Garnishment and Distress Proceedings

Two proposals announced in 2017 Budget Speech – inserting into the Income Tax Act distress proceedings similar to the provision in the Value-Added Tax (VAT) Act, and garnishment of funds in bank accounts for the settlement of tax arrears – have caught the national attention. The discussion has not been helped by the misinformed and misguided statements in the media, even by columnists and persons who have a duty to be better informed.

That failure which is the cause of much of the confusion, misinformation and “noise”, has led to a situation whereby two very different provisions are conflated and wrong premises are used to defend or justify the two proposals. They should be addressed separately. Here is why.

The terms garnishment and distress are of significant legal and constitutional import and depending on circumstances may have different application to action against the person (in personam) and against the thing or property (in rem). As these matters apply to our Constitution they also raise the tension, if not the clash, between, on the one hand, Article 65 which grants to Parliament the power to “make laws for the peace, order and good government” and on the other hand, Article 142 which protects property rights subject to exceptions, as well as Article 8 which makes void any law inconsistent with the Constitution.

But first a piece of history. There was no garnishment provision in the original British Guiana Income Tax Ordinance passed in 1929. That came thirty-three years later as one of the measures introduced by the PPP Government in Act 11 of 1962 to give effect to that year’s Budget presented by C.R. Jacobs Jnr. but which came to be known as the Kaldor Budget. Persons from my generation will recall that that Budget was described by then Opposition leader Forbes Burnham not as the cause of war but the occasion for it. Of course, being an erudite lawyer, Burnham used the Latin for the aphorism although as the events unfolded in February 1962, the consequences were far from learned.

So what is now being proposed is the crude strengthening of a measure to which the PNC and the United Force were violently opposed and were prepared to do anything to block it, among others. Our columnists and self-serving and opportunistic politicians who have had an epiphany about the illegality and evils of tax evasion being such a bad thing may wish to go on the internet and google Wynn-Parry Report.

Both distress proceedings and garnishment are provided for in the VAT Act (section 49 and section 51 respectively) although instead of the word Garnishments used in the marginal note in the Income Tax Act, the corresponding marginal note in the VAT Act is “Recovery of tax from third parties”.

While the provision in the Income Tax Act pre-dates the 1980 Constitution and the VAT Act came much later, both are subject to the Constitution. And while the Constitution naturally allows an exception to the protection of property Article in the case of taxation, (otherwise how would the government be able to finance public services?) a taxing statute or a provision therein may be set aside as unconstitutional if it is confiscatory, discriminatory, disproportionate, or provides inadequate protection machinery for the taxpayer.

Perhaps somewhat confusingly, section 49 of the VAT Act speaks of both “distress proceedings” and “executing distress”. Distress is a summary remedy by which a person is entitled to take possession of the personal chattels of another without legal process while execution imports a legal process to give effect to a judgement of the Court. Moreover, section 49 is directed at goods, including perishable goods and allows the entry into premises accompanied by a police officer. Clearly, the Minister of Finance could not be referring to this section in discussing the expansion of garnishing funds from bank accounts.

The garnishment provisions of the VAT Act in fact mirror those of the Income Tax Act and have no direct or indirect reference to a bank account. Since the Minister wants to harmonise the VAT and the Income Tax Acts in these enforcement procedures, it may be presumed that the VAT Act will also be amended in this regard.

With respect to garnishment under the VAT Act, it is highly doubtful that the Commissioner can lawfully apply the provision before he has made a proper assessment on the taxpayer and after the taxpayer has exhausted his right of objection to the Commissioner, and appeals to the VAT Board of Review and to the High Court. Of course, if the taxpayer refuses to exercise his statutory rights of appeal, or to seek a remedy by way of judicial review, the Commissioner General would be within his rights to pursue the debt.

