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Take from the Poor and Give to the Rich

Introduction
Perhaps not surprisingly the only feedback I received to last week’s column on tax evasion and tax avoidance was from persons who would generally be considered among the better off. And who want more from the society and the tax system because “they work hard, create jobs and have a choice.” Those comments are filled with arrogance, self-importance, self-interest and self-delusion. As though the stevedores, the public health workers, the cane-cutters and others do not work hard, or do not have a choice. They have a choice and that is why they daily flock the Passport Office in Camp Street from 5.30 AM for a passport to go to the Caribbean, North America, to anywhere, to work harder, to earn and to enjoy the fruits of their harder work.

In Guyana the tax system is heavily weighted against the poor and the commentator and columnist was only mildly exaggerating when he said that workers pay a total of 49% of their income in taxes – 33 1/3% income tax and 16% VAT. In fact that commentator forgot to mention the employees’ 5% NIS contribution which in public finance is a form of tax while the rough calculation of 49% ignores the range of zero-rated VAT items and the personal allowance of $35,000 per month. Overall however, the tax burden is very much around the 50% tax to GDP which makes Guyana one of the most heavily taxed countries in the world.

Soaking the Poor
Yet, for some reason there is no real commitment to tax reform about which we have been hearing since 1992. Tax reform is rat poison, for all practical purposes off the table, better understood by those who pay taxes than those who impose them. This is ironic, for some of the most important steps in the march to democracy involved taxation. The Boston Tea Party has to be given pride of place for its inspiration to the independence movement in the US and the iconic statement “no taxation without representation”. How can those of us who were around in the sixties, forget Peter D’Aguiar’s Axe the Tax Campaign when then Premier Dr. Cheddi Jagan sought to introduce a measure of tax reform? Ann Jardim, one of the leaders of the UF carefully ignored the introduction of new taxes but rallied the working class against a miniscule increase in the rate of the personal income tax. Today those who have followed her in the UF are part of the new scheme that takes from the poor to give to the rich, in taxes and state assets.

In the sixties, the political classes were on different sides of the political divide – a left-leaning government seeking to achieve a more equitable sharing of the benefits and responsibilities of citizenship by the trader and business class. Today while the ruling party may have vestiges of working class preferences, its Government seems beholden to the business class whose position of influence – whether at the head table at the Office of the President or at the Pegasus Poolside on Friday evenings – has come to be the defining feature of the Jagdeo Administration. We no longer hear about equity in the tax system, let alone the distinction between horizontal versus vertical equity. Indeed, any acceptance of the concept of tax reform by this Government is not out of conviction but out of a commitment made as a precondition to receive more and more gifts and grants from the donor community.

Stranglehold
Businesses’ stranglehold on the agenda is not peculiar to Guyana. The current wave of globalisation, driven first by the Reagan-Thatcher axis and adopted and sold by the international multilateral institutions across the developing world like snake oil salesmen of old, has witnessed a concentration of wealth and income and a widening of the socio-economic divide. The effect has been a corresponding increase in business’s ability to set the agenda for political discussion and its effective veto over public policy. In Guyana, under the agreements made by the Administration with the donor community any semblance of economic policy is driven by the National Competitiveness Council that is dominated by business interests rather than national interests. The NCC has been more successful at stalling in the interest of the status quo than at achieving any meaningful changes.

Recent research under President Bush revealed that elected officials tend to be unresponsive to the policy preferences of low-income citizens and that they disproportionately favour business interests and the wealthy in all areas of public policy. Like their counterparts in the US, those interests in Guyana also opt out or are favoured by a tax system set up in 1929 for the ruling plantation and trader class and only episodically reviewed subsequently for reform. Indeed, since 1929, there have been only two or three events that could qualify as tax reform and with only one being targeted at getting the rich to pay a fair share of the tax burden. The first of the reforms took place in the early sixties when Dr. Cheddi Jagan brought in Hungarian-born world-class economist and socialist thinker Professor Nicholas Kaldor, to overhaul the country’s tax system. Those reforms included the introduction of the Capital Gains Tax, the Property Tax and steeply progressive but at the highest end, counter-productive, marginal tax rates that went up to 75% from a base 5%.

