Category: Legislation

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Statement on the rate of the Value-Added Tax

Following my presentation at the launch of Ram & McRae’s Value-Added Tax (VAT) Handbook on November 16, 2006, I have largely stayed out of the public debate on the Value Added Tax.

Part of the reason is that early in 2007, after the launch of VAT, a very senior political functionary had confided in me that the Government had discovered a significant error in the computation of the rate of the VAT resulting in the rate being higher than it should be. I was told of course that if I sought to divulge that information it would be denied.

Recent events and statements by public officials, letters in the press, and the increasing evidence of the effect on poor people of the ever-increasing spiraling rise in prices while the Government seeks to gain political mileage from their “initiatives to help the poor”, cause me to regret that I had not addressed this matter earlier.

I had decided that I would await Budget 2008 to see how the collections of VAT and Excise Tax compared with the amounts budgeted in 2007, since the Government had also publicly committed to a revenue-neutral regime of VAT and Excise taxes. The increase was a staggering 76% over budget for VAT and a more modest 20.9% for Excise Tax, an overall increase of 47.8%. Shortly after the Budget was presented I wrote my source reminding him of the conversation about the rate and offered the view that while part of the increase was attributable to the 4.7% growth in the economy and a 14% increase in imports over Budget, “a significant portion of the excess was attributable to the VAT rate initially being set too high”.

In my letter I recommended a reduction in the rate to 12%. My letter was acknowledged promptly but to date its contents have not been addressed with me.

The public is also aware that I openly posed two questions to the Minister of Finance on the issue (see Stabroek News June 19, 2008) as I was concerned about statements coming out of his Ministry and the Office of the President which could not accurately reflect their knowledge and which served to mislead the nation. In fact my information about the incorrect computation of the VAT rate was confirmed only recently by another senior political functionary and I would find it hard to believe that the Minister of Finance was not equally informed.

I hope the Government will now act honourably by correcting its mistake and reduce the rate at which VAT has been wrongly imposed for more than eighteen months.

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QA II concessions, the Minister of Finance and more conflicts

Introduction
In the absence of a Ministry of Planning and Development, the Ministry of Finance takes on immense importance. I therefore publicly greeted the announcement of Dr Ashni Singh as Minister of Finance not as a fellow accountant with training in accountability – of course – integrity, competence, capacity for hard work and an independent streak, but as one who would be confident enough to control expenditure, rein in President Jagdeo’s capacity to ignore the strictures of the constitution in relation to the Lotto funds or to spend first and seek approval after, evident with the frequency and value of supplementary provisions requested in the National Assembly.

More than even the Ministers of Trade or Agriculture, the Minister of Finance is the point person with the private sector, and by his action and even pronouncements can directly affect investments, jobs, performance of the economy, interest and exchange rates and share prices. He is the subject minister for the NIS, the Bank of Guyana and the Guyana Revenue Authority (GRA), appointing their boards often with people of his choice and under his influence, and responsible for the Companies Act and a raft of other legislation. He decides who gets tax holidays, budget allocations (or not), and how insurance companies and financial houses are regulated. His knowledge of the tax laws, their role and operation informs his determination of not only the level of taxation in the country but also the fairness of the system and how the burden is borne by various segments of the tax-paying public.

The overflowing VAT
In the period since Dr Singh’s appointment in September 2006, he has tested the public’s confidence in him in critical areas with his relationship with the private sector and civil society often being at best, polite. In both years following his appointment, he not only broke with tradition but with the implied constitutional requirement (Article 13) to engage stakeholders in pre-budget consultations. He failed even to acknowledge a request by the women’s group Red Thread to meet him on the effects of VAT on women in particular. He did not correct a misleading date (September 15, 2007) on his 2007 mid-year report presented to the National Assembly in November 2007 despite this being drawn to his attention and it reported to have been behind related delays in 2007 by the Bank of Guyana and the Statistical Bureau to publish important information on the economy.

