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Too many income earners outside the tax net

Published: 
Thursday, March 22, 2018

Because the doctor say to pay as you earn
But Sparrow say you paying to learn
And me father say he sharpening the axe
For when the collector come to pay off the income tax
—Mighty Sparrow (1958)
Because the doctor say to pay as you earn
But Sparrow say you paying to learn
And me father say he sharpening the axe
For when the collector come to pay off the income tax
—Mighty Sparrow (1958)

As is accurately illustrated in the words of this calypso classic released six decades ago, the introduction of Pay-As-You-Earn System (PAYE) in 1958 was greeted with much trepidation.

It was a new concept introduced in the first term of a People’s National Movement (PNM) led by Dr Eric Williams. For a nation getting to grips with self government, inching toward Independence but still very much a part of the British Empire, it must have been difficult to embrace the concept of personal income tax. There was some resistance if we are to go by what was sung by Sparrow all those years ago.

While taxation is a measure that is hardly, if ever, embraced by income earners by now there should be wider acceptance and compliance with the system. However, in T&T the words of that great American statesman Benjamin Franklin are not necessary true that “in this world nothing can be said to be certain, except death and taxes.” Death perhaps, but not taxes for a significant part of the population.

True, law requires that all individuals—whether self-employed or employed by someone else—pay taxes. In practice, not so much. The truth is that, apart from value added tax (VAT), there are still large numbers of people in this country earning well above minimum wage and not paying their share of taxes.

More than likely, a lot of self employed people—such as taxi drivers, vendors and small business owners—are operating outside the tax net. There are also many other paying some taxes from their full time jobs but are not reporting additional income from side jobs. Teachers giving extra lessons after classes for which students pay a tidy sum fall in this category.

This represents a high level of evasion that is costing this country millions of dollars in tax revenue—money needed to meet huge public expenditure.

This certainly contributes to current economic challenges, since most government activities, including maintaining and repairing infrastructure and providing goods and services, must be financed by taxation.

Not surprising then that the Board of Inland Revenue’s (BIR) inability to ensure compliance was among weaknesses and deficiencies identified in a Tax Administration Diagnostic Assessment Tool (TADAT) performance assessment report on this country just released by the International Monetary Fund (IMF).

The report underscores the need for substantial reform of the BIR and pinpoints a myriad of problems, including the unreliable state of the taxpayer registration database and weak compliance risk management methodologies which limit the BIR’s capacity to improve taxpayer compliance and generate additional tax revenues.

According to the TADAT report, there is “an inaccurate taxpayer registration database with uncertainty regarding the number of active taxpayers.”

The BIR got a failing grade of D, denoting inadequate performance with minimum standards not met, or insufficient information to determine level of performance, in the area of accurate and reliable taxpayer information.

T&T also did poorly on risk management in identification, assessment, ranking and quantification of compliance risks; mitigation of risks through a compliance improvement plan; monitoring and evaluation of compliance risk mitigation activities; and identification, assessment and mitigation of institutional risks.

In a statement in Parliament last Friday, Finance Minister Colm Imbert acknowledged that T&T’s tax collection system is under performing and despite some reforms over the years—introduction of VAT in the 1990s and improvements to the income tax regime in the early 2000s—major challenges with organisational structure, governance and non-compliance persist.

An overhaul of the tax administration through introduction of the T&T Revenue Authority (TTRA) has been on and off again for the better part of a decade. Blame that on the usual posturings and sabre-rattling that are negative aspects of our political culture.

The PNM got the process started and a change of administration midstream brought in the People’s Partnership which shut down the process when it took power in 2010.

The only thing that has been consistent throughout those changes in administration has been the strong resistance of the Public Services Association (PSA) to the TTRA. The country’s largest public sector union, citing concerns that their membership will job losses and dislocations, continues to strongly oppose the shift to the TTRA although talks have been ongoing with the Ministry of Finance.

As was the case in 1958 when PAYE was introduced, implementation of the TTRA is being overshadowed doubts, worries and confusion and PSA leader Watson Duke continues to stoke the fears of workers.

This is one of those areas where the authorities are simply not doing enough. The Ministry of Finance, through social media and other platforms of communication, has been attempting to educate the public about the new entity. They need to, since this move to integrate the operations of the BIR and Customs and Excise will affect almost every citizen.

However, they haven’t had much success in getting the message across.

In general, the communication strategies of the current administration leave a lot to be desired but that in itself requires a separate discussion.

Suffice it to say that not a lot of citizens are fully on board with the concept and Mr Imbert and his team still have a lot to do to convince the public that the TTRA will deliver a more efficient tax system. We eagerly await further revelations from the minister on this subject.

In any case, the proof of the pudding will be in the eating. The reform process currently underway will only yield the promised best practice in tax administration, including the benefits of improved management and more efficient and effective collection of public revenue, if new and higher standards of operation are introduced and consistently practiced in the TTRA.

Even so, ensuring compliance will be an ongoing challenge. Credible enforcement strategies which protect honest taxpayers and ensure a more equitable distribution of the burden by making sure the evaders are caught, are key

To distinguish itself from its predecessors, the TTRA should maintain a strong client focus delivering the quality of service and support lacking in most of this country’s public sector entities.

An important goal should be to make voluntary compliance as easy as possible for taxpayers, by introducing modern and de-centralised filing, payment and collection systems. Hopefully, there will be adequate investment in technology so that the TTRA, unlike the BIR, properly and securely manage the growth of taxpayer data.

