Tag: Taxation

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The off-shore financial centre idea

Introduction

The announcement by the Minister of Finance in his 2008 Budget speech that the government was embarking on consultations on making the country into an off-shore financial centre must have taken those with whom he did not consult with considerable surprise. The Minister in his speech did recognise the country’s earlier experience with the concept, an experience that saw the advocate of the measure ending up in jail abroad. It is perhaps significant that at that time Guyana’s economy was in dire straits and the introduction of legislation to facilitate off-shore banking was at best no more than an experiment.

With debt write-offs and a change from a managed to a mainly market economy and the graduation from a Highly Indebted Poor Country (HIPC) to a lower-middle income country, much is new. But the announcement has been surprising nonetheless, being perhaps the only policy change in the entire budget speech. Although the Minister has announced consultations, Business Page today addresses the concept, the opportunities and the challenges, since from all accounts not many people have been consulted so far.

Origin

The ‘off-shore’ in the concept derives its name from the Channel Islands and the Isle of Man, just off the shores of England from which the wealthy sought to export their assets from the high-tax regime prevailing in the seventies on the mainland. While these islands continue to earn most of their income from the business, the major centre remains Switzerland, where bank secrecy was considered as sacred and impenetrable as the Da Vinci Code.

In the typical off-shore centre, operators with nothing but a member of staff or two and dealing mainly electronically, whether in opening accounts or in carrying out transactions all of which are designated in foreign currency, carry on the business often from a couple of rooms attached with modern telecommunication. The attraction of such centres, usually lies in:

1. low tax rates,

2. strict secrecy,

3. non-invasive legal, tax and oversight regulations,

4. protection of deposits and

5. insulation from the domestic political, social and economic conditions.

Those conditions by themselves in the post-9/11 world are hard to guarantee and the US in particular has been pressing with some success for a tightening of regulations and the relaxation of the secrecy rules. The result is that money of more dubious origin has been moving from the better regulated centres to the more questionable ones.

Caribbean centres

Despite the risks of being branded, many Caribbean countries have gone this route with varying degrees of success. Barbados and The Bahamas are perhaps the two most successful off-shore financial centres among Caricom countries, but competing with the US Virgin Islands and the Cayman Islands. At the lower level there are Antigua, Belize, Dominica, Montserrat, St Kitts-Nevis and St Vincent, all of which have off-shore banking legislation and which depend on the sector in varying degrees.

For Guyana to compete against its regional partners and the international giants of the industry however, it will have to overcome some uncomfortable truths at home and a negative image abroad. Some of the considerations associated with off-shore banking are embedded in the Guyana economic and social fabric. Off-shore banking is associated with tax evasion, the underground economy, money laundering, narco-trading and the Mafia.

With brutal frankness, the website of the US Embassy in Georgetown begins a 2007 report, “Guyana is a trans-shipment point for cocaine destined for North America, Europe, and the Caribbean,” pointing out that it has been ten years since there were any large domestic seizures, the last being in 1998 when a joint Guyanese/US operation confiscated 3,154 kilograms (kegs) of cocaine from a ship docked in Georgetown. The GOG announced no new drug policy initiatives in 2006. The 2008 International Narcotics Control Strategy Report was released yesterday, and its conclusions indicate that nothing much has changed.

Challenges

Very directly the 2007 report noted that Guyana had not yet implemented its ambitious 2005-2009 National Drug Strategy Master Plan (NDSMP) launched in June 2005; the Financial Investigations Unit (FIU) remained handicapped by the lack of effective legislation to deal with money laundering. In this regard the Money Laundering (Prevention) Act, 2000 was never brought into operation and the draft of a new act has been circulated for comments.

Lax laws – among which must be the non-bank cambios legislation – are an invitation to international crime rings which have been growing in numbers and national origins and destinations. Where at one time the Mafia was thought of as Italian -Al Capone, Antonio Calderon and Salvatore Conterno – the fall of communism has unleashed a new brand of Mafia in Poland and the countries of Eastern Europe which are themselves dwarfed by the Russian Mafia which according to an article on the BBC website controls 40% of private business and 60% of state-owned enterprises through thousands of organised gangs. They now play a big role in Colombia and Israel and are suspected of being involved in the casino business in the Caribbean.

