Middle and lower income Guyanese are now paying higher average tax rates on income and National Insurance Scheme (NIS) contributions combined and government’s tax reform committee has proposed the introduction of progressive rates of taxation to reduce the burden.
For those paying the Pay As You Earn (PAYE) tax, the National Tax Reform Committee (TRC) proposed the 20% taxation rate for those earning between $750 001 and $1 million, 25% for those earning between $1 000 001 and $1.5 million, and 35% for those earning above $1.5 million annually. It had recommended that the annual income tax threshold be moved to $750,000. In this year’s budget it was upped to $660,000 from $600,000.
Citing a report done by Duke University, the committee pointed out that the combined personal income tax and NIS contributions place a heavy burden on middle-income employees between the threshold amount and the maximum contribution amount. The Duke Report had said that employees in Guyana are relatively heavily taxed. Under the income tax Act, as of 2013, Guyanese pay tax at a flat rate of 30% on incomes above $600 000 per annum.
On top of the income tax, the NIS requires a combined employer-employee contribution of 13% of the gross pay up to the threshold amount of $600,000 and then 14% up to the maximum contribution annual income of $1,807,536. In addition, employees pay the broad-based VAT of 16% and excise taxes and import duties on many consumer items.
“While the basic deduction of $600,000 excludes about 10%-20% of employees from the income tax, the 30% flat rate represents a high rate for middle-income earners by international standards. About three quarters of employees and two-thirds of the self-employed have incomes that are middle-income earners who fall between the tax threshold and the maximum NIS contribution income level. Only some 10%-15% have high incomes above the NIS maximum,” the report says.
“Middle-income earners ($600 000 to $1,807,536) have to pay both IIT (Individual Income Tax) and NIS contributions out of their income which raises their combined average tax rate such that it actually peaks at the NIS maximum income amount at about 34% and then starts to fall back towards 30% as incomes increase above this amount. More importantly, the NIS contributions raise the marginal tax rates to 13% for those below the tax threshold, and to 44% for those in the middle-income group,” the Duke Report says.
It pointed out that by contrast, the high-income employees above the NIS maximum only pay the 30% income tax rate on added employment and other income. “These high-income employees are also likely beneficiaries of more generous packages of allowances and fringe benefits, many of which appear to be escaping tax,” it observed while adding that the impact of the high marginal tax rate of middle-income earners raises concerns about the impact of the combined individual income tax (IIT) and NIS on incentives to create formal sector jobs in Guyana.
Gross inequity
According to the TRC report which was seen by Stabroek News, reducing the burden on the poor and the vulnerable must begin by rectifying this “gross inequity” in the structure of the personal income tax and NIS. It had pointed out that were it not for the threshold, the IIT would have been a flat-rate tax, but the threshold makes it somewhat progressive and the marginal tax rate is rather high, especially when the NIS contributions and the VAT are considered.
The committee said it supported the Duke Report recommendations for the IIT/NIS which had proposed the expansion of budget financing of NIS for persons with income below the income tax threshold from one percent to 11 percent and leave a three percent contribution in place (employees, 1.2 percent and employers 1.8 percent). The report had said this would remove an estimated $0.4 billion in 2013 from the cost of employing low-income earners by private sector employers and would cost the government $0.1 billion to fund the four percent of the low income government employee share of the NIS contribution (while the government would continue to contribute its share of the NIS contribution.)
“In addition, the cost for employees with annual incomes below the threshold that does not file IIT returns needs to be estimated. This could raise the overall cost to about $1 billion, but would provide a significant incentive for compliant formal private sector job creation, it said.
The Duke report had also recommended the re-introduction of the 20 percent bracket for the incomes falling between the tax threshold and the maximum NIS annual income for contributions. This would lower both the marginal and average combined tax rates faced by middle-income earners and reduce their IIT payments by an estimated $1.3 billion in 2013, it noted.
Another recommendation was to increase the tax rate on incomes above the maximum NIS annual income for contributions from 30% percent to 35 percent. “This would raise revenues of about $1.2 billion in 2013 that would offset the loss of revenue by high-income workers paying about $1.1 billion less on the income in the new 20% bracket. Overall the top marginal tax rate is lowered to 35 percent and the highest average tax rates will be paid by the highest income earners and not middle-income earners,” it had said.
It also recommended the introduction of a withholding tax that is the same as required under PAYE for contract services of individuals on payments for their services (excluding any reimbursement of expenses) on amounts above the threshold for the period and GRA should seek to co-operate with NIS in identifying all employers and employees. It is estimated that this would raise revenues by some $0.3 billion a year.
While saying that the Duke Report proposal is not unacceptable, the committee also compared two other possible IIT regimes as alternatives to the status quo and to the Duke Report proposal.
Self-employed
Meantime, the committee observed that the self-employed are among the hardest group of earners to tax since many of them operate in the cash, informal economy and are reluctant to undertake proper record keeping. “Despite the prevalence of the self-employed in trade and commerce, agriculture and fishing, the professions, and bottom house and more open operations, the contribution from the self-employed to the tax revenues does not seem to represent what can be considered a fair contribution to total taxes collected. There is also a strong suspicion that many businesses actually benefit from the VAT system by collecting but not remitting the VAT either because they themselves are not registered and ought not to be charging VAT, or are engaging in tax theft,” it said.
“The statistics provided to the TRC tell a depressing tale of tax evasion among self-employed professionals, particularly, doctors, accountants and lawyers, the overwhelming majority of whom declare gross income well below ten million dollars per year. The Committee is also aware that some professionals have taken the Government to court over the 2003 proposed increase fee for a tax practice certificate. Such a stalemate is unacceptable in any disciplined society and the Government and the professionals should seek an early resolution of the matter. Meanwhile the GRA must use all available sources to access information to allow it to raise and enforce assessments,” it added.