Getting the reform process right—so that more taxpayers are included in the system through registration—will yield benefits for this nation well beyond increased revenue. There is the matter of being better equipped to counteract money laundering, for example.

The good news is that a TADAT report gives guidelines that can be followed to tackle the many weaknesses in the country’s tax system. The authorities should get to work right away and eradicate them.

It was a new concept introduced in the first term of a People’s National Movement (PNM) led by Dr Eric Williams. For a nation getting to grips with self government, inching toward Independence but still very much a part of the British Empire, it must have been difficult to embrace the concept of personal income tax. There was some resistance if we are to go by what was sung by Sparrow all those years ago.

While taxation is a measure that is hardly, if ever, embraced by income earners by now there should be wider acceptance and compliance with the system. However, in T&T the words of that great American statesman Benjamin Franklin are not necessary true that “in this world nothing can be said to be certain, except death and taxes.” Death perhaps, but not taxes for a significant part of the population.

True, law requires that all individuals—whether self-employed or employed by someone else—pay taxes. In practice, not so much. The truth is that, apart from value added tax (VAT), there are still large numbers of people in this country earning well above minimum wage and not paying their share of taxes.

More than likely, a lot of self employed people—such as taxi drivers, vendors and small business owners—are operating outside the tax net. There are also many other paying some taxes from their full time jobs but are not reporting additional income from side jobs. Teachers giving extra lessons after classes for which students pay a tidy sum fall in this category.

This represents a high level of evasion that is costing this country millions of dollars in tax revenue—money needed to meet huge public expenditure.

This certainly contributes to current economic challenges, since most government activities, including maintaining and repairing infrastructure and providing goods and services, must be financed by taxation.

Not surprising then that the Board of Inland Revenue’s (BIR) inability to ensure compliance was among weaknesses and deficiencies identified in a Tax Administration Diagnostic Assessment Tool (TADAT) performance assessment report on this country just released by the International Monetary Fund (IMF).

The report underscores the need for substantial reform of the BIR and pinpoints a myriad of problems, including the unreliable state of the taxpayer registration database and weak compliance risk management methodologies which limit the BIR’s capacity to improve taxpayer compliance and generate additional tax revenues.

According to the TADAT report, there is “an inaccurate taxpayer registration database with uncertainty regarding the number of active taxpayers.”

The BIR got a failing grade of D, denoting inadequate performance with minimum standards not met, or insufficient information to determine level of performance, in the area of accurate and reliable taxpayer information.

T&T also did poorly on risk management in identification, assessment, ranking and quantification of compliance risks; mitigation of risks through a compliance improvement plan; monitoring and evaluation of compliance risk mitigation activities; and identification, assessment and mitigation of institutional risks.

In a statement in Parliament last Friday, Finance Minister Colm Imbert acknowledged that T&T’s tax collection system is under performing and despite some reforms over the years—introduction of VAT in the 1990s and improvements to the income tax regime in the early 2000s—major challenges with organisational structure, governance and non-compliance persist.

An overhaul of the tax administration through introduction of the T&T Revenue Authority (TTRA) has been on and off again for the better part of a decade. Blame that on the usual posturings and sabre-rattling that are negative aspects of our political culture.

The PNM got the process started and a change of administration midstream brought in the People’s Partnership which shut down the process when it took power in 2010.

The only thing that has been consistent throughout those changes in administration has been the strong resistance of the Public Services Association (PSA) to the TTRA. The country’s largest public sector union, citing concerns that their membership will job losses and dislocations, continues to strongly oppose the shift to the TTRA although talks have been ongoing with the Ministry of Finance.

As was the case in 1958 when PAYE was introduced, implementation of the TTRA is being overshadowed doubts, worries and confusion and PSA leader Watson Duke continues to stoke the fears of workers.

This is one of those areas where the authorities are simply not doing enough. The Ministry of Finance, through social media and other platforms of communication, has been attempting to educate the public about the new entity. They need to, since this move to integrate the operations of the BIR and Customs and Excise will affect almost every citizen.

However, they haven’t had much success in getting the message across.

In general, the communication strategies of the current administration leave a lot to be desired but that in itself requires a separate discussion.

Suffice it to say that not a lot of citizens are fully on board with the concept and Mr Imbert and his team still have a lot to do to convince the public that the TTRA will deliver a more efficient tax system. We eagerly await further revelations from the minister on this subject.

In any case, the proof of the pudding will be in the eating. The reform process currently underway will only yield the promised best practice in tax administration, including the benefits of improved management and more efficient and effective collection of public revenue, if new and higher standards of operation are introduced and consistently practiced in the TTRA.

Even so, ensuring compliance will be an ongoing challenge. Credible enforcement strategies which protect honest taxpayers and ensure a more equitable distribution of the burden by making sure the evaders are caught, are key

To distinguish itself from its predecessors, the TTRA should maintain a strong client focus delivering the quality of service and support lacking in most of this country’s public sector entities.

An important goal should be to make voluntary compliance as easy as possible for taxpayers, by introducing modern and de-centralised filing, payment and collection systems. Hopefully, there will be adequate investment in technology so that the TTRA, unlike the BIR, properly and securely manage the growth of taxpayer data.

Getting the reform process right—so that more taxpayers are included in the system through registration—will yield benefits for this nation well beyond increased revenue. There is the matter of being better equipped to counteract money laundering, for example.

The good news is that a TADAT report gives guidelines that can be followed to tackle the many weaknesses in the country’s tax system. The authorities should get to work right away and eradicate them.

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