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GUYANA

REVIEW OF THE TAX SYSTEMThe GUYANA THRESHOLD COUNTRY PLAN/IMPLEMENTATION PROJECT

October 2009

Guyana: Review of the Tax System

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GUYANA: COMPREHENSIVE REVIEW OF THE TAX SYSTEM


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ACRONYMS

CARICOM Caribbean CommunityCIF Customs, Insurance & FreightCIT Corporate Income TaxCKDs Completely Knocked Down KitsCPCs Customs Processing CodesCTA Customs and Trade AdministrationEITI Extractive Industries Transparency InitiativeFBT Fringe Benefit TaxGCR Gross Compliance RateGDP Gross Domestic ProductGoG Government of GuyanaGRA Guyana Revenue AuthorityGTCP/IP Guyana Threshold Country Plan/ Implementation ProjectIDB Inter-American Development BankIMF International Monetary FundLMIC Lower middle-income countriesMoF Ministry of FinanceMTR Marginal Tax RateNIS National Insurance SchemePIT Personal Income TaxPAYE Pay As You EarnSBP Single Business PermitTIN Taxpayer Identification NumberTRIPS Total Revenue Integrated Processing SystemUSAID U.S. Agency for International DevelopmentVAT Value-added Tax


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Table of Contents

Executive Summary …………………………………………………………… 7

1. Introduction ……………………………………………………………. 10

2. Contextual background………………………………………………... 13

3. Revenue performance over past decade………………………………. 20

4. Constraints and challenges to tax system review and reform.............. 24

5. Review of tax types and policy reform proposals ……………………. 27

6. Refining the tax administration reform proposals…………………… 89

7. Estimation of the revenue impact of proposed tax measures………... 103

8. Implementation of Proposed Tax Measure …………………………... 106

9. Summary of recommendations and Action Plan……………………....107

LIST OF TEXT TABLES

Table 2.1 Central Government Tax Revenues as a share of GDP forselected lower middle-income countries and for countries inthe Americas, Average 1975 – 2000

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Table 3.1 Guyana, Central Government TAX Revue Collections, 1995 –2008

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Table 3.2 Summary of Guyana Central Governemnt Tax revenueCollections, 1995 – 2008, Shares of GDP and Composition

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Table 3.3 Summary of Guyana Central Government, National InsuranceScheme and Municipal revenue collections, 2000 – 2007

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Table 5.1 Personal Income Tax (OIT) Rate Structure, 1994 – 2008 27Table 5.2 Non-taxable and Taxable Allowances 30Table 5.2A Comparison of Sector Shares from National Accounts and

Corporate Taxable Income36

Table 5.3 Central Government Corporate Tax Rates, 1998 and 2008 byCountry Income Class

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Table 5.3A Revenue Costs of Reducing the corporate tax rate to 30percent

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Table 5.4 Estimated Gross Compliance Rate (GCR) and efficiencyratios in selected Caricom Countries

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Table 5.5 Monthly VAT Outstanding, 2007 66Table 5.6 Months of Negative VAT Outstanding 67Table 5.7 Summary of major vehicle imports, taxes and effective tax

rates69


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Table 5.8 Import Duty and VAT rates for broad categories of motorvehicles

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Table 5.9 Taxes on vehicles of any age 71Table 5.10 Taxes on vehicles aged less than 4 Years 71Table 5.11 Taxes on vehicles aged 4 years and over 72Table 5.12 Summary statistics of taxes collected, average values of cars,

and effective tax rates on passenger cars of different enginecapacities in 2001

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Table 5.13 Comparison of imports of passenger carsaged 4 years andoverwith cars less than 4 years, Gyana 2007

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Table 5.14 Suggested excise tax rates for passenger cars 78Table 5.15 Suggested excise tax rates for passenger cars imported by

public officials and officers78

Table 6.1 2006 Income Tax Returns and Assessments in Guyana 95Table 6.2 2007 Income Tax Returns and Assessments in Guyana 95Table 6.3 2006 Income Tax Audits 98Table 6.4 2006 Income Tax Objections 99Table 7.1 Summary of Revenue Impact of proposed changes 105

LIST OF FIGURES

Figure 2.1 Tax Revenue over GDP, Guyana, 1975 – 2007 13

LIST OF BOXES

Box 5.1 Suggested list of zero-rtaed and exempt items and deferralsunder VAT

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ANNEX A Analysis of excise and other indirect taxation of motor vehicles

Table A1 Import Duty and Vat Rates for Broad categories of Motorvehicles

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Table A2 Taxes on vehicles of any age 113Table A3 Taxes on vehicles aged less than 4 years 113Table A4 Taxes on vehicles 4 years and over 114Table A5 Excise and Combined Tax Rates on passenger ar of 1300CC,

of different ages and CIF values, imported by public officialsor by persons without tax privileges

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Table A6 Excise and Combined Tax Rates on passenger ar of 2300CC,of different ages and CIF values, imported by public officialsor by persons without tax privileges

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Table A7 Import Values and Taxes for Selected import categories ofmotor vehicles, Guyana, 2007

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Table A8 Summary Statistics of Taxes collected, average values of cars,amd effective tax rates on passeneger cars of different enginecapacities in 2007

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Table A9 Comparison of imports of passenger cars aged 4 years andover with cars less than 4 years, Guyana, 2007

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Table A10 Suggested Excise Tax Rates on Passenger Cars 126Table A11 Suggested Excise tax rates for passenger cars imported by

Public officials and officers126


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Executive Summary

This comprehensive review (henceforth ‘Review’) of the Guyana Tax System is beingundertaken under the Guyana Threshold Country Plan Implementation Project (GTCP/IP)funded by the Millennium Challenge Corporation and administered by USAID. Theobjectives of the project are driven by the Government of Guyana’s commitment toachieving and maintaining fiscal sustainability through an efficient and effective taxregime, efficient public expenditure management, and improved fiduciary oversight. Thisreview addresses the fundamental question of how Guyana can improve the efficiencyand effectiveness of the overall revenue system without loss to government revenue. Inaddition to providing a comprehensive assessment of the tax system, the review alsospecifically addresses the Government’s policy goals to:

Improve private sector investment and growth prospects. Enhance the economic efficiency of the tax structure by reducing major

distortions and compliance costs Improve the distributional impact of tax system Sustain revenues to allow for the reduction in government deficit

While generally, the Guyanese tax system uses fairly uniform tax rates, there are anumber of areas where large tax gaps, tax overlaps and/or tax differentials exist thatresult in significant impacts on tax collections, taxpayer behaviors and inequities.Importantly, excessive use has been made of tax exemptions and incentives in all types oftax which are largely unaccounted for, causing significant distortions and loss of revenueand hampering the possibilities of lowering tax rates to assist investment and employmentcreation. The tax system is also characterised by historically high tax yields andcorporate tax rates, significant burden on middle income tax payers and and a taxadministration that is challenged by poor retention of skilled professionals, a cumbersomelegal framework and weak accounting practices in businesses. Further, the economicdevelopment context over the past ten years is one of low economic growth, and highcountry risk with low competitiveness stymying the growth of private investment.

Despite these enormous challenges, there are also attractive opportunities in Guyana forthe opening of new economic sectors, improving competitiveness in traditional sectorsand capitalising on rich natural and human resources that abound in the country. Further,the Government of Guyana has already commenced intiatives to address the economicchallenges and opportunities. Most comprehensively, the National CompetitivenessStrategy (addresses the complete package of competitiveness issues from macro-policiesto the reductions in costs of doing business in Guyana. During 2008 to 2010, theGTCP/IP is also addressing the strengthening of tax administration at the GRA includingthrough the streamlining of new operational procedures, IT support, enhancing of theirtax analysis capabilities, and capacity building in managerial and technical knowledgeareas. The Review also made specific other recommendations on streamlining andamending the tax legislation, which will be taken up by GTCP/IP for implementationduring 2009.


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The Review makes recommendations for broadening the tax base, particularly throughthe rationalizing of exemptions in Customs, VAT and income taxes; streamlining taxadministration including by removing procedures and ‘nuisance’ taxes that are costly toadministrate but do not yield compensating benefits in equity or revenues; andstrengthening the legal framework for tax administration.

In addition to assessing the overall administration of the tax system, the Review alsoanalysed in significant detail the tax structures of each of the major tax typesadministered. This was undertaken with a view to the effectiveness of the structure ingenerating revenue and to propose reforms that will improve the tax yield, tax equity andthe revenue efficiency of the tax administration. Particular attention was paid by theReview to analyisng the 2007-implemented Value Added Tax (VAT) in order to makerecommendations that will promote the sustaining of the ‘tax dividend’ while makingadministrative and policy adjustments necessaryto deal with the realities of the postimplementation assessment of the VAT.

In performing this in-depth evaluation, the following major recommendations wereproposed.

1. Prepare and pass a new Tax Administration Act and consolidate the Income TaxActs to, among others, strengthen tax administration, provide more directly forself-assessment as a principle of tax administration, integrate and streamline thepenalties and fines structure and appeals process for the various tax types

2. Implement a phased reduction in the corporate tax rate to unify the two rates of45% and 35% at 30 % with accompanying introduction of a final withholding taxon dividends and limination of the need for restrictions on close companies.

3. Review, account for, rationalize and reduce all customs and income taxexemptions and introduce a 2% minimum duty for all conditional exemptions.

4. Implement a Single Business Permit system in all municipal areas to replace themyriad of trading license fees currently administered by the central government.

5. Strengthen the property valuation and rates administration including byadministration through the Central Government with revenue sharing to themunicipalities.

6. Phase out the estate duty, net property tax and stamp duties.

7. Reform the structure of the taxation of passenger car imports by (i) removing theage distinction in taxation, reducing the excise rates and making them moreuniform across cars of different sizes, and introducing minimum excise taxamounts by car size; (ii) imposing VAT on all cars; (iii) removing customsexemptions from cars; (iv) making employer-provided car benefits subject to thefringe benefits tax under the income tax; and (v) significantly increasing the


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motor vehicle license fees along with the computerization of motor vehiclelicensing in conjunction with customs database.

8. Phase in a 20% tax bracket for individuals such that the top of the 20% bracketequals the maximum annual NIS contribution. The tax cost of this new 20%bracket is offset by phasing in the explicit taxation of employer-provided fringebenefits including a new fringe benefits tax on motor vehicle benefits, low-interestrate loans and tax exemptions gained because of job positions.

9. Rationalise the zero rating of commodities under VAT to eliminate difficult toadminister items, implement a VAT deferral system to deal with major capitalimports, make refunds claims or excess input carry forwards a choice of thetaxpayer in a net credit position in order to simplify the VAT refund system.

10. Draft and pass an E-Commerce act to provide for e-filing of tax returns andsotftware and procedures to integrate with TRIPS.

The Review also highlighted the need to strengthen the databases and analyticalcapabilities of the Guyana Revenue Authority and the Ministry oof Finance. Areas whereadditional analytical work was required based on an improved quality of availabledatabases included the assessment of the impact of the reforms proposed, thedevelopment of a tax expenditures database and account and the evaluation of thepotential revenue yield of a reformed property tax system. The Review does make someinitial estimation of the revenue impacts of measures based on the available data. Theseestimates suggest that there is an overall net positive impact of the measures equivalent toG$3.8 billion in 2008 constant prices over the implementation phase of 2009 – 2013.Nonetheless, these gains strongly depend on the success of an implementation programthat: informs taxpayers in a timely and credible manner; phases in reforms gradually toallow time for administrative systems at GRA and also businesses to adjust; ensures theappropriate sequencing of measures with a view to their legislative and administrativerequirements and; is undertaken in concert with ongoing efforts at improvingcompetitiveness and the business environment.


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1. Introduction

1.1 Background

This Review of the Guyana Tax System is being undertaken under the Guyana ThresholdCountry Plan Implementation Project (GTCP/IP) funded by the Millennium ChallengeCorporation and administered by USAID. The two-year GTCP/IP began operations onJanuary 14, 2008. The objectives of this tax review are driven by the Government ofGuyana’s commitment to achieving and maintaining fiscal sustainability through anefficient and effective tax regime, efficient public expenditure management, andimproved fiduciary oversight. A second objective is to improve the business investmentclimate.

The present assignment focuses on the fundamental question of how Guyana can improvethe efficiency and effectiveness of the overall revenue system without loss to governmentrevenue. In 2002, the IMF produced report, Guyana: Tax Policy and Tax and CustomsAdministration that provided a comprehensive assessment of the tax regime and severalrecommendations ranging from technical improvements to major reforms, with a four-year action plan for the period through 2005. The GoG accepted many of therecommendations, and subsequently implemented many important measures. The mostnotable reforms include replacing a complicated and distortionary set of consumptiontaxes with a modern Value Added Tax (VAT) and Excise Tax effective on January 1,2007,1 and introducing a modern taxpayer information system (the Total RevenueIntegrated Processing System, or TRIPS, from Crown Agents) along with uniqueTaxpayer Identification Numbers (TINs). The administrative reforms have built on theestablishment of the Guyana Revenue Authority (GRA) in 2000 following the enactment ofthe Revenue Authority Act 1996 (No 13 of 1996). The GRA brought both customs and inlandrevenues under on authority, and now the GoG has approved major organizational reforms to theGRA to move it to functional organization in line with the TRIPS. The combination of taxpolicy reforms, enhanced tax analysis capacity, organizational, systems and proceduralreforms using effective information technology and supported by appropriate staffcapacity building are aimed at significant improvements in the efficiency, effectivenessand equity of the tax system.

In co-ordination with the GTCP/IP, the Inter-American Development Bank is assistingthe Government of Guyana with the Support for Competitiveness Program (GY-L1006)which recognizes the important role that tax policy and administration plays in affectingprivate sector investment and economic growth. This study also aims to contribute tofurthering the objectives of enhancing Guyana’s competitiveness through reviewing thetaxes on and tax incentives provided for investment as well as through reducing the taxcompliance costs of businesses, as the tax administration is streamlined and modernized.

1 The Value-Added Tax Act 2005 (Act No. 10 of 2005) and Excise Tax Act 2005 (Act No. 11 of 2005)replaced the Consumption Tax, Hotel Accommodation Tax, Premium Tax, Entertainment Tax, TelephoneTax, and Purchase Tax.


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Given that the IMF report reflected conditions six years ago, the Government has nowidentified the critical need for another comprehensive review of the tax regime to takeinto account intervening reforms, current conditions, and more recent lessons frominternational experience. While the IMF report covered most tax types, its major focuswas on the need to implement the VAT and Excise Tax in place of the six existing taxeson consumption. It also emphasized the need to effectively implement this reform anduse any revenue gains to help deal with both improving the equity of the tax system(lowering the income tax burden on the low-income groups) and improving the efficiencyof the taxation of corporate investment. The IMF report, however, did not provide anytax analysis of the actual performance of the different tax types, which was a limitingfactor in assisting the GoG to make tax reform choices.

In a similar vein, this review is comprehensive, but develops a number of major focusesthat receive more attention and analysis and, where possible, uses detailed tax data tosubstantiate the analysis and revenue impacts of tax policies. Major objectives of thereview are to identify reforms that will:

1. Improve private sector investment and growth prospects.2. Enhance the economic efficiency of the tax structure by reducing major

distortions and compliance costs3. Improve the distributional impact of tax system4. Sustain revenues to allow for the reduction in government deficit

A number of major themes run through the review and recommended reforms. Whilegenerally, the Guyanese tax system uses fairly uniform tax rates, there are a number ofareas where large tax gaps, tax overlaps and/or tax differentials exist that result insignificant impacts on tax collections, taxpayer behaviors and inequities. A fewillustrates can highlight some major cases.

First, business income is effectively taxed at three different rates: 45% for commercialcorporations, 35% for non-commercial corporations and 33.3% for unincorporatedbusinesses. This means that the tax system is biasing the choice of legal entity underwhich to conduct business and opening up major opportunities for tax arbitrage betweenjointly owned businesses facing different tax rates.

A second example is the tax treatment of motor vehicles, particularly passenger cars, thatin principle face a barrage of high indirect taxes when imported (import duties, excisetaxes and VAT) plus annual license fees and then are potentially subject to annualproperty tax as part of the taxation of net assets and also capital gains tax when sold. Inpractice, however, all or nearly all the indirect taxes are exempted, as elaborated on insection 5. In addition, the income tax has very weak rules and administration to enforcethe declaration of potentially large car fringe benefits gained by public and privateemployees or to prevent the deduction of personal-use vehicles by self-employed persons.This results simultaneously in major revenue losses, distortions in behavior and majorinequities between car users.


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A third case arises in the treatment of land and buildings, which are subject to tax underthe property tax and, when traded, tax under the capital gains tax, and are also taxedunder the municipal and district property rates. While potentially land and buildings aresubject to multiple taxes, in practice none of these taxes is effectively or fairlyadministered again causing revenue losses, tax distortions and inequities in the system.Rationalizing the tax treatment of these major elements in any tax system (businessincome, fringe benefits, motor vehicles, and land and buildings) by refocusing andsimplifying the tax structures should allow more revenues to be collected at lower ratesand more equitably.

Another feature of this review is the need for strategic approaches to implementation ofreforms. First, recommendations should be phased in over 3 to 5 years to allow time forthe economy to adjust to proposed changes in tax structure. This is particularly true forinvestors. Phasing-in tax changes also reduces the tax costs as the economic adjustmentsare implemented in conjunction with (i) improved tax administration arising from theorganizational reforms, enhanced compliance support and strengthened enforcement and(ii) an enhanced business environment that expands the potential tax base.

Second, while tax changes should be phased in, it is important that the path of change isannounced ahead of time and the government is committed to the changes. Investorsneed to forecast future net of tax profits. Stability and predictability are as importantelements of the tax structure as the level of taxes in investment planning. A rapid tax cutthat investors believe may be reversed will have no incentive effect compared to agradual reduction in rates that have a high degree of certainty of being sustained.

1.2 Report Outline

This review is structured as follows. Section 2 presents the context of preparing thisreport in terms of the tax performance in Guyana over recent years and certain features ofthe economy and the current tax structure. Section 3 describes the central governmenttax system as well as broader public sector revenue performance over the past decade.Section 4 describes some of the constraints that are faced in conducting tax analysis inGuyana and how these affected the preparation of this review. Section 5 provides anextensive review of all the tax types used in Guyana along with analysis and policyrecommendation. Section 6 provides recommendations on refinements to the ongoingtax reform. It focuses on issues to improve the implementation of the functionalreorganization being undertaken by the GRA, and also reviews the tax legislation interms of long-term and short-term changes to the laws to enhance the tax system, with aparticular focus on the administrative provisions of the current tax legislation. Section 7provides estimates of the revenue impacts of the recommended tax policy changes.Section 8 describes a high-level implementation process to facilitate the management ofthe reforms. Finally, section 9 summarizes the recommendation of this review in theform of an action plan over the next four years.


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2. Contextual Background

In reviewing the tax system in Guyana there are a number of major contextual issues thatneed to be considered in designing any reforms. These relate to the recent history andkey features of the tax system, the management and performance of the economy, and thechallenges and opportunities for the economy.

2. 1 History of high tax yields

While a major objective of any tax reform is to sustain revenue yields to allow thereduction in the overall deficit of the government from high levels over recent years, it isimportant to recognize that Guyana already has a long track record of high tax yields. Inaddition, most of the recent high government deficits as a share of GDP (2005, 14.7%;2006, 13.9%; 2007, 9.6%) were caused by a surge in public sector capital expendituresand to a lesser extent by increased current expenditures. Normalizing expenditure levels,while sustaining revenues, is expected to bring the overall government deficit below 3%over the medium term.

Guyana tax yields (measured as a share of GDP) have been high over a long period.Figure 2.1 shows that tax revenues as a share of GDP have fluctuated around, and mainlyabove, 30% of GDP over 1975-2007. The average over this whole period was 32.2%.While the tax yield was slightly below 30% from 1997 to 2004, since then it has risensharply to over 35%. How does this track record compare with other countries?

Figure 2.1 Tax revenue over GDP, Guyana, 1975-2007

0

10

20

30

40

50

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Per

cent

age

Tax/GDP

Sources: Ministry of Finance, IMF, Baunsgaard and Keen (2005)2, Glenday (2006)3

2 Thomas Baunsgaard and Michael Keen, “Tax Revenue and (or?) Trade Liberalization” InternationalMonetary Fund, IMF Working Paper WP/05/112 (June 2005)

3 Graham Glenday “Towards fiscally feasible and efficient trade liberalization,” study prepared under theFiscal Reform in Support of Trade Liberalization Project, DAI/USAID, May 18, 2006


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Table 2.1 compares Guyana central government tax yields with other lower middle-income countries (LMIC) over the period 1975-2000. Guyana ranks number one with an

Lower middle incomecountry (LMIC)

Tax/GDP Country in Americas Tax/GDP

Guyana 33.0% Canada 34.4%Namibia 29.3% Guyana 33.0%Swaziland 28.4% Barbados 27.5%Samoa 27.1% Trinidad and Tobago 27.6%Djibouti 25.7% United States 26.4%Tunisia 24.7% Dominica 25.6%Jamaica 23.3% St. Vincent and Grenadines 24.5%South Africa 22.8% Grenada 23.4%Suriname 22.3% Uruguay 23.0%Kiribati 22.1% Jamaica 23.3%Egypt 21.7% St. Lucia 22.3%Morocco 21.3% Suriname 22.3%Fiji 20.4% St. Kitts and Nevis 21.2%Vanuatu 19.9% Belize 20.5%Tonga 18.4% Chile 20.3%Sri Lanka 17.4% Venezuela 18.5%Indonesia 16.7% Antigua and Barbuda 17.7%Bolivia 15.6% Bahamas 16.3%Syria 15.5% Bolivia 15.6%Maldives 15.5% Honduras 14.9%Honduras 14.9% Panama 15.2%Equatorial Guinea 14.8% Costa Rica 13.1%China 14.6% Peru 13.0%Thailand 14.4% Dominican Republic 12.8%Jordan 13.8% Argentina 11.9%Algeria 13.6% El Salvador 10.7%Philippines 13.4% Colombia 10.7%Peru 13.0% Mexico 0.0%Dominican Republic 12.8% Paraguay 9.8%El Salvador 10.7% Guatemala 8.0%Colombia 10.7% Haiti 7.7%Paraguay 9.8% Ecuador 7.9%Iran 8.9%Guatemala 8.0%Ecuador 7.9%

All LMIC 17.7% All countries 18.1%

Table 2.1 Central government tax revenues as a share of GDP for selectedlower middle income countries and for countries in the Americas, average

1975-2000

Sources: See Figure 2.1


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average tax yield of 33% compared to the group average of 17.7%, even though it is atthe lower end of the per capita incomes of the countries in this group.4 Anothercomparison in Table 2.1 is with selected countries in the Americas. Here Guyana ranksnumber two to Canada in the Americas despite most of the other countries having higherGDP per capita than Guyana. It is recognized that Guyana’s GDP is underestimated andthat US Census Bureau is helping the Government to rebase the GDP including bringingin a large portion of the informal sector to the estimate of GDP.

The fiscal goal of Guyana -- sustaining its tax yield at around 35% of GDP to reduce itdeficit to modest levels of around 2% of GDP -- implies that Guyana maintain its revenueyield at very high levels relative to comparator countries by income level and region.

2.2 VAT and Excise “tax dividend”

As noted above, a major objective flowing out of the 2002 IMF review of the tax systemwas the implementation of a VAT and Excise Tax structure in place of the ConsumptionTax, Travel Voucher Tax, Hotel Accommodation Tax, Premium Tax, Entertainment Tax,Telephone Tax, and Purchase Tax. The aim was not only to rationalize the structure toimprove the efficiency of the consumption taxes, but also to gain revenue room over themedium term to allow the reduction in high tax rates such as the corporate rate and alsoto relieve the tax burden on low income earners.

In 2007, the first year of implementation, the VAT and Excise Tax performed well.Combined collections were approximately 16.6% of GDP (or 47.6% of tax revenues)with VAT forming 58% of these revenues. The Consumption Tax and other indirecttaxes that the VAT plus Excise Tax replaced had raised 13.4% of GDP in revenues in2006. The introduction of the VAT and Excise Taxes delivered a “tax dividend” whichhas been largely already spent in 2008 on increases in VAT zero rated items, major cutsin the petroleum taxes and a significant increase in the basic personal income deduction.5

At most about 1% of GDP is left of the “tax dividend” that can provide revenue space tohelp finance other tax reforms involving revenue losses such as cutting the corporate taxrate. In addition, as noted below, there remains scope to increase yields out of the excisetax, in particular by rationalizing the tax rates imposed on motor vehicles.

