The Strengths and Weaknesses of Guyana’s Tax System

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With only modest and sporadic success, Guyana has faced tremendous challenges in establishing an efficient and equitable tax system capable of providing a substantial amount of revenue to meet the required level of public spending.

The inefficiency and inequity of the current system are manifest in high tax rates; a tax structure that often provides disincentives to risk-taking, investment, growth and development and incentives for rent-seeking and corruption; a high concentration of taxes and extensive tax evasion; and by implication, an inordinately high burden on compliant taxpayers.

Additionally, as emphasized by the Minister of Finance in his 2015 Budget Speech, any attempt to undertake the fiscal programmes necessary for the country’s development and tax system transformation could lead to macroeconomic destabilization. Therefore, to understand the magnitude of the reforms that would be needed for Guyana’s tax system, one must flesh out its strengths and weaknesses.

INHERENT STRENGTHS

Based on the current structure, mode of operations, performance and revenue outcomes, there could be little justification in saying that Guyana’s tax system is strong, robust and very effective in contributing to the achievement of the Government’s economic and social objectives. While, by international standards, the tax yield (using a revenue/GDP measure) is not unimpressive, this may be partly a result of the understatement of economic activities. Accordingly, there are certain inherent factors that should have allowed the system to perform better than it has done in the past.

First, the extreme openness of the economy ought to make for a considerable degree of administrative ease and fruitfulness in outcomes with respect to the imposition of custom duties. But its effectiveness was and continues to be diluted by the high incidence of exemptions, widespread evasion and under-declaration of imports, corruption and lack of enforcement by the tax authority.

Second, VAT has proven to be a very high revenue earner. But more revenue can be garnered if the increasingly high incidence of zero rating is curbed, and even reversed. In addition, yields can be further increased if more small establishments can be brought into the tax net (by enforcing the threshold for VAT registration) and if the not insignificant practice of larger establishments sometimes selling eligible products without applying the VAT rate (facilitated by the non-issuance of a receipt) could be pursued more vigorously.

Third, current statistics indicate that VAT, which is linked to other taxes, is rigidly enforced in Georgetown but poorly enforced in other regions. Fourth, there is a long established (since 1929) tradition of paying corporate and individual income tax. Knowledge of this practice could be a psychological basis for cajoling more people to be tax compliant. More intensive education, while capitalizing on fairly high literacy rates, could result in an attitudinal metamorphosis; and a tradition of intensive consultation could result in substantial buy-in with respect to tax reform when the need arises.

In addition, none of the political parties is so conservative, and to the right of the political spectrum, as to make taxes an anathema or campaign issue and to stand vigorously against tax reform, in keeping with changing economic circumstances and designed for a country wishing to undergo a socio-economic transformation.

INHERENT WEAKNESSES

The main weaknesses in the Guyana tax system include an excessive amount of exemptions; significant evasion and avoidance; low administrative capacity; a relatively narrow tax base; and high effective tax rates in certain sectors and a failure to achieve the desired amount of equity.

There is an inordinate amount of exemptions granted to businesses, companies and individuals. The corporate exemptions (worth over $43 Billion in the last five years) relate mainly to customs duties, VAT and excise taxes and are very significant when measured as a percentage of Government tax take, GDP or private sector investment. In addition, there are tax holidays, miscellaneous waivers and other concessions, and accelerated depreciation and other types of investment allowances. This generous situation has arisen both as an attempt to offset the high rate of corporate taxation (“doctoring”) and as a result of the excessive exercise of ministerial discretion, the randomness of which could lead to economic distortion and misallocation of resources.

The instinctive and on-the-spot exemptions to interest groups have been used by politicians, sometimes genuinely, to address hardships but not infrequently to curry favours with segments of the electorate. Such a practice can contribute to a tax system in which there is discrimination of one group over another based on political appeal and lobbying muscle. With respect to tax waivers granted to certain individuals, such as the President, the Attorney General, the Chancellor, the Chief Justice and the Auditor General, a rationale or justification is hard to find, especially since it sends the wrong signals to those persons whom the Government is hoping to rope into the tax net. Various forms of tax exemption have also been used to favour Members of Parliament and to provide non-tax benefits to public servants to compensate for what is perceived to be inadequate salaries. However, they constitute unfair discrimination, which causes dissatisfaction with the private sector.

The high incidence of evasion relates to those companies and individuals who use various devices to evade the several taxes imposed on them by law. There is also a very large underground economy, made up of both unincorporated firms, employing various evasion and avoidance practices, and self-employed persons of various skills and occupations. In addition, smuggling is rampant because of the thousands of miles of unpatrolled borders.

The failure to capture more operatives into the tax net is partly related to the relatively low capacity of the Guyana Revenue Authority (GRA) in terms of trained and skilled personnel; the absence of the availability of adequate and appropriate information technology; failure to use the available technology to capture common and relevant information regarding taxpayers; the absence of a common and adequate database; and a level of professionalism that is not sufficiently high to resist various forms of bribery. In addition, in the past administration, there has been political intervention/ interference so as to prevent the officers from conducting their duties in a fair and non-partisan manner.

The abovementioned weaknesses have all contrived to burden Guyana economy’s with a very narrow tax base, in terms of the relatively small number of firms and individuals that do pay tax (in addition to the high revenue concentration among those who actually pay). This derived weakness is also structural, given the significant share of the agricultural sector in the country’s GDP and the large number of small farmers. Also, the large services sector, with its considerable number of small operatives with various levels of skill, income and net worth, do not lend itself to easy taxation.

