Tag: Taxation

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Every Man, Woman and Child in Guyana Must Become Oil-Minded (Part 12)

Taxation and the Petroleum Laws

The column today seeks to demystify the question of taxation and the oil companies. It is almost depressing the extent to which some persons, including officials, continue to misrepresent the true position regarding the confidentiality of the oil contracts and the payment of taxes by oil companies. I found it astounding that an online oil and gas blog earlier this week quoted a “source” defending the secrecy surrounding the petroleum agreement on the grounds that it has over a thousand clauses!

That is such nonsense and it is regrettable that the relevant authority has not sought to correct such rubbish. In fact, the model petroleum agreement has thirty-three Articles. That is the model which is given to all the oil companies around which negotiations take place. The model was so generous to the companies because of the low probability of finding oil that there was little, if anything to negotiate. That model contract is widely available but no one wants to make the time to read and analyse it. Continue reading “Every Man, Woman and Child in Guyana Must Become Oil-Minded (Part 12)”

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PPP/C’s Income Tax Act amendment is also unconstitutional

The Stabroek News of Friday January 6, 2017, reported that two parliamentary representatives of the PPP/C criticised but abstained from voting on an amendment to the Value-Added Tax giving the Commissioner General the right to prevent persons, through the Chief Immigration Officer, from leaving the country once they owed VAT.

And in the letter columns of the Stabroek News of January 7, former Attorney General, Mr Anil Nandlall returns to the issue with a reasoned argument whether the amendment violates the Constitution and is therefore void (‘Section 45 of the VAT Act is unconstitutional’).

This is interesting because in 1993 then PPP/C Finance Minister, Mr Asgar Ally inserted by way of an amendment to section 71 of the Income Tax Act a new provision that is arguably more dangerous than the APNU+AFC’s amended VAT provision. Taking Mr Nandlall’s argument, it means that the PPP/C’s amendment to the Income Tax Act is, at best, on the same tenuous constitutional ground as the APNU+AFC’s amendment to the VAT legislation.

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Things we have not noticed – conclusion

Introduction
This week I continue to raise questions on matters we may not have noticed in areas of public finance and management in Guyana. If former President Bharrat Jagdeo is rightly credited as the mastermind for the circumventing the financial provisions of the constitution and the financial laws, the credit for the execution of any schemes go to his choice as Minister of Finance, Dr Ashni Singh. Dr Singh as an accountant and former deputy Auditor General has used all his knowledge to confuse all and sundry over the Consolidated Fund and its sub-fund the Contingencies Fund, and other funds known and unknown.

Minister Clement Rohee should justifiably feel aggrieved that he is the only Minister of this government to have been targeted with a no-confidence vote in the National Assembly. After all, Dr Singh must at least have been aware of the deception over the rate of the VAT and the $4 billion for which Irfaan Ally was taken before the Committee of Privileges in the last Parliament while he, Dr Singh, was creatively spared by the then Speaker. He was central to the Clico debacle which has not been followed by any investigation into the serial illegalities that continue to this day; is solely responsible for the annual abuses of the Contingencies Fund; would have played a major role in moving more than $30 billion, yes thirty billion dollars, in dormant bank accounts without proper accounting; and is the minister with responsibility for the state of the National Insurance Scheme. And let us not forget that he is the Chairman of the NICIL Board that has been central to the breaches of the constitution and the inappropriately named Fiscal Management and Accountability Act. NICIL under him is several years in breach of the Companies Act and basic rules of accounting but he continues merrily on. Mr Rohee has every reason to think that there has been some goat in his past.

No more lottery accounting
We can assume that the Minister of Finance has had no hand in the decision to have Mr Ramson offer opportunistic advice on the lottery funds, but he clearly has no problem with the discontinuance by the Audit Office of the annual reporting of the funds collected and how they have been spent. It would be excessively charitable, however, to believe that he has not been consulted and has played no part in ensuring that his colleagues who were targeted for budget cuts earlier this year remain funded, parliament or no parliament, cut or no cut.

However assiduously, and at times clumsily, Attorney General, Mr Anil Nandlall, has rushed to position himself for entry into the Guinness Book of Records for the highest number of cases brought by an attorney general against his own parliament, the responsibilities and the powers of the minister of finance make his office the next most important one in the land. For that reason, while we just cannot afford not to notice the things the does, he and his government, with the help of a hardly working parliamentary opposition, a media that is at best poorly informed, a conflicted and handicapped Audit Office under an unqualified Auditor General, an equally unqualified Accountant General and a Finance Secretary with his own challenges and biases, have made sure he is the only brainer in the country, to use a word he employed recently to disparage his hosts at a public function.