In his first full year as minister the National Assembly rubber-stamped some of the most expensive supplementary provisions ever made in the country ($18 billion), witnessed an unacceptable level of budget under-statements on revenue with VAT alone being under-budgeted by 76 % and the combined effect of two taxes that were supposed to be revenue neutral (VAT and Excise Tax) being under-budgeted by 48%.
The consequence of this was the steepest single year rise in the tax burden this country has witnessed for as long as statistics are readily available (see table below) and a massive 10% increase in the 7-year period 2000 -2007, putting Guyana in the league of rich countries despite the government’s inability to offer the poor and the unemployed basic assistance, or citizens, security, and the continuing flood of migration to any country that Guyanese can enter – legally or otherwise. Amidst all the confusion caused by some misleading statements on VAT from government spokespersons and the Guyana Revenue Authority, the Minister stayed behind a wall of silence. That silence was extended to the saga of the QA II concessions until his ministry responded to increasing concerns expressed by the public.

Tax to GDP ratio – selected years 1992 to 2007

1992     1996     2000     2004     2007

42%        40%          37%         40%         47%

Source: Ministry of Finance National Estimates

Intervention
The intervention came in the form of a wordy four-page clarification from the Ministry of Finance on June 15 and a statement issued through GINA on June 16 responding to a Stabroek News article on the QA II saga on the same day. The clarification restated the government’s commitment to openness and transparency, claimed that fiscal concessions are rule-based and not discretionary, recounted the recent history of the law on tax holidays and sought to blame the saga on poor legislative drafting.

An examination of the statements, however, shows that they are misleading in terms of how the law is applied. The Minister had played a role in the QA II saga wearing several hats, some of which would have involved obvious conflicts and at least wearing one of those hats he should have realised that the law as passed and assented to by President Jagdeo did “not reflect Government’s intent.”

While it is true that the scope for tax holidays is limited to geographical regions and particular types of activities, it is far from correct to suggest that the tax holiday laws are not discretionary. The relevant section of the Income Tax (In Aid of Industry) Act quoted in the clarification provides only “that the Minister may grant an exemption from the Corporation Tax,” which can hardly be considered mandatory. Did the Minister and Cabinet restrict their consideration of the tax holiday provisions to Corporation Tax as the law provides, and not to income tax? In other words, did he give any preferred hotelier or other non-incorporated entity any tax holiday because it was “pioneering” and would he say what authority he used for doing so?

A stretch
Under the claim of transparency the statement refers to “substantial information on tax exemptions” included in annual reports of the Guyana Revenue Authority. It seems a real stretch to consider a total figure as “substantial information” when the quantified information applies only to concessions by the Customs and Trade Administration in respect of goods imported by or for a pot-pourri of products or sectors. There is no information on the beneficiaries of tax holidays and on any Income, Corporation or other taxes remitted.

While the President on the occasion when he castigated Mr. Yesu Persaud spoke of the concessions in the past tense, the Ministry’s statement confidently states that the QA II concessions are subject to approval by the GRA and the Ministry of Finance [sic]. Are we to believe that a matter taken to Cabinet in May 2007 had not been approved one year later and that the company would have proceeded with their multi-million dollar investment only with “subject to” approval?

The statements also tell us that the Minister is Chairman of the Privatisation Board which made the recommendation to the Cabinet of which he is a key member and that the decision by Cabinet was subject to approval by the GRA and the Minister of Finance – confusing to most ordinary minds. Since as the “clarification” states that “Cabinet’s decision is the definitive authority for subsequent decisions and actions,” do the GRA and the Minister have any discretion in the matter, whatever the law says to the contrary?

Pass the buck
But placing the blame on the framers of the 2003 legislation raises further questions. At the time of the 2003 legislation Dr. Singh was not only the Budget Director in the Ministry of Finance and should therefore have been concerned about the legislation’s potential revenue impact, but he was also a member of the board of the GRA as a nominee of the Ministry of Finance and in that capacity too should have perused the legislation both for impact and flaws. Yet it has taken two years after granting concessions under the act as Minister, before there has been any acknowledgment that the act is flawed.