4 Concerns have been raised by the IMF and others about the possible underestimation of the GDP inGuyana. A higher GDP figure will lower the tax yield as well as the deficit to GDP ratio. Even if theunderestimation is 50%, say, it would still leave Guyana with a high average tax yield over 1975-2000 ofabout 22%. In addition, the issue of under estimation of GDP in lower income countries is a commonissue. Hence, even if the real tax yield is lower, if all countries GDP estimates are corrected, then theranking of Guyana is likely to remain similar depending upon the relative degrees of underestimation.5 Table 3.3 below shows consumption taxes jumping from 13.7% of GDP in 2006 to 18% of GDP in 2007.This high level is not expected to be sustained as 2007 contains a significant residual collection of theconsumption taxes replaced by VAT and Excise Taxes and in the first year there is a significant lag in therefunding and absorption of input tax credits carried forward that would be realized in 2008. In addition,the GOG introduced added items to the VAT zero rated lists, major cuts in excise duties on petroleumproducts and expanded the basic deduction under the PAYE by significantly more than inflation from$336,000 to $420,000 in 2008. Collectively, these changes have left at most 1% of GDP in VAT andExcise revenue dividend.


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2.3 Low growth and low private investment

Guyana, with one exceptional period, has experienced low growth rates in per capitaincome despite having low population growth rates due to sustained net emigration. Forexample, from 1975 through 1990, real per capita GDP declined at a rate of about 1.7%,followed by a high growth period of 7% during 1991 through 1997, but then againfollowed by a low average growth rate of about 1.6% through 2007.

While Guyana has displayed high (mostly public) investment rates over the years, thishas not generally translated into high growth rates. In 1991-1997, the period of highgrowth, the investment to GDP ratio was an impressive 36%. This later dropped to anaverage of 24.3% over 1998-2007 when economic growth has been low. Importantly,while the public sector investment rate increased from 16.5% to 17.3% between thesetwo periods, the average private investment rate dropped dramatically from 19.6% to6.7% of GDP.6 This decline in private investment (assuming it has been correctlymeasured), underlines concerns about improving the private sector investment climateand strengthens growing demands for a lowering of the corporate tax rates.

2.4 High country risk and poor business competitive ratings

Guyana has consistently scored poorly across a range of different country ratings thatreflect the risks and costs of doing business. In 2007, the Institutional Investor’sCountry Credit Rating (reflecting a combination of political, economic and financialrisks) was 27.1 points out of 100 putting Guyana in the very high-risk class. (Over 85points is required for a very low risk rating). With this score, Guyana ranked 123 out 178countries rated in September 2007.7 Guyana has a lower rank than most other countriesin the region.8 On other measures, Coface currently rates Guyana with a D rating (itslowest rating) on both country risk and business climate.9 The IFC Ease of DoingBusiness Index ranks Guyana 104 out of 178 countries rated on 2006-07 information.10

The World Economic Forum ranked Guyana 126 out of 131 countries on its GlobalCompetitiveness Index for 2007/08.11

These poor country credit and business competitive ratings have a number of implicationsfor investment in Guyana that are important in the context of corporate tax reform. Aside

6 Estimates are based on IMF and Ministry of Finance data.7 http://www.iimagazinerankings.com/countrycredit/GlobalRanking.asp8 Institutional Investor’s Country Credit Rating in September 2007 for a range of countries in the regiongiven in order of increasing country risk (lower rating and higher rank): Trinidad & Tobago, 65.2 (rank 52out of 178 countries)); Barbados, 63.5 (55); Panama, 56.1 (66); Costa Rica, 53.4 (69); Venezuela, 45.1(81); Dominican Republic, 38.6 (88); Jamaica, 36.2 (92); Honduras, 33.1 (99); Grenada, 32.2 (106);Belize, 29.9 (115); Guyana 27.1 (123).9 Coface country risk rating reflects the average level of short-term non-payment risk associated withcompanies in a particular country. A “D” rating means a high-risk political and economic situation and anoften very difficult business environment can have a very significant impact on corporate paymentbehavior. Corporate default probability is very high. http://www.trading-safely.com/10 http://www.doingbusiness.org/economyrankings/11 http://www.gcr.weforum.org/

http://www.iimagazinerankings.com/countrycredit/GlobalRanking.asp

http://www.trading-safely.com/

http://www.doingbusiness.org/economyrankings/


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from reflecting higher costs of doing business, two key consequences are expected. First,the costs of foreign debt and equity capital are expected to be significantly higher forGuyana than experienced in high-income industrial country economies in line with thelow country risk rating. This implies fewer investments are financially attractive.Second, the responsiveness of foreign capital to improved rates of return in Guyana isexpected to be lower than in countries with low risk rating. Alternatively, this impliesGuyana is faced with a relatively steep upward sloping supply curve of foreign capitalthat dampens foreign capital inflows even after-tax rate of return rise. This hassignificant implications for the expected response to lowering the tax rate on corporateinvestments. The capital supply response is expected to be significantly dampenedcompared to a very low country risk economy that is well integrated into world capitalmarkets. By contrast, poor ratings indicate that there is massive scope for lowering thecosts of doing business in Guyana and improving its country risk rating.

2.5 High corporate tax rates

Guyana has amongst the highest statutory corporate tax rates in the world with its 45%rate on commercial company income and 35% on non-commercial company income.For example, the World Development Indicators reports the highest corporate tax rate forcentral governments of 117 countries.12 Only 10 have rates of 35% and a further 4 haverates between 35% and 40%. At least another six countries fall in this category whensub-national corporate tax rates are also included. No other country reported a rate ashigh as 45%. Generally, since the early 1980s, international tax competition as part ofthe global competition to attract foreign investment has led to a significant decline in thecorporate tax rates, particularly among the higher income industrial countries. The extentof rate cuts, changes in tax structures and rationale behind the changes in corporate taxrates are discussed in more detail later, but here it is sufficient to note that Guyana’s highcorporate tax rates form part of its unattractiveness as an investment destination. Thelowering of these rates needs careful implementation in conjunction with improvementsin the attractiveness of Guyana as an investment destination. Improvements in thebusiness climate will lead to larger increases private investment as after-tax returns oninvestment are increased by cuts in the corporate tax rate. Such higher investmentresponses over time will lower that tax revenue cost of cutting the corporate tax rates.

2.6 Investment opportunities and challenges

While Guyana has features of high country risk and high costs of doing business, it has anumber of attractive features. First, increases in world prices of commodities make anumber of sectors attractive. Based on Bank of Guyana reports of commodity pricesfrom 2002 through 2007, the price of gold has increased by 143% in US dollars,aluminum by 82%, hardwood timber by 52%, and coconut oil by 132%, but sugar hasonly increased by 30% to 45% over these five years. While rising food prices, such asfor rice, sugar, fish, have negative effects on consumer welfare, they also represent amajor export opportunity for Guyana. Rice prices rose by 92% over 2002-2007 and havecontinued to rise steeply in 2008. Similarly, oil prices rose by 225% over the five years.

12 World Bank World Development Indicators 2007

http://www.gcr.weforum.org/


18

While oil prices are currently a major drag on the economy, with oil reserves nowavailable for development, these price increases represent a major economic prospect forGuyana.

Another important potential source of future investment is the large Guyanese Diaspora,which is currently transferring some $250 to $300 million (or 25% to 30% of GDP) toGuyana annually13. This flow of funds needs to be directed through an improvedincentive structure to new attractive investment opportunities. The Guyanese Diasporais well positioned to take advantage of investment opportunities.

2.7 Heavy tax burden on middle-income employees

Employees in Guyana are relatively heavily taxed. Under the income tax, they pay tax ata flat rate of 33.3% on incomes above $420,000 per annum.14 On top of the income tax,the National Insurance Scheme (NIS) requires employee contributions of 5.2% andemployer contributions of 7.8% (or a combined 12.1% on the gross of employer wagecost) up to a maximum monthly wage of $104,278 (or annual compensation of$1,251,366) in 2007.15 In addition, employees pay the broad-based VAT of 16% andexcise taxes and import duties on many consumer items. While the basic deduction of$420,000 (or about US$2,000) excludes about half of the employees from the income tax,the one-third flat rate represents a high rate for middle-income earners by internationalstandards (even where flat rate structures are used such as Russia, 13%; Ukraine, 15%;Czech Republic, 19%; Egypt, 20%). In addition, about 40% of employees who areabove the basic deduction amount, but below the NIS contribution maximum bear thecombined income tax rate and NIS rate or about 45% of any increase in their grosswages. By contrast, about 10% of employees are above the NIS maximum and only paythe one-third income tax rate on added employment income. These high-incomeemployees are also likely beneficiaries of more generous packages of allowances andfringe benefits, many of which appear to be escaping tax (see section 5.1.3 below). Thissituation will be analyzed further below and reforms recommended that can shift the taxburden to higher income earners and possibly even raise added revenues.

2.8 High tax distortions

The Guyanese tax system has some high tax rates and large tax differentials that cansignificantly distort market behavior and open opportunity for major revenue losses. Amajor example is the taxation of business income, which, if earned by a commercialcorporation, is taxed at 45%, by a non-commercial corporation at 35% and by anunincorporated business at 33.3% (aside from a select few businesses awarded taxholidays). As will be discussed below, these are not only high tax rates by international

13 Ministry of Finance, IMF statistical appendices14 Unless otherwise stated, monetary values are in Guyanese dollars, which can be converted to US dollarsat a rate of approximately $203 per US dollar.15 With a 7.8% employer contribution, the gross wage cost to the employer is 1.078 time the wage receivedby the employee before deductions. Therefore, the combined social security contribution out of the grosswage cost is (0.052+0.078)/1.078 or 12.1% of the gross cost of paying the employee, while it is 13% of thebefore tax and deduction wage paid to the employee.


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standards, but these tax differentials encourage the use of tax arbitrage devices to avoidpaying tax at the highest rates on much of the income. Furthermore, given the weak taxcompliance and enforcement of the unincorporated businesses, the system encourages theuse of unincorporated business that puts taxes further at risk. Other examples include thehigh and highly differentiated taxation of motor vehicles and the patchwork of taxes onimmovable property that not only results in behaviors to avoid and evade taxes, but alsoare complicated to administer and expected to result in lower revenues than simpler, moreuniform tax structures.

2.9 Weak tax administration, organization and capacity

Despite Guyana’s high tax yield, it has weak tax administration. Much of its high taxyield can be attributed to tax system heavily “cherry picking” the easy tax handles –imports under the CARICOM trade tax regime (which form a very high share of GDPranging from 74% to 91% of GDP in recent years), formal employee incomes, andcorporate income. Weak tax administration and capacity have been evidenced inminimal use of computerized information systems, e-governance and very weak capacityto conduct tax analysis, investigations, in-depth field audits, and enforce collections.These weaknesses are also exacerbated by local conditions including organizedsmuggling, loss of skilled professionals to emigration, weak legal framework for contractenforcement and weak accounting practices in businesses. These tax administrationshortcomings have been recognized over recent years and are being addressed throughongoing reorganizations, systems strengthening and training programs. This review willseek to note areas that need more emphasis or have been omitted in order to refine thereform process.


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3. Revenue Performance Over Past Decade

This section provides an overview of revenue performance over the past decade or so (insome instances back to 1995). Table 3.1 gives the tax collections by tax types over1995-2007 and budget estimates for 2008. This data is drawn from Guyana RevenueAuthority and Ministry of Finance reports. It provides a useful oversight of thedevelopment of the tax system, particularly the switch from a set of selectiveconsumption taxes to a broad based VAT and excise tax system in 2007. This detailedtax collection data will not be discussed here, but rather in the context of the analysis ofthe particular tax types in section 5 below where each tax is subjected to closer scrutiny.

Here the focus is more on the major components of the tax system plus the other revenuesflowing into the public sector as non-tax revenue, national insurance contributions andearnings, and local government revenues. Table 3.2 summarizes the tax revenues interms of the major tax categories as a share of GDP and shares of total tax revenues. Asalready discussed in section 2.1 above, Guyana has a long history of high tax revenueyields around or above 30% of GDP. The direct income tax has performed with a yieldtypically between 11% and 14% of GDP or between 35% and 45% of total tax revenues.Indirect taxes (mainly taxes on consumption and international trade) have formed thelarger share of taxes. International trade taxes have been fairly steady, but graduallydeclined since 1995 from about 4.7% of GDP to 3.2% of GDP or from 15% of total taxrevenue down to about 10%. Consumption tax yields after staying relatively constantaround 11% of GDP (or 35% to 40% of total tax revenues), jumped up to 18% of GDP(or 50% of total tax revenues) in 2007 with the introduction of the VAT and excise taxes.These high yields are expected to come down somewhat, however, as the taxes are fullyphased in and taxpayers receive full refunds and absorb all the input tax credits over time.In addition, the expansion of zero rating that followed the introduction of the tax isexpected to erode the VAT base somewhat. These issues will be discussed further underthe VAT and excise taxes in section 5.

Importantly, the combination of the income tax, VAT and excise tax formed the bulk oftax revenue (nearly 90%) with the import duty being the next most important revenuesource. Of the other taxes, those on property, namely, the property tax, capital gains orcompliance tax, and the estate duty or process fee, together collect less than 1% of GDPand for less than 2% of revenues. Amongst the “other taxes”, only the license fees onmotor vehicles have any significance and its revenue potential is explored further insection 5.

In addition to taxes, Table 3.3 shows the Central Government of Guyana receives non-taxrevenues in the range of 1.8% to 2.7% of GDP or less than 10% of total centralgovernment revenues. Potentially the most important component of these revenues isroyalty revenues on mining activities (gold and bauxite) which have yielded 0.7% ofGDP. With the potential for the development of oil extraction, royalties may grow insignificance in the future. Outside of the Central Government revenues are three otherimportant revenue components in the public sector. The first is the contributions and


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Types of tax 1995 1996 1997 1998 1999/1 2000 2001 2002 2003 2004 2005 2006 2007 2008 (est)

Total revenue 29,535 35,118 33,999 33,029 36,032 41,357 41,218 44,565 45,280 51,664 56,071 61,886

Total tax revenue 27,819 32,211 31,538 31,075 33,558 38,185 37,755 40,869 41,511 42,369 52,956 58,527 78,519 78,192 Income tax 10,749 12,615 12,193 11,854 13,617 16,022 16,721 18,624 19,168 15,997 23,694 26,771 29,379 26,958 Companies and self-employed 2/ 5,453 6,966 6,532 6,096 6,849 7,648 7,454 8,226 8,287 7,627 10,937 12,949 14,339 14,469 Corporation tax 6,338 7,064 6,728 7,447 7,399 6,955 10,016 11,916 13,088 13,228 Private 5,408 6,683 6,524 6,688 6,901 6,517 9,357 10,704 11,980 11,954

Public 930 381 205 759 498 438 660 1,211 1,108 1,275

Income tax companies 0 2 0 1 1 1 1 3 0 - Income tax self employed 511 582 726 778 887 671 919 1,031 1,251 1,241 Personal IT other 4,230 4,546 4,558 4,759 5,649 7,171 7,818 9,025 9,515 7,412 11,195 11,771 12,892 10,328 Withholding tax 1,066 1,103 1,103 999 1,118 1,202 1,448 1,373 1,365 959 1,562 2,052 2,147 2,161 National Development Tax (5%) 1 0 0 0 0 0 0 0 0 -

Property-related tax 537 686 660 613 607 859 806 1,307 1,044 843 962 1,028 1,192 1,353 Property 411 484 468 430 472 681 687 1,150 884 681 807 843 943 1,063 Estate duty (Process fee) 17 15 21 29 19 20 20 17 22 14 21 23 20 23 Capital Gain Tax 109 188 170 154 116 158 99 141 138 148 133 162 229 267

Consumption & purchase taxes 2/ 9,999 11,596 11,701 11,474 12,533 15,696 14,769 15,528 16,198 20,361 22,571 24,665 39,847 41,820 VAT 22,491 25,063 Imports 13,389 15,105 Domestic 9,091 9,946 Penalties and interest 10 11 Consumption Tax 9,624 11,087 11,225 11,003 11,794 14,857 13,901 14,666 15,318 19,408 21,391 23,272 1,401 on imports 2/ 6,830 7,751 7,902 8,098 8,505 11,372 10,580 11,420 11,577 15,078 16,363 17,732 698 oil imports 2,236 3,476 2,762 3,849 4,309 6,132 6,012 6,765 386

non-oil imports 6,269 7,896 7,817 7,571 7,268 8,946 10,351 10,967 311 on local goods 3,289 3,484 3,321 3,246 3,741 4,330 5,029 5,540 704 Alcoholic Beverages 1,966 2,072 1,971 1,730 1,829 2,111 2,550 2,789 388

Other Local Goods 1,089 1,195 1,145 1,295 1,414 1,484 1,655 1,818 191

Overseas Telephone Bills 224 210 197 213 490 725 814 923 125

Betting Shops 10 8 8 8 9 9 9 9 0 Alcoholic beverages 2,794 3,336 3,323 2,905 Excise tax 15,384 16,353 Imports 13,820 14,588 Motor Vehicles 4,540 5,122

Petroleum Products 8,040 8,068

Tobacco Products 899 1,015

Alcoholic Beverages 340 383 Domestic 1,564 1,765 Alcoholic Beverages 1,564 1,765

Liquor license fees 12 12 15 15 15 16 14 13 14 14 Purchase tax 335 463 442 442 427 475 472 471 444 506 644 828 159 - Entertainment tax 40 46 34 29 27 27 17 9 4 3 2 2 1 - Premium tax 22 22 41 44 81 58 60 64 67 74 Hotel accommodation tax 67 75 84 111 97 75 99 102 10 - Service tax - - - - 7 72 99 104 25 - Motor vehicle licenses 94 168 160 215 195 241 254 228 248 239 274 293 310 331Taxes on international trade 2/ 4,113 4,641 4,383 4,481 4,876 5,313 5,282 5,206 4,908 5,005 5,539 5,826 7,853 7,796 Import duties 3,408 3,747 3,701 3,724 3,704 3,943 3,686 3,480 3,319 3,685 3,638 4,115 5,981 5,914 Warehouse rent and charges 9 12 18 13 10 14 13 16 20 20

Overtime fees 12 26 33 46 53 54 71 77 97 95

Departmental fines 120 124 65 63 41 46 13 54 55 54

Stamp duties 5 5 6 9 5 6 9 10 10 10

Miscellaneous & sundries 7 3 11 96 23 23 131 43 58 58 Environmental tax 3/ 133 134 354 326 344 273 494 422 513 491 Export duties 130 197 9 5 8 7 12 5 12 13 7 7 7 8 Travel Tax 575 697 673 752 358 431 397 452 422 377 499 484 541 557 Travel Voucher Tax 520 627 699 718 679 513 665 599 571 588Other taxes 1,943 1,968 2,147 2,129 1,925 295 177 203 194 162 190 237 247 265 Sugar levy 1,900 1,850 2,000 2,000 1,800 124 - 38 - Professional fees 2 2 2 3 4 7 6 6 5 6 Motor Vehicle and Traffic Act 110 154 160 137 169 133 166 212 221 235 Trading and Other licenses 43 118 147 129 12 15 15 25 20 21 19 19 21 24 Other taxes 217 206 294 309Source: Ministry of Finance; and Guyana Revenue Authority1/ Excludes one-off dividends (G$663 million) and transfer (G$144 million) payments by GUYOIL to the central government to clear the accounts prior to GEC privatization2/ Include revenue from nonfinancial public corporations.

3/ Environmental tax is charged on non returnable beverage containers

Table 3.1. Guyana Central Government tax revenue collections, 1995-2008

(in millions of Guyana dollars)


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Types of tax 1995 1996 1997 1998 1999/1 2000 2001 2002 2003 2004 2005 2006 2007 2008 (est)

Total tax revenue 31.5 32.5 29.6 28.8 27.1 29.4 28.9 29.7 28.9 27.1 32.1 32.5 35.5 32.2 Income 12.2 12.7 11.4 11.0 11.0 12.3 12.8 13.5 13.3 10.2 14.4 14.8 13.3 11.1 Companies and self-employed 2/ 6.2 7.0 6.1 5.6 5.5 5.9 5.7 6.0 5.8 4.9 6.6 7.2 6.5 6.0 Corporation tax 5.1 5.4 5.2 5.4 5.1 4.5 6.1 6.6 5.9 5.5 Income tax self employed 0.4 0.4 0.6 0.6 0.6 0.4 0.6 0.6 0.6 0.5 Personal IT other 4.8 4.6 4.3 4.4 4.6 5.5 6.0 6.6 6.6 4.7 6.8 6.5 5.8 4.3 Withholding tax 1.2 1.1 1.0 0.9 0.9 0.9 1.1 1.0 0.9 0.6 0.9 1.1 1.0 0.9 Property 0.6 0.7 0.6 0.6 0.5 0.7 0.6 0.9 0.7 0.5 0.6 0.6 0.5 0.6 Consumption 11.3 11.7 11.0 10.6 10.1 12.1 11.3 11.3 11.3 13.0 13.7 13.7 18.0 17.2 VAT 10.2 10.3 Excise 7.0 6.7 Consumption Tax 10.9 11.2 10.5 10.2 9.5 11.4 10.7 10.6 10.6 12.4 13.0 12.9 0.6 - Other 0.4 0.5 0.4 0.4 0.6 0.6 0.7 0.6 0.6 0.6 0.7 0.8 0.3 0.2 International trade 4.7 4.7 4.1 4.1 3.9 4.1 4.0 3.8 3.4 3.2 3.4 3.2 3.6 3.2 Other 2.2 2.0 2.0 2.0 1.6 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Total tax revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Income 38.6 39.2 38.7 38.1 40.6 42.0 44.3 45.6 46.2 37.8 44.7 45.7 37.4 34.5 Property 1.9 2.1 2.1 2.0 1.8 2.2 2.1 3.2 2.5 2.0 1.8 1.8 1.5 1.7 Consumption 35.9 36.0 37.1 36.9 37.3 41.1 39.1 38.0 39.0 48.1 42.6 42.1 50.7 53.5 International trade 14.8 14.4 13.9 14.4 14.5 13.9 14.0 12.7 11.8 11.8 10.5 10.0 10.0 10.0 Other 7.0 6.1 6.8 6.9 5.7 0.8 0.5 0.5 0.5 0.4 0.4 0.4 0.3 0.3

Memo: GDP at market prices 88,271 99,038 106,678 108,002 123,665 130,012 130,428 137,748 143,844 156,230 164,873 180,282 220,970 242,585

Source: Ministry of Finance; and Guyana Revenue Authority1/ Excludes one-off dividends (G$663 million) and transfer (G$144 million) payments by GUYOIL to the central government to clear the accounts prior to GEC privatization

2/ Include revenue from nonfinancial public corporations.

Table 3.2. Summary of Guyana Central Government tax revenue collections, 1995-2008: Shares of GDP and composition

(in percent of GDP)

(in percent of total tax revenue)

Types of revenue 2000 2001 2002 2003 2004 2005 2006 2007

Total tax revenue 29.4 28.9 29.7 28.9 27.1 32.1 32.5 35.5of which: Income tax 12.3 12.8 13.5 13.3 10.2 14.4 14.8 13.3

Taxes on consumption 12.1 11.3 11.3 11.3 13.0 13.7 13.7 18.0

Non-tax revenues 2.4 2.7 2.7 2.6 2.2 1.9 2.3 1.8of which: Rents and royalty 0.7 0.7 0.7 0.7 na na na na

National insurance Scheme 5.2 5.1 5.2 4.8 4.8 4.8 4.9 4.3of which: Contributions na na na 4.0 4.1 4.0 4.1 3.6Municipal revenues 0.8 0.7 1.1 0.9 0.8 0.8 na na

Total revenues 37.7 37.5 38.6 37.1 34.9 39.6 na na

(in percent of GDP)

Table 3.3 Summary of Guyana Central Government, National Insurance Scheme and municipal revenuecollections, 2000-2007

other income earned by the National Insurance Scheme (NIS) which amount to around 5%of GDP with contributions forming about 4% of GDP. Notice that NIS contributions arenearly as large as income taxes on employment income (called “Personal IT other” inTables 3.1 and 3.2), and hence, NIS contributions have to be viewed as an equallysignificant burden on the compensation costs of employment in Guyana.