As a specific example, how else does one explain the failure by the Audit Office, the National Assembly, the Public Accounts Committee and the press to demand an explanation for the non-tabling of a mandatory annual report on tax holidays granted by the Minister of Finance? There is sufficient anecdotal evidence that tax concessions alone cost this country about a half as much again as the taxes we collect, to make us take the Minister’s cavalier attitude to tax holidays a matter of substance and seriousness. Yet we as a country choose not to notice. We must have lost our marbles along the way.

Unrestrained powers
Who in the political opposition, the wider National Assembly or the Economics Affairs Committee have taken the time to consider and understand the powers the laws give to the Minister to grant all forms of tax concessions without any disclosure or accountability? I am convinced that the reason tax reform is not on the agenda is that it might expose the lawlessness as well as the ease and impunity with which even illegal concessions can be granted to friends and family alike. We have all forgotten that it is now one year since President Ramotar set up a Tax Review Committee while ensuring that it would not function. As the GMA, the Chamber of Commerce and the Private Sector Commission head into the fund-raising activities and the fun of the cocktail circuit, maybe one of their leaders would ask about the fate of that committee as well as the state of the NIS.

But let us stick to the question of taxes and see the extent of the powers of the Minister of Finance in addition to the power to grant tax discretionary holidays.

The Minister of course has powers to make laws under what is referred to as delegated legislation, and should have these tabled in the National Assembly and published in the Official Gazette. While this tool is seen as useful in enhancing the efficiency in public administration and is available generally to all ministers, the proliferation of such subsidiary legislation has aroused increasing scrutiny. As a result, countries around the world and more recently Australia have introduced legislation to regulate when and how such delegated legislation is used.

I thought it might be useful in an article of this nature to separate the powers of the minister of finance into those that have been used to help in curbing corruption from those which enhance public financial management in Guyana.

The incumbent has done nothing on corruption other than to challenge the Transparency Institute and question Guyana’s place on the Corruption Perception Index. He has centred procurement in his office, and his ministry was the biggest defender of Fip Motilall who cost this country so much.

The incumbent has to consider himself the luckiest man alive for not having been subject to a motion that he be brought before the Privileges Committee of the National Assembly.

Tax laws
Let us now look at some of the powers of the office granted to him by various laws. The Minister can effectively make laws to provide that the interest payable on any loan charged on the Consolidated Fund or guaranteed by the government is exempted from the tax; to approve as a mortgage finance company any company which has entered into an agreement with the government whereunder the company agrees to finance housing development; for the introduction of a presumptive tax on the income from self-employment of individuals who have annual turnover from self-employment of less than ten million dollars (not done); for the introduction of a minimum tax on the income from self-employment of individuals whose annual turnover from self-employment exceeds ten million dollars (not done); exempting under defined circumstances the income of non-resident shipping companies; deciding which sectors and products receive export allowances; designating the allowable expenditure for development of agricultural land; designating the central authorities for transacting diamond business; providing for minimum tax on self-employed professionals (not done); exemption from filing returns by persons whose income comes mainly from employment or interest (not done); specifying the books and records to be maintained by persons carrying on any business; appointing an agent in the UK for the purpose of facilitating the assessment of the income of persons residing in the United Kingdom (a clear throwback to the days when England was the Mother Country); appointment of the Board of Review (which has not been done for several years); making and revising Double Taxation Agreements (which has not been done for nearly two decades); entering into agreements with other countries for the exchange of information for the prevention of evasion or avoidance of income tax and the carrying out of those agreements (not done); prescribing the times for the payment of taxes by companies; and providing for the remitting wholly or in part of the tax payable by any person or category of persons on such income, in respect of any year of assessment, and in accordance with such conditions as may be specified in the regulations.

And that list is under the Income tax Act only.

Under the Corporation Tax Act the Minister can declare as exempt the income of any institution established for the encouragement of thrift or any income arising from investments of any fund or scheme established for the provision of annuities to designated persons.

