A review of the tax system has recommended staged reduction of the corporate tax to a uniform 30% over five years, along with the introduction of a withholding tax of 5% on dividend distributions, to make the economy more competitive and attract more private investment.
According to the draft of the Review of the Tax System, prepared under the Guyana Threshold Country Plan Implementation Project (GTCP/IP), Guyana has high and highly differentiated tax rates on business income, ranging between a 45% rate on commercial companies, 35% on non-commercial companies and 33.3% on unincorporated businesses. What is more, it said there appears to be “no compelling economic or equity reasons” for corporate tax rate differences between commercial and non-commercial companies. It added that the tax differential can be expected to be undermined in cases of jointly-owned commercial and non-commercial companies. In fact, the review observed that owners have every incentive to allocate a disproportionate share of overhead costs and interest expenses to the commercial company to gain the benefit of tax dedications at the higher tax rate, effectively lowering the tax rate on the commercial company below 45%.
The review recommended that the corporate tax rates be lowered and merged at 30% over a five-year period, noting that this would buy time to work on improving the general governance and lowering the costs of doing business in Guyana in a complementary fashion to the lowering of corporate tax rates. “This will minimise the revenues costs, while giving time for investment planning by business in response to an improved investment climate,” it said, adding that the success of the strategy would depend on the government sticking to its commitments to lower corporate tax rates.
The review noted that the higher tax rates in the corporate sector provides an incentive to conduct business in an unincorporated format rather than as a corporation as well as providing opportunities for tax arbitrage with the personal level for all closely held companies.
It said all discussions with the Guyana Revenue Authority (GRA) indicate that it has great difficulty in controlling the tax accounting of incorporated businesses given the weaker oversight of the accounts of such businesses, the risks of unreported sales and income and the inherent risks of owner-managers charging personal expenses as business expenses.”Therefore, any encouragement to conduct business in unincorporated format puts revenues at risk,” it added, saying that one of advantages of rates is an incentive to incorporate, leading to greater formality in the conduct of business, maintenance of accounts and improved tax compliance.
Recommending the reduction of the corporate tax to a standard 30% for both commercial and non-commercial companies, the review also urged the introduction of a 5% withholding tax on dividends paid to residents once the corporate tax rate is lowered below the top Marginal Income Tax Rate (MIR).
It recommended a staged reduction over a five-year period, arguing that the revenue cost could be reduced to more modest levels. It said the corporate tax rates cut should be announced ahead of time and all efforts made to improve the competitiveness of the Guyanese economy so that these corporate tax cuts attract added private investment.
If these measures are not taken, it noted, then the tax cost of the corporate cuts would be higher. The proposal involves lowering the 45% rate for commercial companies by three points a year and the 35% rate for non-commercial companies by one percentage point per year over five years. The review noted that the estimate of the initial 2009 cost would be $1.1 billion, rising to $2.5 billion by 2011 and declining to $1.6 billion by 2013.
The review said that after five years, the government can reassess the competitive position of the global market and decide whether or not to lower its rate any further, since 30% is still in the higher end of taxes internationally.
Citing weak tax administration at the GRA, the tax review has proposed comprehensive reforms to strengthen enforcement and ensure greater compliance. It said that the GRA’s tax administration reform is an important step in creating a more effective and efficient institution, focused on function. It said that despite the country’s high tax yield, it has a weak administration and capacity, evidenced in “minimal use of computerised information systems, e-governance and very weak capacity to conduct tax analysis, tax investigations, in-depth field audits, and enforce collections.” It added that local conditions, including organised smuggling, loss of skilled professionals to emigration, weak legal framework for contract enforcement and weak accounting practices have been worsening the problem.
Moving to a functional organisation, the review added, would also allow the GRA management to take full advantage of the information that can be generated by the Total Revenue Integrated Processing System (TRIPS). What is more, it said clear laws and regulations empowering taxpayers with the knowledge needed to comply with the tax law are vital for overall success of the new structure.
The GRA has indicated that since the commencement of the project in January 2008, it has made significant progress in moving toward a functional organization. It added that under the two-year project, which began on January 14, 2008, the GRA’s Governing Board and the Commissioner-General had already taken steps to improve the organisation’s efficiency in administration and tax collections.