Finally, the constellation of weaknesses and the peculiar nature of their inter-play has conspired to negate, to a considerable extent, the tax equity objective of the Government. At the vertical level, indirect taxation, which impacts irretrievably and indiscriminately on the poor, is high in yield relative to direct taxation. At the horizontal level, some pay corporate and individual income tax, while others do not; and the individual income tax burden falls disproportionately on fixed income earners. Over time, the tax structure has not evinced fundamental change.

In  March  2012,  the  Government  of  Guyana formally entered into the process of negotiating a Voluntary Partnership Agreement (VPA) with the European Union (EU) under the auspices of the global Forest Law Enforcement, Governance and Trade Action Plan (FLEGT). Adopted in 2003, the plan sets out a programme of actions that form the EU’s response to the problem of illegal logging and trade in associated timber products.

With the EU being one of the prime markets for Guyana’s forest exports, it is only logical that the country pursues efforts to attain FLEGT status. But this is easier said than done. Guyana is still stuck at the stage of improving its in-house structures to gain the licence. In fact, it will cost Guyana approximately US$10M to achieve this. This money covers the financial and technical support required for capacity building and other costs.

With that said, one must also consider the fact that the Guyanese timber market faces a number of challenges: developed nations have timber procurement policies that are not favourable for Guyanese timber due to their environmental accreditation requirements; there is poor perception of tropical timbers, in particular, Guyanese greenheart; there is lack of awareness of Guyana’s forest sustainability; the absence of forest certification adds to poor perception; and FLEGT licensing is not equivalent to certification of sustainability undertaken by the voluntary certification schemes such as the Forest Stewardship Council.

Therefore, FLEGT licensed timber will not guarantee acceptance of Guyanese timber into certain markets, particularly for private sector procurement.

Opportunities for Guyana, however, include: its historically low forest degradation rate; strong forestry management principles; its cost effective workforce and greenheart being the only timber with a “13 Grade” that design engineers in Europe can use.

Guyana, thus, needs to change the current perception of its forest industry by communicating the facts through proactive media communication, online communication and responses from forestry bodies/senior officials to counter negative publicity. NGOs and government advisory groups should conduct desk-based research and there needs to be increased inter-Governmental pressure.

In the long term, Guyana needs to actively pursue the finalization of FLEGT licensing and move towards a national standard on sustainability in conjunction with an independent certifying body.

One of the burning issues that remain is the non-acceptance of Guyana’s greenheart into the UK market by the Environment Agency’s procurement policy, due to the misconception that Guyana’s forest is not sustainable. Some experts have said that the UK, as a partner in the FLEGT VPA process, is engaging in double standards.

It is believed that this matter should be actively pursued at the political level. In relation to changing the negative image of Guyana globally, despite the efficient management of its forest, it is agreed by industry stakeholders that the Government, private sector and civil society will need to advocate collectively in communicating the true facts on Guyana’s forests to the international community.

THE POTENTIAL FOR SYNERGIES EXISTS BETWEEN THE GUYANA-NORWAY REDD+ PROJECT AND EU FLEGT: In 2009, Guyana and Norway signed a Memorandum of Understanding on REDD which refers to reducing emissions from deforestation and forest degradation.

The agreed areas of work include EU FLEGT VPA as a REDD+ enabling activity. As a requirement of the MoU between Guyana and Norway, it was stipulated that Independent Forest Monitoring (IFM) should be followed by the monitor and the host institution as a set of minimum standards to be adhered to.

It covers the significant drivers of deforestation and forest degradation by covering all stages of the chain of custody as it relates to logs and lumber harvesting, transportation, processing and export. REDD+ and LCDS integrate FLEGT VPA as REDD+ governance of which forest governance is one aspect.

In addition, Guyana’s intended nationally determined contribution has mainstreamed EU FLEGT VPA as a REDD+ Strategy under Forest Governance as an Unconditional Contribution. REDD+ programmes, such as IFM, are thus regarded as good preparatory platforms for EU FLEGT. As such, in moving forward, synergies should be established with IFM.

Guyana has been granted a no-cost extension to complete three outstanding activities centred on governance before moving on to the next phase of the partnership. These activities are: the initialing of the FLEGT VPA by Guyana under the EU FLEGT VPA process; application

of candidacy by Guyana under Extractive Industries Transparency Initiative (EITI); and the advancement of remaining areas of work involving indigenous peoples.

NATIONAL DISCUSSION AND CONCERNS: There have been a series of national discussions where much focus was placed on the current status of the Guyana-Norway initiative. Locals were informed that the previous phase of the Agreement ended in 2015 and that the progression onto the next phase is contingent upon the three outstanding activities outlined above under the no-cost extension.

Some have expressed a concern that the conversation thus far has not addressed the need for reforestation. It should be noted, however, that a specific unit within the Guyana Forestry Commission has responsibility for forest resources management, including reforestation. However, it has been said time and again that timber harvesting in Guyana is conducted on a selective logging basis which limits extraction to 20m3 per hectare, which is far above the current industry’s performance.

WITHIN THE TIMBER SECTOR, MARKET-BASED LEGISLATION IS CHANGING CONSTANTLY AND COUNTRIES NEED TO STAY ABREAST OF THESE: The Global Timber Forum (GTF) is a platform for groups, associations and federations within the private sector that are involved in forest activity. Among its functions, the GTF provides technical expertise in accessing funding to support private sector engagement. It also provides a voice for the forest private sector. Important parameters about the timber industry are that: it is a highly regulated sector; various levels of permits are required for it to be legal; transaction costs for these permits are high; policies focus mostly on controls; controls established are not always supported by technical data; products from plantations receive the same treatment as products from the natural forest.

Within the sector, market-based legislation is changing constantly and more countries are likely to introduce laws within the next decade. Moving forward, exporters need to focus on understanding their own legal system so that they can assure their customers about the legal compliance and quality of their products.

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