The second source of revenues is dividends and special transfers from the Bank of Guyanaand other non-financial state owned corporations. Over 1998-2003, these revenuesaveraged 0.6% of GDP.


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The third major revenue item outside the Central Government is local government revenue.Table 3.3 includes the revenues collected by the six major urban areas (Georgetown,Linden, Anna Regina, Corriverton, New Amsterdam, and Rose Hall) but excludes anydistrict revenues. These revenues are primarily made up of property rates collected by themunicipal governments. Over 2000-05, municipal government revenues averaged some0.8% of GDP, a significant revenue stream, but possibly inadequate to fund municipalgovernment functions. The Central Government provides annual subventions to localgovernment authorities.


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4. Constraints And Challenges to Tax System Review AndReform

Good tax policy should be supported by sound tax analysis of the revenue, economicefficiency and distributional consequences of the tax policy. While basic economic andtax policy design principles and international cross-country experience can be brought tobear on the analysis of any statutory tax policy, the combination of the complexity ofapplication of any tax policy to the peculiarities of any economy along with the specificadministrative practices of a particular tax administration can lead to outcomes that canonly be reliably revealed through analysis of the actual tax data. Sound tax analysisrequires the systematic collection of data on the tax base and actual tax performance plusthe appropriate analytical tabulations and models to analyze the detailed data on the taxbase and revenue performance. Absence of this analytical capacity represents a majorconstraint on the ability of authorities to monitor, manage, analyze and reform the taxsystem.

In 2002, the IMF produced report, Guyana: Tax Policy and Tax and CustomsAdministration, recognized the shortcomings in terms of lack of analysis of the actual taxdata. This report mainly relied on basic design principles of economic and tax policy aswell as international cross-country experience. The conduct of this review should ideallybe based on sound tax analysis. Where possible, this has been attempted. The process ofcollecting and analyzing tax data for this reviewed has provided a real test case of thepreparedness of the Guyana tax system to manage its tax policy, and hence, it is highlyrelevant to note some of the findings of the review process.

The implementation of TRIPS across all major tax types potentially represents a major stepforward in the capacity of GRA and the Ministry of Finance (MOF) to monitor and analyzetax performance and forecast revenues. TRIPS is designed to capture tax transactions andinformation relevant to each transaction and to produce specified reports to monitor andmanage the tax system. It does not automatically generate the data bases required toanalyze and forecast taxes. Assuming comprehensive or representative coverage of taxtransactions along with the relevant information (taxpayer type, transaction type, timeperiod, exemption type, etc), added systems have to be developed to extract data relevant tothe desired analysis such as all transactions of a particular tax period, taxpayer type, sector,region, etc. In addition, procedures are needed to check the consistency of the data withthe population it represents. For example, does the data contain the correct number oftaxpayers and does it predict the actual taxes collected? Thereafter it can be used as thebasis for analysis of taxes and forecasting revenues, which requires the development ofappropriate models and procedures.

Given TRIPS is already operational on customs, VAT and excise taxes, the conduct of thisreview provided a detailed opportunity to check the capacity of GRA and MOF to extractdata sets useful in the analysis of the tax system. TRIPS is still being implemented in theincome tax so there was no expectation of its use there, but at the same time, many tax


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systems internationally have been successfully managed based on manually maintainedrecords and reports prior to computerization.The following are some of the findings from the work done as part of this review andearlier to develop the work plans for the Guyana Threshold Country Plan ImplementationProject (GTCP/IP):

1. A data dictionary defining and describing the fields and other information contained inTRIPS was not readily available to tax analysts at the time of this report. This limitsthe ability to check the comprehensiveness of the information in TRIPS relative to theinformation in tax returns, customs entries and other tax documents. It also makesspecifying the extraction of databases for analytical purposes more difficult andinadequate.

2. The ability to extract VAT, excise and customs databases whether in database orspreadsheet format from TRIPS is limited. Most extracts had to be repeated a numberof times to get satisfactory data sets.

3. Customs data for 2007 was used to analyze the taxation of motor vehicle imports.Major concerns arise concerning the number of vehicles exempt from import duty andthe basis of exemption. A large number of entries with no duty collected are posted asroutine direct imports with no coding of the reason for no import duty. The RemissionUnit of GRA has compiled listings of exemptions for 2006, but many of these listingsgive insufficient information. For example, a listing of companies receiving importexemptions merely gives the name of the importing company, the value of exemptimports and amount of tax forgone, but no detail of the reason for the exemption nor thetypes of goods imported. No current monitoring reports of import exemptions usageappear to be available even though TRIPS now makes this feasible.

4. The analysis of domestic VAT data revealed a number of issues:a. There appear to be missing VAT entries from the TRIPS database for 2007

when it is expected that this should contain 100% of records.b. There are problems in capturing the refund claims and correcting the amounts of

input VAT carry forwards accordingly.c. There are problems in the reporting on VAT arrears that makes both balancing

the VAT accounts difficult and undermines the administration of arrearscollections.

These no doubt represent start up issues in the VAT data systems, but they needurgent correction.

5. The reporting and monitoring of tax exemptions is weak. It some areas, such ascustoms exemptions mentioned in point 4 above, it lags by about a year on the actualtax event and provides inadequate detail to allow any effective control of the importexemptions. In fact, some of the customs detail is available in TRIPs but is not beingreported and monitored without the appropriate monitoring unit being fully functional.In other areas, such as the awarding and use of income tax holidays, no reports havebeen uncovered to date of the activity or tax cost of tax holidays. This situationundermines the ability of GRA to control tax exemptions or develop tax expenditureaccounts to estimate the tax revenue losses. It also makes impossible the analysis of theefficiency and cost-effectiveness of the tax exemptions and tax holidays.


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The limitations of the current ability of GRA to extract accurate and useful tax data in atimely fashion in turn have posed limitations on this review. They lead torecommendations to conduct further analysis to refine the policy recommendations andrevenue impacts of the recommended tax policy changes.

The GRA has recently established a small tax analysis unit, which proved extremely helpfulto the review of the tax system, but this unit has limited capacity and had little time todevelop the set of databases, reports, tax models etc required to adequately monitor andanalyze tax collection performance. Similar data analysis capacities will be required tosupport efforts to implement risk-based inspection and audit selection and to establish aneffective intelligence function in the GRA that are part of the proposed strengthening andreforms of the GRA.

The MOF has no tax analysis capacity. This undermines its ability to monitor and overseeGRA performance, to analyze and forecast taxes, and to develop new tax policy measures.A tax policy unit in any ministry of finance internationally is a leading and coreorganizational unit. The quality of a country’s tax system and the quality of budgeting ofthe MOF depends critically on the revenue analysis and forecasting capacity of its taxpolicy unit.

The importance of sustaining the components of the Guyana Threshold Country PlanImplementation Project (GTCP/IP) targeted at assisting GRA and MoF establish taxanalysis units in each organization and building capacity in these units needs to berecognized as a priority recommendation of this review. In fact, the effectiveimplementation of the action plan to reform the tax system will depend critically onthese units being established with appropriate staffing and training on an urgentbasis.


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5. Review of tax types and policy reform proposals

5.1 Income tax

5.1.1 Overall income tax structure

The income tax in Guyana is constituted under six laws:1. Income Tax Act (cap 81:01) of 19292. Income Tax (In-Aid of Industry) Act (cap 81:02) of 19513. Corporation Tax Act (cap 81:03) of 19704. Capital Gains Tax Act (cap 81:20) of 19665. Property Tax Act (cap 81:21) of 19626. Estate Duty (Death on Service) Act (cap 81:24) of 1953

Here issues arising under the Income Tax are treated first, followed by issues under theCorporate Tax and In-Aid of Industry Acts. The Capital Gains, Property Tax and EstateDuty are then discussed as a group. Finally, in section 7 issues of reforming andconsolidating these acts are covered.

5.1.2 Personal income tax rate structure

Guyana has used a relatively simple personal income tax rate structure. Table 5.1 showsthat since 1994, the personal income tax (PIT) has been charged either at a flat rate of33.3% on all income above a threshold amount, or during 1998-2005, an additional taxbracket at 20% was included. Currently, in 2008, tax at 33.3% is charged in income above$420,000 per year.

From time to time, the threshold and bracket amounts have been adjusted. To evaluate thecurrent threshold amount against earlier levels, Table 5.1. shows the inflation-adjustedvalues of the threshold and bracket amounts. While current levels are significantly aboverates in 1994-1997, they are significantly below the real levels in 1998 when not only the

Year Threshold Bracket Rate Top Bracket Rate Threshold Bracket Top Bracket1994 120,000 120,000 33.3%1995 120,000 120,000 33.3% 306,240 239,800 239,8001996 144,000 144,000 33.3% 306,240 268,699 268,6991997 180,000 180,000 33.3% 422,640 324,341 324,3411998 216,000 134,000 20% 350,000 33.3% 540,000 372,140 230,864 603,0041999 216,000 134,000 20% 350,000 33.3% 552,000 346,053 214,681 560,7332000 216,000 134,000 20% 350,000 33.3% 912,000 326,009 202,247 528,2562001 216,000 134,000 20% 350,000 33.3% 912,000 317,655 197,064 514,7192002 216,000 134,000 20% 350,000 33.3% 962,160 301,553 187,075 488,6282003 216,000 134,000 20% 350,000 33.3% 1,010,256 284,550 176,527 461,0772004 240,000 110,000 20% 350,000 33.3% 1,060,764 302,062 138,445 440,5072005 240,000 110,000 20% 350,000 33.3% 1,113,804 284,037 130,184 414,2212006 300,000 300,000 33.3% 1,191,744 331,200 331,2002007 336,000 336,000 33.3% 1,251,336 336,000 336,0002008 420,000 420,000 33.3% 1,296,000 396,226 396,226

Table 5.1. PERSONAL INCOME TAX (PIT) RATE STRUCTURE, 1994-2008

Nominal statutory amountsThreshold and Brackets adjusted to 2007

CPI=100NIS annualcontribution

maximum


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top bracket amount was higher than now, but also a 20% bracket was in place. Hence,current PIT places a significantly higher tax burden on personal income than was thecase during 1998-2005, but somewhat lower than 2006-07. While flat rate tax structureshave been used in former Soviet Union and Eastern European countries, typically countrieswith major tax compliance problems, the tax rate in Guyana is higher than rates of 13% to20% typically found elsewhere.

In addition to the PIT, employment and self-employment income has to pay contributionsto the National Insurance Scheme (NIS). On top of the income tax, the NIS requiresemployee contributions of 5.2% and employer contributions of 7.8% (or a combined 12.1%on the gross-of-employer-contribution wage cost16) up to a maximum monthly wage of$104,278 (or annual compensation of $1,251,366) in 2007. Table 5.1 gives the annualmaximum contribution amounts in 1995-2008. As pointed out in section 2.7, the combinedPIT and NIS contributions place a heavy burden on middle-income employees between thethreshold amount and the maximum contribution amount. The combined burden on thegross wage of these employees is about 45%, compared to 12% below the threshold and33.3% above the maximum contribution amount. The distribution of employees isapproximately 50% below the threshold, 40% between the threshold and maximumcontribution amount, and the remaining 10% at higher incomes. It is noted that during1998-2005, that not only was the PIT burden lower but for those within the 20% bracket,the combined burden was about 32%, but still a small group was subjected to the combined45% rate. The imposition of this heavy burden on middle-income employee wagesrepresents major barrier to employment generation in this group.

The reintroduction of the 20% bracket is recommended to reduce the tax burden onthe middle-income employees. Furthermore, it is recommended that this bracket beexpanded over five years until its upper bound is the same as the annual maximumcontribution limit for employees and then it should be sustained at that level as thisNIS contribution limit is raised in the future. Immediate full implementation wouldcost about $3.2billion, but this tax cost can be phased in over 5 years along withoffsetting measures to increase revenues. Given the higher density of employees inthe lower income ranges, to limit the annual cost of the expansion of the 20% bracket,it is recommended that in the first year the bracket be expanded by $120,000 and thenby $200,000 in each subsequent year until it reaches the NIS contribution maximum.For example, in 2009 the 20% bracket could be set at $120,000 above the basicdeduction (or $420,000 to $540,000); in 2010 at $320,000 (or $420,000 to $740,000), in2011 at $520,000, in 2012 at $720,000, in 2013 at $920,000 and then increased in eachsubsequent year to the NIS contribution limit.

The tax cost of this reduction in tax for middle-income earners in the first year would beabout $1.2 billion. This can be offset in a number of ways within the PIT and elsewhere:

i. Freeze the tax threshold for at least three years. The current thresholdcovers about 50% of employees. Individuals coming back into tax netwould be at 20% rate. This would save about $0.1 billion per year

16 See footnote 15 above.


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ii. Phase in full taxation of fringe benefits and allowances (see section 5.1.3below). Fully phased in, this would save over $1.6 billion per year. Ifphased in over two years, this would save $0.8 billion in the first year.

iii. Cuts in direct taxes would result in added expenditures and hence addedindirect taxes of about $0.1 billion

iv. The balance of $0.2 billion could be offset by reductions in discretionary taxexemptions and rate reliefs in the tax system, especially for import duties asdiscussed below in section

In the second year, with the full phase in of the taxation of fringe benefits no net loss isexpected. In subsequent years, any small net losses would be more than offset from thegains in employment income expected from job creation encouraged by the lowering of thetax cost of hiring middle-income employees who form the bulk of employed workers.Additional positive employment effects should also arise from added investment inducedby cuts in the corporate tax rate recommended below.

5.1.3 Employment allowances and fringe benefits

While the Income Tax Act requires in principle the taxation of all gains from employment,the tax law and regulations do not give well-developed rules for identifying or valuingemployer-provided fringe benefits. Without explicit rules and guidelines, it is hard foremployers and employees to identify and value many fringe benefits for tax purposes.Examples include employer provided housing, meals, access to motor vehicles, assistancewith educational expenses and low interest rate loans. More surprisingly, it appears thatthe application of the law on cash allowances made to employees for specific purposes islax and unclear. Generally, given the fungibility of all cash receipts, cash allowances for allpurposes are made taxable. This is not the case in practice in Guyana. For example, in arecent PAYE guideline, a listing of taxable and non-taxable allowances is shown in Table5.2. with applicable sections of Income Tax Act.

It is recommended that(i) no cash allowances qualify for tax exemptions,(ii) for ease of compliance and enforcement, only benefits (as opposed to

costs of earning income) actually paid directly by an employer or wherethe employer reimburses employees based on receipts be permitted asexemptions,

(iii) limits be placed on all reimbursed or employer provided exemptbenefits (either specific amounts or shares of base wages),

(iv) meals only be exempt where all low income employees also qualify,


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(v) all pensions (except if contributions are not deductible as discussed insection 5.1.4) and gratuities17, and station, entertainment, leaveentitlement, security and telephone benefits be made taxable, and

(vi) no benefit exemption be provided to the public sector that is not alsoavailable to the private sector.

Table 5.2 Non-taxable and taxable allowancesNon-taxable allowance Taxable allowancesInternational passage (s5(b))Traveling (s5(b)(ii))Station (s5(b)(iv))Entertainment (s5(b)(ii))Subsistence (s5(b)(ii))MealSecurity and telephoneMedical and dental (s5(b))Gratuity*Leave entitlement or vacation*Severance pay (s5(b)(iv))Hardline

DutyUniformActingOvertimeHousingSavings schemesGratuity*Leave entitlement*Laundry*

* Taxable in all non-government agencies

Fringe benefits and fringe benefit tax

While cash paid or reimbursed benefits do not pose a valuation problem, employer-provided in-kind benefits pose significant valuation problems and precise rules are neededto assist employers in the amounts that need to be declared as part of employee gains fromemployment. In-kind benefits include employers providing housing, motor vehicles, meals,low-interest rate loans, etc. Given the employer deducts the cost of providing thesebenefits, it is critical that the taxable value be charged tax at the personal level. Currently,only housing (“quarters or residence”) has a regulation (14 of 1994) giving specific valuesbased on the floor area of housing, but this regulation does not appear to have been updatedsince 1994 for inflation in housing values. Most surprisingly, the income tax law andregulation are silent on the valuation of employer provided cars, especially given the highlevels of indirect taxation of cars that raises car values significantly relative to Guyaneseincome levels.

17 Employers deduct the cost of providing pension benefits whether paid as an annuity or as a lump sumgratuity; hence, the receipt of these amounts by individuals should be taxed. In cases such as the government,the amount paid out of revenues to former public officials or officers as pensions or gratuities is a deferredbenefit that should be subject to tax just as any other compensation arising from employment. Ideally, theamounts should be taxed as the benefit accrues with each year of added employment. The employee isalready getting a benefit of only being taxed when the payment is actually made after retirement.


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Access to motor vehicles is normally divided in two components, the capital and operatingcosts. For each month an employee has access to a motor vehicle for personal use, therental value of the vehicle (about 3% of the capital value) should be charged as the taxablevalue to the employee. Any operating costs also covered by the employer should becharged in addition. A major problem with vehicles is keeping track of which employeeshave access to which vehicles and in which periods. This is commonly referred to as theallocation of benefits problem. A further problem arises where the value of the benefit ishigh relative to the cash wage of the employee. In such situations, the tax on the fringebenefit may take a high share of the cash wage of the employee. These two problems haveled countries to introduce a “fringe benefit tax” within the income tax where the employerpays the tax on behalf of the employee at a fixed rate, the top personal income tax rate.The base of the tax is typically also taken as the cost of providing the benefit to employees.The fringe benefit tax (FBT) is charged in place of valuing and allocating the taxablebenefit to the employee. The FBT avoids the valuation, allocation and employee cash flowproblems. Given the employer pays, the tax it does not affect the PAYE income taxes paiddirectly the employee.

The FBT should also apply to all tax exemptions received as a result of employment suchas the exemptions for cars for personal use18 by public officers and officials. In addition,the FBT should apply to any individual taxes paid on behalf of employees by theiremployers – for example, where an employee offers a before-tax take-home wage and paysthe taxes of the employee out of profits rather than deducting out of the gross wage.

Another fringe benefit that typically gets brought under an FBT is the low-interest rate loanprovided to employees. Here, the value of the benefit is typically taken as the differencebetween a prescribed rate and the rate charged to the employee on the loan. The prescribedrate is usually the interest rate charged by the tax authority on late tax payments. Whilethere is typically not an allocation problem, often the employee beneficiary is faced with acash flow problem to pay the tax on the loan. Again, the FBT circumvents this problem.

Overall, in countries that fully tax employee benefits whether as part of the individualincome tax or through a fringe benefits tax, experience shows that employers convert mostin-kind benefits to cash wages as once the tax subsidy is removed, the employer wants toreduce the administrative costs involved in providing in-kind benefits such as buying andmaintaining vehicles.

It is recommended that well-defined valuation rules be introduced for all fringebenefits and that a Fringe Benefits Tax be introduced into the Income Tax Act formotor vehicle benefits, low-interest rate loans, tax exemptions and tax paid byemployers on behalf of their employees.

18 Personal use would apply to use for commuting to work and any other personal use. For a vehicle to be forofficial use it would need to be registered in the name of the Government and stationed on governmentpremises.


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The reform of the tax treatment of allowances and other fringe benefits should yieldadditional revenues in excess of $1.6 billion after two years with most of the tax burdenfalling on higher income employees.19

5.1.4 Tax treatment of pensions and pension contributions

In most countries, pension savings receive some form of tax assistance. Normally, savingsunder an income tax are made out of after-tax income, the investment income earned on thesavings is taxed, and then the net-of-tax accumulated savings is eventually consumedwithout further income tax. This standard income tax treatment of savings is referred to asTTE (Tax Tax Exempt) treatment.

Internationally, tax assistance is provided to pension savings in one of the following twoways:

(i) Where pensions are funded, the investment income on the pension funds isallowed to accumulate tax free, but contributions to such a fund are madeout of after-tax or tax-paid income (that is, no deduction or exemption isprovided), but no tax is charged on the withdrawals from the pension fund.This is referred to as the TEE method – all taxes are collected up front whenthe initial income is earned. This approach is common in countries thathave difficulty in collecting tax from pension receipts and do not havebroad-based filing of individual income tax returns. Guyana generally fitsthis situation, but does not fit the tax treatment as discussed below.

(ii) Contributions to a pension, whether funded or not, are deducted from taxableincome (or exempted) within some limits; where the pension is funded,investment income earned on these before-tax contributions is tax exempt;but all withdrawals from such a fund or payment of pensions are taxable(given no tax has been collected on the income or accumulationspreviously). This is referred to as the EET method – all tax is deferred untilthe accumulated amount is withdrawn or used. This is a common taxstructure for pensions, but requires extensive tax legislation andadministrative capacity to control the deductible contributions, tax-exemptpension funds, and tax the eventual withdrawals or receipt of pensions.Interestingly, in the United States, private pension savings are mainly givenEET treatment, but social security contributions and benefits are given TEEtreatment.

Guyana exempts pensions, gratuities and social security benefits from income tax, but isunclear about the deductibility of contributions from the income of individual or corporatecontributors to pensions or social security funds.

19 This is a conservative estimate assuming that employees with annual incomes above $720,000 per year arereceiving 20% of their cash salaries as allowances and benefits, those with incomes between $540,000 and$720,000 are receiving 10% of their cash salaries as allowances and benefits, and those with lower incomesare receiving no untaxed benefits.


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In case of Guyana, from a careful review of the rulings applicable, tax treatment of thepension system seems to be even more generous compared to international standards.According to the PAYE Guidelines, employers are allowed to deduct emoluments in termsof salaries, wages, bonuses and similar payments, whether of their own account or onbehalf of their employees. Considering the fact that those Guidelines do not expresslyexclude from payment subject to deduction contributions to the NIS, as it does for someother concepts, it is safe to assume that, employer contributions on behalf of the themselvesor their employees and contributions by self-employed persons are deducted from taxableincome. In the case of NIS, employers contribute 7.8% of the wage up to a maximummonthly wage of $104,278. Therefore, there is a tax loss of the corporate tax rate (35% or45%) of this amount.20 The employee also has to make a contribution of 5.2% of the wage.This amount is withheld from the employees wage and paid over to the NIS separately fromthe withholding of PAYE income taxes paid to GRA. It is not clear from the PAYEguidelines, the tax legislation or practice whether employers are calculating PAYE beforeor after deduction the 5.2% NIS contribution. Given the PAYE tax and NIS contributionare separate calculations and administrations, it is likely that employers are not deductingthe employee contribution in assessing PAYE. NIS contributions are about $4 billionannually, with 60% of these from the employer contribution. If 60% of employment is bytaxable employers, a tax cost of about $0.6 billion is arising from the effectiveexemption for employer contributions to NIS.

In the case of voluntary contributions by employers on behalf or employees to pensionplans or payment off current pensions, both the income tax law and the PAYE regulationsand guidelines are silent in terms of its tax treatment. Apparently, lump sum gratuities andcontributions to pension annuity policies are also deductable for employers. Employerswould take all of these as costs of hiring workers and doing business, therefore deductablefrom corporate income tax and tax free for employees. No data is available on the size ofthese contributions or payments.

Therefore, most pension savings appear to be totally exempt in Guyana. It is effectivelyfollowing an EEE approach for much of the pension savings and possibly TEE foremployee contributions to NIS. Different economic, equity and fiscal concerns arises fromthis outcome. On the one hand, individuals form higher income brackets receive most of thebenefit as the absolute value of the tax expenditure increases as the income level goes up.Also, richer individuals are in a position to profit from this scheme by channeling privatesavings toward pension mechanisms. In terms of achieving higher rates of savings in theeconomy, the international experience shows that more often than not there is only arecomposition on household savings, rather than a net increase, at a high fiscal cost. In thecase of Guyana, revenue erosion is even more evident given the highly liberal tax treatmentgranted to all the three taxable points associated with a pension mechanism: contribution,investment (at least in the case of NIS funds) and withdrawal or benefit payments.

20 Theoretically, the employer should get a deduction for the gross of contribution wage (including the 7.8%contribution), then this gross amount should be reported as employee income and be subject to individual tax(zero or 33.3% depending on the tax bracket).