But his real opportunities for acting in the most unaccountable and irresponsible manner lie in his power to grant tax holidays and two other lesser known provisions of the laws, one in the Income Tax Act and another in the VAT Act. Under the Income Tax Act, the Minister has the power to reduce the rate of withholding tax on any distribution or payment for the purpose of giving effect to any agreement relating to tax between the government and any person not resident in Guyana. Neither the GRA nor the Commissioner General has any say in the matter but must simply do as the Minister says. Nor is there any reporting of the exercise of this discretionary power.

And under the VAT Act, in order to zero-rate a supply of goods and services, all the Minister has to do is sign with a person an investment agreement for which there is no definition, specified contents or penalties for non-compliance with any promises by the investor.

Additionally, the Minister of Finance makes all the delegated legislation under the Value-Added, Excise and the Customs Acts and appoints directly or indirectly all the members of the Revenue Board which exercises wide policy-making powers over the administration of all the revenue collecting agencies.

These are enormous powers that are hardly regulated, if at all. True, the Financial Management and Accountability Act has certain guidelines on the charging of expenditure on the revenue of the country; how sums due to the revenue be remitted; and the authority for the remission, concession, or waiver of taxes.

Conclusion
The Minister has shown himself time and again to be irresponsible and willing to bend and if necessary to circumvent the law. There is hardly a qualified accountant in the traditional public service, and both the posts of Auditor General and the Accountant General are held by unqualified persons. It is not the ideal environment in which the Minister of Finance is a Dr Ashni Singh. Rather than allowing Deodat Sharma to misdirect them with petty cash issues, the PAC must make a concerted effort to rein in the excesses of Dr Singh which have cost this country tens of billions.

The Economic Affairs Committee has work to do.

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Things we have not noticed

Introduction
Following, but not as a result of last week’s column addressing the parlous state to which Cabinet Secretary Dr Roger Luncheon has brought the National Insurance Scheme, I had two very interesting conversations, one with a business leader and the other with an MP. In advance of consultations to be held with the actuary on his draft report on the eighth five-yearly actuarial report on the NIS, they both wanted to know my thoughts on the report’s findings and recommendations. Both seemed not to be in the least bit uncomfortable to admit that while they had last week’s Sunday Stabroek they did not get around to reading the newspaper or the full-page column on precisely that topic. We can only guess about their contribution to a consultation for which they would have been so hopelessly unprepared on a matter of such grave national importance, a matter that has been the subject of several articles over a recent two-week period.

It is even worse. By now we all should have been aware that the government of which Dr Roger Luncheon is the Cabinet Secretary and the Board of the NIS of which he is the Chairman, did not implement the recommendations contained in the sixth and the seventh actuarial reports on the Scheme at December 31, 2001 and 2006. But the two persons I spoke with apparently did not know about the parlous state of the Scheme, while my politician friend was bold enough to ask seriously but rhetorically, how did we “allow that?” Perhaps our politicians have been reading too much Lewis Carroll.

A second issue on the NIS is the location of the consultation. Now you would expect that anyone consulting with the actuary would want to meet with him outside of the framework of the NIS Board or its chairman. But that kind of liberal and rational thinking would in Dr Luncheon’s eyes be too dangerous. The consultation had to take place with Dr Luncheon, whose leadership of the Scheme is not insignificantly responsible for its parlous state, at Luncheon’s office and under his chairmanship. Dr Luncheon may strike many as a bumbling incompetent but he remains a dangerous practitioner of artful politics. The idea to hold the consultations on his turf and in his presence was clearly designed to control any criticisms of his government’s abominable management of the Scheme, now facing its worst crisis in 42 years.

Even as we ponder the serious medicine prescribed by the actuary to address the crisis the NIS faces, my hope is that the media would now ask the private sector as well as the political parties and the trade unions in particular, for a report on the consultations. As I indicated last week, I am particularly concerned that if the recommendations are accepted the burden of the adjustments would be felt mainly by the workers of the country.

Now you see it, now you don’t
Today’s subject seeks to raise questions on other matters we may not have noticed. It touches on the disproportionate sharing of the benefits and burdens of the taxation system and the inequality it has spawned in the vast disparity of wealth among those who are part of the power structure and those outside of it. This column has addressed such disparity time and time again and for emphasis captioned a column on January 29 of this year drawing attention to the US system under the topic, “If Mitt Romney was in Guyana, his 13.9% tax rate would have been lower.” The reason is that our tax system favours the employers, those with capital over the workers, who often struggle to make ends meet and who at the end of their working lives which the actuary now says should be extended to sixty-five have nothing but an NIS pension to look forward to. I will deal with that disproportionality next week and look at how different types of income are taxed differently in Guyana.