Absent from the discussion too, is any recognition of two other drastic procedures for recovery provided in the Income Tax Act. The first is under section 97 providing for the enforcement of a tax debt by way of parate execution, a Roman Dutch legal concept generally available to banks. As applied in the Income Tax Act, parate execution allows for the relatively speedy process for the disposal of property by the GRA. The second is under section 101 which provides that a certificate registered with the Registrar of the Supreme Court has the same force as a judgement of the High Court. The Act is unclear whether the Commissioner is required to avail himself of the section 101 process before seeking to apply 102. But instructively, section 101 is also a product of the 1962 Act referred to above.

It is probable that the idea for the introduction of distress proceedings into the Income Tax Act arose from someone who is unaware of sections 97, 101 and 102 of that Act and of the Rules of the High Court dealing with enforcement of judgements. The Commissioner General has confirmed that the distress and garnishment provisions in the VAT Act have never been applied and we know as well that the Income Tax provisions for parate execution under section 97, for a certificate under section 101 and for garnishment under section 102 have not been applied in all or the better part of fifty-four years, so why should anyone believe that strengthening any one of them is necessary? Does Prime Minister Moses Nagamootoo, the leader of the National Assembly know these things or wants to know them, insulated as he is from the day to day challenges of the working class whose interest he once claimed to champion?

The measures purportedly to improve tax administration seem more designed as a substitute for effective, professional administration and constitute a textbook case of draconian legislation. To use the words of the Sri Lankan Bar Association in similar circumstances, the proposed legislation is “discriminatory, draconian in their nature and harsh and superfluous”, grounds under which it successfully brought a constitutional challenge.

Provisions of the various Tax laws already give the GRA enormous powers for the administration of the Act and the collection of taxes. Its new head is familiar with the successful operations of those laws, having been part of the tail end of the glorious days of the Inland Revenue Department when it was respected for its professionalism, impartiality, competence and independence, characteristics which no doubt enabled it to operate effectively using the existing laws.

The new head does not need new, additional and draconian powers to be effective. He needs to apply the existing tax laws without fear or favour, with the same deference to big and small, and undaunted by touchable and untouchable alike.

Straw man fallacy

Please permit me to comment on a letter by Mr Ruel Johnson (SN January 6, 2016: ‘It is good to show we are capable of clemency but first we must show we can deliver justice’).

That letter was partly in response to a letter by me in Stabroek News January 5, 2016 ‘Treatment of Sattaur by persons from the GRA is not acceptable’.

My letter addressing four main points spoke for itself. I believe therefore that Mr. Johnson was engaging in the classic straw man fallacy of creating, in order to refute, a point not made in my letter.

I will not pursue any further correspondence or argumentation on this matter.

Treatment of Sattaur by persons from the GRA is not acceptable

Commissioner General of the Guyana Revenue Authority Mr Khurshid Sattaur erred gravely when he shared taxpayers’ information with the administration. However irrestible the demand, he ought to have made it clear that he would not comply. Instead, he compromised himself, his office and his profession. A complaint of professional misconduct was made to the local and international professional accounting bodies but was later withdrawn. There was therefore no adverse finding against him.

Seven months into a new government, the public learns that Mr Sattaur has been sent on leave to facilitate a forensic audit of the authority. I accept that, even with the apparent inconsistency.

What I do not find acceptable is the humiliating treatment he is reported to have received from persons from the Revenue Authority. If the report of leave is correct ‒ and there is no reason to doubt this ‒ Mr Sattaur remains Commissioner General and a member of the Governing Board of the GRA. He does not cease to be either because he is on leave. It is rare and improper for persons on leave to have their homes visited by their subordinates and computers and firearm taken away from them. In the case of a taxman for whom threats to life are an occupational hazard, the danger is obvious and is recognised in his being provided with a guard and a firearm licence.
Continue reading Treatment of Sattaur by persons from the GRA is not acceptable

Threshold Country Plan/ Implementation Project was a major failure

Introduction
It was interesting to see almost the entire Cabinet turn out on February 17 at a ceremony at the Georgetown Club to mark the end of the Guyana Threshold Country Plan/ Implementation Project (GTCP/IP). The two-year project, financed by a US$6.7 million grant from the (US) Millennium Challenge Corporation (MCC), was launched on January 14, 2008, reportedly with the specific aim of supporting government’s efforts to overcome the country’s serious fiscal challenges while also streamlining the business registration process.

