There is a tendency to use tax policy and not monetary policy to encourage investment in the country and to persuade foreigners to join the investment effort. Monetary policy would require that the cost of capital be cheap. This strategy means lower interest rates with the possible expansion in the money supply and the risk of inflation and loss of capital. So, Guyana, like many other countries, has used fiscal incentives to lure foreign investment to the country. It offers tax holidays where companies could pay no tax for periods between five to 10 years and, in special cases, for periods beyond 10 years. Guyana also offers special depreciation or deduction rules for expenditure on capital items such as industrial structures, plant and machinery, mineral and petroleum deposits, patent rights, scientific research and the provision of housing for employees. The focus is on large companies.
For small businesses, the tax benefit comes from using what is known as the pass thru facility, a situation in which the business income is not taxed and is passed on to the individual owner or owners to be taxed at the rate of the individual taxpayer. Prior to 2013, the tax rate was 331/3 per cent. Now it has been reduced to 30 per cent. With small businesses seen as the engine of growth, it raises the issue of whether or not small businesses are being shortchanged with a dependence on the pass thru facility as against the tax holiday which is directed at foreign corporations.
The concessions of tax holidays, special depreciation rules for expenditure on capital items and land development target foreign investors. Yet, it is easy to be left with the impression that an investor from Guyana, from within the CARICOM region or outside of the domestic or interregional jurisdiction is allowed access to the tax benefits designed to attract or stimulate investment. Despite references to company, corporation and share capital in the tax laws, neither the Income Tax Act nor the Regulations set any minimum spending level for taking advantage of the incentives. With the adoption of the Fiscal Enactments Act of 2008, the emphasis has been on the geographic location of the industry and the impact of the investment on employment, especially where the tax holiday is concerned. In addition, the menu of incentives appears to be size neutral and gives the impression that a business of any size could enjoy them. This impression is reinforced by the likelihood that a small business could be registered as an incorporated entity and possibly could have its buildings, machinery, plant, equipment and other physical capital depreciated at the special rates depending on the level of investment spending. Clarifications from the tax authority make clear that that is not the case.
Both the tax holiday and the pass thru facility seek to reduce the burden of tax on the business entity through the use of exemptions. The tax holiday refers to the granting of a reduction or an exemption from paying tax on business income for a specified period of time. In Guyana’s case, the exemption from the tax holiday is set at 100 per cent with the benefit being available within a set period of five to 10 years with the possibility of it exceeding 10 years. This means that irrespective of the level of income, the company pays no taxes on its business income if it invests in new economic activity and creates employment in any of the following regions: 1, 7, 8, 9 and 10. The benefit also extends to the company if it creates employment in a preferred set of industries which include non-traditional agriculture, aquaculture, bio-technology, tourism, petroleum, textile, wood processing and information and communication technology.
The tax holiday has the advantage of allowing an enterprise to retain control of all the money that it earns during the fiscal grace period. The result is that the investor could recover its initial investment faster. A potentially shorter payback period helps to reduce the risk profile of the investment and give investors the assurance that it was worth making the investment. The availability of a larger sum of money could lead to an expansion of the investment and the creation of more jobs or the setting up of new industries. However, the tax holiday could lead to higher capital outflows during the holiday period, especially when coupled with payments for management services provided by the parent company. Consequently, the tax holiday comes with both risks and benefits for the country.
Ease on income
There is nothing in the Income Tax Act that indicates that a facility with similar ease on income is available to small businesses. Persons familiar with tax compliance issues indicate that the pass thru facility is available to small businesses which are unincorporated. Incorporated small businesses pay the business tax rate. The pass thru’ facility allows the small business to take its calculated net income and pass it on to the owner of the business. In that way, the owner of the business takes control of the income and includes it with his or her individual income to determine the personal tax liability. This means that the business is not taxed separately as would be the case of the large company or corporation were it not enjoying the tax holiday. The exemption is not set at 100 per cent as is the case with the tax holiday. However, all of the business income could benefit from the individual exemption threshold if the owner has no other income. Yet, this possibility does not remove or reduce the disadvantage suffered by the small business since any income in excess of the threshold is subject to tax. Further, a small business that is incorporated is required to pay the same tax rate as its larger domestic counterparts.
It is at that point that small businesses are put at a disadvantage. The company that enjoys the tax holiday still has to obtain service from various government departments. It is entitled to use public goods like every other person or business. To provide these services, taxes are collected, including from small businesses, and are then reallocated to the large companies through the concession of the tax holiday. Quite often one is told that the investment regime of Guyana does not discriminate. Contrary to popular thinking, tax incentives are not equitably applied and discriminate against local small investors.