Can Guyana checkmate tax evasion with FATCA? (Part 2)

Mar 20, 2016 News

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By Kiana Wilburg

Two weeks ago, I shared with you, extracts of my interview with Chartered Accountant Shawn Naughton, on the importance of the Foreign Account Tax Compliance Act (FATCA) and how Guyana stands to benefit from getting on board. But as it is with everything, there are advantages and disadvantages, and in our discussion, Naughton and I examined both sides of the spectrum.

For those who missed the first edition, FATCA is an international tax tool for improving compliance by US taxpayers with the tax laws of the USA. The US tax laws provide that all its citizens and resident taxpayers are to be taxed on their worldwide income.

In that edition, Naughton addressed some key issues, expounding on the effect FATCA would have on Guyana and concerns about FATCA as it relates to Guyana. (See the following link for more details: https://www.kaieteurnewsonline.com/2016/03/06/can-guyana-checkmate-tax-evasion-with-fatca/)

Today, we look at Guyana’s ability to receive information about its elusive taxpayers through this programme, and what is required of Guyana in order to be eligible for it.

 

Kaieteur News (KN): From what you have said, the residence of a taxpayer is important in deciding which country has the right to tax a person.   Please clarify how this works.

 

Shawn Naughton (SN): The question of taxing rights is a sovereign issue and must be provided for via the domestic tax laws of a country. It is however true that the tax-residence of a person and the place in which he earns his income are the two most common factors determining which country has the right to tax that income.

Guyana’s tax laws provide that all income earned in Guyana should be taxed in Guyana. This is commonly referred to as “source taxing rights” (the right to tax income sourced in that country).   Virtually all countries agree that if income is earned in that country it should be taxed there, so they have included this rule in their tax laws.

Taxing rights based on a taxpayers’ residence and/or citizenship is a secondary taxing right.   What this means is, should a taxpayer earn income in one country but is a resident or a citizen of another country he may be subjected to “taxing-up” in the second country.

The first country would have priority rights to tax (source taxing rights) and the second taxing-up rights. As an example, if you are a citizen of the USA but earn salary in Guyana of $2,000, Guyana will tax the $2,000 (since the money was sourced here). USA would tax the same $2,000 because you are a US citizen.  If the Guyana tax on the $2,000 turns out to be say $500 and US tax $600,  USA will tax-up ($600-$500=$100 which should be paid to USA).   Effectively the USA has given relief for the Guyana tax paid (called double tax relief) since the $2,000 income was taxed twice (once by Guyana and again by the USA). Note that Guyana’s tax laws also provide for double tax relief.

If a company which is subject to source taxing in Guyana (because it operates here) is offered a period of ‘no tax’, whether or not it makes a profit during that period, the company could end up being taxed in full in its country of residence, since there is no tax paid in Guyana to relieve.

Continuing with the example, the US tax would be $600-$0=$600 since Guyana waved its rights to tax.   Simply stated, in many cases the company would not end up getting a tax waiver or exemption, as a result of foreign tax paid, and Guyana would lose the tax revenue.

Care should therefore be taken when offering tax waivers to companies.

 

KN: Is determining residence difficult?   How is it determined?

 

SN: Well first let me explain that the USA is one of only a few countries to tax based on citizenship. In the USA, citizenship for taxing purposes is based on the country’s immigration law definition of a citizen.

Tax-residence is however a term defined by tax law. The residence of an individual is usually based on that individual’s presence in a country. The individual’s connections to the country may need to be considered, in addition to presence, where presence alone cannot establish residence.

A company’s country of residence is usually where it was incorporated and/or where it is managed.   In Guyana, a company is resident where it is managed and controlled.   Given this definition, a company could have been incorporated and operating in Barbados, but be Guyana resident for tax purposes.

This fact has implications for Guyanese taxpayers who may register a company in say, Delaware USA, a tax haven which charges no tax on company profits, in an attempt to avoid paying Guyana tax.