With the project closure coming soon after the 2010 Budget projecting a record deficit for 2010, it had to be diplomacy rather than reality for Director of Threshold Programmes, Mr Malik Chaka, to report to the assembled dignitaries on the successful implementation of the project, an assessment echoed by President Jagdeo and Dr Ashni Singh, Minister of Finance. Even if the 2010 Budget was overlooked, the assessment was not borne out by the results of other elements of the project. Indeed, the ultimate test is that Guyana did not qualify for further assistance under the programme, a sign of failure, not success.

From conception to conclusion, Guyana’s performance on the project was sub-par. Identified by the MCC on November 8, 2005 as eligible to receive Threshold Programme funding, Guyana had to secure assistance from the MCC to enable it to make its proposal. That was accepted by the MCC on June 27, 2007.

E-mail and telephone consultancy
During the course of the project, US consultants MetaMetrics Inc provided “performance-based management systems technical assistance… through email and telephone communications.” According to this firm’s website, the Government of Guyana requested the support of the MCC to provide technical, institutional and operational support in:

(i) the preparation and implementation of a value-added tax (VAT) while at the same time strengthening the institutions involved in tax administration and tax policies;

(ii) the transformation of Customs administration;

(iii) transformation of the institutions that provide fiduciary oversight on the utilization of public resources; and

(iv) completion of government procurement reforms.

According to the Final Draft Report (FDR) dated June 26, 2006, the project was a continuation of the government’s “comprehensive fiscal reforms” in the area of reducing the fiscal deficit and improving transparency, accountability and fiduciary oversight. According to the FDR, these reforms, which have received financial support from the World Bank, IMF, IDB and the CARTAC, are expected not only to alter the fundamental structure of revenues and expenditures but more importantly, to strengthen the institutions involved in tax administration and oversight, leading eventually to a progressive reduction in the fiscal deficit.

The plan
Nathan Associates Inc, another US consulting firm was appointed Implementing Partner for the project. The ‘local’ face of the project was Dr Coby Frimpong, supported by a small number of Guyanese employees. The government would, of course, be aware of how the US$6.7 million was spent, and in the spirit of transparency and accountability, should disclose how much was paid to MetaMetrics, Nathan, and Dr Frimpong who for many years was the country’s highest paid consultant, until that prize went to another foreign, non-resident consultant. It would be interesting to know too, whether the value of the grant has been incorporated in the national accounts, as required by the Fiscal Management and Accountability Act.

MetaMetrics noted that the Guyana Threshold Country Plan Implementation Project would be conducted through the following six tasks:

1) Strengthening tax administration

2) VAT implementation

3) Creating tax policy and forecasting analysis capability

4) Improving expenditure planning, management, and controls

5) Empowering and creating capacity within two principal parliamentary fiduciary oversight committees

6) Business registration and incorporation

Assessing success
It is submitted that it is against these objectives that the success – or failure – of the project should me measured. Let us look at these, though not necessarily sequentially. Item 2 of course came one year after VAT had been introduced, and it would be disingenuous for the project managers to claim any success from VAT’s implementation. Mr Chaka’s praise of the collection of “more taxes and customs revenue” was not only ill-informed but is also not the kind of comment one expects.

Did he know, for example, the government’s commitment to make VAT and excise tax revenue neutral, when in fact it turned out that collections were 48% over budget, because of an error in the rate? Had any work been done by the consultants, they would have realised that the government, even after discovering its error, never publicly admitted or corrected it, or honoured its revenue-neutral commitment.