Self-interest?

The moves to clamp down on poorly-regulated centres became pronounced in 2000 when in the space of two months a number of centres were labelled as “non-cooperative” by the Financial Stability Forum (FSF) in the context of global financial stability. Then on June 22, as “non-cooperative” by the Financial Action Task Force in the context of money laundering, and on June 26, as “Tax Havens” by the Organisation for Economic Co-operation and Development (OECD) in the context of tax competition. Among nine that were named twice in two months were three Caribbean countries – The Bahamas, St Kitts-Nevis, and St Vincent.

These led to calls for stricter controls of off-shore centres, which became more pronounced after the attack on the US in 2001. Defenders of off-shore banking see these as the work of the countries of the OECD which are concerned about competition rather than security and financial considerations.

Off-shore centres do have a number of advantages associated with the industry, not least of which is that there may be little else to choose from in terms of economic strategies as no doubt is the case with Niue and Nauru with populations of under 25,000 people. Whether these advantages translate into success is doubtful, just looking at some of the countries with which we are familiar.

Lawyers and accountants

Off-shore banking is also very attractive to lawyers and accountants who practically manage and make tons of money from the sector. From an employment perspective, however, it is even less than insignificant with business being largely conducted electronically. On the other hand their attraction to depositors may lie in the model where withholding tax is not charged on interest earned from deposits which can result in deposits being shifted from the commercial banks to their off-shore counterparts.

Guyana has double taxation treaties with Canada, the Caricom states and the UK, and a tax exchange information agreement with the USA, which all provide for the disclosure and sharing of information, and all of which may need to be reviewed in the proposed scheme of things. Given the US’s views of Guyana in relation to crime, that country may almost certainly want to ensure that there are sufficient safeguards in the regulation of off-shore businesses that may take away many of the advantages usually associated with the industry.

Conclusion

At present there is nothing to suggest that the Bank of Guyana is incapable of regulating the existing financial sector, although it has hardly done its job in relation to the New Building Society, and one wonders whether it is really in control of the non-bank cambios. It is likely that the off-shore business will come under its supervision requiring several changes to the Bank of Guyana Act and regulations. Again that may be seen as intrusive by potential operators. And can we hope to do all of this essentially with a minuscule Financial Intelligence Unit?

That this is the only policy issue identified by the Minister in his budget presentation must cause concern whether the government has any fresh ideas to deal with the challenges facing the major sectors of the economy or the taxpayers in the PAYE system and on whom the Budget now reveals has been placed additional tax burden.

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Budget Focus 2008

2007 was the year of Cricket World Cup, the single largest sporting event ever held in Guyana. It was an event on which billions were spent by the Government of Guyana and the private sector, yet there has been no analysis of the returns and the extent to which expectations were met. Significantly, visitor arrival numbers were about 12% above the preceding year. With World Cup done, we do have tourism and infrastructure assets but the Stadium for example, which may have cost close to $10Bn to build, will have to be maintained at substantial annual cost.

Budget 2008 which had been planned for earlier in the year became a casualty of both the Lusignan (January 26) and Bartica (February 17) massacres. In the latter case the presentation was set for February 18th but the massacre on the evening before forced a cancellation. It was presented four days later on February 22.

Despite the extra days and the gravity of the situation only one paragraph on the Bartica massacre appears to have been added to the Budget Speech. The work of the Government and the nation must of course go on but the events of the weeks preceding the budget should have impressed on the Minister the pressing issues confronting the nation – crime, the increasing threat of flooding, inflation and the brain drain. To the extent that he dealt with any of these it was how many billions the Government was going to spend.

The ability of the economy to withstand the pressures of crime and spiralling prices will be tested in 2008 as Carifesta returns to Guyana. This and other significant events such as local government elections, the completion of the Berbice Bridge and the Skeldon Modernisation Project were the backdrop against which Minister of Finance Dr. Ashni Singh presented a G$119Bn budget – 8.5% higher that the latest estimates of 2007.

