how economic agents alter their perceptions.  

On the issue of whether enforcement dampens economic growth or not, Prof Briguglio explained that some economists believe that control of tax evasion may discourage investment since evasion results in higher profit.  “However,” he continued when asked about the Maltese case, “in Malta, where tax evasion is rampant, Government is losing millions if not billions of euros in tax revenue. Such funds can be utilised to attract investment. The worst effect of tax evasion is that it is unethical and illegal and therefore associated with dishonesty. If left unchecked, tax evasion would generate a culture of fraudulent practice.”

Inevitably, there will be sectors which will be hit more than others. Once again, the professor argued that the increased tax evasion will hit mostly those persons whose income is not taxed at source and rogue companies. “In particular,” he concluded, “those who are able to befriend politicians, knowing that if caught they will not be adequately punished – a classical case of moral hazard.”

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