The unfair tax system Business Page Stabroek News April 30, 2000 BUSINESS PAGE is dedicated to providing objective information an opinion on issued of interests to the business community and the public at large. The articles in Business page are prepared and contributed by CHRISTOPHER RAM. Christopher Ram is the Managing Partner of Ram & McRae, Chartered Accountants, Professional Services Firm. Introduction April 30 - perhaps the most dreaded day in the calendar. Not only must taxpayers file three separate tax returns but he (or she - it's one area in which there is no discrimination) must also pay capital gains tax, property tax and balance of income tax, whichever are applicable). Dealing with the tax authority is in many ways worse than dealing with the dentist except that the optimist believes that his taxes are being spent in his best interest. The big difference is that whilst there is only a health penalty in avoiding the dentist, avoiding the tax man can be very costly. The law makes tax evasion a criminal offence and if you are unlucky to be caught your bank account will be seriously affected by the penalties which the law imposes. Even if you are just a bit tardy the draconian charges imposed by the act would make our bankers look like Sunday School teachers. Today in recognition of the fateful day Business Page addresses some of the issues which concern taxpayers. This is not a theoretical issue as taxpaying in Guyana is still a voluntary matter. Although statistics coming out of the Inland Revenue Department are woefully inadequate and prevent any informed analysis, one of the many foreign consultants who have looked at our tax system has described it as a "charity" system in that practically all the revenues coming into the Department are based on the voluntary returns of the taxpayer. In other words the Department itself does not go out, locate and tax those who are not on its roll. This is all the more ironic given the wide powers which the Department has under the law. Political control Tax issues are a matter of utmost confidence and I recall the Commissioner of Inland Revenue in Barbados telling me that he would rather resign or go to court than give information to any politician. Not so in Guyana. Section 4 of the Act gives the Executive President (an elected position) the power not only to access taxpayers' information but makes it entirely proper for him to permit the disclosure of the information to other persons authorised by the President. This is as a result of an amendment passed by the Burnham administration to give effect to the paramountcy concept. On a number of occasions there has been a call for the amendment of this provision without any action being taken. The second area of presidential authority over the head (no pun intended) of the Department is in relation to the payment of taxes. Section 105 gives the President the power "to remit, wholly or in part, the tax payable by any person in respect of any year of assessment if he is satisfied that it will be just and equitable so to do." Who is going to question the President's judgement on what is "just and equitable"? Presidential and political authority is also exercised through the appointments to the Revenue Authority. The President appoints the Commissioner General whilst the Minister appoints the Chairman and the members. We must not forget that the President has retained authority over the Ministry of Finance and that in effect one person controls the tax machinery of the entire country. Clearly this is an unhealthy state of affairs which must be unique and has no place in any democracy. It is sad that neither the lawyers nor the accountants consider this a matter worthy of the national agenda. Political influence can also be brought to bear on the tax system under the Income Tax (in Aid of Industry) Act which gives the Minister of Finance sole discretion in the granting of tax holidays. He does not need to report this to anyone, not even the National Assembly nor does his budget include any information of the amount of taxes waived in any year. Penalties for late payment The Act does not pretend to impose interest on late payments but boldly describes the payment as a penalty. For failure to pay any tax on or before the due date "a sum shall be added thereto calculated at the rate of 45 per cent per annum of the amount of such tax remaining unpaid, and if any amount of such tax is not paid within twelve months after the prescribed date, at the rate of 50 per cent per annum of the amount of such tax remaining unpaid." In other words, if the tax remains unpaid for two years the taxpayer is required to pay almost double the amount. But the law adds insult to injury. If the taxman owes you he can take his good time and give all kinds of excuses why he cannot repay you any taxes overpaid. Part of the excuse relates to how much the Minister of Finance provides for refunds in his Budget. Of course he does not have to pay you a cent in interest reducing further any incentive he might have had to settle. Then to add injury on injury if he owes you and you owe him there is no right to a set-off