Please download the full publication at www.ramandmcrae.com

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The export allowance visited (continued)

Cost and benefits

Export allowances were introduced as an incentive for companies engaged in foreign exchange earnings, and looking at the countries where they are still available several years after their introduction, there must be some doubt as to whether they have achieved their objective. When the allowances were introduced in Guyana in 1988, the country was in desperate financial straights, the black market for foreign exchange was thriving and America Street was the dominant non-bank foreign exchange market. Things have changed substantially since then with the introduction of the Economic Recovery Programme by Hoyte and its faithful continuation by the PPP/C government. In other words the economic justification for the export allowance seems to have reduced substantially. Whether Guyana should have abolished it earlier would depend on those changing circumstances as well as an analysis of its contribution, its benefits and its costs.

Tax data in Guyana at sectoral or geographical levels are impossible to come by which would make tax policy formulation difficult indeed.

Who are the beneficiaries and to what extent does the economy benefit from the tax foregone? Such information simply is not publicly available, but from the legislation the furniture sector would surely be among the beneficiaries in respect of non-regional sales.

The direct cost of the allowance is the tax foregone against which we should consider whether the incentive was the real cause of the investment and whether efficient companies would not find it attractive to invest in, for example, value-added processing of what many consider to be among the best wood in the world, without both tax holidays and export allowances. What would be the justification for similar exemptions for shrimps and minerals (other than gold, diamonds and bauxite) which are in international demand, when the law already allows tax holidays of up to ten years, carry-forward of losses till eternity, initial allowances of up to 40% on qualifying plant and machinery as well as annual tax allowances? Anything more than those suggests that the beneficiary business is a state-financed venture in disguise.

In other words, other than for the beggar-thy-neighbour policies on tax incentives pursued mainly by developing countries, there may have been little justification for the generous concessions in the first place, concessions which detracted from the broader issue of generally high rates of tax. Instead of fixing the whole tax system we consolidated the high tax rates for some in order to give relief to others – a story replicated in so many other sectors of the economy.

Incentive rewards evasion

There are two other consequences of the allowance that are worthy of mention. The first is that it not only discourages sales to the domestic market which may not only have the same needs as the overseas market but helps to cover some of the fixed costs, therefore making the company’s export prices more competitive – a different issue from dumping.

The second in some ways stems from the first, but is also inherent in the system. Even where such a company serves the domestic market it has an incentive to ‘duck’ those sales by not bringing them into the books, thereby evading the tax which would have otherwise been payable.

Loss of respect

Guyana needs to encourage all its earners – workers as well as entrepreneurs. It can do so by enlightened policies that do not discriminate against those who can least afford it and in favour of those who can. As long ago as 1993, I presented a paper entitled ‘Tax Reform – A Vehicle for Economic Recovery,’ in which I pointed out the unjustness of the tax system and that we were ignoring the experiences of other countries in a blind pursuit of attracting businesses at any cost.

Just incidentally that paper was quoted extensively but selectively in the parliamentary debate on the VAT legislation. Not that we should underestimate the contribution of businesses in general or exporters in particular. But in relation to the export allowance, the example of Trinidad and Tobago would be useful more than just for the fact that their manufacturing has taken off since its abolition, which may only be part coincidence and part lower energy costs.

Accompanying the removal of the export allowance, that country introduced lower rates of income and corporate taxes and very directly granted 150% allowance for expenses incurred in export promotion. We should encourage exports but let us do so within good logic, fairness and international treaty obligations.

This particular column arose out of discussions on the private sector, its independence and willingness to look the government in the eye. If our entrepreneurs are unable to compete internationally without undue reliance on government and subsidies in areas where we have natural advantages such as rum, forestry and wood products, then their claim to being world class will be no more than empty boasts.

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The export allowance visited

Introduction

Note: Following the Business Page article in Sunday Stabroek (13.1.08), which criticised the way the Private Sector Commission advocates on behalf of its members, the commission reacted by a clarifying press statement, without reference to the article and in a measured tone. That statement was not only welcome but also desirable, and it would have been helpful if the Ministry of Finance too had joined in the discussion which touched on critical tax and expenditure issues – the raison d’etre of the ministry.