The ministry’s statement also sought to place, incorrectly in my view, the concessions for QA II on the same level as the Berbice bridge for which there is separate legislation passed subsequent to the 2003 legislation (Act 3 of 2006), specifically exempting the income of and dividends and interest paid by the concessionaire from corporation, income and withholding tax, and income earned by contractors and subcontractors to be exempted from income tax for the concession period.

Given the confusing statements made by spokespersons who are either expected to know or apply the relevant laws, the proposed seminar on privatisation and fiscal concessions to be hosted by the Privatisation Unit (of the Ministry of Finance) on July 9 becomes all the more necessary, and it is clear that the list of participants should be widened. Moreover, while it is never good to hold up applications regarding investments it may be preferable to place such applications on hold pending corrections and clarifications.

Conclusion
But there is one final issue that neither the clarification nor the statement addressed. Under section 38 of the Investment Act 2004, concessions granted under the section of the Income Tax (In Aid of Industry) Act dealing with tax holidays require a procedural audit by the “Auditor General or any suitably qualified person” designated by him. The only professionally qualified accountant in that office is the wife of the Minister of Finance, which potentially could unfairly place her in the unenviable position of being associated with adverse comments on concessions that her husband would have granted. Whatever opinion is issued by the Audit Office and whatever Chinese Wall may have been put in place, this is a most blatant case of conflict of interest in a most important function of the country’s administration. The respective functions simply cannot co-exist and the Public Accounts Committee should immediately step in to end it.

Next week: BP turns its attention to the operations of the general tax laws under the watch of the President and the Minister of Finance.

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Open letter to the Minister of Finance on VAT

It is heartening that Dr. Ashni Singh, the Minister of Finance has finally addressed the Press on matters concerning his Ministry, even though he was less than forthright on the matter involving the President, Mr. Yesu Persaud and tax concessions.

I am writing to pose publicly to Dr. Singh two straight questions: 1) Is he aware that had the rate of VAT been correctly computed prior to its being set into law, the standard rate would be less than 16%?

2. Would Dr. Singh now be equally prompt in reducing the rate – which incidentally he can do on his own, subject only to an affirmative resolution of the National Assembly?

I would appreciate a timely response from Dr. Singh.

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The President, ‘scraps’ and concessions

It was a week of ‘scraps’ for President Jagdeo, if we count his inexplicable meeting last Monday at State House with the scrap metal dealers, who come under Prime Minister Sam Hinds’ portfolio. There were, however, two others, one involving the country and the other specifically the private sector. At the GBTI Business Forum 2008 on Monday, the President cast aside the expressed hope by the bank’s CEO that the forum rise above the controversy of the net benefits/loss from the CARICOM/EU Economic Partnership Agreement (EPA) and address its opportunities and offerings. The President chose instead to engage in what many in the audience saw as a barely disguised and inappropriately timed attack on the EPA, the Caribbean Regional Negotiating Machinery (CRNM), some of his own regional counterparts and the European Union.

But it was the launch of the new newspaper the Guyana Times where the President really bared his knuckles as he associated leading businessman and entrepreneur Yesu Persaud with ‘ignorance’ and suggested that the entrepreneur and leading private sector spokesperson for scores of years attend a seminar on the tax laws of the country. Mr. Persaud, speaking in his capacity as a private sector representative at the launch had dared to suggest that the concessions which the government had granted to Queens Atlantic Investment, the parent company of the Guyana Times Incorporated be extended to “all Guyanese.” A more transparent and equal treatment for investors has for years been the concern of domestic operators, and indeed the PPP in opposition, as they witnessed foreigners being granted sweetheart deals that effectively doomed local operators as second class in the scheme of things – the wood sector being the most obvious example.

Mr. Persaud was perhaps referring to ongoing concerns that concessions had been offered to the five new businesses of the investor group, instead of some only. The President who admits to being a close personal friend of the investors took umbrage at the call and announced that he had asked Mr Winston Brassington of the Privatisation Unit to hold a seminar on the tax laws, leaving the audience to wonder why not the GRA?