Burnham and Hoyte
In 1970 the Burnham Administration enacted the Corporation Tax Act which introduced a separate regime of companies while incorporating over seventy sections of the Income Tax Act into the new Act. The next wave saw the abolition of dividend taxation and pensions, unification of the corporate tax rate, the abolition of the progressive income tax and the abolition of allowances – all pro-business and anti-worker in their effect. The PPP/C before President Jagdeo has the distinction of reversing the unification of tax rates and introducing the Minimum Corporation Tax on all, and then only on commercial, companies. Jagdeo has to his credit the immoral imposition of the 16% Value-Added Tax. Now, if tax evasion is illegal then we have to find a word for the imposition of a tax at a rate that is knowingly and admittedly excessive and wrong.

Barring one or two exceptions, every reform then has favoured the wealthy and the powerful at the expense of the poor. Here are some of the starkly contrasting provisions in the tax legislation.

1. Wages and salaries are fully taxed. Dividends are fully exempt.

2. Income from personal exertion is taxed at 33 1/3%. Capital gains and interest income are taxed at 20%.

3. The employer-provided vehicle, and sometimes more than one, driver(s) and security are fully exempt from tax. A travel allowance to the worker to help her defray the cost of getting from home to work is fully taxed.

4. The entertainment allowance paid to the executive is fully exempt; the meal allowance paid to the worker is taxable unless a strong case is made for it to a skeptical and uncompromising revenue officer who will claim that a meal is a private expense. As if entertainment does not include a high level of private benefit as well.

5. There is no limit to the pension that is tax-free. Most workers on retirement have to make do with under $20,000 per month. The retired top-executive receives hundreds of thousands tax free.

6. Overseas passage assistance – a throwback to the British planter class, is exempt for all but can only be enjoyed by those with spending power.

7. The working poor are taxed at source; the self-employed with all their benefits and concessions, can decide how much tax they want to pay.

8. There are ethnic and gender biases in the tax system that no one even wants to whisper, let alone acknowledge or debate.

9. The wage earner gets no deductions or allowances; business can deduct most expenses, whether it be the magazine or the business trip.

10. Duty and tax concessions favour those who have economic or political power over those who do not. Just look at the beneficiaries of the duty-free vehicles.

11. Businesses get tax holidays; their workers’ earnings are fully taxed.

12. The entrepreneur has a choice between taxable and tax-exempt business activities; the employee’s only choice is not to work.

No vision, no tax reform
The above, is a brief review of the relative position of the workers versus the executives and the “entrepreneur” under our tax laws. Those laws clearly cry out for reform. But then as the late Richard Musgrove, public finance specialist said, tax reform needs a clear and detailed vision of where we are going – a vision that is sadly lacking in President Jagdeo. That is why he could be so easily diverted to the LCDS as a tunnel-vision strategy for development and even as he heads CARICOM, could be completely sold on a Continental Destiny with neighbouring Brazil. If what he said in a recent speech he gave at a private function is to be believed, he is now looking to Brazil to help us with our rice industry even as his Government pumps $400 million in what by implication is an inefficient industry.

The cry for reform, no matter how compelling or loud, is unlikely to be heard or to win support from those of power within and influence without. A review I saw recently by a leading donor to the Guyana economy, actually praises the country’s fiscal performance, completely ignoring the tax burden that the citizens of the countries making up that donor would regard as completely unacceptable given the low level of public benefits available in Guyana. In many of those countries the entertainment allowance is now denied at the corporate level and in Australia the Keating Tax Reform Package dealt an effective blow at non-cash fringe benefits.

Conclusion
But at the domestic level there simply is no need or pressure for reform. With perhaps a single exception, the top tier of the opposition political parties has shown no interest in tax reform, confirming the view that there is no ideological or class difference among the political elites. Labour has been emasculated by personal interests and petty rivalry exploited by, again, the politically powerful while Ann Jardim’s successor is just another of that elite.

The Ministry of Finance has been depressingly slow at taking any initiatives in tax policies. It has left these to the tax administrators, a fundamentally flawed position – the two roles and functions being obviously different. We need lower rates of tax both on individuals and corporate, removing not the loopholes but the chasms that in some cases discount the nominal rate of tax by as much as 75%. We need a society in which the fiscal benefits and obligations are shared and borne fairly by all and in which relief must not be sought in tax evasion.

Similarly, the President has allowed elements in the private sector to hijack the social and economic debate including tax reform. If any progress is to be made, then the hijackers will have to be brought into line. Failing that, we are left with an inequitable and dysfunctional tax system, high tax rates and massive evasion. That is in no one’s interest.

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Question: What’s the difference between tax avoidance and tax evasion?