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Given the weak administrative capacity of the GRA for the individual income tax, it is notrecommended that Guyana adopt the EET approach as used in many developed countryeconomies. It should uniformly apply TEE, and clarify that contributions to pensionschemes or payments of tax-exempt current pensions should not be tax exempt ordeductible.21 A tax savings of about $0.7 billion should accrue.

A final consideration for the NIS is that that the administration of contributioncollections be handed over to the GRA once the full computerization of the income taxhas been achieved and the planned reorganizations accomplished. GRA will need todevelop the capacity to maintain computer-based tax accounts for all persons. There aremajor administrative efficiency gains for the joint collection of NIS contributions alongwith PAYE and other income taxes. In addition, the auditing of contributions is moreefficient if the GRA is simultaneously auditing the compensation basis of the PAYE, thecosts of labor deducted from earning business income and the amounts deducted for NIScontributions. Such joint collection of social security contributions is commoninternationally.

5.1.5 Self employment tax issues

GRA officials have repeatedly raised concerns about the difficulties of taxing the self-employed including professionals. The common range of issues arise such as difficultywith the maintenance of complete accounts, understatement of revenues, unrecorded and/orundocumented cash transactions, and the deduction of personal expenses as businessexpenses. Note that this last problem of controlling the deduction of expenses for personalbenefit is the analogous problem to employer-provided fringe benefits. Hence, thedevelopment of explicit rules for the taxation of fringe benefits will also strengthen thetaxation of the self-employed. For example, how should the use of a personal motorvehicle for business purposes be treated? As noted above, where motor vehicles are usedfor personal use, the capital value should be treated as a personal benefit and not deductiblefor business purposes. In fact, many countries disallow any deduction for passenger carsfor unincorporated business unless they are exclusively used for businesses purposes inactivities such as taxi services, care hire, etc. Only the operating costs incurred forbusiness purposes should be deducted for cars not exclusively used for business purposes.

Another area that needs careful limitation is the use of private residences for businessactivities. Again only the share of costs of a residence exclusively used for businesspurposes should be deductible. This requires the clear specification of what is deductible,the books and records required to be maintained to justify the deduction and the use ofrandom field audits to verify deductions.

21 The alternative and more accurate approach of treating employer pension contributions on behalf ofemployees is to allow the employer to deduct the amount from the corporate income, but report thecontribution as part of the employee income subject to PAYE. In this case the appropriate tax of zero or one-third would be charged depending on the income level of the employee. While this is the more theoreticallycorrect way to treat employer contributions, it undermines the hidden nature of the employer contributionsand the appearance of the employer bearing this part of the contribution burden.


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Effective from January 1, 2004, professionals are required to pay an annual fee as part oftheir annual certification. For the first three years of certification, the annual fee is$25,000, and thereafter the fee ranges from $75,000 to $250,000 per year. This iseffectively a presumptive tax on the income of self-employed professionals. This fee iscurrently being challenged in court and currently only collects some $6 million annually.Ideally, more effective economic audits of all self-employed professionals would be amore effective and equitable approach than presumptive taxation. If thesepresumptive taxes are felt to be necessary in the short-term, it is recommended that theybe structured as alternative minimum taxes within the income tax.

It is recommended that the deduction of depreciation and interest costs on vehiclesand houses only be allowed on vehicles if they are exclusively used for businesspurposes in specified sectors, and for residences only on the share of the residenceexclusively used for business purposes. Similarly, only operating costs of use ofvehicles or residences should be deducted.

5.2 Corporate tax and in-aid of industry measures

5.2.1 Corporate tax

Guyana imposes tax on corporate income under a separate tax act from the Income TaxAct, namely, the Corporation Tax Act (cap 81:03) of 1970. In addition, a further tax act,the Income Tax (In-Aid of Industry) Act (cap 81:02) of 1951, is used to codify theawarding of tax holidays by sector and region as well as the provision of additionalinvestment deductions.

As shown in Section 3, the corporate tax has raised around 5.5% of GDP or about one-sixthof tax revenues annually over the past decade. Unfortunately, not much detailed data isavailable to analyze the base of the corporate tax, both because of weak GDP statistics (anindustrial survey has not been done for many years to accurately measure value added bysector) and GRA has not compiled data on the actual underlying income of its corporateclients. Table 5.2A draws upon data available to date. It gives the broad sector distributionof value added at factor cost (excluding government) in Guyana in 2005 from nationalaccounts data to compare with the distribution of taxable income in 2006 and 2007 bysector provided by GRA. Note that the taxable income excludes tax free or exempt incomeand taxable income in dispute. Ideally, the value added data should be adjusted to removelabor compensation and depreciation to be more directly comparable with taxable income,but given the focus of the comparison, here is on the sector distribution of the base, if theseadjustments are similar proportions across sectors, then the distribution of sectors should besomewhat similar. Major differences exist between the two distributions. Nationalaccounts show agriculture to be the largest sector at 38% whereas the taxable income ofthis sector is only 3%. Taxable income shows services to form an 81% share, whereasnational accounts show this sector at 32%. Mining and quarrying is 12% of value added,but only 1% of taxable income. Even if much if the agricultural sector income is earned byunincorporated business, this will not correct for the differences in apparent tax basedistributions. Some of the differences may be due to inaccuracies in the national account


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estimates of sector value added and may need to await completion of a new survey. Otherdifferences may be arising from the concentration of tax breaks (tax holidays, investmentdeductions, etc) in certain sectors such as mining and manufacturing. Confirmation of thiswill also need to await availability if more detailed information on the composition of thecorporate tax base from the detail contained in tax returns.

The other major difference that emerges in the two sector distributions is the share of thetax bases that would be classified as commercial taxed at the 45% rate and the share thatwould be classified as non-commercial taxed at the 35% rate. The national accounts dataindicates that only 24% of value added would be at commercial, whereas actual taxcollections over 2006 and 2007 came from 80% in the high-tax rate commercial sector.This could indicate that much of the low-tax rate non-commercial sector has been receivingtax exemptions and/or has a heavier concentration of unincorporated businesses and/or hasa heavier concentration of poorly performing businesses. For example, national accountsthat he sugar sector would be about 16% of the base, whereas it only forms 3% of taxableincome according to GRA. This significant dependence on the commercial sector hasmajor implications for revenues when options to lower the corporate tax rate are consideredbelow.

Agriculture 38% 3%Sugar 11% 3%

Mining & Quarrying 12% 1%Manufacturing & Construction 19% 15%

Sugar 5%Services (excluding government) 32% 81%

Finance 5% 12%Trading, distribution &communications 19% 67%

All sectors 100% 100%

Commercial (45% tax rate) 24% 80%Non-commercial (35% tax rate) 76% 20%

Share of GDP at factor cost (excludinggovernment), 2005

Share of taxable income of corporations,average 2006 & 2007

Table 5.2A Comparison of sector shares from National Accounts and Corporate Taxable Income

Here a few major issues arising out of the tax legislation and tax performance arehighlighted below, with a primary focus on the high and highly differential corporate taxrates.

5.2.2 Corporate tax rates

As outlined in section 2.5 above, Guyana has high and highly differentiated tax rates onbusiness income: 45% on commercial companies22, 35% on non-commercial companiesand 33.3% on unincorporated business. High and differentiated tax rates are related, butsomewhat separate issues. The higher tax rate charged on investment has the obvious

22 A commercial company has at least 75% of gross income from trading in goods not manufactured by it andincludes a commission agency, telecommunication company, bank and short-term insurance business.


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direct effect of requiring investments to yield higher rates of return to equity to cover thetax and the cost of equity capital. This clearly constrains the available investmentopportunities in a country, which in turn affects growth, employment and wage ratesnegatively. High tax rates also generate pressures to lobby and bribe officials to gainaccess to discretionary incentives. Tax differentials between different types of investments(a) raise policy questions as to the efficiency and equity reasons for the differentials, (b)lead to distortions in investment and inconsistencies between sectors, and (c) equallyimportantly, open up major tax planning opportunities that can significantly undermine thetax revenues.

Under an income tax that aims to tax the aggregate of all types of income accruing to anindividual, there is no basic reason to tax corporate income different from any other type ofincome. This implies that there is no basic reason to tax corporate income at higher ratesthan the top marginal tax rate on individual income. Typically, most countries will setcorporate tax rates at or below the top marginal income tax rate (top MTR) for individuals.For example, India in 1998 had its corporate and top MTR both at 40% through 1998 andthen lowered its top MTR tax rate, but did not immediately lower its corporate rate to 30%until 2007 when it merged the rates again at 30%. Where the corporate tax rate is set lowerthan the top MTR, then either a withholding tax is used to bridge the gap on corporatedistributions that are not subject to income tax, or a system of tax integration is used suchthat the individual income tax rate is charged, but a credit is given for the corporate taxesalready paid. With growing international competition for foreign investments, manycountries are now charging corporate tax rates significantly below their top MTR. Guyanahas set both its corporate tax rates above its top MTR. Some significant policy reason isneeded to justify this. In addition, some significant economic externality would need to bepostulated to justify the 45% for commercial companies compared to non-commercial ones.Given the mix of types of companies defined as commercial – trading andtelecommunication companies, banks, short-term insurers, and commission agents – noobvious common negative externality suggests itself that would argue for this disparate setof sectors being taxed at a higher rate than other sectors.

The sectors that are often taxed at higher corporate tax rates by some countries are miningand oil gas sectors where higher corporate taxes are targeted at gathering a higher share ofthe natural resource rents in these sectors. For example, Trinidad and Tobago has a generalcorporate tax of 25%, but oil exploration, extraction and refining is taxed at a 50% rate anddown stream activities at 35%. Different countries use different approaches to appropriatea significant share of natural resource rents of which higher corporate tax rates is onemethod. Appropriation of such economic rents, however, is not applicable to the sectorsincluded under commercial companies.

In Guyana, three major tax differentials need consideration:1. Differences between the tax rate in Guyana and that in the home countries of

foreign investors2. Differences between the commercial corporate rate (45%) and non-commercial

corporate rate (35%)3. Differences between the corporate rates and the tax rate on unincorporated business

and other income at the individual level of 33.3%


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International tax competition and foreign investment

In a highly competitive global economy, the competition to attract and retain capital hasbecome an ongoing and possibly escalating battle internationally as capital markets haveemerged and merged making capital mobility a more common reality in an increasingnumber of countries. The international comparison of corporate tax rates is not a simplematter as the effective rate charged on corporate income typically varies according to theownership of the corporation and how corporate income is paid out to the owners, asidefrom the numerous effects arising from accounting conventions, inflation and investmenttax incentives that can raise or lower the effective tax rates paid by corporations on theiractual economic profits as opposed to taxable profits.

International trends to lower CIT rates

Most simple international comparisons focus only on the statutory company or corporate(or “headline”) tax rate charged on profits at the company level. International competitionfor investment has put downward pressure on corporate tax rates since the 1980s. Onestudy of a large sample of countries showed the average central government statutorycorporate tax rate dropping from 39.6% (+/- standard deviation of 10.9%) in 1980 to 32.7%(+/- standard deviation of 8.4%) in 1995.23 Data on corporate tax rates over 1998 through2006 from the World Development Indicators 2007 is summarized in Table 5.3. Thisindicates that corporate tax rates declined further by about 6 percentage points amongsthigh- and upper middle- income countries, but only 1-2 percentage point drop for lowerincome countries. Interestingly, an increasing number of oil-exporting countries set theircorporate tax rates at zero, and many new lower middle-income states (former SovietStates) have set their corporate tax rates in the 10% through 20% range. Combined centraland sub-national government corporate tax rates for 30 OECD countries over 2000-2007also show continued rate declines by 6 percentage points on average from 33.6% in 2000 to27.6% in 2007.24 While these statutory tax rates are important in that they reflect the firstlayer of tax on all corporate income, they do not capture subsequent withholding taxes ortaxes at the personal tax level applied to dividend distributions, in particular.

23 Joel Slemrod, “Are corporate tax rates, or countries, converging?” Journal of Public Economics 88 (2004)1169– 1186, Table 124 SourceOECD Revenue Statistics of OECD Member Countries, Comparative Tables Vol 2007 release 01

Country income class Number1998 2006 Change

High income OECD countries 23 33.4% 27.3% -6.1%

High income non-OECD countries a 25 21.8% 15.3% -6.5%Upper middle income countries 26 29.8% 24.1% -5.7%

Lower middle income countries b 29 29.8% 28.6% -1.2%Low income countries 14 31.8% 29.5% -2.3%

Table 5.3 Central Government Corporate Tax Rates, 1998 and 2006 by country income classAverage Central Government Corporate Tax Rate

a. In 1998, 5 countries with zero tax rate; in 2006, 8 countries with zero tax rateb. Many former Soviet Union states and new Eastern European states have corporate tax rates in the range of 10% to 20%Source: World Bank World Development Indicators 2007


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What are the importance of foreign investment and the impact of its taxation on aneconomy? If domestic private savings are taken as relatively fixed, then a combination ofgovernment and net foreign savings tends to determine investment and growth. If aneconomy is open with low country risk and faces a fixed costs of capital funds, butrelatively unlimited supply of foreign savings, then competing for capital through loweringtax rates relative to capital-source countries should expand investment significantly. Theultimate impact of such expanded investment, given a fixed cost of capital, accrues to laboras the capital intensity of the economy increases while capital owners earn a fixed rate ofreturn. This insight has led many countries to lower their first layer corporate tax rates onundistributed profits below their top MTRs and often below the company tax rates ofcompeting countries.25

Some of the countries with low central government corporate tax rates (below 30%) includea diverse set of economies, such as: Switzerland, Paraguay, Ireland, Romania, Chile, HongKong, Poland, Slovak Republic, Cambodia, Croatia, Georgia, Hungary, Turkey, Canada,Estonia, Czech Republic, China, Denmark, Ghana, Mauritius, Korea, Germany; Austria,Netherlands, Finland, Mexico, Norway and Sweden.26

Countries such as Hong Kong, Ireland and Mauritius have followed low corporate tax ratepolicies for sometime with some economic success. Many others have only recentlyrestructured their rates and which of them will be relatively more successful in attractingcapital investment remains to be ascertained. Some have added sub-national taxes orsurtaxes that raise their rates significantly, and others, like South Africa, have finalsecondary or withholding taxes on distributed dividends. The remaining countries merelyhave low tax rates at the corporate level.

Within the Caribbean region, corporate tax rates range from 40% in Barbados, 36% inSurinam to 33.3% in Jamaica, 30% in Haiti, and 25% in Belize and Trinidad and Tobago.

Differential between home and host countries CIT rates

While, at their face value, low corporate tax rates may appear to be attractive, care has to betaken to ensure that lowering Guyana’s tax rates do not merely result in added taxes goingto the home country treasury. The taxation of worldwide income by the home country at ahigher tax rate than the host country results in the foreign investor effectively paying the

25 See for example, Alberto Barreix and Jerónimo Roca, “Strengthening a fiscal pillar:the Uruguayan dual income tax”, Cepal Review, No. 92, August 200726 Examples of countries with low central government corporate tax rates (below 30%): Switzerland, 8.5%(21.32%)a; Cyprus, Paraguay and Serbia, 10%; Macao, Oman, Uruguay and Uzbekistan, 12%; Ireland,12.5%; Latvia, 15%; Romania, 16%; Hungary, 16% (20%)b; Chile 17%; Hong Kong 17.5%; Iceland, 18%;Poland and Slovak Republic, 19%; Cambodia, Croatia, Georgia, Hungary, and Turkey, 20%; Canada, 22.1%(36.1%)a; Estonia, 23%; Czech Republic, 24% (36.8%)c; China, Denmark, Ghana, and Mauritius, 25%;Korea, 25% (27.5%)b; Germany 25% (38.9%)a,b; Austria, 25% (43.8%)b; Netherlands (25.5%); Finland(26%); and Mexico, Norway and Sweden, 28%, where a= combined central and sub-national corporate taxrate, b= combined corporate tax and surtax, and c= includes final withholding tax on distributed dividends


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higher tax rate with the additional taxes going to the home country treasury. This alsonullifies the effectiveness of any tax incentive. Therefore, lowering the higher than averageGuyanese tax rate down to the level of the home countries, would not involve the risk suchpointless revenue transfers and can gain the benefits of expanded investment throughinduced foreign investment.

Part of the issue, therefore, is knowing the tax structures of the home (or capital-source)countries of foreign investors as well as how responsive they are to changes in host countryinvestment returns. This includes whether the host country profits are only taxed whenrepatriated as dividends or whether the full current accrued income becomes taxable. Aslong as the former is the case, the host country can lower its first layer of corporate taxwhile setting withholding taxes to capture the difference between the host and homecountry rates on repatriated dividends (in the same way it can equalize taxes on domesticdividends with the personal marginal tax rate.) The lower first layer corporate tax rateshould at least encourage a business to reinvest its profits rather than repatriate them,thereby expanding investment in the host country.

Another concern of having above average corporate tax rates is the incentive for the foreignowners to transfer price the profits of the Guyanese company away from the high tax rate.This can be achieved through a number of channels to raise cost artificially in Guyana.These include (a) the home company financing the Guyanese company with high levels ofowner-supplied debt (or the thin capitalization problem) to strip out profits as interestexpenses, (b) high-priced management fees or royalty charges, and (c) over pricing anyother inputs supplied by the owner to the Guyanese company. All these mechanisms lowerthe effective tax rate and require both tax laws and sophisticated tax administration tominimize the revenue losses. Alternatively, bringing the corporate tax rates in line withhome or source-country rates limits the problem.

Guyana has corporate tax rates that are in the high range internationally and also has a verya limited set of tax treaties, as noted below. Hence, Guyana can lower its corporate tax ratedown to about 30% without concerns that it is enriching home country treasuries, and beconfident it is providing an effective foreign investment incentive. Guyana’s main concern,however, is its unattractive country risk ratings and lack of business competitiveness, whichwill constrain the effectiveness of any corporate tax reduction and reduce the offsettinggains expected from expanded employment opportunities. It is of interest to note that mostof the international tax competition has been among the higher income countries that arealso typically the lower country risk and cost economies and are also well integrated intoglobal capital markets. Other countries that have chosen to move to low corporate rateshave done so in conjunction with wide-ranging economic reforms.

Critically, Guyana will need to work simultaneously on a broad range of policies toimprove its country risk rating and the attractiveness of its business environmentwhile it lowers and harmonizes its corporate tax rate.


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Corporate tax rate differentials

As noted above, there appears to be no compelling economic or equity reasons forcorporate tax rate differences between the commercial and non-commercial companies.Furthermore, this tax differential presents an incentive for jointly owned commercial andnon-commercial companies to undermine the tax policy. In such cases, owners have everyincentive to allocate a disproportionate share of overhead costs and interest expenses to thecommercial company to gain the benefit of tax deductions at the higher tax rate. This willeffectively lower the tax rate on the commercial company below 45%.

Tax rate differences between corporate and personal levels

Guyana has a simple “single stage” approach to tax integration with the personal incometax, namely, tax is collected only at the corporate level and dividends distributed toresidents are tax exempt. The higher tax rates in the corporate sector than at the personallevel, however, raise two serious concerns. First, it provides an incentive to conductbusiness in an unincorporated format rather than as a corporation. Second, it providesopportunities for tax arbitrage with the personal level for all closely held companies.

All discussions with the GRA indicate that they have great difficulty in controlling the taxaccounting of incorporated businesses given the weaker oversight of the accounts of suchbusinesses, the risks of unreported sales and income, and the inherent risks of owner-managers charging personal expenses as business expenses. Therefore, any encouragementto conduct business in unincorporated format puts revenues at risk. One of the advantagesof corporate rates below the top MTR is to encourage incorporation that leads to greaterformality in the conduct of business, maintenance of accounts and improved taxcompliance.

Where corporate tax rates exceed the top MTR, owners of closely held companies haveopportunities to shift income from the corporate to the personal level and avoid paying thehigher corporate rate. For owner-managers, and also where family members work for thebusiness, profits can be paid out as wages that are deductible at the corporate level andtaxable at the personal level. In such situations, opportunities also exist for personalexpenses to be charged as tax-deductible business expenses and avoid tax completely. Ageneral method (even where the owner does not work for the company) is for the owner tothinly capitalize the company by the owner providing debt rather than equity finance to thecompany and shift the profits to the personal level as interest rather than dividends. Again,interest expenses are deductible at the corporate level and taxable at the personal level. Tocontrol these tax avoidance methods requires both legal and administrative capabilities,areas where Guyana is weak. Again, these tax problems can be removed by setting thecorporate tax rate at or below the top MTR.

It is recommended that Guyana reduce its corporate tax rate to 30% for bothcommercial and non-commercial companies and leave its top MTR of 33.3% forindividuals unchanged. It should introduce a 5% final withholding tax on dividendspaid to residents once the corporate tax rate is lowered below the top MTR (see


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footnote 27). This leaves the question of how rapidly to reduce the tax rates – graduallyover time with announced commitment to the full reduction or in a single step.

The major concern of a rapid single-step reduction is revenue loss because of (i) highdependence of corporate tax revenues on the commercial sector currently paying 45%, and(ii) the current poor competitiveness and risk ratings of Guyana and poor growthresponsiveness of the economy to added investment over recent years. While a corporatetax cut is expected to encourage investment the responsiveness of the economy is expectedto be slow in the initial years to this tax rate cut. If general competitiveness and governancereforms are introduced over the medium-term, this responsiveness can be expected toimprove.

Some countries have introduced dramatic one-step tax cuts such as Egypt and Turkeywithout suffering revenue losses, but these tax cuts were accompanied by equally dramaticcancellations of existing tax breaks and tax holidays, even on some of those alreadyawarded. While Turkey already had reasonably capable tax administration, Egyptaccompanied its tax rate cuts with strong enforcement measures at the new low tax rates aswell. Guyana could consider going the rapid route, cutting its rates to 30% in one-step, if it also is willing to make rapid and major cuts in the tax breaks offer tobusinesses through the income tax and roll back customs duty exemptions. Withoutsuch added moves, it is estimated that the cost of reducing corporate tax rates to 30% in2009 would be about $5.6 billion initially, even though this cost would moderate over 5years to an annual cost of $2.1 billion as the economy gradually responds to the morefavorable investment conditions. See Table 5.3A. The estimates assume significantimprovements in the competitiveness and risk ratings of the Guyana economy over the next5 years. Without these improvements, the revenue costs could be about double theseestimates in the later years.

Aternative reduction options 2009 2010 2011 2012 2013Single step to 30% -5.6 -5.2 -4.5 -3.5 -2.1Staged reduction over 5 years -1.1 -2.0 -2.5 -2.5 -1.6

Revenue cost in G$ billions in 2008 constant prices and 2008GDP

Table 5.3A Revenue costs of reducing the corporate tax rate to 30%

With a staged reduction in the rates over 5 years, the revenue could be reduced tomore modest levels. This would involve lowering the 45% rate for commercialcompanies by 5 percentage points a year and the 35% rate for non-commercialcompanies by one percentage point per year over 5 years. Table 5.3A providesestimates of the initial 2009 cost of $1.1 billion rising to $2.5 billion by 2011 and thendeclining to $1.6 billion in 2013. These costs amount to about $10 billion less in presentvalue terms over the five years.

It is recommended that Guyana lower its corporate tax rates over a 5-year period tomerge at 30%, that is the 45% rate be lowered in steps of three percentage points each


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year and the 35% by one percentage point each year. This will buy time to work onimproving the general governance and lowering the costs of doing business in Guyanain a complementary fashion to the lowering of the corporate tax rates. This willminimize the revenue costs, while giving time for investment planning by business inresponse to an improved investment climate. As noted in the introduction to thisreview, the success of this strategy will depend on the Government of Guyana stickingto its announced commitments to lower its corporate tax rates. After 5 years, it canreassess its competitive position in the global market and decide whether or not tolower its rate any further, noting that 30% is still in the higher end of tax ratesinternationally. In addition, once the corporate rate goes below the individual rate afinal withholding tax on dividend distributions to residents should be implemented toclose the tax gap. 27

5.2.3 Minimum Tax

Besides being taxed at a higher tax rate, commercial corporations are subject to a 2 percentminimum tax on turnover, which is creditable against future tax liabilities when CIT is paidin excess to the former.

