Sunday, August 21st, 2005

Introduction:

Business Page today returns to what could probably be regarded as one of grist to the mill of this column over the years - the issue of taxation. The last time we dealt with the subject was a review of the Value-Added Tax (VAT) and the Excise Tax Bills which have now been passed by the National Assembly still containing most of the objections raised by several stakeholders, including the Private Sector Commission, to a Select Committee of the National Assembly. I participated in one of those presentations and found the partisan approach and line of questioning particularly by the government members of the committee, unfortunately regrettable and unproductive. Most astonishingly the Minister of Finance who chaired the committee announced without hesitation or equivocation that the timeline for implementation was among the commitments to the ever powerful International Monetary Fund and the sovereign government had no choice in the matter!

VAT was again in the news last Friday arising from a statement attributed to the Commissioner General of the Guyana Revenue Authority published by the Government Information Agency GINA. But I will come back to this shortly.

...the worse they get

Despite the fact that Guyana has one of the highest tax burdens in the world, the International Monetary Fund (IMF) is either pushing or is blamed for pushing some of the new and harsh tax measures being imposed on Guyanese. We readily recall the Fiscal Enactments (Amendment) (No.2) Act 15 of 2003, now the subject of a court case initiated by the professionals rebelling against the imposition of a tax on their services - borne not by them but by the consumer of their services. That act, widely regarded as another imposition of the IMF, includes a number of other drastic measures which have not received much public scrutiny or attention. This lack of attention may be due to the fact that the tax compliant members of the business community were generally unaffected while those - particularly the self-employed - have gone about their merry way of tax evasion and are, perversely, unaffected anyway.

Two years after the passing of that act the provision for a minimum tax on self-employed individuals and professionals has still not been put into effect - no doubt conscious that this is going to be extremely difficult to enforce and will drive businesses further out of the mainstream. This administration started with a Minimum Tax over ten years ago when it was imposed on companies with the commitment that it would be extended to the self-employed later. That is still to happen and in fact the provision having been repealed in respect of non-commercial companies, the tax now only applies to trading, financial and telecommunications companies.

Penalties, more penalties and interest:

But let us look at the provisions of the act which the public was led to believe was the relaxation of one of the earlier law's more drastic impositions - the penalties and interest for late filing. When looked at more closely the situation is actually significantly worse and it now takes about twelve months for the penalties and interest on outstanding returns and taxes to more than double the tax liability.

To illustrate this point we used a scenario of a taxpayer with tax assessed of $1,000,000 payable on April 30, 2004 but who only filed tax returns and paid the amount outstanding at the end of August 2005. The hapless taxpayer is liable to a penalty for late filing - (2% or 5% depending on whether the return is only filed after being demanded by the Revenue Authority); penalty (not interest which in the eyes of the IMF and the Revenue Authority is not a penalty!) for late payment - two per cent of the unpaid amount for each month or part thereof that the tax remains unpaid during the first three months after the due date, three per cent per month or part thereof during the next three months, four per cent per month or part thereof during the next six months, five per cent per month or part thereof thereafter. On top of this Act 15 of 2003 the Financial Administration and Audit Act Cap 73:01 provides for interest on late payments at the rate of 19.88% per annum for the period May 2004 to June 2004 and 19.54% from July 2004 to August 2005.

Since the act states that the penalty and interest outstanding are part of the tax assessed, the interest and penalty should be compounded at most on a quarterly basis. After a mere sixteen months the $1M has become $2,365,789, with interest and penalties accounting for $1,365,789 - an effective charge of close to 85% per annum! By comparison the interest and penalties which applied under the repealed provisions would have been $636,667 - over $730,000 less!

This is clearly an absurd and intolerable position which would bankrupt many businesses and a case of killing the goose which is not unusual in IMF prescriptions.

The accountant's magic:

That Parliament and the Revenue Authority did not think through this act sufficiently - whether it was an IMF imposition or not is hardly relevant - is evident in that the law implicitly suggests how to get around it. Here is how the magic of the accountant or one of those GRA-licensed tax consultants can do it and indeed how they do it. They 'doctor' the financial statements by blatantly under-disclosing income or over-stating expenditure to show tax payable as nil, penalty for late payment nil and interest nil. Hey, your tax is zero and for a small fee you have just saved $2.365M!

The obvious and most common question is whether these penalties and interest can be forgiven or remitted, and here too the situation appears to be worse. Prior to Act 15 of 2003, section 108 of the Income Tax Act gave the commissioner authority on being satisfied that there was good cause, to remit the whole or any part of a penalty imposed under section (70 [5]) which deals with delivery of tax returns within the prescribed time or under section 99 (1) under which the 45%/50% was charged and under which the graduated 2 per cent, 3 per cent, 4% and 5% per month is now imposed.

Good cause:

The new position is that remission is now only possible in respect of the monthly charge under the Income Tax Act and in respect of the interest on late payment charged under the Financial Administration and Audit Act, but only if good cause is shown.

In an apparent attempt to remove the uncertainty and subjectivity which prevailed in the application of this discretion, Act 15 of 2003 has gone further and defines 'good cause' to mean circumstances in respect of a particular taxpayer when there is doubt as to the collectability that can be resolved by the waiver of the whole or part of the penalty.

It is uncertain whether this intention has been achieved since the element of subjectivity still remains. Business Page has lamented the absence of statements of extra-statutory concessions and other publications setting out the benchmarks and principles which the Revenue Authority follow in the application of some of the less clear provisions of the tax laws.

While such a publication could not address all the circumstances which the Revenue Authority would consider as 'good cause,' it would certainly go a long way to remove the high element of subjectivity and discretion which still prevails in the tax system.

Next week Business Page will return to the specific question of the VAT including the statement by the Commissioner General and the draft regulations which have been published and very usefully are available on the GRA website.