What was unfortunate was the attempt by Mr Ronald Bulkan (Stabroek News, 18.1.08) to engage in a purely personal attack that left little room for reason or judgment and was replete with sarcasm and bitterness unbecoming of a leader of the private sector. Mr Bulkan’s outburst arose out of a point in the article relating to the export allowance which gives substantial tax relief to all but eleven products (not services) exported to non-CARICOM countries.

Perhaps Stabroek News may wish to consider whether it is not being too accommodating of those who abuse its liberal letter columns policy to make personal attacks against others, including those who serve society, often pro bono and without asking for this and that concession from the state.

I do, however, appreciate the opportunity offered by the letter to look in some detail at the issue of the export allowance and the implications for retaining it on the books.


Origin

The export allowance was introduced by the Hoyte administration by Act No 11 of 1988 as an incentive to exporters of certain products to non-CARICOM countries giving them a tax rebate of up to 50% of profit on export sales if their exports of these products exceeded 61% of their total sales. By an amendment in 1997 the level of exemption was increased to 75% for the same level of export sales, so that if the company’s exports accounted for 100 % of sales, its effective tax rate is reduced from 35% to 8.75 per cent. Put in the context of a system in which dividends from resident companies and paid to residents are exempt from any form of tax, persons in control of relevant companies can manipulate the system so that they pay themselves small salaries and large dividends tax free. In theory, therefore, the directors/shareholders of a company qualifying for the maximum allowance and choosing non-taxable allowances and dividends over salaries will pay no tax, and the combined rate of corporate and personal tax is still 8.75 per cent.

Let us look at this in context. Take the example of an individual earning $100,000 per month or $1,200,000 per annum. At the new threshold that person must pay $260,000 in income tax, taking home $940,000. (NIS is ignored for the purpose of this point). Compare this with a company earning the same $1,200,000 of taxable profits and qualifying for the 75% export allowance. The net tax charge is $105,000 and the balance of $1,095,000 can now be paid to the directors/shareholders tax free.

It is true that the Guyana Revenue Authority can set aside a transaction if it is “artificial or not given effect thereto,” to use the words of the Income Tax Act, but there is nothing artificial about exercising one’s right to any largess offered by the tax laws. In contrast, any expenses which the employee bears to get to work, let alone equip her/himself to work is not deductible, while the all-expenses paid car the company provides the executive and sometimes their spouse is not considered taxable income of the executive, but is allowable as a taxable deduction of the company! These are just a few examples of the tax system favouring the rich over the poor, and why not only the PSC but everyone should insist on meaningful tax reform within the framework of fiscal reform.

Guyana stands alone

Under the Agreement on Subsidies and Countervailing Measures (SCM), part of what is referred to as the Final Act of the 1986-1994 Uruguay Round of Trade Negotiations, subsidies including the kind of tax credits allowed by our legislation were scheduled to end in 2002. The Doha Ministerial Conference in 2001 allowed an extension to the transition period to 2007, but subject in each case to annual review. Among CARICOM countries Trinidad and Tobago applied the original deadline and abolished their export allowance at the end of 2002 while ten other Caribbean countries including the weakened Dominica were among the nineteen countries that in 2007 sought and obtained an extension up to the end of 2008 for maintaining the export allowance. Although Barbados is among these countries it is interesting to note that over time they have significantly altered their export allowance regime, so that currently the construction and data processing services are the major sectors entitled to the benefit.

Guyana is among twenty countries listed in Annex VII of the agreement which because of their per capita GNP being less than US$1,000 could reserve their right to benefit from more than the usual extensions applicable to the other CARICOM countries. To qualify for this, however, those countries had to meet certain requirements, including annual consultations with the SCM committee to justify its case. Of the twenty countries, Bolivia, Honduras, Kenya and Sri Lanka have reserved their right to benefit from the extension despite graduating from the sub-US$1,000 benchmark.