Answer: the thickness of a prison wall

That is how the former Labour Chancellor of the Exchequer in the UK, Denis Healey defined the two related practices but which have distinctly separate consequences. He was also tough on tax evasion and also said “It will squeeze the rich until the pips squeak.” The first quote in fact matches the general view on the contrasting level of permissibility of what others may call aggressive tax practices. Remember however that Mr. Healey made his statement decades ago. Internationally, things have changed since then and not only tax administrators but legislators and very importantly, the courts, certainly in the more advanced economies, are taking more direct action against aggressive tax practices.

It may in fact be due to Bush’s War on Terror targeting not only those who pulled the trigger or threw the bomb but those who financed those who pulled the trigger or threw the bomb. The evidence is that the coordinated and sustained efforts to contain domestic tax evaders and the tax haven jurisdictions that have for decades facilitated them are yielding significant results. As one international tax specialist wrote recently, “the seemingly endless game of cat and mouse seems to be shifting largely to the cat’s advantage.”

In 2008, Germany paid an informant for records taken illegally from a Liechtenstein bank, in an effort to track down German tax cheats including some of its international tennis stars. But it was the United States that has shaken the very foundation of Swiss bank secrecy – which essentially forbids access to information of or about the account of any person other than the account holder – when it demanded from the Swiss bank UBS the names of 52,000 account holders suspected of tax evasion. The Swiss initially refused but the tide had been turning against those “fiscal and moral termites who have been eating away at tax revenue bases throughout the world in an unprecedented fashion over the last thirty or so years.”

The Swiss blinked and now the Obama Administration is planning to go even further with the enactment of new legislation, the Stop Tax Haven Abuse Act – that is designed to better enable US authorities to obtain information about offshore trusts and accounts used by Americans to hide their income and assets from the Internal Revenue Service of the US. The position is that the US can access the information under the scores of Double Taxation Treaties which the US has with countries across the world or under what are called Tax Information Exchange Agreements such as the one it has with Guyana. In the alternative, the US simply threatens sanctions against those it considers uncooperative.

Tax evasion, tax avoidance and tax planning
It seems fairly simple to distinguish between tax evasion and tax avoidance. It is the difference between working outside the law and working within the law (though against its spirit). Tax evasion can and often is contrasted with tax avoidance, but also with tax planning/mitigation, and it is here that the issue becomes difficult. Tax evasion typically involves the non-payment of a tax that would properly be chargeable if the taxpayer made a full and true disclosure of income and allowable deductions. Common examples of tax evasion include a deliberate failure by a business to report the full amount of revenue received or the deliberate claiming of a deduction by a business for an expenditure it has neither incurred nor paid. There is no ambiguity about tax evasion – it is illegal and a crime under our laws. On the other hand, tax avoidance can be considered either as permissible or impermissible, although they are not that easy to distinguish.

Tax planning or tax mitigation can be traced back to a well-known and oft quoted case involving the Duke of Westminster in which the court ruled that “every man is entitled to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be”. One simple example of tax planning is where a business promoter makes his decision on the form of the entity on the basis of the applicable tax considerations. If the trader was to set up a company it would be taxed at 45% and be subject to Minimum Corporation Tax. On the other hand if he operates under his or a business name the profits all accrue to him and the trader would be taxed as an individual at the personal tax rate of 33 1/3%. Tax planning may also include the decision to lease or buy an asset which would have different tax consequences but both of which are entirely legal.

Pandemic
Where it becomes really difficult is in respect of “impermissible tax avoidance”, which refers to artificial or contrived arrangements, with little or no actual economic impact upon the taxpayer, and which are usually designed to manipulate or exploit perceived “loopholes” in the tax laws in order to achieve results that conflict with or defeat the intention of Parliament. In fact this is what section 74 of our Income Tax Act seems to address but uses the words “artificial” and “fictitious” and gives the Commissioner wide powers to disregard or set aside such transactions. In tax jargon our section 74 is a general anti-avoidance rule (GAAR) and is designed to protect the revenue base from erosion by “fiscal termites” that seem to have created a pandemic in our economy, much worse than any Swine Flu or AIDS. .

Since revenue collection is a primary function of any tax system, any systematic and widespread avoidance activity will clearly have an adverse impact on that function. But avoidance does more than this – it also significantly affects the efficiency and equity of tax systems by siphoning off resources from more productive ventures, redistributing the tax burden and threatening to undermine compliance. We seem not to care that the poor employees are burdened by high and unavoidable tax personal taxes and wrongly charged VAT, all for the benefit of the private sector entrepreneurs, a term that has come to include drug dealers, money launderers and tax dodgers.