The rationale behind imposing minimum taxes is to ensure taxpayers with business incomedo not avoid the burden of the income tax for long periods, especially in those cases wherethey receive streams of benefits from preferential tax regimes. Under this consideration,there is no technical justification to exempt non-commercial corporations from theminimum tax. Besides clear inequitable treatment, both types of corporations seem to beequally capable to avoid income tax payment by obtaining the same type of tax incentivesor by engaging in similar tax planning strategies. In fact, as discussed above, thecommercial companies earn about 80% of the taxable income and pay about 84% of thetax. This suggests that non-commercial corporations are getting access to more tax breakand there is greater need to apply the minimum tax to non-commercial rather thancommercial corporations. An equal tax treatment of different type of taxpayers, however,is a necessary condition to achieve an efficient and competitive tax system. Therefore, ifthe minimum tax is to be maintained, it is better to apply it consistently across thetaxpayer community. This recommendation will become necessary if the corporate taxrates are unified over the medium term.

One clear way to avoid the use of minimum tax schemes is to rationalize the existence ofspecial tax treatments and incentives as discussed in section 5.2.4. Over time, corporationswould tend to pay their normal share of income tax liability without concerns that taxbreaks were undermining their tax contribution over the long run.

It is unclear whether the use of the minimum tax has actually increased compliance levelsof domestic corporations. While there are better alternatives to the imposition of aminimum tax scheme, such as by defining its base with better proxies of business profit,such as fixed assets, it is probably more advisable to foresee the elimination of the

27 For example if the corporate rate is lowered to 30% a 5% withholding tax in dividends will make the taxrate on distributed dividends equal to 33.5% (= 30% + 5% of 70%).


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minimum tax as other reforms on the CIT system take hold over time, such as therationalization of tax rates and the bringing interest receipts under full taxation.

5.2.4 Tax Incentive Agreements28

Tax incentives in Guyana are granted in different forms. Under the wide discretionarypowers granted by law, the Minister of Finance approves almost any kind of exemptions forcustoms duty, zero rating the VAT as well as exemptions under the income and excisetaxes. There are no explicit guidelines on the type of goods and services or businessespotentially subject to exemption. Tax exemptions are usually granted after the submissionof a business investment plan prepared by the private sector company.

Another way of implementing preferential treatment in Guyana is through tax holidays,also approved by fiscal authorities based on powers granted by the Income Tax (In Aid OfIndustry) Act. The current practice is to allow a 1-2 year holiday for new investments inGuyana. For this incentive to take place, an agreement between government and thetaxpayer has to be reached, which requires serious administrative costs to be incurred byboth sides. Such discretionary investment incentive typically can be expected merely toenrich the returns of the investor rather than induce incremental investment. Complexinvestments are not typically planned on the chance of receiving a large enough taxincentive after all the costs of business and investment planning has been undertaken. Taxincentives are only likely to be widely used and become effective where they are automaticand assured, such as the incentive gained from lowering of the corporate tax rate for allcorporations.

Tax incentives are meant to encourage additional investments that would not otherwise beforth coming. They aim to enhance the return on capital, particularly foreign capital,although with the integration of international capital markets the distinction betweendomestic and foreign capital is diminishing over time.

For the host economies, tax incentives mean the loss of substantial revenues. Thisrepresents a major loss of revenues if the investment had not really been affected byincentives. Although it has been shown repeatedly that tax incentives do not make anysubstantial difference in attracting foreign investment outside of the “foot-loose” lightmanufacturing sectors such as clothing and footwear, incentives exist mainly due toperceived tax competition among countries.

Generally, problems with tax holidays schemes include that they are available to existingbusinesses already on the ground, and that they have not been found to be cost-effective. Inaddition, a one- or two-year agreement is a very short period for an investment with longmaturity period. In any event, for this kind of investments, the Income Tax Code alreadyhas indefinite loss carry forward provisions to allow capture of losses suffered during theinitial years of operation.

28 For a full discussion of tax incentives see for example, Nathan Associates, The Effectiveness and EconomicImpact of Tax Incentives in the SADC Region, (2004).


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Foreign investment is more a function of the state of the country’s physical infrastructure(transport, power, communication, etc) and social infrastructure and governance (health,education, security, bureaucratic, financial and justice systems). Tax revenues are neededto build these kinds of infrastructure. Therefore, phasing out excessive tax incentives andusing the public revenue for creating and improving the country’s infrastructure makesmore sense from a public policy point of view.

The cost of investment incentive packages is unknown as no list of companies awardedincome tax incentives has been made available. The cost of import duty exemptions isknown for 2006 for exemptions awarded to companies. This amounted to a massive $6.3billion or about 10% of total tax revenues collected that year. If the bulk of thesediscretionary incentives were cost ineffective, then this represents massive waste.

It is recommended that all discretionary incentives be halted in favor of:(a) the lowering of the company tax rates as discussed above,(b) the conversion of investment deductions to partial expensing with offsets ofthe depreciation base (as discussed below in section 5.2.4),(c) the conduct of a detailed study of the cost, effectiveness and economicefficiency of investment incentives and the need for improved infrastructureand governance to attract investment, and(d) the creation of special expenditure accounts (tax expenditures) meant toquantify the impact of the different tax incentives and subsidies embedded intothe tax codes as a control mechanism to both budget and tax policies inGuyana.

5.2.5 Depreciation and investment deductions

The tax code allows for eight different type of depreciation deduction under both straightline and reducing balance depreciation methods. In order to implement a depreciationregime like this, each fixed asset is required to have a separate file with all the relateddetails. After classification of the fixed assets, they have to be recorded in an assets recordbook. As a matter of introducing simplicity and clarity, it is advisable to pool all assets infour broad categories and to depreciate them using the declining balance method.

For some specified types of assets, tax incentives are granted in the form of accelerateddepreciation and additional investment deductions as incentives for attracting investment toGuyana. Both of these tax incentives are not neutral, but are biased in favor of short-livedassets because of the earlier and/or double deduction provided. A preferred neutralstructure without investment biases is to provide partial investment expensing fordepreciable capital investments, but reduce the deprecation allowance base by theamount of the expensed capital. For example, instead of providing a 10% investmentdeduction in addition to depreciation allowances, the investment allowance at 20% could beexpensed but the depreciation allowance base would be reduced by 20% of the investment.This is often known as the “split system” as it provides partial expensing and regulardepreciation allowances on the balance. This system is neutral as long as the shareexpensed is less than the share of equity in the investment.


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5.2.6 Interest expenses

Interest payments in Guyana are fully deductible for corporations at tax rates of 45 and 35percent for commercial and non-commercial companies, respectively, whereas arms lengthinterest earned is taxed only at the final withholding rate of 10 percent. This scheme opensup arbitrage opportunities, especially for loans among related corporations. Interest wouldbe deducted at 45% by the corporation raising the loan, whereas the related personproviding the loan would only be taxed at 10% on the interest received. In order to avoidthe erosion of the corporate income base, especially during relatively high inflationarytimes, and to introduce neutrality into the tax regime, it is advisable to tax interest earnedat the general tax rate. The withholding tax would no longer be final on interest paidto residents, except in the case of interest paid by financial institutions to residentindividuals. Furthermore, the introduction of a thin capitalization rule (or limit ondeductible interest based on a maximum debt to equity ratio) would also minimizeincentives for multinational corporations to shift income abroad or for a domesticcorporation to shift income to the personal level.

5.2.7 Dividends

Dividends paid out by resident corporations to residents are exempt from corporate incometax (CIT), whereas a 20 percent withholding tax (raised from 15% in 2004) is levied ondividends to non-residents.

The practice of dividend exemption from CIT is concomitant with a full integration systemof the corporate and income tax, where the effective tax rate equals the personal income taxrate applicable to the individual shareholder. Under the current practice, benefits accruedto corporations through tax incentives, such as accelerated depreciation and immediateexpensing schemes, are passed on to shareholders by the full amount of dividenddistribution. Though there are alternative ways to achieve full integration while keepingtrack of dividend distributions from previously taxed income, they are difficult toadminister.

The tax integration scheme achieved by the dividend exemption method is broken in thecase of non-resident shareholders. However, some degree of tax relief could be granted bylowering the withholding rate with bilateral treaties to avoid double taxation. The current20 percent withholding rate could be used as bargaining power to Guyanese tax authoritiesat the time of negotiation of tax treaties.

5.2.8 Tax Treaties

Guyana grants unilateral relief from double taxation so that income tax paid by a residentcorporation overseas is credited against domestic tax liability. In terms of tax treaties,Guyana has signed a multilateral treaty to avoid double taxation with the Caricomcommunity, as well as United Kingdom, and Canada.


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Besides avoiding double taxation, tax treaties are designed to foster cooperation andinformation sharing among fiscal authorities of trade partners. Most of all, they haveproven to be an efficient mechanism to create certainty to foreign investors and avoiddiscrimination rules against them. These tangible benefits could be brought forward toGuyana by increasing the network of double taxation tax treaties with main tradepartners, such as Belgium, Portugal, and Netherlands in the EU area, the UnitedStates as well as China, Japan and India in Asia.

Within the Caricom community, Barbados, for example, has already signed 13 tax treatieswith countries from different regions.

An increased activism on the tax treaty area would not only put Guyana on a morecompetitive stance in international grounds. It would also allow GRA to open up efficientexchange of information channels with treaty partners to oversee the compliance behaviorof resident taxpayers doing businesses abroad, and thus to protect tax bases under its ownfiscal jurisdiction.

5.2.9 Penalties

Penalties for late payment are 45 percent per year due during the first year and 50 percentfor the following years. Refunds due to taxpayers do not earn interest and are not subject toa deadline for payment.

In general terms, it is a good practice on tax administration to set different types ofpenalties depending on the degree of culpability. Tax fraud should be ideally punisheddifferently from late payment, for example. Besides their differentiation, tax penaltiesshould ideally be settled at levels such that encourage the settling of disputes with taxauthorities. Excessively high penalties discourage compliance, dispute settling, and addsadditional collection burden to the tax administration. It is recommended that penaltiesfor late payment be moderated to around 15% to 20%. Given penalties should bedefined as “tax”, the later they are paid, they would also accrue interest charges. Theinterest rate charged should be at least the Government short-term borrowing rateplus a margin to bring the penalty in line with private short-term borrowing rates.

Interest should also be assessed and paid on overdue refunds from the treasury to thetaxpayer. As discussed in the VAT section, late payment of refunds without interest fromthe government undermines the credibility of the tax administration and imposes highfinancial costs to taxpayers. The financial burden on refunds claimants get even higherwhen the treasury fails to recognize the time value of refund money. Therefore, besides theassessment of penalties and interest against non-compliant taxpayers, interest should alsobe paid on overdue refunds and on other overpayments to the treasury. Consideringthe government risk of default is relatively lower to that of the taxpayer community,interest should be settled at a lower rate compared to the one assessed in the case ofunderpayments from taxpayers such as the short-term borrowing rate of the Government.

5.2.10 Life insurance


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Guyana taxes life insurance business by a short-cut method known as the “I minus E” orinvestment income minus expenses method. This method avoids the complications ofcalculating the underwriting income component of life insurance profits and only includesthe investment income earned on the life fund. This method has a number of inherentproblems: one is the difficulty in assessing the full accrued income on the life fund whichshould include capital gains; and another is the fact that the payments to brokers for sellinglife insurance policies form a major component of the expenses and these are front loadedrather than being amortized over the life of a policy. Hence, life insurance business taxesare notoriously low internationally. A simple solution employed by many countries,especially those with limited actuarial and accounting expertise, is to impose a tax onlife insurance premiums at a rate of around 5% either as a final tax or as analternative minimum tax.

5.3 Property tax, capital gains tax and estate duty

5.3.1 Capital gains tax

Capital gains are taxed under the Capital Gains Tax Act (cap 81:20) of 1966. It has onlyraised about 0.1% of GDP in revenues each year.

Capital gains on sale of financial assets and real estate are taxed differently depending onits period of realization. Short-term capital gains (on assets held less than 12 months) aretaxed as ordinary income in the year of realization, whereas long term is taxed at apreferential rate of 20 percent, regardless of whether the asset is held by an individual or acorporation. Assets are not adjusted by inflation, which basically means that tax bases arecomposed by both real and inflationary gains.

Around the world, income tax systems treat many types of capital gains in a different wayfrom other forms of income by applying specific provisions in the case of particular typesof gains, sometimes exempting them from tax and sometimes subjecting them to tax atdifferent rates. In the case of Guyana, it does make sense to provide a lower tax rate oncapital and financial assets realized in the long term. Under this scheme, assets are not keptlonger than desired as a way to avoid the realization of high tax rates, whereas realizationof immediate or ‘speculative’ gains are taxed at normal rates.

The lack of provisions to adjust the acquisition cost of assets by inflation imposes higherreal effective tax rates on capital gain realizations, especially for assets of longerdisposition such as land. However, the administration of capital gain taxation fully adjustedby inflation tends to introduce high compliance and administrative costs to taxpayers andauthorities, respectively, in the short term. Even if such rules were applicable, the partialindexation of the tax system in Guyana could introduce inequities and distortions. Forexample, it makes little sense to adjust the acquisition costs of a fixed asset for capital gainstaxation, but maintain its nominal cost to assess depreciation allowances.


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Therefore, in terms of recognizing the full effect of inflation into the tax base, it is better toprovide an overall solution to the entire tax system, rather than parts of it. In the meantime,the relative lower tax rate applicable to long term capital gains, along with a partialrecognition of inflation for assets held for more than two or three years, seem to be asensible solution in the shorter run. It is recommended that inflation adjustments beintroduced for all assets held at least one year for each full calendar during which anasset has been held. This approach simplifies the determination of the inflation index byallowing the use of full calendar year inflation rates.

5.3.2 Property Tax

The property tax is collected under the Property Tax Act (cap 81:21) of 1962. This is aform of a net wealth tax charged on individuals and companies. It has raised only modestamounts of revenues, about 0.5% of GDP each year.

The net property tax in Guyana is levied on the gross value of moveable and immovableproperty, minus qualified liabilities under self-assessment basis. Two different tax rateschedules apply to corporations and individuals. For both types of taxpayer, a 0.5 percentrate is applicable for every dollar of the next $5 million above a threshold amount, and 0.7percent for every dollar of any remainder. However, the law provides two different zeropercent thresholds: on the first $7.5 million of net property for individuals, and $1.5 millionfor corporations. Exemptions apply to members of diplomatic service, military forces, theUnited Nations, some international consultants, and charitable organizations, among others.

For any property acquired before 1991, net value is computed in two parts: Market price asof January 1991, plus cost of improvements and additions made after that date. In the caseof property acquired thereafter, tax base is assessed by the cost of purchase and anyimprovements and additions. Price value of properties is reduced by depreciationallowances for property purchased after January 1991, and the value of nominal debtsdeducted for income tax purposes.

There are several issues associated with the levy of the net property tax in Guyana. Thehistorical cost base mechanism to compute the tax base for the property purchased beforeJanuary 1991 has embedded an underestimation bias. By 2007, the erosion of marketprices assessed back in 1991 is about 67% due to inflation. This has not been compensatedfor by the added value of improvements and additions that have taken place afterwards.This underestimation bias is further accentuated as the value of new debts reduces oldproperty value, dollar by dollar, to assess net property tax liability.

A self-assessed net property tax is inherently complex and will be biased towards onlyincluding registered properties or properties that require registration for change ofownership and financial asset held in formal institutions. As such, besides its downwardbias in the value of its base, the tax is also biased against formal sector and registeredassets.

Besides problems on its base design and complexities associated with the assessment of taxliability, net property tax is basically imposed upon the same tax base as both the income


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tax and property rates levied by municipalities of Guyana. A net wealth tax is effective thesame as an income tax except the former taxes the stock and the later the annual flows. Atax of 0.75% on real net wealth is approximately a 10% tax on real income (assuming a7.5% real rate of return.) Hence, the property tax can be seen to be double taxation onincome, effectively raising further the already high income tax rates.

The property tax is also competing with the property rates charged by municipalities on thegross market value or rental value. As a result, two different levels of government end upcompeting for the same source of revenue. Who should really tax property values? Theunderlying principle behind the property tax is the “benefit principle” which states that thetax should be paid by those who benefit from the services provided by the state. In thiscase, those benefits provided by the state in lieu of this tax are many fold: infrastructuresuch as local roads and street light; fire protection and security; and social services likeeducation and health. These benefits are reflected in the property value, which is the base ofthis tax. When people perceive this connection between taxation and services, they arewilling to comply with the tax and it becomes functional.

In developed countries, property is mostly a local government tax base. Centralgovernment may be involved at the margin such as issuing laws and guidelines for tax ratesor it may be more heavily involved in terms of collecting the tax and handing the proceedsto the local governments, as will be discussed bellow in section 5.11. In developingcountries, there is a gradual trend towards empowering local governments to administer thistax and there are different possible models for doing this, as local government is betterequipped both to provide services to people and also to administer the property tax.

In recent years, serious efforts to streamline collection and administration of local propertytaxes by Municipalities in Guyana have been carried out. In particular, the Inter-Development Bank (IDB) financed a broad reaching study aimed at empowering localgovernments with modern valuation systems, a restructured valuation division, and bestpractices on property tax assessments, as part of the Urban Development Programme. Theoutcomes in terms of municipal revenue collection and improvement on compliance levelsare still expected to accrue in future years, as the project for modernization of the taxsystem has not yet completed. As a result, urban revenues have shown a steady 0.8 percentof GDP on average during the 2000-2005 periods without further improvement in taxcollections so far.

Whereas there is a strong case for municipalities to streamline property tax collectionsbased on the “benefit principle”, the central government of Guyana is better suited to levybroad base taxes guided by the “ability to pay” principle. Income taxation is clearly the bestchoice to achieve this goal as its base reaches flows of net wealth, rather than stock ofwealth such as property. Therefore, it makes sense to eliminate the net property taxlevied by the central government of Guyana and to support Municipalities effortstowards the modernization of property taxes. It is recommended that the netproperty tax be phased out over the next three years by doubling the thresholdamounts in each of next two years and setting the rates to zero thereafter. This shouldbe done in conjunction with the strengthening of the legal and administrative capacityof municipalities to collect property rates as discussed further in section 5.11. The


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elimination of this complex double tax will result in savings of compliance andadministrative costs that can be better devoted to income tax and property rates compliance.

5.3.3 Estate duties

Estate duties are collected under the Estate Duty (Death on Service Act) (cap 81:24) of1953. Negligible amounts of revenue are collected annually. Given the capital gains taxapplies to gains on properties at the time of property being transferred when an estateis wound up on death, it is recommended that the administrative and compliance costsof this tax be saved by repealing the estate duty.

5.4 Natural Resource Taxation

Even though there is currently no definite timeline for the exploration and production of oilin Guyana, the Government has envisioned the taxation of oil exploration through sharingagreements with private sector investors, which include provisions to split the rent of oilbetween oil companies and the government

According to the sharing agreements, 75 percent of total production is regarded asinvestment cost during the first 2-3 years of exploitation, while the remaining 25 percent isconsidered profit. Thereafter, a 50-50 split is established as a benchmark for profit sharing.In addition, Government revenue will be obtained through royalties, and income tax.

The basic premise underlining the production sharing arrangement is that the mineralwealth is under the government’s jurisdiction for the benefit of all citizens. Therefore, thegovernment is not transferring ownership of the natural resource, but provides a contract forits exploitation.

The issue of ownership is precisely the fundamental difference between a tax-royaltyregime (concessionary system), and production sharing arrangement (contractual system).The tax-royalty regime or the concessionary system allows individual ownership ofresources. When a government enters into an agreement with an investor for naturalresource exploitation, there is a transfer of title in favor of the investor. In return, theinvestor pays taxes and royalty. On the other hand, under the production sharing agreementor the contractual system, the government retains the ownership of the natural resource.The mineral or oil companies have a right to receive a share of production or revenues fromthe sale according to the terms of the contract.

Production sharing arrangements have evolved mostly in the oil and gas sectors. Underthese contractual arrangements, the government retains ownership of the minerals while theoil/gas company becomes a contractor to develop and extract the oil/gas resource inexchange for a share in production or revenues from the sale of oil or gas according to aproduction sharing arrangement. The contractor meets the exploration and developmentcosts in return for a share in production. However, the contractor will not be paid in casethe exploration is unsuccessful.


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The international taxation of oil and gas has generally evolved towards a combination ofproduction sharing agreements and income taxes. The rationale behind this trend is thatthis arrangement allows a simpler and more transparent tax regime through a progressivemechanism of sharing where the Government’s share is related directly to projectprofitability or contract return, in contrast with gross royalties or production payments. Inaddition, from the international taxation perspective, a combination of production sharingand income taxes is a preferred option as far as taxes paid in host country qualify forforeign tax credit in contractor’s home country.

As far as can be ascertained from the sharing contracts devised by the Government ofGuyana, this agreement does not mean that the operations are not subject to royalties.Normally, a production agreement is often used in combination with royalty and the shareof profit/production going to the contractor is subject to the normal income taxes. The useof royalties both partially compensates the Government for the depletion of the non-renewable resource and secures the Government an up-front stream of revenues.

In terms of these considerations, the general structure of the current tax regime of oilproduction in Guyana seems to be in line with best international practices on naturalresources taxation. Thereafter, the success of this scheme would depend on the actual ratesset and the efficient administration by the tax authorities. In addition, Guyana isencouraged to sign up to the Extractive Industries Transparency Initiative (EITI) thathas been endorsed recently by the G8 countries along with China, India and Korea. TheEITI operates through the verification and publication of payments by companies forextraction and governments receipts from the extraction of oil, gas and minerals.29

In the case of the taxation of minerals, holders of mining license are subject to royaltypayment alone in respects of minerals obtained according to the Mining Act (Cap 65.01).The royalty rates on minerals are in the range of 1 to 5 per cent of production value. Thedetails of royalty agreements are part of the license agreements authorized under the law,but are not part of the public record. Compliance with EITI and good governance wouldhave the royalty arrangements published. This requirement should be added to the miningand oil laws.

Ideally, royalty rates should be fewer in number, preferably a single rate around 5 per cent.While royalty rates ensure some revenue flow to the government depending upon theextraction, high levels of royalty rates also cause “high grading” and result in inefficiencyburden on the economy. Therefore, one or two moderate royalty rates are preferable incombination with corporate income tax on all types of minerals and metals. With astronger tax administration in place, other more sophisticated royalty structures could beconsidered that charge a higher royalty rate but allow deductions for the specified variablecosts of extraction.

Some developing countries endowed with natural resources offer tax incentives to investors inorder to attract capital investment for exploitation of natural resources. Even though there is no

29 See http://eitransparency.org/


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clear evidence that providing tax incentives makes an impact on the overall level ofinvestment in the mining sector, there has always been some sort of tax competition amongresource rich developing countries to attract foreign investments. The main tax incentivesapplicable to the natural resource economic sector are the following:

(1) Tax holidays and reduced tax rates

Some countries have offered outright tax holidays for limited periods or a reduced rate ofcorporate income tax for the life of the exploitation of the resource body, but these instrumentshave become less common over time. The main reason is that these are not linked to actualinvestment on the ground and have not been found to be cost-effective. They also result intax schemes being used to shift other unrelated income to the low rate offered for miningactivity. In addition, the main attraction to exploit any natural resource which is located in aspecific country are the resource rents or super profits available which is the key attraction toinvestors. Reduced tax rates merely decreases the country’s share of these rents.

(2) Tax credits or deductions or accelerated depreciation for capital investment

The investor receives an income tax credit, which is a percentage of the investment cost or isallowed to expense a share of the capital investment either in place of or in addition todepreciation allowances. Alternatively or in addition accelerated depreciation rates may beoffered that write off the costs faster than normal. These mechanisms decrease the effectivetax rate in a similar but less transparent way to a tax rate reduction, but are effectively limitedby the size of the investment and cannot be used to cut taxes on other unrelated income. Theydo bias investment choices and raise the same questions about their necessity wheresignificant resource rents are available.

(3) Deduction of infrastructure expenditures

The investor is granted a special deduction for qualifying investments on infrastructure andsocial services provided by the corporation aimed at improving the access to natural resourceproduction sites. This is common in cases where mines are in remote areas that require newcommunities and transport mechanisms to be established as part of the costs of exploiting theresource.

(4) Liberal loss carry forward rules

Sometimes more liberal loss carry forward rules are applicable including loss carry forwardprovision for unlimited period.

