-US-funded tax review finds
Import duty was only paid on 4% of cars imported in 2007, according to a recent US-funded study which has found that there was an estimated $1.9 billion in exemptions that year with no clear explanation.
According to a draft of the Review of the Tax System, prepared under the Guyana Threshold Country Plan Implementation Project (GTCP/IP) and dated November 2008, no import duty was paid for 96% of the 4,208 cars imported that year. But imports by privileged persons, including diplomats and public officers, only accounted for a small share of the exemptions.
“Overall, this analysis indicates an urgent need for more continuous monitoring of customs compliance on motor-vehicle imports based on TRIPS [Total Revenue Integrated Processing System] data as well as post-release audits,” the review reports. It says the linking of TRIPS and vehicle registration systems, already part of the GTCP/IP work plan, would allow for more control over tax evasion by vehicles through post-release audits of vehicles as well as more complete registration of the existing stock of vehicles.
While 7% of the 2007 entries paid no taxes of any type, an analysis of Customs Processing Codes (CPC) shows that imports by diplomats, aid-funded projects and the like made up only 10% of them. The review also noted that in addition to fully tax-free cars, roughly 85% of imports are receiving customs duty exemptions and/or Value Added Tax (VAT) zero-rating through mechanisms such as import privileges afforded to public officers and officials or various other imports for approved purposes.
Data available for 2006 indicates only 172 public officers and officials were awarded exemptions, amounting to $261 million in taxes, while 92 re-migrants were awarded exemptions worth $144 million. In 2007, however, CPCs account for 378 entries for public officials, officers and re-migrants. “This is a significant number, but it still leaves a large unexplained number,” the review says.
An investigation of the CPCs for passenger car imports, it adds, shows that out of the entire duty- free car imports, only 28% of them had CPCs other than the regular C400 import codes, indicating that there was some reason for an exemption. The same ratios apply to other motor vehicle imports, like buses, trucks and tractors: 6% paid import duty while only 29% of the duty free imports had CPCs other than the C400. The review states that this occurrence leaves major questions about whether the wrong CPCs were used in 2007 or whether the wrong import duties were charged.
The review says reports of import exemptions for 2006 show that some 78 companies were awarded exemptions covering an unspecified range of business imports that amounted to $6.3 billion in duties. However, no data is available indicating what share of the exemption covered motor vehicles and passenger cars in particular. “If these reports for 2006 are accurate and the pattern was repeated in 2007, then a large share duty-free car imports must be explained by import exemptions awarded to private businesses,” it notes.
High tax rates encourage illegalities
According to the review, the complex and high tax rate structure for passenger cars was designed to discourage the importation of old, highly depreciated vehicles. It also concludes that the various tax rates are likely to change car buyer choices towards smaller low-value cars that will shrink the base. Moreover, it warns that the high-tax rates “are likely to encourage smuggling, undervaluation and political pressures for tax exemptions, which in turn open up opportunities for negotiating discretionary exemptions with relevant officials.”
Passenger cars are subject to complex taxation, including import duty, VAT and an excise tax that is dependent on the age of the car and its CIF value. As a result, taxes rates cover an enormous range, the study says. For cars under four years, the combined rate ranges from 118% for cars under 1500cc engine capacity to 303.7% for cars over 3000cc. Further, for each size class of vehicles the excise tax rate rises above the excise rate charged on a vehicle aged less than four years as the import value falls below the break even value.
As a result, as part of the raft of tax reforms recommended in the review, a new excise tax rate is proposed to reduce overall tax on passenger vehicles. It says the complex set of excise tax rates for cars of four years or more should be dropped and replaced with a simple alternative minimum unit excise tax for passenger cars of all ages and imports. Additionally, it proposes that for public officers and officials, the VAT should be restored on all passenger car imports and the differentiation of cars by age should be removed. It also says customs duty should be charged on all vehicle imports unless explicit import duty exemption is recorded.
The review of Guyana’s Tax System is being undertaken under the GTCP/IP funded by the US Millennium Challenge Corporation and administered by the USAID. The two-year programme began on January 14, 2008. It is unclear if the government has responded as yet to the draft report which was submitted in November of last year.
Citing “weak” tax administration at the GRA, the study 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 noted that despite the country’s high tax yield, it has a weak administration. “Weak tax administration and capacity have been 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,” the review said. 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.
According to the review, tax administration shortcomings have been recognised over recent years and are being addressed through ongoing reorganisations, systems strengthening and training programmes. It said a functionally-based organisation allows staff to develop areas of expertise in functional areas, such as audit, taxpayer service, collection and enforcement, while also creating an organisation that fosters its own checks and balances.
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. However, towards this end, it noted that there are still important steps to be taken to make change a reality. It also stressed that such a major change must be managed and cannot be trusted to “happen” organically. “There is evidence that suggests either the change is being managed inefficiently, or that there is less than full commitment to creating a new organizational structure in GRA,” the review said, while observing that there was no organizational change steering committee. “Managing change of this magnitude is complex. A formal group needs to be created to oversee this process to ensure a smooth transition,” it added.