Nothing from the official site of the WTO suggests that Guyana has conformed with the requirement for consultation and justification under the agreement and it seems that by the end of 2008 Guyana will be the lone exception among CARICOM countries to have the export allowance on its books. One expects that, not least in the interest of the much vaunted harmonisation, the other Caribbean countries which will have removed the subsidies to meet their obligations will expect compliance by Guyana. Statistics published by the World Bank indicate that Guyana passed the US$1,000 threshold and should have, at the minimum, followed the example of Bolivia and others which have taken advantage of the special provisions applicable to them.

Cost and benefits

Export allowances were introduced as an incentive for companies engaged in foreign exchange earnings, and looking at the countries where they are still available several years after their introduction, there must be some doubt as to whether they have achieved their objective. When the allowances were introduced in Guyana in 1988, the country was in desperate financial straights, the black market for foreign exchange was thriving and America Street was the dominant non-bank foreign exchange market. Things have changed substantially since then with the introduction of the Economic Recovery Programme by Hoyte and its faithful continuation by the PPP/C government. In other words the economic justification for the export allowance seems to have reduced substantially. Whether Guyana should have abolished it earlier would depend on those changing circumstances as well as an analysis of its contribution, its benefits and its costs.

Tax data in Guyana at sectoral or geographical levels are impossible to come by which would make tax policy formulation difficult indeed. Who are the beneficiaries and to what extent does the economy benefit from the tax foregone? Such information simply is not publicly available, but from the legislation the furniture sector would surely be among the beneficiaries in respect of non-regional sales.

The direct cost of the allowance is the tax foregone against which we should consider whether the incentive was the real cause of the investment and whether efficient companies would not find it attractive to invest in, for example, value-added processing of what many consider to be among the best wood in the world, without both tax holidays and export allowances. What would be the justification for similar exemptions for shrimps and minerals (other than gold, diamonds and bauxite) which are in international demand, when the law already allows tax holidays of up to ten years, carry-forward of losses till eternity, initial allowances of up to 40% on qualifying plant and machinery as well as annual tax allowances? Anything more than those suggests that the beneficiary business is a state-financed venture in disguise.

In other words, other than for the beggar-thy-neighbour policies on tax incentives pursued mainly by developing countries, there may have been little justification for the generous concessions in the first place, concessions which detracted from the broader issue of generally high rates of tax. Instead of fixing the whole tax system we consolidated the high tax rates for some in order to give relief to others – a story replicated in so many other sectors of the economy.

Incentive rewards evasion

There are two other consequences of the allowance that are worthy of mention. The first is that it not only discourages sales to the domestic market which may not only have the same needs as the overseas market but helps to cover some of the fixed costs, therefore making the company’s export prices more competitive – a different issue from dumping.

The second in some ways stems from the first, but is also inherent in the system. Even where such a company serves the domestic market it has an incentive to ‘duck’ those sales by not bringing them into the books, thereby evading the tax which would have otherwise been payable.

Loss of respect

Guyana needs to encourage all its earners – workers as well as entrepreneurs. It can do so by enlightened policies that do not discriminate against those who can least afford it and in favour of those who can. As long ago as 1993, I presented a paper entitled ‘Tax Reform – A Vehicle for Economic Recovery,’ in which I pointed out the unjustness of the tax system and that we were ignoring the experiences of other countries in a blind pursuit of attracting businesses at any cost. Just incidentally that paper was quoted extensively but selectively in the parliamentary debate on the VAT legislation.

Not that we should underestimate the contribution of businesses in general or exporters in particular. But in relation to the export allowance, the example of Trinidad and Tobago would be useful more than just for the fact that their manufacturing has taken off since its abolition, which may only be part coincidence and part lower energy costs. Accompanying the removal of the export allowance, that country introduced lower rates of income and corporate taxes and very directly granted 150% allowance for expenses incurred in export promotion. We should encourage exports but let us do so within good logic, fairness and international treaty obligations.

This particular column arose out of discussions on the private sector, its independence and willingness to look the government in the eye. If our entrepreneurs are unable to compete internationally without undue reliance on government and subsidies in areas where we have natural advantages such as rum, forestry and wood products, then their claim to being world class will be no more than empty boasts.