(5) Exemptions from customs duty or VAT on imports

Some countries either exempt imported machinery, equipment and materials used in theexploitation of natural resources from import duty, or give a duty draw back, or impose alower tariff rate, especially where the mineral product is mainly for export. The VAT onimported capital equipment may be suspended to avoid financing the import VAT while arefund is eventually paid.

http://eitransparency.org/


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As discussed in section 5.2.4 above, tax incentives represents an arguably cost-ineffectivemechanism to encourage investments from the private sector. This is especially true innatural resource sectors where significant rents are the main attraction and investors haveno choice but come to a country if they want to share in such rents. In such cases, in fact,there is more of an argument for using either higher effective corporate tax rates or acombination of normal taxation and production or profit sharing for the country to gain itsfair share of the rents. Considering the various tax mechanism mentioned above, onlyitems (3) through (5) should receive consideration.

Given the potential revenue importance in the future of oil taxation, it isrecommended that a special study be undertaken in the short-term to provide moredetailed proposals on the taxation in the oil and gas sector in Guyana. Such a studyshould be based on modeling the cash and tax flows and risks of typical oil extractionprojects expected in the Guyanese context so that the impacts of different tax, royaltyand profit or production sharing rates and arrangements can be analyzed from theperspectives of the company, the treasury and the economy.


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5.5 VAT and Excise tax

5.5.1 VAT

Comparative revenue performance of VAT in Guyana

Although countries from the same economic region tend to apply similar VAT general taxrates, they may have different revenue performance. Differences in the design of the taxbase, the existence of special administrative arrangements, and structural economicconditions usually explain divergent revenue outcomes.

In an attempt to measure the VAT revenue performance in Guyana compared to its treatypartner countries, two of the widespread methods to measure performance methods areused: Efficiency Ratio and the Gross Compliance Rate (GCR)

The efficiency ratio, measured as the share of VAT revenue to GDP divided by the generalrate, represents a wide indicator of the coverage of the base and the quality of the taxadministration. Usually, a high ratio suggests a revenue- efficient use of each percentagepoint of general VAT rate as a consequence of a broad design of the tax base and qualityenforcement actions.

To construct the efficiency ratio measure, it is considered appropriate to use the finalconsumption aggregate as a benchmark to measure VAT revenue performance, instead ofGDP, which is the usual parameter widely used in this type of measurements. Besides thefact that final consumption better resembles the VAT base, GDP measures could varyamong countries in different aspects, such as the coverage of informal activities. For thisreason, the Gross Compliance Rate (GCR), assessed as the ratio of VAT collection to finalconsumption, as a percentage of income, multiplied by the standard rate30 has been thepreferred option to compare the VAT revenue performance in Guyana.

Table 5.4 depicts the results of both revenue performance measures estimated for Guyanaand some selected CARICOM countries. Considering the fact that VAT collection tends toimprove over time as economic agents and revenue authorities experience gains inefficiency in compliance and collection activities, the very recent introduction of the VATin Guyana suggest that current revenue performance measures may understate long runefficiency ratios. However, early assessments of the VAT performance compared to fellowCARICOM economies portray useful conclusions in terms of policy design.

30 GCR is also known as the Consumption Efficiency Ratio, or “c-efficiency”.


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Table 5.4 Estimated Gross Compliance Rate (GCR) and Efficiency Ratios in Selected CARICOMCountries

CountriesFinalConsumption% of GDP 1/

VATCollection(% of GDP) 2/

GeneralVAT Rate(%) 3/

VAT Potential(% of GDP)(B) x (D)

GrossComplianceRate (GCR)( C) / (E)

VATEfficiencyRate( C) / (D)

(A) (B) (C) (D) (E) (F) (G)

Guyana 89 10.3 16 14.2 0.72 0.64Barbados 87 9.2 15 13.1 0.70 0.61Jamaica 88 9.0 15 13.2 0.68 0.60Trinidad & Tobago 51 3.0 15 7.7 0.39 0.20Sources: World Bank (WDI), Guyana Revenue Authority.1/ Includes household and government sectors2/ 2000-2003 average, except for Guyana (2007)

In terms efficiency rate, the VAT in Guyana converges with the revenue productivity levelreached by Barbados and Jamaica, countries with over 10 years of practical experience onadministering the VAT. Each percentage point of VAT yields revenue collection equivalentto 0.6 percentage points of GDP. The favorable result of this indicator suggests a broaddesign of the VAT base in Guyana at the initial stage of implementation.

The comparative results found by calculating the efficiency ratio do not change much whencalculating GCR. Using the final consumption benchmark instead of GDP, revenueperformance in Guyana compares again competitively with Barbados and Jamaica,suggesting again a relative effectiveness of the VAT system in Guyana to raise revenues.

In spite of the promising revenue capacity of the VAT in Guyana suggested by the abovecalculations, three issues should be considered carefully for tax policy purposes:

(a) Without an efficient refund of taxes to those taxpayers whose tax on inputs turns outto be higher than tax on outputs, revenue collection figures could be temporallyoverstating the real capacity of the system to generate revenues.

(b) Countries like Guyana with relative high ratio of trade of GDP show relativelyhigher revenue performance rates, considering the simplicity of collecting the tax atthe point of import. However, a lack of an adequate functioning of the domesticcomponent of the VAT administration could undermine the long-term viability ofthe system including the import component.

(c) The number of zero rated items has expanded significantly since the introduction ofVAT. Many of these add significantly to the compliance and administration costs ofthe VAT. They also erode the effective VAT base.


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Zero Rating practice in Guyana

Different from the exemption mechanism, zero rating is the only relief measure built intothe VAT system that totally relieves the final consumer from the tax burden whenpurchasing a good or hiring a service. When exempt, a trader usually pays VAT on inputswithout claiming any credit, even though no VAT is charged on exempted good or service.In these cases, traders from exempt sectors usually pass on to the final consumers the VATpaid in his inputs not recovered as a credit, generating the so-called cascading effect.

There are some theoretical and practical arguments that support the recommendation ofusing zero rating as a relief mechanism for a limited non-export goods and services.However, many complications can arise if zero rating is used inappropriately:

(i) The final consumer receives a benefit when purchasing zero rated items;however, it is not clear whether this consumer will receive any benefit at allwhen zero rate is imposed on intermediate goods and services, assuming thefinal good or service is taxed at the general rate. Under the VAT mechanism,the value added by the final producer would still be taxed, even though some ofhis inputs are zero-rated. At the end, the benefit is internalized by themanufacturer in terms of cash flow relief, but it is not necessarily passed on tothe final consumer when the general tax rate is applicable to the final good orservice.

(ii) In practical grounds, it is very difficult to draw a clear line between zero andpositive tax rate items. Zero rating of some essential food items is a clearexample of this complexity in those cases where this preferential treatment isapplicable to particular types of vegetables, fruits, or bread, for example.Administration and compliance costs incurred by revenue authorities andtaxpayers, respectively, increase when VAT laws include numerous andnarrowly defined goods and services subject to preferential treatment.

(iii) The refund system concomitant to the zero rate scheme entails highadministrative and compliance cost, imposing one of the most challengingoperation complexities aroused by the VAT system. Tax relief is totallymaterialized only when the trader receives from the government the full amountof money equivalent to the VAT paid on inputs. Delays and mismanagement ofrefund payments introduce several distortions into the market place, putting atrisk the benefits that the zero rate is designed to convey.

(iv) Different from the exempt sector, traders whose production is treated as zero-rated still have to comply with registration, bookkeeping and other types offormality demanded by the VAT law. This is also true for small traders whoseannual turnover qualifies them for exemption from registration. Therefore,traders selling zero-rated goods and services need to allocate additionaladministrative resources to manage VAT refunds applications.


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(v) Application of zero rate only to domestic suppliers of selected items whileleaving imports taxable, results in positive trade protection for domesticproducers, introducing distortions into the economy and potential tradesanctions by international trade organizations under WTO rules or regionaleconomic trade authorities under CARICOM agreements.

Therefore, besides eroding the tax base, the practice of zero rating non-export items couldimpose undesirable economic, compliance and administrative consequences, as well asopportunities for illegal claims of refunds, which could be avoided if an exemption or apositive tax rate were used instead. The current list of 157 consumable items under zerorate treatment in Guyana strongly suggest that the GRA faces the burden of administeringVAT refund claims (legal and illegal) from hundreds of domestic taxpayers from differenteconomic sectors beyond its current technical and administrative capacities.

For the GRA to work in an effective and equitable manner there is a clear need torationalize the current list of zero rate treatment, so that this benefit could only beapplicable to a well defined basket of non-export goods and services. Considering theconstraints faced by the GRA in terms of staff and operation capabilities, it would bedesirable to apply exemption, reduced or general rate treatments to most of the itemscurrently zero-rated.

In an attempt to advise an effective way to rationalize the current list of zero-rated items inGuyana, it is important to review some of the normative and practical foundations uponwhich some goods and services are granted special privileges for VAT purposes.

Why grant special treatment under VAT?

Based on pure administrative grounds, one of the rationale behind granting specialtreatments under the VAT is in those cases were it is hard to identify and measure theoutput of a given good or service. In the case of financial services, for example, it is noteasy to measure the output of financial services in addition to the fact that these services areinternationally mobile. Small traders are another example of this category, as theadministrative cost of taxing traders below a certain threshold is comparatively higher thanthe revenue gains from taxing them. Therefore, there is some justification for grantingspecial treatment for these sectors.

The international practice of exemptions and zero rating identifies the following broadcategories of goods and services to be generally included in the category of preferentialtreatment:

(i) Agricultural products and key agricultural inputs

(ii) Passenger transport

(iii) Basic or staple food items

(iv) Cultural activities

(v) Services provided by the public sector


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(vi) Financial services

(vii) Residential real estate

Agricultural products and passenger transport services usually receive special treatmentstatus based on distributional or equity issues, considering the need to grant relieve to lowincome consumers and small-scale farmers. In view that both sectors normally fall belowthe small sector threshold limit, this relief is anyway obtained in a more practical way sinceit is less costly to tax administrators to manage an exemption mechanism based on the sizeof traders, rather than types of products offered in the marketplace.

As for the food category, it is certainly the case that most governments usually providesome type of relief from VAT based on equity grounds. However, in order to prevent awidespread erosion of the tax base and a heavy burden on the VAT administration from aproliferation of refund claims, some criteria are needed for setting different group of fooditems as exempt, zero rated, taxed at a lower or at the general rate. Some of these criteriarequire distinctions between necessary or luxury goods, processed and unprocessed,original state and preserved state of food items.

In respect to cultural activities, merit considerations heavily weight on the decision ofgranting special treatment. The basic issue to consider special exemption or zero rate statusis the highly subjective criteria upon which every country regards culture. The commonpractices favor taxing all cultural activities and, in any case, grant relief to item specificcases depending on each countries specific circumstance.

Goods and services supplied by the public sector in competition with the private sectorshould be fully taxed to avoid price distortions in the economy. Exemption may be grantedfor those cases where purely non-commercial services are given free of charge, forexample, defense and some categories of health and education services fall in this category.For the health and education sector the standard advice and practice is to exempt basicservices such as primary education and basic healthcare, and at the same time taxing thespecialized services at normal tax rate.

The construction sector poses different issues. One way to deal with this sector is to tax theconstruction services, granting input credits where services are used as business inputs.The leasing of real estate for commercial purposes can be subject to VAT, different fromthe case of owner occupied houses. To avoid distorting choice between renting and houseownership, the commercial leasing of residential property is sometimes also exempt. Analternative way to treat residential property for VAT purposes would be to tax at the time ofpurchase. The construction activities should be taxed in the normal way and grant creditfor construction as a business activity. Under this practice, those who construct houses forown occupation would at least pay VAT on their inputs. This advantage would be wipedout when building inputs are also granted exemption status.


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Rationalization of zero rating in Guyana

Using the theoretical and practical considerations discussed above as normative backgroundto analyze the current zero rating policy in Guyana, the following rationalization proposal ispresented by each category of consumable items currently under zero rate treatment:

A. Essential Food Items

From the 35 items listed under essential food items category, some guidelines could bederived by reexamining the existing list of zero rate items:

(i) Despite the fact that some of the items included into the list could beindisputably considered as essential for low-income consumers, the VATlegislation draws some differential treatment among similar good items withouta clear rationale. As an example of this borderline cases, it is worth to mentionzero rating of fresh fruits, excluding apples; unflavored cracker biscuits,excluding sweet biscuits, or bird eggs. These distinctions complicate theadministration of the VAT in terms of auditing and managing an effectiverefund system and are burdensome for compliance. In addition, opportunities forabuse are clearly open without a clear definition of tax treatment for similarcommodities.

(ii) Besides tax treatment differentiation by group of similar food items, thelegislation also draws some distinctions between producers of commodities bygranting zero rate benefit only to local producers of unprocessed pork, beef,shrimp, fish, cashew nuts, peanuts, jams, jellies and peanut butter. As mentionedabove, this practice may violate CARICOM trade agreements by providingpositive protection to local producers, and at the same time, it affects thefunctioning of the price mechanism as a necessary condition to an efficientallocation of resources in the economy.

In an attempt to avoid high costly complications in the administration and compliance ofthe VAT system, while at the same time providing relief to low income consumers in acost-effective way, there is a need to scrutinize closely the current list of zero rated fooditems, leaving only some of the 35 items in the zero rate listing. A well designed basket ofgoods could still be left outside of the tax net using more general criteria such as: essentialunprocessed rice, fruits, vegetables and animals, as well as bread and milk, without drawingdistinctions between close substitutes (e.g. apples and oranges) and between type ofproducers (domestic and foreign). .

B. Essential Consumable Items

The current practice in Guyana is to extend zero rate treatment to a list of 62 consumableitems defined as essential, such as matches, sanitary products, bed and table covers, rags,curtains, rugs, mats and bicycles. Similar to the category discussed above, preferentialtreatment is granted only to domestic producers of some of the items regarded as essentialconsumable.


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The basic problem by enlisting this category of goods as zero rated, is the clear inability totarget the benefit at the consumption of low-income people. Relatively richer householdsare usually the group of the population, which receives most of the monetary benefitsconveyed by this type of zero rating. Therefore, on pure equity grounds, it is advisable toexclude from the zero rate list most of the goods categorized as essential consumer items,leaving only a few of them with a more clear social justification, such as mosquitoes netsand bicycles, regardless of the place where these products are manufactured.

In a number of cases, only domestically produced products are zero-rated. This raises twoproblems. First, a major tax compliance and enforcement problem arises in distinguishingbetween sales of domestically produced and imported products. Second, this lower tax ondomestically produced goods is effectively a form of trade protection and in violation of theCARICOM CET requirements. If a class of consumption goods is truly a basic needs goodfor the poor, then they could be zero rated irrespective of source, otherwise they should beremoved from the zero-rated list.

C. Essential Domestic Services

This category is comprised of education services and materials.Although education is clearly a sector which governments usually target as potentialbeneficiary of preferential tax treatment, a careful definition of which kind of servicesshould be regarded as education for tax purposes is advisable. This is particularlyimportant when dealing with education services in fields such as foreign language, sportstraining, art history, or culinary courses. An adequate definition of education servicesthrough the tax legislation, including terminology such as primary, secondary and/orvocational education could be an efficient way to target the type of investment in humancapital that the government wishes to protect outside of the tax net.

In terms of the education materials listed as zero rated items, there is no clear justificationto grant special treatment to some goods such as recipe books, novels or musicmanuscripts. Therefore, a thorough reexamination of the items regarded as educationmaterials is advisable.

The zero rating of all electricity supplies is a major revenue loss and primarily benefitshigh-income consumers. It is recommended that only a limited number of zero-rated unitsper household per month be supplied to target this benefit to the low-income user whileraising revenue from and encouraging conservation by the higher income users.

D. Agriculture Inputs

There is a widespread practice among countries to grant zero-rated or exempt status to atargeted range of agriculture inputs, including specialized agricultural machinery andequipment, as a means to ameliorate the effect of taxation on the final price of unprocessedstaple food items, and to support the financial position of farmers, especially exempt small-scale farmers.


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In the case of Guyana, this preferential treatment is granted as a zero rate, rather than as anexemption. By doing so, agriculture producers receive full relief from taxation on some oftheir key inputs. This benefit is not different from the one that would be obtained ifexemption were granted to imported inputs instead of zero rating, as VAT would not becharged anyway at the port of entry.

Besides revenue erosion, zero rating of agriculture inputs raises again the issue ofadministrative complexities and fraud opportunities associated with refunds in those caseswhere inputs are domestically produced. These issues are more problematic when dealingwith a large number of small farmers typically operating in the informal sector. Asdiscussed above, zero rating encompasses the need for agriculture producers and suppliersto register as VAT taxpayers and to follow minimum accounting requirements difficult toobserve by informal economic agents typically operating in this sector of the economy.

In order to minimize administrative burden and abuse opportunities, it is advisable tomaintain zero rate treatment only to those inputs directly connected with theagriculture production, such as fertilizers, pesticides and seeds. For the rest of the vastlist of items regarded as preferential agriculture inputs, it may be better to grantexemption or positive rate taxation. Machinery and equipment potentially used foralternative purposes other than agriculture, such as motor vehicles or well –drillingequipment, pose special challenges to tax administrators given the evident practicaldifficulties associated with auditing the use of the item rather than its very nature.Therefore, a careful review of the current list of zero rated machinery meant foragriculture use should be undertaken.

Also under this category, tax regulations include as a zero rated item, the import of rawmaterials to be used in the production of goods, which will be subsequently exported by ataxpayer who exports at least 50 percent of its products, upon the approval of the GRACommissioner General. The rationale behind this practice is to alleviate the cash flow ofmajor exporters, especially in those cases where the refund system is incapable to deliver intime VAT paid on inputs. Considering the revenue relevancy of a proper VAT taxationat the import port in Guyana and the complexities of auditing the 50 percent exportthreshold, it is advisable to review this practice. It gives an unintended advantage tothe exporter in competing in the domestic market on domestic sales and raisesconcerns about whether any of the zero rated inputs are final purchases. The creditmethod system has been designed to avoid decisions at the point of taxation about thesubsequent use of the goods. It would be preferable to remove this type of use-basedzero-rating and upgrade the refund mechanisms as discussed below in this section.

E. Building Materials

Locally produced building materials, such as sand, stone and concrete blocks are some ofthe construction items currently zero-rated. Besides the domestic protection issue discussedbefore, this practice promotes the same administrative burden and fraud opportunitiesthrough the refund system for small-scale producers of building materials. The VATlegislation does not provide tax relief for the sale of real estate or the lease for commercialpurposes. Therefore, zero rate tax relief to building materials is not passed on to final


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consumers of residential or commercial constructions, except for the case of the supply ofresidential dwelling, which is exempt from VAT. In view of these arguments, constructioninputs should be fully taxed and creditable for construction businesses.

F. Health and Medical Services

Similar to education, medical services and the supply of prescribed and some over thecounter drugs are typically subject to preferential treatment under the VAT forredistribution purposes. Currently, VAT regulations in Guyana outreach zero ratingtreatment to all over the counter drugs, including products meant for promoting health andwell-being, but excluding items such as energy drinks and food supplements classifiedunder Chapter 21 of the Common External Tariff. A well-defined concept of medicalservices and medicines issued through regulations as zero rate items is a useful safeguardagainst arbitrage opportunities from providers of services not necessarily considered asessential.

G. Computers, Computer Accessories and Sports Equipments

Some of the benefit provided by the zero rating of this category of items is captured byrelatively high-income individuals. As personal income increase over time, individuals arelikely to buy a grater amount of computer and sports equipments. A more efficient way totarget this subsidy is by supplying such items to lower income population segments throughpublic institutions, such as schools and sports facilities. In addition, preferential treatmentof imported goods with questionable social justification is accompanied by highopportunity costs, as the revenue foregone would be otherwise captured at the import gateat comparative lower administrative costs.

Therefore, it is advisable to remove all of the items listed in this category from preferentialtreatment status and include them into VAT the tax net.

H. Transportation and Travel

Similar to the other categories of items discussed above, it is difficult to justify zero ratingof motor vehicles and air transportation of goods and passengers on distributional andequitable grounds. The benefit passed on to final consumers through lowered price of airtransportation would only benefit high income individuals, whereas zero rating totransportation of intermediate goods does not have any impact on final prices of taxeditems. Also, the practice of granting zero rating to the transportation of goods andpassengers into the own country territory - subject to an agreement between theGovernment and the provider of the service – results in positive trade protection fordomestic carriers.

I. Heavy equipment

A range of heavy equipment is zero-rated. This may be appropriate if all the users are low-income unregistered businesses, otherwise it is redundant for registered businesses thatqualify for input tax credits. The only issue can be cost of financing the VAT on expensive


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imported equipment while the business awaits a refund. Rather than zero rating such itemsin contravention of the basic principles of a credit-method VAT and creating demands forexpansion of the zero rated items, a more effective way is to introduce legislation to allowVAT deferment on major equipment items (say, items with CIF values over $20,000,000imported by registered businesses). Under the deferment method, the payment of importVAT is deferred until the input VAT is claimed and then the import VAT is effectivelycanceled such that no VAT is paid or refunded. Customs essentially holds the import entryopen until, the importer presents the VAT entry claiming the input tax. A time limit has tobe set for presenting the VAT entry and interest could be charged on any delayedpresentation to cancel the import VAT liability. This method is neutral across all sectors.

To summarize the discussion and recommendations above, Box 5.1 presents arecommended summary listing of goods and services for zero rating, exemptions anddeferral. The detailed definitions of goods and services as well as the detail of manystandard customs import exemptions have been omitted for the sake of brevity.

Box 5.1Suggested list of zero-rated and exempt items and deferrals under VAT

Zero-rating:

Export of goods and servicesUnprocessed/fresh/raw rice, fruits and vegetables, animalsMosquitoes netsFertilizers, pesticides, fungicides, herbicides, seeds, animal feed, specializedagricultural machinery, fishing netsFirst X kwh of electricity per household per month

Exemptions:

Raw/chilled/frozen meat and fish, uncooked birds eggs, raw brown sugar, bread,cooking salt, cooking oil, milk, milk powder and baby formulaCertified primary, secondary and tertiary educationBasic healthcare and medical services (including dental and optometrist services) andprescription and veterinary drugsPublic water and sewage servicesNon-commercial charitable activities (including sporting and cultural activities)Funeral servicesFinancial servicesResidential rentalsImports of tourists, re-migrants, diplomats etc that are exempted under Customs ActCurrency

Deferral of VAT:

Imports of major capital equipment items by registered VAT payer


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VAT Refunds

As a matter of general principle for a VAT system implemented in an effective andequitable manner, refunds should be paid promptly. Delaying refunds of payments (or longcarry forward of excess credits) to businesses in net credit positions have negativeconsequences in terms of cash flow for the business and the imposition of higher effectivetax rates. Therefore, delayed payments of VAT credits become an effective penalty againstinvestors and can lead to a serious backlash to the credibility of the tax system by thebusiness community. It also becomes a negotiation point between the authorities andtaxpayers leading to tax fraud and corruption opportunities.

In developed countries, refunds are usually paid within three to four weeks of the end oftaxable period, with no or few restrictions on the refund payment. However, developingcountries and transition economies usually limit, or even deny, the entitlement to refund indifferent ways. Some countries only grant refunds to exporter oriented taxpayers, whereasothers pay refunds with some time lag. Nowadays, there is trend among these countries torule carry forward on input credit excesses for several months, hurting the working capitalstance of businesses making relatively large investments in fixed assets. This also results inan over statement of the tax collections as it ignores the hidden liability to eventually paythe tax credits.

Delayed refund systems are highly correlated with poor audit capabilities. Countries ill-equipped with sound audit and enforcement competences end up carrying out extended pre-payment checking of claims rather than relying on a sound post-payment audit. Without aclear sense of the level and frequency of legally claimed refunds, tax administrations areincapable of paying refunds in a timely fashion.

The current refund practice in Guyana is defined in Section 35 of the VAT Act and issummarized as follows:

(i) For businesses with excess credits, tax is refundable only for the excessremaining after a carry forward period of six consecutive tax periods.

(ii) For businesses with 50 percent or more of sales taxed at zero rate, a refund canbe claimed during the next taxable period for the excess credits on input taxattributable to the zero rate supplies.