President Jagdeo explained that the concessions were in respect of the pioneering projects of the investors, the antibiotic plant and the textile mill. The problem which many share with Mr. Persaud is that the piecemeal information on the deals has had to be forced out of the government and its spokespersons while the group has remained conspicuously silent, obviously confident that the government would deal with it as a PR exercise and not a disposal of state resources in which all are interested. Perhaps the Guyana Times, which calls itself the Beacon of Truth, would show its editorial independence and commitment to truth and the people of a country that makes it all possible for its investors, to run its own story on what many may consider a steal of a deal.

The truth
All this of course could have been avoided if the government had complied with section 37 of the Investment Act 2004 that requires it to publish in the Gazette information regarding the fiscal incentives granted under section 2 of the Income Tax (In Aid of Industry) Act Cap 81:02. Only then would the nation be able to decide the real truth and how the agreement limits the concessions to the President’s “pioneer” industries.

The President was at pains to justify the as yet undisclosed concessions as having been granted under the authority of Cap 81:02. In fact, the act gives discretionary powers to the minister to grant concessions under two circumstances set out in section 2 as follows:

(a) the activity demonstrably creates new employment in one of the following regions –

(i) Region 1: Barima – Waini

(ii) Region 8: Cuyuni – Mazaruni

(iii) Region 9: Upper Takatu – Upper Essequibo

(iv) Region 10: Upper Demerara – Upper Berbice

(b) the activity is new economic activity in one of the following fields –


 (i) Non-traditional agro processing (excluding sugar refining, rice milling and chicken farming);

(ii) Information and communications technology (excluding retail and distribution);

(iii) Petroleum exploration, extraction, or refining;

(iv) Mineral exploration, extraction, or refining;

(v) Tourist hotels or eco-tourist hotels.

Limits
But the President should have informed himself that the authority for such concessions seems to be limited by section 6 of the Financial Administration and Audit Act (FAAA) which stipulates as follows:

(1A) Except as provided in subsection (1C) [dealing with the duty of the Minister of Finance to make subsidiary legislation to waive any tax payable due to the taxpayer’s inability to pay such tax because of natural disaster, disability or mental incapacity etc.], no remission, concession, or waiver is valid unless the remission is expressly provided for in a tax Act or subsidiary legislation;

(1B) No remission, concession, or waiver of tax by Order or other subsidiary legislation is valid unless the Act under which the subsidiary legislation is made expressly permits the Minister to provide such a remission, concession, or waiver.

The President and the Minister of Finance, who like the group have been silent on the issue, must now consider whether they were properly advised of the relevant provisions of the law including the limitations under the FAAA, and that section 2 of Cap 81:02 does not recognise the “pioneer industries” referred to by the President.

The Finance Minister Dr. Ashni Singh has an obligation to the nation to indicate whether any cabinet paper submitted under his name recommending the concessions quantified the cost to the country of the concessions granted to the investors. If there was no such paper it would be a serious indictment of the President, the Minister and the entire cabinet.

And the rent
While much attention has been paid to the tax holidays and the government boasts how attractive a deal it won with annual rental of $50 million dollars per year, the government has been careful to avoid the real value of this rent.

Remember that there is a 99 year lease and there is nothing to indicate that there is a rent escalation clause providing for periodic increases in rent based on inflation and other economic factors. This then is how the figures look if we place a time value on the rent the country will earn from this deal and assuming discount rates of 10% and 5%, with the former being the more likely:

Discounted at 10% 5%
by the 10th year $21M $32M
by the 15th year $13M $25M
by the 20th year $8M $20M
by the 25th year $5M $16M
by the 50th year $0.5M $4.6M
by the 75th year $43K $1.4M
by the 99th year $4K $0.4M

In other words, by the half-way stage of the agreement, using a discount factor of 10%, the amount of the rent expressed in today’s dollars will be $39,043 per month! Assuming the unlikely scenario that a discount factor of 5% is justifiable, the monthly rental at the same point would be a princely sum of $381,516.

Now look further down the road to the end of the lease period and see that the rent using a 10% discount factor would be, in today’s prices, $365.85 per month! So just what is this about an option to buy for US$3.5 million in three years time?