Changing administrative approach
Across the major economies, national revenue authorities have been taking measures to identify and shut down perceived impermissible tax avoidance activities. Within the UK, Her Majesty’s Revenue and Customs Anti-Avoidance Group co-ordinates anti-avoidance activity including litigation strategies in relation to avoidance. To counter tax avoidance, the Group deploys its resources where it considers the risk greatest and provides direction for the effective use of resource within other areas of HMRC. The approach is now a form of cooperation between the tax authorities and larger entities that is designed to bring about effective consultation, certainty and speedy resolution of tax issues. Changing from the old command style tax administration to a more co-operative approach, the authorities enter arrangements with the taxpayer whereby the latter would submit its tax strategy on a particular issue and have this cleared by the tax authorities in return for which it is saved the time and cost of revenue audits and litigation.

Another approach is increased cooperation among the tax authorities of various countries with the Organisation for Economic Cooperation and Development (OECD) and the Joint International Tax Shelter Information Centre set up by Australia, Canada, the UK and the US being prime examples.

The tax authorities are also aware that much of the tax avoidance by the big companies is hatched and or blessed by their tax advisors.

They have therefore not been hesitant to go after the larger accounting firms that design and market packaged boutique packages sold under attractive but expensive labels including asset protection and the virtues of mainly offshore tax shelters.

Both corporate as well as high-net worth individuals seems to consider the risks associated with tax evasion as more than compensated for by the rewards.

The changing attitude of the courts
The Duke of Westminster case (1936) has long dominated the thinking of the courts and more recently they have propounded what is called the Ramsay principle (1982) under which the courts would examine transactions that seem to have no commercial purpose and ignore or set them aside as envisaged by section 74 of our Income Tax Act.

The Ramsay principle was seen as a separate theory of revenue law which said that tax laws must be interpreted very strictly in favour of the taxpayer. That principle appears to have ended in 2005 in a case that came before the House of Lords.

The latest case essentially ruled that tax provisions dealing with tax evasion should be given a purposive construction which could have wide effect since all anti-avoidance measures are designed to prevent tax evasion. But life will never be as simple as this and no doubt the courts will continue to be challenged by the creativity of tax advisors and dishonest taxpayers even as the nature of transactions become ever novel and complex even for tax administrations.

The Guyana scene
There does not appear to have been any reported case out of the Guyana courts addressing section 74. That is equally true of the region with one notable exception in Jamaica, involving a leading case on asset stripping, under similar anti-avoidance provisions.

On the other hand, there are some frequently used permissible tax planning strategies, none of which again appear to have reached the courts but this is because they have not been challenged by the Revenue Authority. Some of the more common strategies include the structuring of the business (corporate or individual); the efforts to take advantage of the differential tax rates applicable to companies (non-commercial company and therefore taxed at 35% or commercial and taxed at 45%); and transactions designed to benefit from low or no tax under some of the provisions under Double Taxation Treaties of which the Caricom Treaty is a prime example.

What seems more common is the rank tax evasion where income is blatantly ducked and the money laundered abroad under the permissive exchange control regime we enjoy and very often abuse.

Another is to charge all forms of personal expenses to the business and get full deductibility while yet another is the use of fake invoices which overstate the figures in the accounts and understate those given to the Customs, both of which are accepted unknowingly by the GRA. Businesses can generally count on finding a friendly accountant willing to sign off on their make believe financial statements that seem to get past just as easily, the tax authorities as well as the lending institutions.

Guyana is the only regional country that has a net property tax capturing the assets held here and abroad. The overseas assets are almost invariably overlooked by the GRA despite arrangements that allow for the exchange of information with the tax authorities of all our major trading partners. The Cambios seem custom-designed to facilitate such evasion while the country appears only willing to pretend that we have serious intentions about preventing money laundering.

One glaring example of how tax evasion takes place under the noses of those in administrative, political and professional positions is with respect to political donations. It is known that businesses contribute significantly to the elections war chest of the major political parties, sometimes more than they pay in taxes. Yet, none of this gets its way into the books. Is it just possible that some of these donors who are feted under the full glare of publicity actually pay more to the political parties than in taxes? Or is it that they consider that this gives them tax immunity?

