The Repealed Environmental Tax…Do we really stand a chance in court against wrongfully-taxed treaty companies?

May 29, 2016 News

By Kiana Wilburg

Even after the Environmental Tax was repealed, it still continues to haunt us. This was evident in the number of

Chartered Accountant, Shawn Naughton

cases that have been brought against Guyana by foreign companies operating here.
In fact, Attorney General, Basil Williams informed members of the press in April that two such companies have signaled their intention to file proceedings in the Caribbean Court of Justice (CCJ) so that they can get a refund of the environmental tax that was paid here over a seven-year period. This is in spite of the fact that the environmental tax was repealed since last year.
Williams is of the view that the two companies are basically piggybacking on the judgment in a previous matter in which a similar claim was made against Guyana, and that company won. Williams argued that in that matter, the Government of Guyana did not lead evidence to show that the tax was transferred to the Guyanese consumers. The Attorney General said that the Government intends to lead such evidence, if required, in future.
The arguments on both sides seem understandable to various extents. It is pertinent that we consider how the environmental tax was intended to work in the first place and what really went wrong in the process.
Helping us to answer these two crucial questions this week is Chartered Accountant, Shawn Naughton.
In a nutshell, Naughton expressed that the tax was intended to help with the ‘plastic epidemic’ which existed in Guyana at the time.
Naughton said that companies were to be charged for damaging our environment with plastic, metal, glass or cardboard beverage containers imported into Guyana. He said that the tax was to be collected like any other duty at the port of entry (air or sea) from all importers.
But to every rule, there is always an exception. The Chartered Accountant said that Guyana is a signatory to a Caricom treaty known as the “The Revised Treaty of Chaguaramas”. The treaty, he explained, provides that there will be no import duty imposed on goods originating in treaty member states, i.e Caricom states. This simply meant that the tax could be applied to goods not originating in a treaty state.
The Chartered Accountant explained that the taxing regime therefore needed to have rules for taxing these two categories of imports differently. But Guyana’s laws did not make such provisions and as such, levied the tax on all imports without discriminating.
Naughton said that a system which provided for the refunding of the tax on treaty imports, subsequent to the tax being collected at our ports, would have been relatively straightforward to administer.
“Note that very developed countries make the error of not properly analyzing the potential effects of agreeing to international laws (treaty laws) before signing on to them. Many have had to react, like we have to, subsequent to a court decision,” Naughton said.
He added, “The UK had many court cases ruled against the state, because its domestic laws applied were not compatible with treaty agreements the state entered into with other states (mainly the European Union). The fact is that treaty law generally overrides domestic law, which means that domestic law should be treated as having no effect where it conflicts with treaty agreements.”
But one cannot escape the reality that at the end of the day, treaty-importers have sought and are seeking to recover moneys that seem significant. Naughton explained in this regard that the amounts being sought should equal the amount suffered by the qualifying claimants.
He said, “Remember that, based on the treaty agreement, Guyana should not have benefited in this way at the cost of treaty importers. The court’s responsibility is to reverse the effect; that is, take away the illegal benefit from Guyana and refund the aggrieved treaty importer. The only defence with respect to amounts that is sometimes available to the wrongdoer, in these cases, is the timing of claims made.”
He explained that the wrongdoer, using time limiting provisions, may be able to limit recovery by the claimant to damages occurring within the last three years say, damages suffered in prior periods being non-recoverable. He said that since treaty law usually overrides domestic law, time limiting provisions used as a defence in treaty cases should usually come from the specific treaty.
Naughton said that it is important to note also, that a taxpayer who pays $100,000 in environmental tax is able to save on income/corporation tax by treating the same $100,000 as a business expense (usually added to the costs of purchases).
He also pointed out that if the environmental tax is refunded, the deduction should also be reversed. He said that by reversing the expenses of prior years, there would be a corresponding increase in profits in those years. Naughton said that since these profits did not exist prior, they would not have been taxed, and thus so should now be taxed.
The Chartered Accountant expressed that the Customs Act provides that a refund of an amount previously allowed as an expense should result in taxable income in the hands of the company of the said amount, and at the rate of assessments applicable in the year in which the refund occurs.
He explained that this means that the environmental tax, now refundable by the Guyana Government to treaty importers, should generally be subject to income or corporation taxing. In negotiating an out of court settlement, he said that if this option is chosen, the net position explained above should therefore be the starting point for Government.
He was then asked for his opinion on the use of the argument by Government that the treaty importers have already recovered the tax by passing this cost to Guyanese customers, in future environmental tax cases.
Naughton contended that generally, in economics, suppliers of goods are expected to be most influenced by the actions/reactions of competitors supplying similar goods in the same or similar economic conditions. He said that they are aware that if they increase price above that of these competitors (the market price) they are likely to lose market share and as such profits.
He noted that suppliers are therefore known for price cutting (below market price) to win market share, and not for increasing price. He added that they take as a given that they must accept a certain price and try to manage costs down to a targeted level. He said that this was in effect in the argument that was successful against the government, and would expect it to continue being the argument of all subsequent claimants, since it is strongly supported by economic theory.
Naughton asserted that the behaviour of suppliers can be contrasted with that of consumers who are usually influenced by the actions/reactions of other consumers. He argued that consumers are usually willing to pay a higher price to secure goods, which are in short supply, to ensure that their own supplies are adequate.
Naughton pointed out that such action/reaction by consumers could push market price up.
He said that normally, where market prices adjust upwards, all companies operating in that economy would benefit from the resulting windfall. He said that whether the environmental tax caused the treaty importer to not benefit from such a windfall, or to lose market share trying to increase price to recover the tax, the net effect is that the importer was hurt by the tax.
“In a pricing case such as this, economists are usually invited as expert witnesses to explain how pricing of goods for sale works. It might be expected that an economist, testifying for the plaintiff, would be successful at explaining to the court that the claimant lost an opportunity to benefit from normal windfall, lost market share, and/or, just made less profits because of the environmental tax. As I understand it, this is all that needs to be shown for the court to conclude that an award will not result in the claimant being ‘unjustly enriched’.”
Naughton said that tax courts make much use of business experts in an attempt to keep the application of tax laws in its context. He emphasised that the voice of a pricing expert should therefore not be underestimated in court cases such as these.