Do those who tout the benefits of the deal really believe that the investors are so ‘ignorant’ as to choose to spend US$3.5 million dollars when they are the beneficiary of the giveaway of a century minus one year?

Conclusion
The dilemma we now face is what happens if the government has granted concessions that are not ‘valid,’ as they would appear not to be under the FAAA. Would the taxpayers have to bear for 99 years, the burden of government’s decision?

The President had earlier announced that he left the meeting when the matter was being discussed by cabinet. Perhaps he should have stayed and advised his colleagues about the state of the laws and the limits of their powers.

He may have saved his friends and colleagues from possible embarrassment and the taxpayers of the country the waste of resources.

Still, I hope I am invited to the Privatisation Unit’s Tax Seminar to which I recommend that the members of the cabinet, the President’s advisers and investor friends be invited as well.

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The audit report: does it really mean anything?

The second oldest profession
Shareholders may not quite realise it but they not only appoint (and can remove) the auditors but the auditors are by law, required to report to them. That is the theory. The practice is that management deals directly with the auditors, fixes their remuneration, challenges them on key concerns they raise and most significantly can recommend their removal. The audit report – even to those who may have some understanding of its nature – has become so lengthy, boring and obscurely complex that it is likely that even the company secretary who reads it at the Annual General Meeting (AGM) does not quite understand what it really says. Richard Bennison, head of audit of KPMG UK in the prestigious monthly publication Accountancy of May 2008 was perhaps only a tad too cynical when he said that “The message of an audit report is, in the vernacular: These accounts are about right unless management have deliberately conspired to falsify them.”

A standard, clean audit opinion issued by the profession can run up to 500 words, about five times more than is required by the Companies Act 1991. How and perhaps more importantly, why did the second oldest profession not known for its literary skills, develop such a love for words with the result that an eight-line report in 1983 became sixteen in 1993 and some 27 in 2007? Has length added anything to shareholders’ understanding of the report or merely shielded the auditors from lawsuits for shoddy auditing work done well out of the sight of the shareholders who appoint them, and whose only communication with the shareholders is their report which is attached to the financial statements circulated with or contained in the Annual Report of the company?

Monopoly
The audit profession has had an unshakeable but arguably necessary monopoly on all companies operating under the Companies Act 1991 as successive Ministers of Finance have failed to trigger the section in the Act which would have dispensed with the need for an auditor. The smallest company then is required to meet the same stringent accounting and disclosure requirements as say, a Banks DIH. Auditors are also helped in another respect by the Companies Act 1991, which simply requires the auditors to state whether in their opinion, the balance sheet and the profit and loss account show a true and fair view. In the repealed Companies Act Cap 89:01 auditors were required to state, perhaps impossibly, whether the accounts showed “a true and correct view…”

Readers of financial statements also need to recognise that while the audit profession will not say it, “true and fair” is a largely undefined term and that within case law and auditing literature there may be more than one “true and fair” view of the state of affairs and results of a business. Add this to the prolixity of the report and we find a complete absence of a key ingredient prescribed by the Financial Reporting Council (UK) for audit reporting: to provide a positive contribution to audit quality. The FRC suggests that for such a contribution to take place it would require audit reports to be written in a manner that conveys “clearly and unambiguously” the auditor’s opinion on the financial statements, and addresses the need of users of financial statements in the context of applicable law and regulations.

The first rule: cover your behind
That is eminently sensible, but is that what auditors really want or do they want to avoid lawsuits which can cripple them? The first thing an auditor seeks to do is minimise his risk including the risk of being sued. Accordingly auditors need to protect themselves and that protection comes at the expense of clarity, brevity and utility. In my decades of auditing experience with a number of international and local firms I cannot recall a single conversation among audit partners identifying communication with shareholders as even the last of their audit objectives.