Such a company may still remain taxable here if it is managed and controlled here.  It should be noted that Guyana’s definition of a company’s residence makes migration of such companies (changing its place of residence; place with taxing up rights) relatively easy.

The place of incorporation is the place of residence of a company under US tax law.

For a US incorporated company to migrate, another company with a foreign place of residence would need to purchase the US Company. The UK tax statute provides that companies incorporated there are resident there. UK tax laws also provide that a company’s place of ‘central management and control’ would determine its residence; ‘central management and control’ being defined by case law.

Like Guyana, the UK rules allow the UK to argue that a company which was incorporated in another country is UK resident, because the UK is its place of management. Companies incorporated in the UK are also resident there, which means that the UK retains residence taxing rights.

Simply put, should a company be incorporated and be carrying on a business in the UK, that company remains UK resident, regardless of whether the company is also resident under the laws of another country. Where a company is found to be resident under the laws of two countries there may be a tax treaty between the two countries which allows only one of the countries to assume residence taxing rights.

These rules are referred to as ‘treaty tie breaker rules’. If there is no treaty between the countries then both countries retain residence taxing rights which can result in unrelieved double tax (an impediment to international trade).

I am sure you would agree that this has been my most technical answer so far.   That is because this is a technical issue. Companies should always seek the advice of an international tax specialist in answering international tax questions.

 

KN: What does Guyana have to do to achieve the status it hopes to reach under FATCA?

 

SN: The USA needs partners to help it enforce FATCA provisions. They need us. There will however be a need to achieve an acceptable standard of data /information protection to minimize risk of legal proceedings being instituted against any or all of the countries involved, for the way a taxpayer’s data/ information was handled.  All FATCA partners must meet this standard.

Secondly, FATCA on its own does not provide for reciprocity. For Guyana to receive information on its taxpayers, it must agree to this separately with the USA.   Guyana signed a reciprocal Tax Information Exchange Agreement in 1992.   The condition for reciprocity is therefore already satisfied.

 

KN: Could you please provide an example to demonstrate how FATCA will impact US citizens operating businesses here?

 

SN: I am glad you asked this. When I delivered a copy of my article “FATCA; Guyana’s Pilot into International Tax” to Kaieteur News Publisher, Mr. Glenn Lall, he immediately pointed out that there are implications for virtually all local companies, as nearly all are owned by US citizen(s)”. There are tax implications for all. Assuming the US citizens did not report their Guyanese income to USA as required, the following will likely result:

• If the entity is considered separate from its owners the entity is likely to be non-US resident (so USA would not have taxing-up rights on the entity). The IRS would however have rights to tax-up income of the entity distributed to the owner(s) as dividends. This is because the USA taxes its citizens on dividend income received from non-resident companies. If no distributions are made by the entity, the US would have no rights to tax (either the entity or its owner(s)). Note that a payment by an entity may be classed as dividends if that payment effectively serves the same purpose as dividends (distributing wealth the entity earned, to its owner(s)).
• Where the entity is considered one and the same with its owner(s), the income of the entity does not need first be distributed to its owner(s) before taxing-up will apply. As soon as the income is earned by the entity it is treated as earned by its owner(s), so taxing-up should apply immediately.

The IRS will assess for back years to recover revenue lost as its tax laws so allow. Associated penalties will also be charged by the IRS. The IRS can also conduct a tax audit to establish whether the chargeable income, based on which taxes were paid to Guyana, was fair.

If for example, IRS establishes that the chargeable income for a year should have been US$2,000,000 while Guyana taxed chargeable income of only US$1,000,000 the IRS may assess for US$700,000 (35% assumed) while Guyana assessed for US$250,000 (25% assumed).   Taxing up would be US$700,000-US$250,000 = US$450,000.

This is the reason for FATCA.  FATCA is part of a stimulus programme. Its purpose is to raise revenue for economically stimulating investments which should ultimately result in job creation in the USA.

(To be continued)

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