For starters, let us look at the system of remission of duties granted by the government which was reported on each year in the annual report of the Auditor General up to 2005.

There is a lot to argue with on whether some of the figures do not defy the logic of the reported performance of the economy during the six years. The wild swings between 2003 and 2005 seem to make little sense, but that is really not relevant here, except perhaps to reflect the quality of some elements of the work done by the Audit Office. As for the revenues of the country and their impact on the resources available to spend on education, health, security and infrastructure, it matters little whether the authority to grant remission of duties since 2003 is vested solely in the Commissioner General as the Audit Office seems to think.

But even if the Audit Office is correct, and regardless of where the range of authority lies, there should surely be some formal manner in which the body vested with the powers of remission reports to taxpayers and the National Assembly on the extent and value of remissions granted. If the power is vested in someone else, the one person who should insist on the publication of the information is the Minister of Finance who has constitutional responsibility for the national budget. Any taxes required to meet public expenditure which are borne, if at all, at lower effective rates by one segment of the population, must inevitably be met by those who do pay. But coincidentally or otherwise, the Audit Office ceased to report on remissions from the time Dr Ashni Singh became Finance Minister.

Dr Singh and tax remissions
Dr Singh has been egregiously reckless on the expenditure side of the Budget, misdirecting public funds to NICIL of which he is the Chairman, making unlawful withdrawals from the Contingencies Fund for which he is solely responsible, and authorising the transfer of billions of dollars from the 2000 series bank accounts which requires statutory authority. Under the Jagdeo presidency – and quite possibly still – spending outside of the authority of an Appropriation Act became normal with not even a hint of protest from the Finance Minister. After his role in the unlawful granting of concessions to the former President’s friend, it is difficult for anyone to believe that he is any less careless with the country’s tax revenues than he is with its expenditure.

Yet, our laws give the Minister of Finance enormous powers to give away tax revenues, over what may appear to be a small range of taxes but which have substantial fiscal implications. We start with the first and perhaps best known concession, the tax holiday. Under the Income Tax (In Aid of Industry) Act, the Minister of Finance has discretionary powers to grant an exemption from corporation tax with respect to income from new economic activity of a developmental and risk-bearing nature, or from dozens of economic activities. Without putting too much of an emphasis on it, the ease with which Mr Jagdeo and Dr Singh amended the law for friends shows how elastic and discretionary the law is.

And bear in mind that in approving tax holidays, the Minister is also extending exemptions from Property Tax and the Capital Gains Tax act.

Here again there is a silence feeding the appetite of the conspiracy theorists. Tax holidays can extend from five to ten years and cost billions. So the law requires some accountability. Under the Investment Act the Audit Office is required to carry out annual audits of the tax holiday incentives granted by the Minister, but the Audit Office has failed in its obligations under section 38 of the Investment Act to have laid in the National Assembly such a report for any year. The deadline for this is six months after the end of each financial year.

I have repeatedly raised this omission with no reaction from anyone. Surely the Public Accounts Committee has a duty to deal with this blatant disregard for the law with the potential of massive cover-up of tax giveaways. All to the detriment of those who pay taxes.

To be continued

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Tax rates hardly matter

Introduction
As promised, this week’s column looks at the importance of tax rates in the overall scheme of tax policy in any country. I start by saying that lower rates of tax do matter – they allow the taxpayer to retain a higher level of the income earned which they can use for re-investment or higher dividend payments to shareholders. They can also make a country more competitive since prospective investors pay some attention to countries’ nominal tax rates in their investment equation. Hence, the decision to reduce the corporate tax rates by five percentage points would be welcomed both by companies and individuals, as evidenced by the swift response of the Private Sector Commission (PSC) to the announcement by the Minister of Finance.

In making his announcement the Minister said companies benefiting from this measure would be in a position to retain and invest a significantly higher share of their profits. While some may suggest that the reduction in the tax rate had an unmistakable eye on the upcoming general elections, they cannot argue with the effect advanced by the Minister since by definition a reduced tax charge leaves more after-tax profits which are available for investments, higher dividend payments and related party loans. But seemingly too quick to please the political directorate, it was the private sector representatives who stated that the reduction would make Guyana competitive in terms of tax rates.