Conclusion
Tax reform in our case has first to deal with tax evasion and administration. This government has been paying lip service to tax reform ever since it came to power seventeen years ago. Unless it thinks that imposing VAT on top of high personal tax rates is tax reform, it has done nothing and tax evasion is now worse than it has ever been. VAT has brought in immoral windfalls, reducing the incentive for reform which the Government has delegated to the National Competitiveness Strategy. So far, that body which is chaired by the President has shown no intention, appetite or capacity to deal with it. And the GRA is either overwhelmed by the level and scale of tax evasion or is not utilising the tools and deploying the resources at its disposal to deal with the crisis.

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The audited financial statements and annual reports were used to analyse NBS

I am pleased to see some new names surfacing in the discussion of topical issues. It suggests that there may yet be persons out there prepared to engage seriously in these issues even if sometimes without a sufficient knowledge or understanding of the facts. I therefore consider it useful to address some of the more salient matters raised by Mr Salim Khan in his letter in the Stabroek News of October 6, 2009 ‘Assessments from critics of NBS are counterproductive.’

1. Mr Khan claims I have a peeve about the NBS, having served as a director of the Society. I grant him an unchallenged right to psychoanalyse my writings and personality.

2. Mr Khan recommended that the facts be checked, although there is no evidence that he himself did so. Not only do I always use the audited financial statements and annual reports of the Society for my periodic analysis but before the most recent Business Page, I wrote the Society’s Director Secretary for a copy of the half-year 2009 financials. He is yet to acknowledge my request. Would Mr Khan please help?

3. With NBS being the only Building Society in the country, Mr Khan may wish to tell readers which industry in which country he is referring to in claiming that “NBS’s financial position is as sound as any in the industry.”

4. Can Mr Khan explain what he means in his letter by a “simplistic portfolio of loans” and whether he thinks that the board was wrong to support the members’ motion at the 69th AGM for a Board Loans Sub-Committee?

5. Is Mr Khan aware that commercial banks are subject to two rules on provisioning against doubtful loans – IAS 39 and Bank of Guyana Supervision Guideline 5, the latter of which does not apply to NBS?

6. If Mr Khan would care to read my reviews of the commercial banks’ annual reports posted at chrisram.net, he would immediately realise that their interest spread is a criticism that I invariably make. Having said that, I wonder if Mr Khan knows the following:

a. That unlike the regulated financial and banking businesses, the NBS does not maintain a non-interest bearing statutory deposit with the Bank of Guyana. If they did, it would easily mean on the basis of NBS’s 2008 financial statements setting aside more than $3 billion dollars as non-income earning assets. By not doing so, NBS can earn, at the average rate of interest it earned on mortgages in 2008, income of $275 million not available to the commercial banks.

b. That the NBS is exempt from corporation taxes and consequently for every $100 net income earned by the Society, the commercial banks paying corporation tax at the rate of 45% would have to earn $180.

c. For those commercial banks approved for lending for low income housing, the ceiling is $3 million per loan while in the case of the NBS it is $12 million.

d. That the NBS pays no property tax which on its 2008 net asset position would amount to approximately $40 million annually.

e. That legislatively, NBS with its emphasis on mortgages and prescribed limits, is precluded from the risks of commercial lending faced by the commercial banks.

7. When stacked up against those realities, it is surprising that the NBS does not report higher surpluses than it currently does.

The reason in my view is the result of the inefficiencies of the monopolistic privileges enjoyed by the NBS under statute, politicised, ineffective and self-serving governance and a board and management that lack the range of skills that a modern financial institution needs in a competitive environment.

8. Mr Khan is the only person I know who speaks as a keen observer but who considers directing business to the competition a virtue. As far as I am aware, the only business the NBS ever directed to competing lending institutions was for temporary, bridge financing during the period when the security for loans was being perfected.

Thereafter, the NBS would grant the loan including such amount as to liquidate the bridge-financing.

I trust that I have clarified and addressed Mr Khan’s issues and look forward to his extending me reciprocal courtesies. I trust too that others, including the directors of the NBS, who make similarly uninformed comments and claims, would be guided accordingly.