and here again he has an arsenal of excuses. He can rely on the fact that he has not raised an assessment and therefore any overpayment has not been established. Penalties for late filing Once a taxpayer has not filed a return within the prescribed time he is liable to a penalty even though he may have paid or overpaid all his taxes in advance. The penalty varies depending on whether the taxpayer files late without having been requested by the Commissioner in which case the penalty is 2 per cent of the tax assessed, or whether it is in response to a demand for a return in which case the penalty is 5 per cent of the tax assessed. This is terribly unjust when one considers how tardy the Department is in responding even to the simplest request made to the Department. Just try getting a Certificate of Compliance to enable you to dispose of a simple motor-cycle or to get a Liability Statement to enable you to determine your liability. The tax year The Act sets the tax year as the calendar year but allows special periods of assessments based on the accounting year of the taxpayer. This would make life simple not only for the taxpayer and the Tax Department but the accounting profession as well. Many countries allow filing within a defined period after their accounting year whilst a few are based on alphabetical order. Yet the Department never seems too willing to accede to a request let alone to recommend a change in the law. Property tax Guyana has a net worth tax whether on tangible or intangible assets. This is in addition to rates and taxes payable to the local authority on real property. This is a tax on capital and has been harsh not only on businesses but on those who have invested in real property. The insensitivity of the law was most cruelly demonstrated a few years ago when in response to a request by the business community for the tax to be regarded as a business expense the law was amended to make it statutorily a non-deductible expense. Group relief Tax laws around the world are designed to raise revenue and to favour the taxman. The principle underlying tax laws are substance over form but this does not apply to group relief whereby losses can be recognised in group accounts. It is more than time that we revisit what is still basically a 1929 Act to make it more relevant to modern commercial practice. Restricting the right of appeal One of the most important tax cases which came before the High Court and later the Court of Appeal of Guyana in the 1970s is the case of Bata Shoe Company (Guyana) Limited versus the Attorney General and the Commissioner of Inland Revenue. Several constitutional issues were raised in that case, including the right of appeal by a taxpayer to the Board of Review or to the courts. Section 82(5) of the Income Tax Act provides that no appeal shall be allowed to the Board of Review unless the person aggrieved by an assessment has paid 2/3 of the taxes which he disputes. Section 98 provides that 100 per cent of the taxes in dispute must be paid for the matter to be taken to a judge in chambers. In that case Bata argued that the requirement to lodge the deposit created a great hardship on the taxpayer and put a restraint upon his right of appeal. Bata also argued that though the effect of the above provisions may not directly take away the right of appeal, they do so indirectly because of the extreme hardship they imposed on him. Our judges ruled, however, that it is the case in most jurisdictions that a right of appeal is given by statute which normally lays down the conditions under which that right may be exercised and he can only appeal "within the limits which the statute giving the right lays down." They further ruled that the deposit requirements impose no fetter on the taxpayers right of appeal because he has no such right unless he fulfils those requirements. For some strange reason no one has bothered to suggest that the quantum of the deposit is unreasonable and that frivolous appeals could be discouraged by setting lower but still reasonable levels of the deposit. Conclusion The tax laws were designed to favour the authorities in an era when the concept of taxpayers' rights had not even yet been conceived. Given that so much of our tax system depends on self assessment and voluntary payments, both in law and in practice, there should be more sensitivity to the rights of the taxpayers. The tax laws should impose strict deadlines on the Department to carry out its functions under the Act, to pay interest at corresponding rates, to allow setoff and to ensure prompt refunds. It must be responsive to technology as well permitting taxpayers access to their records and electronic filing. It must remove all semblance of political control and influence over the Department, making it a truly independent body with one of the single most important functions of the state. It must be more progressive, recognising the unequal circumstances of taxpayers with the same income and provide allowances for families, relief for mortgage interest and deductions for property tax. It is time that we implement people and business oriented tax reform in Guyana.