The private sector leaders travel around and must know that the corporate rate in two of our major Caricom trading partners (Trinidad and Tobago and Barbados) is 25% while our reduced rates are 30% for non-commercial companies, 40% for commercial companies and 45% for telephone companies. Non-regional investors on the other hand would be familiar with much lower tax rates in their own countries, so that our 30%/40% would still sound to them extremely high.

Government failure
The biggest but unacknowledged problem for the private sector is the failure by this government to address tax policy and tax reform which it has been promising for eighteen years. For example, tax policy would address how we treat one sector over another, whether a single person should receive the same personal allowance as the single parent with a number of children, whether there should be differentials in tax rates, the balance between direct and indirect taxes, extending the use of the withholding tax to domestic contractors, etc. Unfortunately what passes for tax policy is the demand for tax revenues to finance a bloated, politicised and inefficient bureaucracy and a government that seems to have an insatiable appetite to spend, spend and spend.

I strongly believe that the flat, across-the-board reduction of five percentage points is both intellectually lazy and politically cowardly. If the officials of the Ministry of Finance were to read the report of the Bank of Guyana (latest mid-year 2010) or indeed the statistics in their own National Estimates, they would see that the business community is increasingly investment-averse despite all the tax and contracts goodies thrown their way. As the following table shows, growth in the economy is being driven by the public sector.

[table to be inserted]

Source: National Estimates 2011

Goodies
The tax laws are now replete with all forms of incentives, some of which are general and others specific, some found in legislation and others in agreements signed by the political arm of the government. Some are intended to encourage exports (the export allowance), investments (the Income Tax in Aid of Industry) which also provides tax holidays for investments in the hinterland, low cost housing and exemption from VAT.

More than a decade after its introduction and generous exemptions for public companies investments, the Stock Exchange remains extremely inactive with no new issuers, i.e., companies going public, or existing companies offering new issues. In the absence of rules on thin capitalisation and the differential tax treatment of loans versus dividends, even our larger public companies find it cheaper to borrow than to raise new capital. There was a time when Banks DIH and DDL could be relied upon to make rights issue or bonus shares which allowed for some greater liquidity in the market. They have not needed to do so.

The commercial banks hold deposits of more than $230 billion dollars of which loans and advances, inclusive of the public sector loans, amounted to $68.9 billion. For several years the government has been critical of the commercial banks and Minister Manzoor Nadir, the self-appointed chief spokesperson of the 2011 Budget is on record as stating that “the commercial banks have been penalizing our people for too long.” He is also on record for cautioning against differential tax rates to protect the locally manufactured products since they “protect local inefficiencies.” That Mr Nadir now supports the things he had earlier railed against shows how politicised the tax system is, how it is influenced by the changing tides of political opportunitism and why we have a tax system that is, by any measure other than revenue collection, so dysfunctional.

Drivers
Tax policy has to be driven by a vision and relevant information. This column has called for more relevant information to be disclosed in public documents. Principal among these would be the annual report of the Guyana Revenue Authority which the Minister of Finance has failed to table in the National Assembly for some time now. Let us see how much the construction sector, the bauxite sector, the forestry sector, the agriculture sector including rice, sugar and other crops sectors contribute to the national coffers, and how much remissions, rebates and holidays they receive which may amount to billions each year. And yes, we should be able to see how much each region contributes and compare this with their receipts from the central government.

The Minister has access to data that would tell him that the bulk of the corporate taxes collected by the GRA is paid literally by a handful of companies. These are the commercial banks, Banks DIH and DDL, GT&T and Digicel and the oil distribution companies. The majority of companies could not care about tax rate – they decide how much tax they will pay and have their accounts prepared accordingly. This of course is also true of the self-employed, for which Regent Street is a metonym and to which political protest is as applicable as tax evasion is. There is a strong suspicion that setting a payment level for any period is also true of VAT, and as I have written before in this column, that some politicians have given pledges to the business community for tax support in exchange for votes.

Conclusion
Tax policy and tax reform will clearly have to wait for some years. The Jagdeo-Singh duo is comfortable with the status quo under which urban workers and consumers are the biggest contributors. They are equally comfortable with some sectors and segments making no contribution to the national coffers while demanding so much. The parliamentary debate on the 2011 Budget will close without any discussion on either tax policy or tax reform. In that sense, we are all losers.