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‘Subsidies’ is an economic concept which takes many forms

I wonder whether, if Mr R Ravie Ramcharitar had understood the terms “benefit from” and “subsidized,” he would have written a letter (‘The Guyana Times competes in an open market for advertising, including government advertising’ SN, September 30 ), so laced with misplaced venom and ill-advised reasoning. The term “benefit from” referred to the use of facilities subject to subsidised rentals, duty, and other illegal tax concessions given by President Jagdeo to the Ramroop company Queens Atlantic Investment Inc. (QAII). Mr Ramcharitar should tell us whether Guyana Times Inc is paying market rent, in which case QAII is improperly and immorally exploiting concessions granted by the state – as done by another prominent investor – or is charging rent based on cost which included subsidies in various forms. It is a case of lose-lose for Mr Ramcharitar and his principals.

Second, ‘subsidies’ is an economic concept which takes many forms, including cash disbursements, tax exemptions, preferential exchange rates, governmental contracts with special privileges, and other favourable treatment. Is it not obvious then that advertising by a government to a start-up newspaper that dares not disclose its total circulation, let alone the components of its circulation, falls into that category? What are these prestige advertisements that Guyana Times attracts? Are these the 20% GINA advertisements – in addition to direct government ads – which cannot be justified and certainly not on the basis of any normal circulation criteria?

And what is this about superior circulation and readership among the business and professional community? Since Mr Ramcharitar is so confident about his “facts,” I am sure he would not hesitate to share them with his “superior readership.”

I am disappointed that Mr Ramcharitar would put his name to a letter that so casually deems others as malicious, fearful or jealous. Of whom or of what? Of the real beneficiaries of the PPP/C and President Jagdeo’s largesse, including subsidised land at Pradoville, but who dare not sign such a letter? And was it fear that caused Mr Ramcharitar not even to acknowledge that the identical letter by me appeared in the Kaieteur News as in the Stabroek News? Is his company afraid of the Kaieteur News or is there a more dangerous subliminal prejudice against Stabroek News at work here?

Finally let me say how much I am looking forward to examining a copy of Guyana Times’ annual return and accounts for 2008 which I had hoped the directors would have filed by now. Or is exemption from the statutory filing another concession enjoyed by the Ramroop companies?

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IFRS for SMEs: One cheer for the accounting profession!

Introduction
After more than six years of drafting, consultations, redrafting, deliberations, field testing and debates across a number of countries of the world, the International Accounting Standards Board (IASB), the body responsible for international standard-setting for the accounting profession, has issued an International Financial Reporting Standard (IFRS) designed for use by small and medium-sized entities (SMEs). Guyana is a member of the International Federation of Accountants and such standards automatically apply to Guyana.

The accounting regulator in Guyana, the Institute of Chartered Accountants of Guyana is now considering adoption. While it has not pronounced on the new standard it is expected that the standard would be available for use in the 2009 financial statements of all Guyanese SMEs. While not the most satisfactory situation, some members of the accounting profession have opined that even in the absence of such pronouncement, businesses and their auditors should take the lead and apply the new standard immediately.

The release of the new IFRS should be seen as one of the most welcome developments and contribution of the accounting profession in modern times. It simplifies many of the rules governing the preparation, contents and presentation of financial statements for all but a dozen or so of our companies. Up to this time the same rules that applied to the multi-billion dollar company like Demerara Distillers Limited also applied to the small one person operation – a requirement that is expensive, impracticable and nonsensical. The financial sector would be particularly gratified as the new standard removes one of the excuses of the profession about the cost, time and complexity involved in the preparation of financial statements submitted to them in support of credit applications and renewal.

The IFRS for SMEs is a self-contained standard of about 230 pages tailored for the needs and capabilities of smaller businesses. Many of the principles in full IFRSs for recognising and measuring assets, liabilities, income and expenses have been simplified, topics not relevant to SMEs have been omitted, and the number of required disclosures has been significantly reduced.

Main features
The following principal changes to existing accounting rules for SMEs arising from the new IFRS are highlighted:

1. Some topics in IFRSs are omitted because they are not relevant to the typical SMEs. These include: earnings per share; interim financial reporting; segment reporting; and special accounting for assets held for sale. To the extent that they do apply, non-mandatory reference could be made to the existing IFRS’s, which does compromise the stand-alone precept.

2. Some accounting policy options permitted under full IFRSs are not allowed under the SME IFRS because a more simplified method is available under the new standard. These include: financial instrument options including available-for-sale, held-to-maturity and fair value options; the revaluation model for property, plant and equipment and for intangible assets; proportionate consolidation for investments in jointly controlled entities; for investment property, measurement is driven by circumstances rather than allowing an accounting policy choice between the cost and fair value models; and various options for government grants.

