Taxpayers and their compliance with VAT – Part 1

Jul 10, 2016 News

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By Kiana Wilburg

It’s no secret, the significant role tax revenue plays in financing a country’s planned development activities. So important is its role that countries are keen to protect themselves from tax revenue shortfalls by planning to ensure a stable tax revenue collection regime.
The planning strategy usually includes countries seeking to ensure that the parameters required to be met for each type of tax to perform well are actually met.

The strategy may also, or alternatively, seek to focus on a certain type of tax for stable revenue collection.
To better understand the latter strategy, I sought the help of Chartered Accountant, Sean Naughton.
With the proliferation of globalization, Naughton believes that multinational enterprises, that is, companies with related companies in other countries, lead to many destabilization issues for corporate income tax revenue.
He said that the main issue with multinational enterprises is with sharing global profits in ways that are unacceptable to most countries concerned, given the contributions made by each to the creation of that profit.
Naughton explained that this international tax issue was addressed and redressed many times by leading global bodies like the Organization for Economic Cooperation and Development (OECD) through its Fiscal Affairs arm.
Currently there is a study on “Base Erosion and Profit Shifting” (BEPS) being undertaken by this body, because while there has been major strides, there are still many international tax problems in the area of sharing profits between countries where the multinationals carry on business.
Naughton shared that the USA has proposed to replace its current system of taxation with a single sales tax regime called “FairTax”.
The Chartered Accountant said that with the corporate income tax regime gone, so too will the BEPS issues, which causes unstable tax revenue collected.
He said that other countries do not propose to remove the corporate tax regime, but to place reduced reliance on it, preferring to rely on consumption-based taxes like VAT or other sales tax.
Naughton said that the UK has reduced its corporate tax rate from 30% in 2008 gradually down to 20% currently, and proposes further reductions to a projected 17% rate in 2020. He said that while reducing corporate income tax rates, the UK’s VAT rate has been steadily increasing from a standard rate of 15% in 2008 to 20% currently.
The Chartered Accountant noted that one of the most significant points being made in support of the proposed FairTax system is that once you consume goods/ services in the USA you would have paid the tax (hard to evade the tax).

MANAGING THE PARAMETERS OF VAT
Guyana’s version of the stabilizing sales tax is the Value Added Tax (VAT). The implementation of this tax has had the effect of stabilizing tax revenue for our country.
At the time of setting up the VAT regime, projected revenue from the tax would have been agreed as dependent on the achievement of certain parameters. These parameters would need constant monitoring to ensure stable revenue collection.
According to Naughton, some of the factors which should have been considered are indicted below.
. Collecting agents – this is the registering of businesses which collect the tax from consumers and pay it over to GRA;
. Verifying reported sales – The tax is a percentage of sales value. Being satisfied that the reported sales is correct should therefore be of utmost importance;
. Exempt goods/services – The extent to which tax exemptions are given for goods/services sold must be continuously monitored to ensure stable revenue collection; and
. Refunding input tax – minimizing the risk of refund fraud through constant monitoring.

COLLECTING AGENTS
Naughton stated that maximum registration of qualifying agents should mean the collection of maximum tax revenue.
“Remember that when businesses which are not registered sell taxable goods/services, the tax would not be collected. However, there is an argument to be made that for a fairer system, no business should be exempt from registering; no matter how little its sales are per year,” Naughton expressed.
He said that the extremely low level of registration in Guyana is because most Guyanese taxpayers do not want to be registered and would prefer to under report sales to avoid registration. He explained that GRA’s only option in such a case would be to prove that the threshold has been met and force registration. It is however not easy proving annual sales or even over 300 days of sales. The Chartered Accountant said that it would be easier to prove that a single day’s relevant sales is more than $50,000 or that the average of three days sales exceed $40,000. He explained that this is because by simply observing the business for a few days, the authority would have all the evidence it needs.
“A point I made, representing the Linden Chamber in 2007 when VAT was being launched, was that registered businesses are put at a competitive disadvantage (must either increase price to collect the government’s revenue, losing market share, or cut profit; refunds do not fully compensate). This would hardly be the case if the majority of businesses were registered. Registration fears will also be reduced,” Naughton expressed.
He opined that there is an obvious obligation to protect both the tax revenue and the private sector by maximizing registration.
To be continued …

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