President Granger did not mention the phrase tax reform once in his 2015 manifesto message, while his prime ministerial candidate stated that his team “proposes to restructure the tax recovery system, not to oppress the wage earner, but to catch the tax dodger”. But after some two-and-a-half years, although the government’s Tax Reform Committee made sweeping recommendations, tax reform appears to have been relegated to the back burner.
With respect to corporation taxes (CTAX), according to the Ram & McRae website, there are three rates of CTAX in Guyana: a 30% rate that applies to non-commercial companies, a 40% rate that applies to commercial companies except telephone companies and finally a 45% rate for the telephone companies.
If one just observes the CTAX rates in Trinidad as an example, they have a basic rate of 25% and a band of 35% that is applied to the oil and gas industry. If you are a company in Guyana, and you have a legal choice, which country would you prefer to pay your taxes? Guyana at 35%/40% or Trinidad at 25%/35%?
This situation has opened a door to a practice called transfer pricing, that allows companies to avoid paying their fair share of taxes in Guyana legally. It is called tax avoidance. In reality, the tax burden is exported from Guyana to another country with a lower tax rate, allowing that company to bypass the Guyana Treasury. In reality, there is such a company called Guyana Stockfeeds (Trinidad) Ltd which is a subsidiary of Guyana Stockfeeds Inc (See the Annual Report).
The solution to increasing the CTAX payment to the Guyana Treasury is simple ‒ reform the tax system. But it requires a phased reduction of the CTAX rates. A strategic starting point is a reduction of the rate for from 35% to 25% for the non-commercial companies (mainly the dwindling manufacturing sector). That one concession will make a world of difference to the investment landscape.
I disagree with the Minister’s excuse that tax reforms will have adverse budgetary consequences. It has been empirically proven in many instances that any reduction of the CTAX will directly enhance the investment climate, generate new jobs and new tax payments. A reduction in the rate of taxes is a flow, not a spot transaction and thus to quantify the impact of the tax reform, one must quantify the cost-benefits over a period of time (let us say a year) and this is what the Minister has refused to do. Rather he is focused on the spot position and his ‘book losses’ at a particular date. But that is a bean-counting mentality.
Any reduction in the CTAX will result in the freeing-up of hundreds of millions of new dollars for new investments. Because of the multiplier effect, such a scenario can redound to the state getting new tax revenue from other sources as a result of these new investments, and such a situation will boost economic growth.
The ideal principle of taxation is to broaden the base and lower the tax rates. The principle goal of tax reform is to promote economic well-being and drive aggregate demand – new investments, enhanced productivity and a living wage. Instead, the Minister of Finance, Mr Jordan continues to delay the implementation of the recommended tax reforms that even Mr Statia advised (he sat on the Tax Reform Commission).
It is time for the Minister to wake up and cut through the fog and if he does not understand the core concepts, why isn’t he buying expertise to help him? At this stage of the game, we should not be discussing the reduction of the CTAX rate for the private sector; it should have been a well-advanced process already reaping the benefits from the increased investments, augmented productivity and expanded wages for the workers which would have all been feeding into the expansion in aggregate demand, and by extension the economy.