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.