But if companies legislation is so precise about the report of the auditors, how did we get here?
The first thing to note is that Guyana does not have its own accounting and auditing standards. As members of the International Federation of Accountants (IFAC) dominated by the big firms in the developed world, the local accounting regulator, the Institute of Chartered Accountants of Guyana, is committed to its members adopting and applying the standards set by IFAC. While nationalists (if they still exist) may consider this another form of colonialism, the fact is that international banks and multilateral lending agencies as well as investors, stock exchanges and domestic banks find comfort in financial statements that are prepared and audited to the highest standards of best practice, which are in effect the standards set by the major players.

The initial explosion in the verbosity of the audit opinion was a reaction to what was described as the expectation gap – auditors had to disabuse readers of any notion that the audit was somehow expected to detect frauds or that the auditors were responsible for the preparation and content of the financial statements. The report by the auditors rightly seeks to draw attention to the fact that the management is responsible for the financial statements and that the auditors’ duty is to report on those statements using such methods and techniques as would enable them to report in a most cost-effective (read profitable) manner.

Case brief
But the real reason for all the ‘wordiness’ is the fear of litigation, a fear that has dogged the accounting and auditing profession if not as far back as the South Sea Bubble (1720), certainly in cases like Kingston Cotton Mill (1896) which put the auditor as a watchdog not a bloodhound; Hedley Byrne v Heller (1963) which established the principle that when a person makes a statement in a professional capacity, he voluntary assumes responsibility to the person he makes it to unless he has put a disclaimer in his communication; BCCI (1991), referred to satirically as the ‘Bank of Crooks and Criminals International,’ one of the first cases in which the financing of international terrorism was an issue; and more recently, the 2003 Scottish case Royal Bank of Scotland v Bannerman Johnstone Maclay (‘Bannerman’), in which the court ruled that in preparing the audited accounts of their clients, APC Ltd, Bannerman may have owed RBS, one of APC’s creditor banks, a duty of care and therefore liable for any loss suffered as a consequence.

It was sufficient for RBS to show that Bannerman should have been aware that the accounts and audit report would be provided to RBS for the purpose for which RBS relied on them, even though they may have been prepared for a different statutory purpose. Crucial to the court’s reasoning was the absence of any third party disclaimer in the audit report – which has come to be known as the ‘Bannerman’ statement, used by auditors to discourage third parties from relying on the audit. It is widely believed that it was the presence of such a provision that protected Ernst & Young in a £350M case involving German truckmaker MAN and a subsidiary audited by Ernst & Young, which had been bought by MAN.

Not everyone is happy with such a disclaimer, and a suggestion by the Audit Practices Board of the UK to dispense with the Bannerman statement has met with consternation among UK audit firms. The leading accounting body in the UK, the Institute of Chartered Accountants in England and Wales, is convinced that the Bannerman statement remains a strong and integral part of the audit report, and that there is nothing wrong in principle with disclaiming any duty to third parties.

Tax evasion is not a crime?
In Guyana, some auditors give their blessing to accounts which have been accepted by financial houses and the Guyana Revenue Authority (GRA), but which even Alice would consider pure fantasy. During the last decade we saw some high profile receiverships in which businesses went under shortly after receiving clean reports from their auditors, causing massive losses to the banks. The GRA is too often the victim of some of the most spurious accounts imaginable and yet neither the banks nor the GRA has taken any action against any auditor.

Using history as their guide, auditors assume that the chances of their being sued by lenders for negligence in signing off on the financial statements of their clients are about as likely as snow in Guyana. Those auditors who also prepare the tax returns for their clients must know that those returns are relied upon by the tax authorities for the assessment of taxes and that under the Income Tax Act they can be held criminally liable for aiding and abetting in tax evasion.

Since in Guyana it does not appear that tax evasion is a crime then clearly aiding and abetting it cannot be a crime either! Instead of sanctioning those auditors and tax consultants whose product is so egregiously bad, the GRA routinely issues them with annual Tax Practice Certificates that are used as a licence to continue in their ways.

One of the new rights created by the Companies Act 1991 is the right of the shareholder to have the auditors answer at the AGM questions relating to their duties as auditors. So far it is the directors who have been answering those questions and it would be fascinating to witness such an encounter between shareholder and auditor! That little exercise in shareholder democracy may do more for governance than all the hundreds of words in the audit report.