In addition, tax regulations include as a zero rated item, the import of raw materials to beused in the production of goods, which will be subsequently exported by a taxpayer whoexports at least 50 percent of its products, upon the approval of the GRA CommissionerGeneral. This mechanism largely saves the refund of input VAT assuming that all outputsare taxable. The inadvisability of such a mechanism is discussed in point D above.

The carry forward mechanism is used as a safeguard against fraud that can be really caughtonly with a quick and effective audit system. Therefore, the long-term solution to avoidfraudulent refund claims is strengthening audit and enforcement administration capacities.In the short and medium terms, there seems to be no justification for a differential treatment


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between the VAT refunds for excess credits, probably by the acquisition of capital goods,versus VAT refund for business with over 50 percent of sales at the zero rate.

Note that, in general, the net VAT, whether positive or negative, is only a fraction of thegross output VAT charged and total input VAT claimed. Hence, it is more important toaudit the gross output VAT and total input VAT claimed as small understatements in theformer and overstatements in the latter can lead to large underestimates of positive taxesowed or large overstatements of tax credits claimed. It is a mistake to focus adisproportionate amount of audit effort on VAT credit cases when potentially more tax maybe lost in understated positive taxes. In addition, aside from first time VAT payers, it is notnecessary to audit an excessively high share of refund claimants compared to other VATpayers and delay payments of refunds unnecessarily, given both situations can be dealt withwhen detailed field audits are conducted and ex post adjustments made for eitherunderstatement of output VAT or overstatement of input VAT.

VAT refund rules and operation are especially relevant in the case of Guyana given theliberal zero rating policy adopted so far. During the 2007 fiscal year, 2400 taxpayers filledout an average of almost 10 VAT returns. Whereas half of those returns showed positiveVAT liabilities on average, one third reported negative VAT positions. Out of the 2400taxpayers, 1,650 taxpayers filled out a total of 8,004 months of tax returns with excess ofcredits (or negative VAT) during the first year of VAT operations. On average, monthlynegative balance reported to be G$ 426.6 million for all taxpayers.

Table 5.5Monthly VAT Outstanding 2007

Balance AverageMonths Relative

Nil 1.2 12%

Negative 3.3 34%

Positive 5.2 54%

Total 9.7 100%

Source: GRA with own calculations

Importantly, at the end of 2007, these VAT payers were carrying forward over $2 billion inexcess VAT credits. This indicates the large unintended VAT burden on the privatebusinesses and the extent of the over statement of actual taxes collected from domestictaxpayers. This is in addition to unpaid refund claims of about $0.8 billion, but offset byoutstanding arrears of about $0.5 billion at the end of 2007. Overall, this implies anoverstatement of domestic VAT by about $2.3 billion.

As noted above, excess credits are the result of either zero rating activities or purchases inexcess of sales. In either case and according to the refund mechanism currently practiced,taxpayers should either claim for refund if the sales are attributable to zero rated sales,which exceed 50% of sales, or carry forward negative balances for up to 6 months,respectively. The larger the carry forward period of excess credits, the higher the financial


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penalty imposed to the taxpayer. By analyzing the frequency distribution of months withVAT negative outstanding from those taxpayers with excess credits, it indicates that almosta third of taxpayers filed more than 6 months of tax returns in this situation.

Furthermore, over one hundred taxpayers kept on carry forwarding up to 12 months ofexcess input credits. From the data observed, it is not clear whether those taxpayers havealready filed for refund. Assuming they did, careful attention should be taken by taxauditors to make sure taxpayers are not filling out for refunds and carrying out credits notyet refunded at the same time. A fraudulent double benefit could be obtained in this case.In fact, given this possibility of carrying forward credits and claiming refundssimultaneously, it is recommended that the tax returns be amended to reflect thereduction in credit carry forwards when refunds are claimed.

The profile of monthly VAT outstanding balance within the taxpayer population in Guyanacalls for further reforms in both the regulatory and operation grounds. A simpler, neutraland transparent solution will be to give all taxpayers the choice of asking forimmediate refunds, in the case of excess input credits. Those taxpayers with temporalexcess credits - due to purchase of capital equipment, for example – could just decideto carry forward for several months, under the expectation of future positive VAToutputs.

Immediate claim of refunds entails administrative complications and risky fraudulentopportunities for fraudulent exporters and other zero rating claimers. Ideally, newbusinesses must be audited for some time before getting refund to make sure it is a genuineunit and not a fraud. However, existing businesses should be subjected to risk-based auditsthat would focus on both understatement of output taxes and overstatement of input taxes,which can result in both under statement of positive VAT owed, or overstatement ofnegative VAT credits.

Table 5.6Months of Negative VAT Outstanding

No. Months Frequency Relative

1 291 18%

2 241 15%

3 246 15%

4 178 11%

5 137 8%

6 97 6%

7 79 5%

8 70 4%

9 48 3%

10 53 3%

11 81 5%

12 129 8%

Total 1,650 100%

Source: GRA with own calculations


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To deal with the negative cash flow concerns of investors about late refund, some countrieshave adopted the practice of allowing deferment of VAT payments on specific capitalimports until VAT input deductions are claimed. This approach could be followed byGuyana for capital imports above a given threshold once an effective customs control andcoordination between customs and domestic VAT administration have been achieved.

Some important points to keep in mind for VAT refund process are as follows:

There is a significant potential for fraud in VAT refund. This can happen byoverstatement of exports and other zero rating sales to the domestic market, whichlowers tax on sales and increases refund on inputs.

GRA should make clear distinction between claimants with a history of complianceand those who are new.

A pre-refund audit should be implemented for high-risk claims, while a normal postaudit should be conducted for lesser risk cases. This requires the development andimplementation of an effective and objective risk assessment system.

Tax department should maintain historical profiles for each refund claimant.

One part of audit department may simply focus on refund audits, i.e. verifying thefacts of refund claims based on some risk criteria.

VAT refund also creates opportunities for corrupt practices by tax and customsofficials and this has to be carefully watched.

It is important to keep in mind all the administrative and technical consequencesconcomitant to VAT refund described above. Rationalization of the current list of goodsand services subject to zero rating would ease administrative pressure to GRA and financialstrain on taxpayers. The exemption mechanism has been used as a tax relief mechanism toavoid the problems of delayed refunds with similar revenue and economic consequences. Infact, slow or nil refunds to zero rating claimers produce similar effect to an exemption.

Finally, the Guyana VAT legislation allows for refund of VAT paid by non-residents –basically tourists - on the purchase of goods to be used abroad for personal consumptionabove G$20,000, provided that such non-resident individual presents at the port of exitdocumentation proving the export of goods. GRA officials are expected to provide aphysical inspection of those goods as part of the refund claim process. Albeit this practicehas sound technical foundations in the design of a destination-based VAT and has beenfollowed by different countries, it is probably more cost-efficient to devote GRA inspectorsand technical equipment to key audit processes with higher risk of evasion. In addition,Guyana is not a major shopping destination and hence, few transactions are involvedmaking administration cost ineffective. Therefore, it is advisable to remove from thelegislation the possibility of granting refunds to tourists.


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5.5.2 Excise tax

In 2007, the Excise Tax was introduced on some selected items under the Excise Tax Act2005 (Act No. 11 of 2005) along with the broad-based VAT. The ítems subject to taxinclude motor vehicles, petroleum products, tobacco products and alcoholic beverages uponimportation or production for domestic sale. Only alcoholic beverages are produced inGuyana. The revenues collected in 2007 and expected in 2008are included in Table 3.1above. The focus in this section will be on the taxation of motor vehicles and especiallypassenger motor cars. The reasons are the revenue importance of taxing passenger carsand the high degree of complexity of the excise rate structure introduced that appears to beundermining its revenue generating capacity and inducing extreme avoidance and evasionbehavior. Given both the complexity of the tax structure on motor vehicles and theavailability of detailed import data for motor vehicle imports in 2007, a special Annex A isprovided to analyze the rate structure and the import data.

Table 5.7 shows that passenger cars and trucks were the major motor vehicle imports bynumber and value in 2007, but passenger cars dominated the tax revenues ($4.5 billion outof $5.5 billion) and excise taxes formed 95% of tax revenues and excises on passenger carsdominated the excise taxes ($4.3 billion out of $5.3 billion). While the importance of excisetax revenues from passenger cars is clear, it is also clear that significant VAT and customsduty revenues are exempted in all types of vehicle. This is discussed in the context ofpassenger cars below and more generally under the Customs Duty section below.

This section focuses on the issues arising out of the analysis and the proposed reforms tothe taxation of passenger cars and mini-buses.

Basic tax structure of motor vehicles

Motor vehicles in Guyana are all imported and subject to three basic taxes: import duty,excise tax and VAT. The import duty structure arises from the CARICOM CommonExternal Tariff (CET) and the VAT is 16% for all types of vehicle. The import duties (witha few exceptions) are basically structured as follows: buses, 10%; passenger cars, 45%;trucks, 10%; motorcycles, 20%; and chasses fitted with engines and bodies (includingcabs), 20%. This implies that if the excise tax was zero for motor vehicles the followingeffective tax rates would apply on imported motor vehicles:

Type of motorvehicle

Number ofvehicles

Import value ofvehicles (G$)

Total taxes onvehicles (G$)

Effectivetotal tax rate

Excise tax onvehicles (G$)

Excise tax asshare of total

taxesPassenger cars 4,208 5,077,500,858 4,523,679,448 89% 4,349,438,365 96%Buses 709 1,729,152,152 370,224,130 21% 362,803,734 98%Trucks 1,295 4,739,536,809 635,659,184 13% 542,765,705 85%

All types 6,212 11,546,189,818 5,529,562,761 48% 5,255,007,804 95%

Table 5.7 Summary of major vehicle imports, taxes and effective tax rates


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Table 5.8 Import duty and VAT rates for broad categories of motor vehicle

Type of motorVehicle

Import duty VAT Combined rate

Buses 10% 16% 27.6%Passenger vehicles 45% 16% 68.2%Trucks 10% 16% 27.6%Motor cycles 20% 16% 39.2%Chasses with engines 20% 16% 39.2%Bodies 5% 16% 21.8%

On top of this relatively simple rate structure, a complex set of excise taxes is charged thatrecognizes a number of different categories in addition to these broad categories forpurposes of excise tax rates. (See Excise Tax Act, Act No 11 of 2005 and Regulations.)

(i) Buses are divided into commercial and private use categories.(ii) Private-use buses and passenger cars are divided into four engine capacity

categories, but petrol-engine passenger cars aged 4 or more years are dividedinto 6 engine capacity categories and diesel-engine passenger cars into 5 enginecapacity categories.

(iii) Trucks are broken down by 4 gross vehicle weight (GVW) categories.(iv) Buses for less than 30 passengers, passenger cars and trucks are divided between

vehicles aged less than 4 years and those aged 4 years and more.(v) Buses over 4 years old are broken out by passenger capacity.(vi) Passenger cars are divided into fully built up vehicles and completely knocked

down kits.(vii) All motor vehicles are divided based on the importer: judges, magistrates,

members of parliament, public officers, re-migrants and other importers. (Inaddition, tax-free imports are permitted by diplomats and aid-financed projectsor as sports awards.) Judges, magistrates and members of parliament pay noexcise tax, while public officers and re-migrants pay reduced rates.

The excise rate categories are captured in the following three tables:


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Table 5.9 Taxes on vehicles of any age

Vehicle category Excise tax rate Combined import,excise & VAT rate

Chasses with engines 10% 53.1%Bodies 10% 34.0%Motor cycles 10% 53.1%

Table 5.10 Taxes on vehicles aged less than 4 years

Vehicle category Excise taxrate

Combinedimport, excise& VAT rate

Reduced exciserate for publicofficers/officials

Reduced exciserate for re-migrants

Commercial buses, lessthan 30 passengers

10% 40.4%

Private use busesUp to 1500cc 30% 65.9%1500 to 2000cc 50% 91.4%2000 to 3000cc 100% 155.2%Over 3000cc 145% 212.6%Passenger carsUp to 1500cc 30% 118.7% 10% 5%1500 to 2000cc 50% 152.3% 30% 10%2000 to 3000cc 100% 253.2% 30% 10%Over 3000cc 140% 303.7% 30% 10%Trucks 10% 40.4%


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Table 5.11 Taxes on vehicles aged 4 years and over

Vehicle category Excise tax rate BreakevenCIF value 1

Reducedexcise ratefor publicofficers

Commercial busesLess than 21 passengers US$2,600 US$23,63621-30 passengers US$6,900 US$62,727Passengers cars, petrolUp to 1000cc (1.5*CIF+US$4200)*10%+

US$4200US$16,211 US$430

1000 to 1500cc (1.5*CIF+ US$4300)*10%+US$4300

US$16,596 US$430

1500 to 1800cc (1.5*CIF+ US$6000)*30%+US$6000

US$28,364 US$1800

1800 to 2000cc (1.5*CIF+ US$6500)*30%+US$6500

US$30,727 US$1950

2000 to 3000cc (1.5*CIF+ US$13500)*70%+US$13500

US$42,110 US$8950

Over 3000cc (1.5*CIF+ US$14500)*100%+US$14500

US$54,717 US$9950

Passengers cars, dieselUp to 1500cc (1.5*CIF+ US$6200)*10%+

US$6200US$23,930 none

1500 to 2000cc (1.5*CIF+ US$8200)*30%+US$8200

US$38,764 none

2000 to 2500cc (1.5*CIF+ US$15400)*70%+US$15400

US$48,037 none

2500 to 3000cc (1.5*CIF+ US$15500)*70%+US$15500

US$48,349 none

Over 3000cc (1.5*CIF+ US$17200)*100%+US$17200

US$64,906 none

Trucks (goods vehicles)GVW less than 7 tonnes US$2000 US$18,182

7 to 10 tonnes US$3000 US$27,273

10 to 20 tonnes US$4500 US$40,909

Over 20 tonnes US$5000 US$45,455

1. CIF breakeven value is the CIF import value at which the same excise duty is collected if the import dutyand excise taxes are collected at rates as if the vehicle was less than 4 years old or as if it was 4 years orolder. For vehicles 4 years and older, if the declared CIF value is lower than this breakeven value, theeffective excise tax rate rises, but if the CIF value is higher the effective rate falls below that charged onvehicles less than 4 years old.


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Complexities in the taxation of passenger cars

If passenger cars were merely subject to a flat 30% excise tax rate (as for small cars andbuses) then the combined customs, VAT and excise tax rate would be 118.7% (which issignificantly above the effective total tax rate of 89% shown in Table 5.7). Instead, withthe combination of the excise rate rising with the size of the car and being differentiated bythe age of the car and CIF value of the car as given in Tables 5.10 and 5.11, the effectivetax rates on passenger cars range over an enormous range. For cars under 4 years of age,the combined rate ranges from 118.7% for cars under 1500cc engine capacity to 303.7% forcars over 3000cc. For cars aged 4 years or more, the complex excise formulas in Table5.11 apply. For each size class of vehicles the excise tax rate rises above the excise ratecharged on a vehicle aged less than 4 years as the import value (or CIF value) falls belowthe breakeven value noted. The effective excise rate, for example, for a 1000-1500ccvehicle rises from 30% to 173.4% for an import value of US$2,000. The excise rate fallsfor import values above the breakeven value. Examples illustrating this are given in TablesA5 and A6.

Apparently, this complex and high tax rate structure was designed to discourage theimportation of old, highly depreciated vehicles. It has had two basic effects. One it hasleft a complex set of very high tax rates on cars of different sizes, ages and CIF values. Thevery high tax rates have also resulted in offsetting tax breaks being introduced. First, theVAT has been zero-rated for all cars of 4 years and over. Second, motor vehicles importedby a member of parliament, judge, magistrate, or public official or officer under section 23of Customs Act are both free of import duties and zero rated under VAT.31 In addition,public officers and officials get reduced excise rates as noted in Tables 5.10 and 5.11. Re-migrants also get reduced excise rates on car imports.

In principle, these very high excise and combined tax rates on vehicles raise a number offundamental taxation concerns.

(i) The combined rates for many vehicles are above the maximum revenue-raisingrate that, as discussed in some detail in Annex A, is likely to be at most 100%.This means that as the tax rate rises above 100% the base contracts faster thanthe rate rises and revenues fall – the so-called Laffer Curve Effect.

(ii) The major rate differentials are likely to change car buyer choices towardssmaller low-value cars that will shrink the tax base.

(iii) The high tax rates are likely to encourage smuggling, undervaluation andpolitical pressures for tax exemptions, which in turn open up opportunities fornegotiating discretionary exemptions with the relevant officials.

31 Under section 23 of the Customs Act introduced in 2003 the public officers and officials can apply forexemption from import duty every 3 years for a used car or every 5 years for a new car. Pro rata recapture ofthe exemption is required on the transfer of the vehicle in less than 3 or 5 years as the case may be.


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Actual motor vehicle imports and taxes in 2007

Analysis of the actual imports of motor vehicles for 2007 show that these concerns arejustified and an extremely disturbing taxation picture emerges for passenger cars.Table 5.12 shows that 74% of cars by number and 48% by value and 69% of tax revenuefrom car imports in 2007 were small cars with engine capacity below 1500cc, with the1000-1500cc category the dominant import category. While 89% of imported cars paidexcise tax, only 5% paid VAT and 4% paid import duty. A rough estimate indicates thatabout $1.9 billion was exempted in import duty and $1.6 billion in VAT.

The low incidence of VAT payments is not surprising when the age of the cars is takeninto account. Table 5.13 shows 86% of the vehicles were aged 4 years and over and hencewould be zero-rated under the VAT, leaving only 9% to be explained by other specialimport categories.

The explanation of why only 4% of imported cars in 2007 paid any import duty leaves amajor challenge. Imports by privileged persons (diplomats, public officers, etc) onlyaccount for a small share of these exempt imports. About 7% of the entries paid no taxes ofany type and are likely to represent imports by diplomats, aid-funded projects, etc, thoughanalysis of the Customs Processing Codes (CPC) of the entries shows that these types ofimports constitute only 10% of this 7%. In addition to the fully tax free cars, some 85% ofimports that are receiving customs duty exemptions and/or VAT zero rating throughmechanisms such as the import privileges afforded to public officers and officials orvarious other imports for approved uses. Data available for 2006 indicates only 172 publicofficers and officials were awarded exemptions costing $261 million in exempt taxes and92 re-migrants were awarded exemptions worth $144 million. CPCs for 2007 entries show378 entries corresponding to public officials/officers and re-migrants. This is a significantnumber, but it still leaves a large unexplained number.

An investigation of the CPCs for passenger car imports shows that out of all the importduty free car imports, only 28% had CPCs other the regular normal import code (C400),that is they had codes indicating some reason for an exemption. Interestingly, the sameratios apply to other motor vehicle imports (buses, trucks, tractors, etc): only 6% paidimport duty and only 29% of the duty free imports had CPCs other than C400. This leavesmajor questions about whether the wrong CPCs were used in 2007 or whether the wrongimport duties were charged. Reports of import exemptions for 2006 show some 78companies were awarded import exemptions covering an unspecified range of businessimports costing $6.3 billion in import duties. No data is available to date indicating whatshare of this exempt amount was motor vehicles, or specifically passenger cars. If thesereports for 2006 are accurate and the pattern was repeated in 2007, then a large share ofduty free car imports must be explained by import exemptions awarded to privatebusinesses. Given that outside of car rental companies, tourist services and taxi services,passenger cars are used for personnel benefit rather than as a cost of earning income in abusiness, the issue of the taxation of fringe benefits from employment again appears to bean important issue – both for public and private employees. Overall, this analysisindicates an urgent need for more continuous monitoring of customs compliance onmotor vehicle imports based on the on-line TRIPS data as well as the increased use of


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post-release audits. The issue of fringe benefit taxation is dealt with under theincome tax.

Another remarkable result is distribution of the effective total tax rates paid on car importsas shown in Table 5.12. First, the highest effective tax rate of 134% is in the popular1000-1500cc size class, and then the effective tax rate drops off for the larger cars, leavingan overall effective tax rate of 89%. Part of the explanation is that 99% of these 1000-1500cc vehicles paid excise tax and part comes from Table 5.13 that shows that 99% ofthese vehicles were aged 4 years or more, and hence, paid high effective tax rates.

Second, a huge dispersion in effective tax rates was experienced in 2007 even within a sizeclass. For example, for the 1000-1500cc cars, which were not fully exempt, the effectivetax rates varied around 134% from a low of 4.2% to a high of 1, 197.5%. 32 What does thisvariation in rates mean in terms of total tax collections? As discussed above, themaximum revenue yielding tax rate for small car imports is probably about a total rate of100% or less. Hence, all the low rates are losing revenues compared to a uniform rate, andthe high rates over 100% are also losing revenues because they are causing the value of carsbeing purchased to shrink faster than the tax rate is rising once the maximum revenue-yielding rate is exceeded. This conclusion comes about even without considering theeffects of high tax rates on the incentives to undervalue car imports, smuggle cars, and seekexemptions officially or unofficially. Hence, tax revenues can be raised by moving therate structure to a lower more uniform set of tax rates.

A further finding is that, while the excise tax has been set up to discourage the importationof older cars, Table 5.13 shows that 86% of car imports were actually 4 years or older. Inthe most popular import category of 1000-1500cc passenger cars, cars aged 4 years andover are 99% of the imports. While the effective tax rate, on the older cars is effectivelyhigher, the average import value per older cars is generally less than half the value of thenewer cars in each size category. This results in a lower average value per older car afterincluding the effective tax rate. While the newer car clearly has more years of operationallife left in it, the lower gross-of-tax price of the older cars is clearly still dominant.Importantly, the effective total tax rate on the older cars is lower than expected given boththe general zero rating of cars aged 4 years and older and more significantly the widespread exemption from the 45% import duty rate that undermine the effect of the highexcise duty rates on cars 4 years and older.

32 Interestingly the weighted average total tax rate charged on these 2,960 cars was 134 % which issurprisingly close to the total tax rate excepted if 45% import duty, 30% excise and 16% VAT were chargedwhich has a combined rate of 118.7%. This turns out to be share chance. In fact, only two out the 2,925 tax-paying vehicles actually paid 118.7% as an effective total tax rate. Some 709 imported cars paid at effectivetotal tax rates ranging from about 4.2% up to 118%, but a much larger number, 2,214 paid at rates from119.6% up to a high of 1,197.5%!! Clearly, cars paying above 118.7% had to be over 4 years in age. (SeeTables A8 and A9)


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Passenger cars (petrol or diesel) by engine capacity import duty excise tax VAT Totalnumber

Total tax Cumulativeshare of total

tax

Average importvalue US$

Average Minimum Maximum

Cylinder capacity not exceeding 1,000 cc. 37% 84% 63% 171 97,965,189 2.2% 4,375 65% 10.2% 184.3%Cylinder capacity exceeding 1,000 cc but not exceeding 1,500 cc. 1% 99% 1% 2,960 3,014,961,009 68.8% 3,813 134% 4.2% 1197.5%Cylinder capacity exceeding 1,500 cc but not exceeding 2,000 cc: 5% 73% 5% 747 1,054,651,238 92.1% 8,814 80% 4.2% 668.8%Cylinder capacity exceeding 2,000 cc but not exceeding 3,000 cc 6% 31% 9% 187 211,133,348 96.8% 19,915 28% 10.0% 1249.8%Cylinder capacity exceeding 3,000 cc 3% 40% 3% 143 144,968,663 100.0% 21,296 24% 5.0% 652.4%

All passenger cars 4% 89% 5% 4,208 4,523,679,448 6,033 89% 4.2% 1249.8%

% of cars paying Effective total tax rate

Table 5.12. Summary statistics of taxes collected, average values of cars, and effective tax rates on passenger cars of different engine capacities in 2007

Passenger cars (petrol or diesel) by engine capacity Numberimported

Import value Total taxes

Cylinder capacity not exceeding 1,000 cc. 23% 24% 32% 4,298 4,636 59% 86% 6,831 8,622Cylinder capacity exceeding 1,000 cc but not exceeding 1,500 cc. 99% 97% 98% 7,183 3,763 79% 135% 12,876 8,847Cylinder capacity exceeding 1,500 cc but not exceeding 2,000 cc: 72% 58% 86% 13,310 7,055 26% 120% 16,746 15,532Cylinder capacity exceeding 2,000 cc but not exceeding 3,000 cc 34% 21% 42% 23,631 12,600 21% 55% 28,599 19,579Cylinder capacity exceeding 3,000 cc 42% 25% 47% 27,685 12,459 17% 46% 32,305 18,148

All passenger cars 86% 65% 90% 15,033 4,560 26% 123% 18,918 10,179

Average valueof car aged lessthan 4 years in

US$

Average valueof car aged 4

years and overin US$

Average valueof car includingtaxes aged lessthan 4 years in

US$

Average valueof car including

taxes aged 4years and over

in US$

Cars of age 4 years and over as share of total Effective taxrate for carsless than 4

years

Effective taxrate for cars 4or more years

Table 5.13. Comparison of imports of passenger cars aged 4 years and over with cars less than 4 years, Guyana, 2007


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A final point found from the import data is that curiously, 23 vehicles of various kinds arereported to be imported as completely knocked down kits (CKDs) with no or low taxescollected on them.33 The CKD classification is specifically designed for cases where amajor vehicle manufacturer ships all the parts to a licensed assembler that is typicallyregistered by the local customs authorities to receive such kits at reduced import duty rates.All the import cases were in fact old vehicles. It is noted that Guyana is offering tradeprotection through the excise schedule, namely, a reduced excise tax rate of 5% is offeredfor completely knocked down (CKD) kits of buses, passenger cars and trucks imported bylicensed manufacturers. This effectively adds to the trade protection offered for theassembly of these vehicles through the import duty tariff. This differentiation of adomestic tax in favor of domestically produced goods over imports essentially adds to theeffective import duty of the assembled cars and runs counter to compliance with theCARICOM Common External Tariff (CET). In addition, the provisions are largelyredundant in the current globalized motor vehicle market where economies of scale invehicle assembly are critical to competitiveness. Given the very small size of the Guyanesevehicle market, the location of car assembly in Guyana would have to be based on exportcompetitiveness and not on protection of the domestic market. Highly protected domesticassembly could lead to negative domestic value added compared to importation of theassembled vehicles causing economic waste.

