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Saturday, December 07, 2013
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Does Govt collect enough taxes?
The Government is leaving billions of tax dollars uncollected because of its failure to establish a unified tax authority, says former Central Bank Governor Ewart Williams. Such a tax authority would bring the income tax, VAT and customs departments under one roof and would reduce the likelihood of tax evasion, which Williams described as “rampant.” T&T has a simplified, flat tax system with a $60,000 income threshold below which no tax is paid and a charge of 25 per cent on every dollar earned above $60,000.
The revised estimate of the amount of taxes collected in the 2012 fiscal year was $46.4 billion, while the Government expects to collect around $50 billion in 2013. For years, ministers of finance have been concerned that with T&T’s energy resources in decline, the country would have to maximise non-energy taxes in the future. This has led to calls for reforms to the tax system to ensure greater compliance by more taxpayers, which would allow more taxes to be collected.
In his 2013, Minister of Finance Larry Howai pledged to conduct a comprehensive review of the current tax system that would be completed in fiscal 2013, which ends on September 30. Howai said that, in the interim, he would seek to boost non-energy revenues by addressing the long-standing issues of taxes on property and the fuel subsidy.
He said: “The transformation of Trinidad and Tobago into a modern high-performing engine of growth would require a fiscal regime which would enhance the competitiveness and productivity of the national economy in particular the non-oil economy while at the same time generating appropriate public revenues to meet our acknowledged commitments.
While we have revised regularly our oil and non-oil tax regimes, evolving and changing domestic and international considerations have compelled us to conduct a comprehensive review of the current tax structure. I shall do so in fiscal 2013. I envisage an outturn over the medium-term which would ensure that the country generates the revenue to meet our required public expenditure.
In the interim, we have examined several scenarios for arriving at a balanced budget within our proposed time-frame, which the minister had identified as being by 2016. Three (3) important initiatives have been identified:
• Land and Building Tax
First is the Land and Building Tax. During the course of the next fiscal year I propose to put in place a regime which will cover residential, commercial, agricultural and industrial land and this regime will be fairer and more equitable than that which was previously proposed. We shall continue the waiver of tax liabilities which commenced in 2010 until the complete framework for implementing this tax is put in place.
• Fuel Subsidies
Second, is the fuel subsidy. I propose to address the inefficient allocation of resources and the associated budgetary implications of the fuel subsidies as we move towards a balanced budget over the medium term.
• Tax Collection
Third, is a comprehensive review of our tax system. This review will cover the entire tax system, including tax policy, administration, and enforcement. It will encompass all sources of government revenue and focus on tax revenue, including personal and corporate income tax, Value Added Tax and excise duties as well as capital and property taxes. It will also examine the net benefits to the government for charging fees for the goods and services it provides.”
Not much has been heard of that exercise since the minister’s announcement and with less than 72 hours to go before he presents the 2014 budget package, there is some doubt concerning the completion of the tax review. The previous People’s National Movement (PNM) administration had done a significant amount of work on the creation of a unified tax authority, which the PNM called the T&T Revenue Authority.
In delivering the 2010 budget, then Finance Minister Karen Tesheira spoke of the establishment of the T&T Revenue Authority. She said Government’s plan was “to promote institutional reform in several areas of activity including local government administration, pension and property tax administration and our customs and tax administration through the formation of the Trinidad and Tobago Revenue Authority.”
Later in that budget presentation, Tesheira made it clear that the establishment of the Revenue Authority would have a significant impact on tax collection. She said: “While the establishment of the Trinidad and Tobago Revenue Authority in the new fiscal year is expected to boost domestic revenues, the full impact of this very important fi scal reform is not expected for another year or so.
The fiscal outlook is therefore for a much stronger performance beginning in 2011 and continuing as our fiscal, monetary and structural reforms begin to take effect.”
In an analysis of the commitments made by the Minister of Finance, the T&T Chamber of Commerce outlined some of the key features of the reform exercise:
• Implementation of a more rationally structured and simplified tax legislation so as to make it more coherent and user-friendly
• Simplification and clarification of the rules relating to the taxation of benefits-in-kind provided to employees;
• Consolidation of the system of capital allowances which are currently provided for under various pieces of legislation;
• Introduction of provisions dealing with Transfer Pricing which were proposed in last year’s Budget Statement but not implemented;
• Addressing the thorny issue of the reform of the Board of Inland Revenue and the Customs and Excise Division and finding a model which delivers efficiency
We recognize, however, that such a reform exercise may be a long-term process, but in the interim, certain administrative reforms can be implemented which may ease the compliance burden of taxpayers, including:
• Rationalization of the tax calendar which currently provides for a multitude of payments and filing deadlines for Income Tax, Corporation Tax, PAYE, VAT and N.I.S. Applying a consistent rate of penalty, which should be established at no more than 25 per cent, to all taxes.