The report said that the self-employed contribution to tax revenues has increased from 0.56% of tax revenues in 1992 to 2.56% in 2014 but given the prevalence of the self-employed in the economy that percentage has to be considered negligible. It pointed out that the self-employed persons pay $3,489 million in income tax while employed persons pay $17,899, or five times as much.
Presumptive taxation
The report recalled that in order to address this problem, the government introduced legislation in 2003 for the use of presumptive taxation to address the self-employed. It noted that the World Bank considers presumptive taxation to be “an optimal method of curbing widespread non-compliance without employing excessive government resources because it addresses the concerns of both taxpayer and tax authority. Presumptive taxation provides taxpayers with a simplified option for tax compliance without requiring full financial transparency.”
However, the report said, simply having the legislation is not enough, as is evidenced by the 12 years of inaction on the introduction of such a method of taxation. It added that it is not unknown for taxpayers to challenge the level of presumptive tax so some caution needs to be exercised and the introduction of the presumptive tax well-thought out.
The report outlined the Duke Report recommendation of a withholding tax on specific self-employed persons and added that beyond these recommendations for a withholding tax on contract services payments, including consultancy payments, at the same rate as the PAYE, the TRC recommends more generally that the provisions of the Income Tax Act Cap 81:01, Section 28A be utilised to assess presumptive taxes at differentiated rates. This is important especially to capture those businesses that choose to operate as sole proprietorships and unincorporated companies in order to facilitate tax evasion; hard-to-tax professionals such as doctors, lawyers and accountants; and those entities that operate in hard-to-tax sectors such as agriculture and mining, the report said.
In terms of specific sectors, for individuals operating in the gold and diamond mining sector, the TRC recommended that the withholding tax paid by individuals in the gold and diamond mining industry be treated as a payment on account and not a final tax. “In other words, the withholding tax may be refunded if it is determined, when a tax return is filed, that the recipient‘s tax liability is less than the tax withheld, or additional tax may be due if it is determined that the recipient’s tax liability is more than the withholding tax,” the report said.
Alternatively, the tax may be considered a final tax but the rate be increased from 2% to 5%. The ambiguity in the law as to the status of the tax and whether it is a final tax or not will have to be clarified once a decision is made, it added.
Tributors
The committee also recommended that Section 33 F (4) to (6) of the Income Tax Act be amended to make it clear that tributors are required to file returns and are eligible for the personal allowance and refunds as necessary. One option is to increase the rate of the deduction to 20% and to treat this as a final, presumptive tax not subject to the personal allowance, it said. The TRC further recommended that the provisions of the income Tax Act Cap 81:01, Section 28A, regarding presumptive taxation be implemented.
In terms of individuals operating in the sugar and rice sector, the committee recommended a withholding/presumptive tax for operators in these sectors. In the case of cane farming, the tax can be collected by GuySuCo while in the rice sector it is charged at various stages, exporters to millers and millers to farmers. Alternatively, the presumptive tax can be applied to these sectors, it said.
“The rationale for this is that the country bears considerable cost of drainage and irrigation but receives very little by way of tax revenue. Tax concession can be no more a right than taxation is a duty and an expression of citizenship,” the committee argued.
As it relates to the construction sector, the committee recommended a withholding tax for any contract over a certain sum. “Non-resident contractors suffer a deduction of 10% on each payment and it is recommended that the rate for resident contractors be set at half that amount,” it said.
In terms of interest income in the financial sector, the committee recommended that interest income form part of the chargeable income of all taxpayers where such income is more than $100,000 for the year.
As it relates to rental of property, the report said that real estate has become a vehicle of choice for persons engaged in money laundering activities in the economy. “While income from the rental of property is self-assessed, it is recommended that self- assessment audits be performed on a random basis to determine if income from the rental of property is being captured in the tax net,” the report said.
The committee also recommended that the discrimination favouring payments by government and projects funded by donors be ceased. “Such discrimination is seen for example in gratuities paid in lieu of pensions to Government employees, a facility not available to the private sector, non-taxable overtime and bonus payments outside of the provisions of the tax laws, and the treatment of those employed on short term contracts as self-employed contractors responsible for their own taxes,” it said.
As it relates to employer-employee issues, the report noted that there are two major employer-employee issues in the taxation employment income. This relates to the many activities, where the employer in collusion with the employee chooses to treat the relationship as principal and contractor thereby removing the obligation to deduct and pay over income tax on the PAYE basis and NIS; and many employers grant excessive allowances and benefits to employed persons, some of which are not declared.
The first problem is one of enforcement, the report said. It recommended that the Guyana Revenue Authority review and amend as necessary its Tax Operating Policy (TOP) on this matter. That TOP should be applied across-the-board, it said.
According to the committee, the second problem involves an allowances structure that favours senior employees and the self-employed over other employees, including those working with self-employed persons. “We recommend that the entire allowance system be overhauled, including housing, which was last set in 1994 at $20 per square foot (US$0.10). Lump sum entertainment allowances should be limited and actual expenditure limited to entertainment strictly for business purposes. The employee should also be taxed on a share of the cost of any vehicle provided by the employer (i.e. to cover his personal use) while any lump sum allowance should be set by Regulation as in the case of housing or preferably replaced by a fixed mileage allowance based on actual usage,” it said.
The reform committee was chaired by Maurice Odle and included Dr Thomas Singh, Christopher Ram and Godfrey Statia.
The report was submitted to Minister of Finance Winston Jordan on January 18, days before the 2016 budget presentation.