An informed analysis of the tax collections should extend beyond crude numbers to the composition of the direct and indirect taxes garnered by the GRA. The analysis should examine the composition of the taxes collected by revenue type, sectors, regions, and classes of taxpayers. Did any of the consultants realise that using loopholes and tax shelters one major entity subject to a nominal rate of tax of 45% pays only 14% of profits in taxes? And that many others in a similar situation are not that different? Or that a person receiving a $10 million dividend from any such company pays no income tax, while an employee of the company earning $100,000 per month is required to pay income tax of $260,000 per year? Or that any pension, without limit, is tax free? Perhaps the consultants should have explained their concept of tax equity, to allow a fairer assessment of their own measure.

The missing GRA’s Annual Reports
It will take a dedicated column to examine the tax take and how the self-employed continue to evade taxes on a massive scale. The consultants should have asked the Minister of Finance why he has not brought in regulations to give teeth to the section of the Income Tax Act which empowers the Revenue to apply a presumptive method of determining the income of certain self-employed individuals. Suffice it to say that all the self-employed taxpayers of the country pay a mere 2% of the total income and corporation taxes collected by the GRA. This modest increase by this large group is partly because, as this column has consistently pointed out, a number of previously incorporated trading companies have de-registered, immediately and automatically reducing their tax rate from 45% to 33⅓% and excluding them from the minimum corporation tax of 2% of turnover. If proof be needed, the numbers show that corporation tax as a percentage of tax revenues has declined from 23% to 20% from 2006 to present. Yet, the self-employed percentage has remained fairly flat.

But tax administration would also require better governance, accountability and transparency in the Revenue Authority. I have recommended on numerous occasions that the annual report of the GRA provide useful statistical data on revenue collections to enable informed statistical analysis. Instead, in blatant violation of section 28 of the Revenue Authority Act, the Minister consistently fails to lay the annual report in the National Assembly. This is the same Minister who in his 2010 budget speech railed against persons not providing information to his Bureau of Statistics, describing non-compliance as “unacceptable and unlawful,” and threatening steps to enforce the law.

The missing tax policy
In relation to task 3 above, there has been no progress and therefore, not surprisingly, no report. The consultants were of course at a disadvantage. If the government and the Minister are not serious about tax policy, no consultants could make them become so. It takes a special government to care about tax sources or their impact.

Others care only about quantum and this government has been almost unique in that it has never been hard-pressed for revenue to finance its policies – some good and others less so. Debt-write off, on the back of poor country status, helped the government increase expenditure on the social sector, such as health and education. And just when the write-offs started to dry up, there came the annual windfall from the VAT and Excise Tax. VAT and Excise Tax in 2010 will double the collections in 2006 of the taxes they replaced, even as the economy grew by an average of 3% over the five year period.

Bureau of Statistics workshop
The consultants also probably did not notice, but according to the 2010 budget speech, the country is not nearly as poor as the government was representing it to be. With the Finance Minister now saying that the economy is actually 69% better off than would have been previously calculated, each Guyanese is now much, much better off than we had been told, if not felt. No one has bothered to say how rebasing could actually increase the value of goods and services produced in the country, but the public would no doubt be looking forward to the workshop which the Minister of Finance promised that the Bureau of Statistics would host “shortly” to provide technical details on the rebasing exercise.

Had the rebasing been done earlier, we may very well not have qualified for some of the assistance and concessions we have received from all and sundry.

But there is a more direct connection to tax revenues. The working person is paying income tax at 33⅓% taxes and VAT at an average of a minimum of 10% (to allow for zero-rating and exempt supplies), averaging about 40% and on top, another 5% to NIS which is a form of taxation. At the other extreme are companies, self-employed persons including the new army of government consultants and contract employees; those whose salaries are exempt and whose income comes from unearned income, such as dividends, interest and rents, bear considerably less than half the tax borne by the employed persons.

Since 1994, I have pointed out the inequities in our tax system. These were later identified in National Development Strategy 1 and 11. In fact this is what NDS 11 says, in part, about our tax system:

“Income taxes in Guyana appear to be inherently unfair, since persons in the informal economy, and almost the entire agricultural sector, indeed almost all in the self-employed category, do not pay them…”

If anything, despite all the studies, consultancies and promises, the situation has become worse.

To be continued

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.