• Reduction in the interest rate applicable to late payment of taxes. Currently the interest rate with respect to Income Tax and Corporation Tax is 20 per cent while a 24 per cent rate of interest applies to VAT. Such interest rates are oppressive and should be revised to be more in line with prevailing market rates and perhaps pegged to the Central Bank repo rate or other similar rate.
The Chamber is also pleased to see that a taxation regime on property is expected to come into effect within a year’s time, as we believe that Government is losing substantial revenue through non-collection of this necessary tax. What we would like to see is a taxation structure that is ultimately in line with the current market value of properties, but also takes into consideration the current economic climate.
We expect that the tax revenue will be used for purposes that improve the surrounding areas and services of the properties in that community. Revenues collected from the property tax should not become part of the consolidated fund and expended in other areas. The authorities must make the expenditure accounts of the tax revenue transparent and available to the public. The waiver on lands and building tax cannot continue ad infinitum and so we welcome the introduction of a modern and equitable property tax regime.
The Chamber will continue to monitor the progress of this implementation and offer its assistance with the set up of the regime.
In its analysis of the 2013 budget, the accounting firm, PriceWaterhouseCoppers submitted the following:
Since the enactment of Ordinance 1 of 1917 which brought into existence the first income tax regime in Trinidad and Tobago, our taxation system has mushroomed from generating income of £95,000 in that first year to a current yield of $40bn in 2012. But what can be said of those intervening years? There have been some significant developments, including:
• The introduction of the PAYE system in 1958;
• Quarterly installments on nonemolument income in 1963;
• Withholding tax on nonresidents in 1966;
• Petroleum taxes in 1974; and
• Value Added Tax in 1990.
In addition to these developments, 1966 saw the establishment of the Board of Inland Revenue charged with the responsibility of the administration of taxes in Trinidad and Tobago. Our tax system and the fiscal policies that support it continue to evolve. As the economy changes over time, new markets emerge, new dynamics take place and shifts in relative importance between sectors and factors of production are a natural corollary.
While views as to the performance of the T&T economy relative to the tax system may differ depending on the empirical evidence relied on, few will challenge the view that there is an urgent need for a reform of the tax system if there is to be an increase in the efficiency and maximation of revenue generation. Tax reform is usually necessary when there is a change in the economic fundamentals which render the existing taxation regulation insufficient or misaligned to the current functioning of the economy.
It may also be required when there are inadequacies within the current system. It is on the latter that this article is focused. Over the last four decades reform efforts in tax administration in developing countries have generally centered on information technology (IT). The gains from adopting new technology, however, have often failed to reach expectations. Successful reform efforts did not result simply from computerising antiquated processes, but from re-engineering whole systems.
Radical improvements in tax administration require changes in organisation and methods
It is no secret that the tax administration in T&T has been plagued with numerous pitfalls and inefficiencies which have negatively impacted not only revenue collection, but also the attractiveness of the investment landscape within T&T to local and foreign investors.
The challenges faced by the tax administration include deficiency in record keeping, inadequate office facilities and staffing constraints to name a few. Routine processes such as audits and objections are unreasonably protracted which result in significant disruptions to business operations, financial burdens and the creation of bottlenecks at the Tax Appeal Board which is already bogged down with a significant backlog of cases stemming from disruptions in its operations over the last few years.
An appropriate reform strategy must consider the obstacles and constraints arising from such organisational rigidities as the public service rules and regulations, including bases for and constraints on, reward and promotion, the salary structure, and procedural hurdles in acquiring expertise and equipment.
Ultimately, the pace of change and the success of any modernisation programme depend on human resources—on the training, skills and motivation of the people who are expected to administer the system and use and operate the technology. As one observer noted: “Technology alone cannot do the job of good tax administration, and good tax administration can be carried out without technology.” Any reform of the tax administration system should be gradual and must include:
• Improvement in the monitoring of the performance of the tax system by introducing regular statistics of income reports and tax compliance analyses;
• Reduction in revenue leakage by improving the number and capability of the resources allocated to collection;
• Improvement in compliance by focusing on the identifying and registering those taxpayers who are out of the net and strengthening the enforcement unit to allow for greater authority in enforcing collections; and
• Modernising the tax administration by reviewing human resource requirements and implanting the transformation of the BIR to an autonomous revenue authority with strong management and business acumen so that they can better understand the environment in which their stakeholders operate and on which they base their decisions.
The Finance Minister has recognised the dire need for the revamping of the taxation system and has committed to undertake same in 2013 with an in-depth look at taxation policy, administration and enforcement with emphasis on personal income tax, corporation tax, value added tax, excise duties and capital and property taxes.
We look forward to the promised consultation, and hope that it will occur throughout the process up to and including legislative drafting so that we can minimise the disconnect that sometimes occurs when policy makers, administrators and taxpayers each seek to apply their own understanding of various measures.
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