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Threshold Country Plan/ Implementation Project was a major failure

Sunday, February 28th, 2010

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

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Take from the Poor and Give to the Rich

Sunday, October 18th, 2009

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?

Sunday, October 11th, 2009

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 President, ‘scraps’ and concessions

Sunday, June 8th, 2008

It was a week of ‘scraps’ for President Jagdeo, if we count his inexplicable meeting last Monday at State House with the scrap metal dealers, who come under Prime Minister Sam Hinds’ portfolio. There were, however, two others, one involving the country and the other specifically the private sector. At the GBTI Business Forum 2008 on Monday, the President cast aside the expressed hope by the bank’s CEO that the forum rise above the controversy of the net benefits/loss from the CARICOM/EU Economic Partnership Agreement (EPA) and address its opportunities and offerings. The President chose instead to engage in what many in the audience saw as a barely disguised and inappropriately timed attack on the EPA, the Caribbean Regional Negotiating Machinery (CRNM), some of his own regional counterparts and the European Union.

But it was the launch of the new newspaper the Guyana Times where the President really bared his knuckles as he associated leading businessman and entrepreneur Yesu Persaud with ‘ignorance’ and suggested that the entrepreneur and leading private sector spokesperson for scores of years attend a seminar on the tax laws of the country. Mr. Persaud, speaking in his capacity as a private sector representative at the launch had dared to suggest that the concessions which the government had granted to Queens Atlantic Investment, the parent company of the Guyana Times Incorporated be extended to “all Guyanese.” A more transparent and equal treatment for investors has for years been the concern of domestic operators, and indeed the PPP in opposition, as they witnessed foreigners being granted sweetheart deals that effectively doomed local operators as second class in the scheme of things – the wood sector being the most obvious example.

Mr. Persaud was perhaps referring to ongoing concerns that concessions had been offered to the five new businesses of the investor group, instead of some only. The President who admits to being a close personal friend of the investors took umbrage at the call and announced that he had asked Mr Winston Brassington of the Privatisation Unit to hold a seminar on the tax laws, leaving the audience to wonder why not the GRA?

President Jagdeo explained that the concessions were in respect of the pioneering projects of the investors, the antibiotic plant and the textile mill. The problem which many share with Mr. Persaud is that the piecemeal information on the deals has had to be forced out of the government and its spokespersons while the group has remained conspicuously silent, obviously confident that the government would deal with it as a PR exercise and not a disposal of state resources in which all are interested. Perhaps the Guyana Times, which calls itself the Beacon of Truth, would show its editorial independence and commitment to truth and the people of a country that makes it all possible for its investors, to run its own story on what many may consider a steal of a deal.

The truth
All this of course could have been avoided if the government had complied with section 37 of the Investment Act 2004 that requires it to publish in the Gazette information regarding the fiscal incentives granted under section 2 of the Income Tax (In Aid of Industry) Act Cap 81:02. Only then would the nation be able to decide the real truth and how the agreement limits the concessions to the President’s “pioneer” industries.

The President was at pains to justify the as yet undisclosed concessions as having been granted under the authority of Cap 81:02. In fact, the act gives discretionary powers to the minister to grant concessions under two circumstances set out in section 2 as follows:

(a) the activity demonstrably creates new employment in one of the following regions -

(i) Region 1: Barima – Waini

(ii) Region 8: Cuyuni – Mazaruni

(iii) Region 9: Upper Takatu – Upper Essequibo

(iv) Region 10: Upper Demerara – Upper Berbice

(b) the activity is new economic activity in one of the following fields -


 (i) Non-traditional agro processing (excluding sugar refining, rice milling and chicken farming);

(ii) Information and communications technology (excluding retail and distribution);

(iii) Petroleum exploration, extraction, or refining;

(iv) Mineral exploration, extraction, or refining;

(v) Tourist hotels or eco-tourist hotels.

Limits
But the President should have informed himself that the authority for such concessions seems to be limited by section 6 of the Financial Administration and Audit Act (FAAA) which stipulates as follows:

(1A) Except as provided in subsection (1C) [dealing with the duty of the Minister of Finance to make subsidiary legislation to waive any tax payable due to the taxpayer’s inability to pay such tax because of natural disaster, disability or mental incapacity etc.], no remission, concession, or waiver is valid unless the remission is expressly provided for in a tax Act or subsidiary legislation;

(1B) No remission, concession, or waiver of tax by Order or other subsidiary legislation is valid unless the Act under which the subsidiary legislation is made expressly permits the Minister to provide such a remission, concession, or waiver.

The President and the Minister of Finance, who like the group have been silent on the issue, must now consider whether they were properly advised of the relevant provisions of the law including the limitations under the FAAA, and that section 2 of Cap 81:02 does not recognise the “pioneer industries” referred to by the President.

The Finance Minister Dr. Ashni Singh has an obligation to the nation to indicate whether any cabinet paper submitted under his name recommending the concessions quantified the cost to the country of the concessions granted to the investors. If there was no such paper it would be a serious indictment of the President, the Minister and the entire cabinet.

And the rent
While much attention has been paid to the tax holidays and the government boasts how attractive a deal it won with annual rental of $50 million dollars per year, the government has been careful to avoid the real value of this rent.

Remember that there is a 99 year lease and there is nothing to indicate that there is a rent escalation clause providing for periodic increases in rent based on inflation and other economic factors. This then is how the figures look if we place a time value on the rent the country will earn from this deal and assuming discount rates of 10% and 5%, with the former being the more likely:

Discounted at 10% 5%
by the 10th year $21M $32M
by the 15th year $13M $25M
by the 20th year $8M $20M
by the 25th year $5M $16M
by the 50th year $0.5M $4.6M
by the 75th year $43K $1.4M
by the 99th year $4K $0.4M

In other words, by the half-way stage of the agreement, using a discount factor of 10%, the amount of the rent expressed in today’s dollars will be $39,043 per month! Assuming the unlikely scenario that a discount factor of 5% is justifiable, the monthly rental at the same point would be a princely sum of $381,516.

Now look further down the road to the end of the lease period and see that the rent using a 10% discount factor would be, in today’s prices, $365.85 per month! So just what is this about an option to buy for US$3.5 million in three years time?

Do those who tout the benefits of the deal really believe that the investors are so ‘ignorant’ as to choose to spend US$3.5 million dollars when they are the beneficiary of the giveaway of a century minus one year?

Conclusion
The dilemma we now face is what happens if the government has granted concessions that are not ‘valid,’ as they would appear not to be under the FAAA. Would the taxpayers have to bear for 99 years, the burden of government’s decision?

The President had earlier announced that he left the meeting when the matter was being discussed by cabinet. Perhaps he should have stayed and advised his colleagues about the state of the laws and the limits of their powers.

He may have saved his friends and colleagues from possible embarrassment and the taxpayers of the country the waste of resources.

Still, I hope I am invited to the Privatisation Unit’s Tax Seminar to which I recommend that the members of the cabinet, the President’s advisers and investor friends be invited as well.

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The off-shore financial centre idea

Sunday, March 2nd, 2008

Introduction

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

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

Origin

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

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

1. low tax rates,

2. strict secrecy,

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

4. protection of deposits and

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

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

Caribbean centres

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

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

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

Challenges

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

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

Self-interest?

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

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

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

Lawyers and accountants

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

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

Conclusion

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

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

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Posted in Legislation, Public sector, Taxation | No Comments »

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