I have highlighted the revaluation issue because this has become a common practice in Guyana following our experience with hyper-inflation in the late seventies and eighties.

3. Recognition and measurement simplifications: The main simplifications to the recognition and measurement principles in full IFRSs include the accounting principles and disclosure rules for financial instruments; goodwill and other indefinite life intangible assets which must be amortised over their estimated useful lives (ten years if useful life cannot be estimated reliably); research and development costs which must be recognised as expenses; borrowing costs which must be recognised as expenses; property, plant and equipment and intangible assets; and defined benefit plans the past service cost of which must be recognised immediately in profit or loss while all actuarial gains and losses must be recognised immediately either in profit or loss or other comprehensive income.

4. Substantially fewer disclosures: No longer should the financial statements look like a formidable book written in a language to confuse rather than inform. Pro-forma financial statements compatible with the new IFRS have been developed and published by the IASB and are available on their website.

5. Simplified redrafting: A significant feature of the new standard is that it will only be subject to triennial reviews so that there is more certainty and uniformity in the preparation and presentation of financial statements. No need to worry about annual reviews and changes and the implications for comparative figures. Hopefully as well, instead of spending a whole lot of time on what was essentially non-added value work, auditors will assist their clients in offering advice on internal controls and business issues.

Definition
One of the main questions that obviously came to mind in developing the new standard is what will be considered an SME, since there was no agreed or universally accepted definition. SMEs come in many shapes and shades and it would be a challenge for the profession and the law to capture in a single definition the range of such entities. An SME in a developed country could be a major player in a developing one and therefore a definition based on quantitative factors such as number of employees or level of sales was rejected.

An SME is defined in the standard as an entity which publishes general purpose financial statements for external users but does not have public accountability. An entity has public accountability if (a) its debt (borrowings) or equity (shares) instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market; or (b) it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. All companies traded on the Guyana Stock Exchange, banks, insurance companies, securities brokers/dealers, unit trusts, etc, would be considered to have public accountability and cannot therefore prepare their financial statements using the IFRS for SMEs.

What about those SMEs that seem to be neither fish nor fowl and how do we deal with the public interest companies for which special reporting requirements are desirable? Where for example does a Guysuco, a GPL or a GT&T come, and are consumers any less important than investors?

The IASB considered whether to include in the definition of public accountability those companies which provide an essential public service such as a public utility. Respondents to the discussion paper however felt that in many jurisdictions such entities could be very small.

Consideration was also given to those entities which were economically significant in their home jurisdiction but the IASB felt that “economic significance may be more relevant to matters of political and societal accountability” and therefore felt that the final decision should be left to the individual jurisdictions.

Time for action
The issue of this standard should be addressed not only by the accounting profession in relation to its clients but by the Ministry of Finance, the Guyana Revenue Authority and the lending community. The Companies Act envisaged that the Minister of Finance would set certain levels of income, assets or staff below which the requirement of the audit of a company could be dispensed with. The act has now been on the law books for eighteen years but no such pronouncement has been done. It is time that this be done.

The Guyana Revenue Authority too has to consider whether it should be insisting that a one-man company with a small turnover and few assets should require an audit but the multi-billion dollar self-employed person does not. Yes, it is a legislative matter but it is up to the GRA to make recommendations based on practice and experience.

The lending community now has an opportunity to decide whether it will continue to accept some of the sloppily and inaccurately prepared financial statements submitted in support of lending applications or whether it will now sit with its clients and the accounting profession and insist on a higher standard of accounting and reporting. The accounting profession locally has generally been very slow and a ditherer on the occasions on which leadership was required. It should now piggy-back on the initiative of its international brotherhood – for that is what it is – and take decisive action on this matter to justify the wide powers it enjoys under statute.

Conclusion
The new IFRS is clearly both an opportunity and a challenge and to use that overdone term, every stakeholder should see and use this to rectify many of the serious mistakes that have been perpetrated and tolerated for decades.

Mistakes that have caused the loss of billions of dollars of revenue to the state, the loss of reputation of a profession that has become associated with tax evasion and aggressive tax planning and the inability of the layperson to read and understand financial statements, an important requirement for a developing capital market.

At the same time, the new IFRS is not a panacea and outstanding issues such as corporate governance, money-laundering, tax evasion and poor and unethical standards of accounting and auditing will remain to be addressed. This new IFRS is however welcomed by Business Page as a useful development. One cheer for the accounting profession!