Fringe benefits rules : implementation, effects and possible improvements

Abstract

In principle, as of the enactment of the Income Tax Act in 1948, fringe benefits have been considered a taxable source of income falling under the wide spectrum of “gains or profits from employment”, as regulated under article 4(1)(b). Nonetheless, due to problems arising in determining under what circumstances and to what extent benefits should be treated as fringe benefits, what value they should be given and the manner in which they should be declared, resulted in benefits in kind being excluded from the taxable income package of the employee. In order to address the problems encountered, the Fringe Benefits Rules were enacted, as per Legal Notice 125 of 2001, in order to provide a clear-cut solution. The objectives behind the implementation of the Rules were identified as being, to deal with the problem of the high deficit facing the Maltese economy, to contain remuneration misplacement and to fill the gap within the employment income tax regulation. The Fringe Benefits Rules, which came into effect as from January 2001, provide the classification of benefits in kind, determine the circumstances under which the benefits fall taxable or exempt and provide the methods that should be used to determine the value of the fringe benefits falling under each category. Apart from a brief summary of the main provisions of the Fringe Benefits Rules, this dissertation presents a critical analysis of the regulation. This investigation delves into whether the Rules give a real valuation to the fringe benefits, as well as determines the criteria involved in drawing a line between benefits that are taxable and those that are exempt. Certain individuals are directly or indirectly, positively or negatively affected, by the implementation of legislative rules, both at the introductory stage and in the longer term. This dissertation will draw attention to the effects that the introduction of the Fringe Benefits Rules has exerted on the main parties concerned, namely employees, employers and the Maltese economy, within a two year span from the its effective date. The study has also identified areas within the Fringe Benefits Rules that may induce individuals into evading or avoiding their tax liability and where considered feasible, possible improvements where presented so as to minimise or eliminate the impact of such shortcomings. Furthermore, tax authorities are focusing on ensuring compliance to the Fringe Benefits Rules, through measures identified as careful auditing and compliance testing, which secure that long-term benefits are reaped from the introduction of the legislation.