It is recommended that the excise tax on CKDs of vehicles be removed from the excisetariff and CKD tariff codes only be allowed to be used by a registered excisemanufacturer of vehicles. If vehicle assembly is undertaken in Guyana, such a businessshould be licensed under the excise act and the excise tax should be charged on the fullybuilt up vehicle produced and sold in Guyana at the same excise tax rates as are charged onimports.

33 Guyana has no motor vehicle assembly industry and CKDs require expensive specialized equipment toassemble them. Major motor vehicle manufacturers are typically only willing to ship CKDs on large scale tolicensed manufacturers capable of assembling their vehicles to their standards. CKDs specifically excludethe importation of car parts separately and if an assembled car is imported for its parts, it is classified as ancar.


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Vehicle category

Passenger cars (petrol or diesel) by engine capacity

Importduty rate

Excise taxrate

VATrate

Combinedtax rate Combined

tax rateCombined

tax rate

Minimumimport value

in US$

Cylinder capacity not exceeding 1,000 cc. 45% 30% 16% 118.7% 20.0% 1,000 101.8% 10% 500 85.0% 3,500

Cylinder capacity exceeding 1,000 cc but not exceeding 1,500 cc. 45% 30% 16% 118.7% 20.0% 1,300 101.8% 10% 650 85.0% 4,500




Cylinder capacity exceeding 3,000 cc. 45% 140% 16% 303.7% 70.0% 14,000 185.9% 25% 5000 110.3% 14,000

Private use buses by engine capacity

945 to 1500cc 10% 30% 16% 65.9% 20.0% 2,000 53.1% 10% 1000 40.4% 9,000

1500cc to 2000cc 10% 50% 16% 91.4% 30.0% 3,800 65.9% 15% 1900 46.7% 11,500

2000cc to 3000cc 10% 100% 16% 155.2% 60.0% 10,600 104.2% 20% 3500 53.1% 16,000over 3000cc 10% 145% 16% 212.6% 70.0% 17,700 116.9% 25% 6300 59.5% 23,000

Vehicle category

Passenger cars (petrol or diesel) by engine capacityCombined

tax rateCombined

tax rate

Cylinder capacity not exceeding 1,000 cc. 10% 500 28% 10% 500 28%

Cylinder capacity exceeding 1,000 cc but not exceeding 1,500 cc. 10% 650 28% 10% 650 28%

Cylinder capacity exceeding 1,500 cc but not exceeding 1,800 cc: 30% 2,500 51% 15% 1,250 33%


Cylinder capacity exceeding 2,000 cc but not exceeding 3,000 cc 30% 3,975 51% 20% 2,650 39% Cylinder capacity exceeding 3,000 cc 30% 6,000 51% 25% 5,000 45%

Excise tax is higher of advalorem or unit tax

(US$)

Excise tax is higher ofad valorem or unit tax

(US$)

Phase 1 Phase 2


(US$)


(US$)

Excise tax rate, lessthan 4 years

Excise tax, US$, 4 ormore years

Phase 1 Phase 2

30%30%

8,9509,950

Existing tax rates

Existing tax rates

Table 5.14. Suggested excise tax rates for passenger cars

Table 5.15. Suggested excise tax rates for passenger cars imported by public officials and officers

430

430

1,800

1,950

10%

10%

30%

30%


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Suggested new excise tax rate structure on vehicles

It is recommended that the excise rates be reduced, made more uniform for cars of similar typeand the tilt in the rates between car size categories be flattened in order to reduce the overall taxrate on passenger cars and personal use buses into a range where it is at or below its maximumrevenue yielding rate. The suggested new rate structure is given in Tables 5.14 and 5.15. Thechanges can be phased in over two years. The package of measures should raise between $1billion and $2 billion in added revenues depending on the components of the packageimplemented. The effective total tax rate should be raised by 10% but with the more uniformrate structure and the tax base will also expand as higher value cars are imported so that totaltaxes on imported cars should increase by at least $1 billion. The package of measures shouldinclude:

1. The complex set of excise rates for cars of 4 years or more be dropped and replacedwith a simple alternative minimum unit excise tax for passenger cars of all ages andVAT would apply to cars of all ages and to imports by 2009. For all groups givenreduced excise duty rates, the alternative minimum unit rates would be scaledaccording to the reduction in ad valorem excise rates. This will ensure that in nocase will the effective tax rate fall below the ad valorem rate. It will also help guardagainst undervaluation and discourage the importation of highly depreciated motorvehicles.

2. The excise rate for cars under 1500cc would be reduced in phases over two yearsfrom 30% to 20% and then 10%. This would offset the imposition of VAT on allcars. The tilt in the excise rates would reduce from 30% up to 140% to smallerrange of 10% up to 25% as shown in Table A10.

3. Customs duty to be charged on all vehicle imports unless explicit import dutyexemption recorded in CPC. Continuous monitoring based on TRIPS data andrandom audit of vehicle imports to be used to ensure enforcement.

4. For public officers and officials the VAT should be restored on all passenger carimports and the differentiation of cars by age should be removed. An alternativeminimum unit tax should be introduced based on the minimum import values andthe ad valorem rates. After the second phase of excise rate reductions, the excise taxrates for the larger cars imported by public servants will also come down. See TableA11. Leaving the import duty exemptions in place will leave public officers andofficials with combined tax rates of less than half those of the regular combinedrates after rate reductions. A salary increase for all public officers and officialscould be introduced based on the expected added tax collections.

5. The linking of the TRIPS and the vehicle registration systems, which is already partof the work plan of the Guyana Threshold Country Plan Implementation Project,will allow more control over tax evasion by vehicles through post release audits ofvehicles as well as more complete registration of the existing stock of vehicles.


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6. Raise the annual registration fee on all vehicles. This is discussed in Section 5.7.

7. A fringe benefits tax at the personal income tax rate of one-third should be paid bypublic and private employers on all motor vehicle employment benefits includingtax exemptions arising from employment.

8. The excise tax on CKDs of vehicles should be removed from the excise tariff andCKD tariff codes only be allowed to be used by an excise registered manufacture ofvehicles. Fully built up vehicles sold by such a registered manufacturer would besubject to excise tax.

These changes to the excise taxes and VAT and fringe benefits taxes applying to motor vehiclesshould be phased in over two years. At the same time further work is required to (i) analyze inmore depth the role and use of motor vehicle exemptions and (ii) monitor the import and taxcollection response to these changes, which effectively eliminate the VAT and exciseexemptions for most importers. This is important given the simplification of the current highlycomplex structure that is recommended above to assess accurately the response. It is expectedthat the tax rates can be further lowered and exemptions on import duty further eliminated inways that will increase revenues further while still simplifying and lowering the tax ratestructure. Tracking the responses to the first two rounds of changes should inform a possiblethird phase of changes. In addition, as the administration of the vehicle registration systembecomes effective and comprehensive, the possibility of substituting broad-based annual licensefees for upfront excise and import duties becomes possible. Over the medium term, the exciseduty on motor vehicles could be phased out.

5.6 Import duties

The customs tariff structure of Guyana depends upon the common external tariff (CET) set bythe 13 member countries of Caribbean Community (CARICOM) since 1973. Customs revenuesare collected under the Customs Act (cap 82:01) of 1952. The last version of the CET came intoeffect January 1, 2007. Trade between CARICOM member countries is duty free as long as thegoods originate from a member country.

In recent years, import revenues have formed about 10% of total tax revenue and yielded about3.2% to 3.6% of GDP in revenues, which is typical of countries in the low- and middle-incomerange, which still rely significantly on trade taxes. On the other hand, given the very high shareof imports over GDP (92.5% on average during 2004-07), the revenue yield from customs dutieswere very low. On average over 2004-07, the effective duty collection rate out of imports ofgoods was only 2.6%. Even if petroleum fuels and capital goods are excluded, this effectivecustoms duty rate only rises to 5%. The revenue importance of customs duty exemptions ishighly evident.


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This study has not focused much on the actual tariff structure other than in the context of motorvehicles, given the CET structure, which makes the setting of trade policy a common and slowmoving exercise. The two aspects of customs policy that are worthy of note here are (i) that thecomputerization, organizational and capacity building reforms that the GRA is currentlyundertaking, and (ii) the problems arising out of import duty exemptions.

The recent implementation of TRIPS in customs should lead to fully automated submission andprocessing of customs entries. This should lead to more rapid and accurate processing ofcustoms entries, and lead to the more complete and effective monitoring of customs proceduresso that more uniform and fair application of the customs law is achieved. In conjunction withTRIPS, the expected functional reorganization and capacity building being implemented withassistance from the Guyana Threshold Country Plan Implementation Project (GTCP/IP) shouldlead to the implementation of risk-based inspections that should benefit from the establishmentof an intelligence and investigation capacity. In addition, the implementation of post-releaseaudit capability should add to the ability to control smuggling and undervaluation of imports.The combined effects should be lower compliance costs, improved trade facilitation andenhanced revenues.

The other major concern with import duties is the large number of exemptions and the wide-ranging discretionary powers of the Minister of Finance to grant exemptions (under section 9 ofthe Customs Act) subject to conformation by the National Assembly (under section 10). ThePart III of the First Schedule of the Customs Act lists the exemptions:

i. Part A provides for partial exemptions. This is a list of reduced duty rates on alist of industrial raw materials and intermediate inputs

ii. Part B provides two list of conditional full exemptions:1. Approved Industry and Agriculture. This is an extensive list of some 90

groupings of industrial inputs (capital equipment, intermediates and rawmaterials) for use in specified industries for specified purposes; in some cases,imported inputs have to be shown not to be manufactured in Guyana.

2. Other approved purposes. This is a list of 44 categories of imports includingthe standard categories of imports by diplomats, aid agencies, personal effectsof visitors to Guyana, cultural articles including books, etc, and for charitabledonations, educational, scientific, health and safety purposes, etc purposes, butalso includes exemptions for government and public sector imports

iii. An extensive list of goods ineligible for conditional exemptions. This listessentially insures the import protection for selected domestic sectors.

Three issues of concern arise out of these import exemptions. The first is the economicefficiency costs caused by the trade protection subsidies that arise from these exemptions onbusiness inputs, particularly from the conditional full exemptions in Part B.1. These exemptionsmagnify the subsidy to Guyanese businesses relative to the protection already implicit in theCET. They are also likely to be windfall gains rather than inducing added domestic investment,as they are discretionary exemptions that are use-based and have to be applied for, and hence,


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would be largely expected to go to businesses already operating in Guyana for their existingactivities. Second, the exemptions for government audit agencies result in both anunderstatement of the true size of government expenditures and in risks of revenue leakages tothe extent that duty-free goods find their way into the private domestic market. Third, theseexemptions result in a large revenue loss or tax expenditure.

The cost of import duty exemptions is known for 2006 for exemptions awarded to companies.This amounted to a massive $6.3 billion or about 10% of total tax revenues or 150% of thecustoms duties collected in 2006. A large share of these exemptions went to profitable sectorssuch as mining and telecommunications. Where these exemptions lowered the costs of doingbusiness, some of these duty losses would have been recouped as added corporate taxes, but theywould have also lowered the VAT and excise tax bases on any final goods imports, hence,resulted in VAT and excise losses. About 75% of the direct tax cost would be expected toremain as the net tax cost.

The detailed analysis of motor vehicle imports in 2007 presented in section 5.5.2 and AppendixA also confirms the excessive and possibly uncontrolled use of customs duty exemptions. Only5% of vehicles paid any duty and only 28% of the exempt imports had a customs codingindicating a reason for the exempt status. Clearly, the lack of controls, monitoring and auditingof customs entries is allowing exemptions in excess of even those intended in the customs lawsand regulations.

Excluding the organizational reforms that are already part of the reform of GRA generally andCustoms specifically, as documented in Nathans Associates, Organization Design Report of theGuyana Revenue Authority, GTCP/IP, March 2008, a number of recommendations arise fromthis discussion of import duty administration and revenues:

i. More continuous monitoring of imports taxes and exemptions be undertaken tocontrol and account for exemption losses on a monthly basis. Ultimately, thisinformation should feed into a set of tax expenditure accounts

ii. More detailed studies of the economic efficiency and revenue costs of theseexemptions be undertaken in order to plan a transition any from use-baseddiscretionary exemptions to more limited automatic exemptions.

iv. Introduce a minimum duty rate of 2% on all exempt imports of companies. In2006, a 2% minimum duty would have collected $460 million. If expanded to allexempted imports other than those with diplomatic privileges, passengers andpersons changing residence, etc, then the revenue yield would be significantlyhigher.

v. All government and government agencies should become dutiable on theirpurchases. Offsetting budget adjustments would need to be made in the initialyear to adjust budgets for the added tax charges paid out of the correspondingtax revenue. Local government s should receive added transfers to offset theestimated added duty costs of their operations.


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5.7 Motor vehicle and drivers licenses

In accordance with the Motor Vehicle and Road Traffic Act (cap 51.02) First Schedule, Part A,license fees in respect of vehicles used solely for private use follow a schedular structure, mainlybased on size and weight of vehicles. In addition, the First Schedule, Part B, specifies licensefees are required for licenses for drivers, dealers, conductors, etc.

As a percentage of GDP, the License Revenue Office (LRO) of GRA collected between 0.14%and 0.17% from motor vehicles licenses in recent years. Collections from licenses on motorvehicle showed fluctuations. This behavior, in part, is explained by fluctuations in the number ofnew motor vehicle registered each year. From 2006 to 2007, there was a net decrease of newregistrations of about 2,816 to 8,739. By the end of 2007 a total of 44,186 motor vehicles wereregistered into the database. On average, $5,300 was paid for per vehicle. Curiously, thenumber of vehicles registered in 2007 was significantly down from the 55,367 vehiclesregistered in 2006. As discussed below, there is lots of room to raise motor vehicle license feesin Part A.

The LRO also collected some 0.1% of GDP from drivers and other licenses over recent years.The fees for driver’s licenses have not been raised for at least a decade. The standard driver’slicense fee is $2,000. It is recommended that the fees for drivers and other licenses in PartB be doubled.

Motor vehicle licensing can be an efficient way to achieve benefit principle objectives in raisingrevenues. License revenues collected from owners of vehicles cover the annual capital costs ofthe road network. A license is the user charge that gives vehicles access to the road network. Awell-designed licensing system should be able to increase license costs to those heavier vehiclesthat require more substantial road infrastructure because of their weight per axle. (Fuel taxes canplay a similar role for covering the costs of road maintenance from road usage.) Therefore, itmakes a good economic sense to increase the revenue burden through vehicle licenses comparedto import duties, VAT and excise taxes, considering the complexities and wide preferentialtreatments granted for these taxes (see section 5.5.2.) Structuring license fees as a user chargealso means that no exemptions need to be provided to any person including those withdiplomatic privileges. In addition, with the expected computer linkage between the TRIPScapturing the vehicles entering Guyana and the LRO, the accuracy of the vehicle registry shouldimprove significantly allowing wider coverage of the Guyanese vehicle population. A quickstudy should be undertaken to determine the annual capital cost (or rental cost) of the roadnetwork in Guyana to a reasonable basis for setting the license fees as user charges.

Motor vehicle licensing can also be used as a method of presumptive taxation where vehicles areused to conduct difficult-to-tax unincorporated, and often-informal businesses, such as bus andtaxi services. Raising the license fees on vehicles registered for such activities serves as anindirect taxation method on the net income of such businesses.


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It is also recognized that motor vehicle license fees can be seen as an alternative means oftaxation to customs duties, excise taxes and VAT. The latter are essentially an upfront, one-timecharge on purchasing a vehicle, whereas a vehicle license is an annual charge. For exampleinstead of collecting about US$5,000 when a car is imported, about US$500 could be charged ayear. Currently, only about US$25 per car is collected per year through license fees. Thebalance between license revenues and import revenues should be shifted over time towards theannual license fees. While the existing levels of license fees can be doubled in the short-run asexcise taxes are reduced (as discussed in section 5.5.2 above), the pace of any switch in revenues(by lowering import-based taxes and raising license fees) needs to take into account thefollowing:

i. The new computer-based vehicle registry linking LRO to customs should be fullyoperational and enforcement of vehicle licensing by the traffic authorities shouldbe effective such that compliance levels with vehicle licensing are high. This canbe better achieved initially if the license fees are still reasonably low such thatthey do not encourage evasion or corruption.

ii. A rapid major increase in the license fees would unfairly double tax persons thathad fully paid duties and taxes on their vehicles upon importation.

iii. The study to justify significantly higher user fees in place of taxes needs to becompleted in order to justify higher fees as user charges on the broadest possiblebase rather than being treated as taxes that raise the pressures for and problems ofexemptions.

It is recommended that the vehicle license fees be increased significantly (initially doubledand then increased by at least by 20% each year) in conjunction with lowering andrationalizing the indirect taxes in motor vehicles as well as the introduction of a fringebenefits tax on motor vehicle benefits from employment. The full extent of the increase inthe fees should be conditioned by an estimate of the annual rental cost of the road networkand the affordability and enforceability of increased license fees. In addition,consideration could be given to raising the license fees on passenger buses, particularlymini-busses, and taxis as an indirect of presumptive method of taxation the income ofpassenger bus services in urban areas.

5.8 Other Licensing

The GRA collects fees for a miscellaneous range of some 78 different trading and specificbusiness licenses. This raises very small amounts of revenue, some $21 million, annually. Thisis not a cost effective revenue source. It is recommended that all license fees be consolidatedinto a single business permit to be collected by local governments upon registration ofbusinesses active in their areas. This aligns the fees with compensating the local governmentsfor the cost of delivering services provided to businesses. Local governments can more cost-effectively identify and register businesses active in their areas.


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5.9 Travel taxes

Guyana collects taxes on travel through the Travel Tax ($1,500) and Departure Tax ($2,500) or atotal of $4,000 per departing passenger. It also collects the Travel Voucher Tax of 15% of basefare on air tickets. Ideally, the travel tax should be collected as part of the ticket price as done bymost countries through arrangements with IATA to save the compliance and administrativecosts, but apparently problems arose in the past attempting this modality of collections. It isrecommended that this mechanism be reinvestigated to determine the reasons for collectionproblems for the travel and departure taxes in the past.

5.10 Stamp duties

Revenue stamps are issued by the Guyana Post Office. These have to be attached to all receiptsand other specified financial documents. This type of transaction tax is economically inefficientas well as imposing high compliance costs relative to the revenue yield. Given they are not animportant revenue source; it is recommended that revenue stamps be eliminated.

5.11 Local government revenues and property rates

Municipal governments play an important role on delivering services to support both businessesand households in any country. As Table 3.3 in section 3 shows that during 2000-05 urbangovernment revenues averaged some 0.84% of GDP, a significant revenue stream, but possiblyinadequate to fund municipal government functions. These revenues are primarily made up byproperty rates collected by the six major urban areas (Georgetown, Linden, Anna Regina,Corriverton, New Amsterdam, and Rose Hall) but excludes any district revenues. Georgetownconstitutes some 94% of these revenues.

The completion report of the recent IADB-financed Integrated Urban Development Programmeindicates that significant improvement were made in strengthening local government policy andplanning capacity in the central government, and administrative capacity in the municipalities,strengthening both revenues and budgets. In most municipalities, progress was made introducingnew bylaws, but at the central government level new law proposals required to reform theproperty valuation system and the transfer arrangements were not passed into law. Whileprogress was made in strengthening the registration and valuation of properties under the currentrental value approach used in the municipalities, significant critical work remains to have anefficient and effective property rates system in place as the backbone of municipal revenue. Theadded reforms required include the following:

i. Reform of the property valuation law to shift from a rental value basis to acapital value basis for urban properties.

ii. Implementation of a simple computer-assisted mass appraisal (CAMA) systemin the urban areas to complete and sustain the revaluation of properties.


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iii. Capacity building program to strengthen the property valuation and ratesadministration.

Internationally, property rates in urban areas form the core of urban government finance as wellas the most efficient and suitable tax for municipal governments to collect. Different from othersources of revenue, the suitability of local governments to collect property tax is hardly arguably.Property tax has proven to be in both theoretical and practical grounds the most suitable revenue-raising tool for local government from different policy perspectives:

(i) Revenue adequacy: A close correspondence between expenditure responsibilityand revenue availability favors an efficient link between the benefits and costs ofservices that local governments provide.

(ii) Benefit principle: Resident individuals contribute finances to local governmentsconcomitant with the benefits obtained in terms of public services. At the sametime, local authorities are held accountable to taxpayers and local voters about theorigin and destination of public funds if the revenues are sourced locally.

(iii) Administration capability: Closeness to taxpayers grant authorities comparativeadvantage to identify properties, keep records, assess values, collect taxes andpunish under or noncompliance. Typically, the local government is providingthese same properties with services such as waste disposal, water and sewage,security, etc.

Notwithstanding these underlining reasons for local governments to collect property taxes,international experience, especially drawn from developing countries, shows that centralgovernments may exert a fundamental role on property tax policy and administration in differentways. Sometimes, central governments set the rates to be collected by local authorities, establishlimits on rates, or allow municipalities to set rates subject to central approval. Centralgovernments may also assist local authorities with tax administration and share part of theproperty tax revenues. In Indonesia, for example, central government assisted local authoritieswith administration since the tax was reformed in 1986 and retained about 19% percent collectedfrom this source to cover property tax administration and for general revenue purposes. By1994, however, the full amount of the revenues was allocated to sub-national governments andover time, more of the administrative and policy powers have been decentralized.

Despite reasonable economic or administrative reasons behind a central government’s lead roleon property tax policy-making, administrative assistance or revenue sharing, any proposal on thisdirection should be analyzed carefully. Tax effort by local authorities to administer the propertytax could be seriously undermined if the central government captures a significant share ofrevenues. Shared revenues and administrative responsibility, and limited policy-makingjurisdiction may not be conductive to adequate local government accountability and could easilybecome a disincentive to an efficient administration of property tax. To make a fiscaldecentralization work and to gain its full benefits, local governments must exert a primary role to


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choose tax rates, design bases, collect revenue and mobilize it towards the mix and quality ofpublic services demanded by its constituents.

In the case of Guyana, where the Central Government has additional sources of revenue tosustain its revenues as it reforms its tax system, the fundamental question to be posed is: how tobuild capacity at the municipal level aimed at strengthening property valuation and taxadministration and to capture a share of total revenue at the same time, without distorting theunderlining desirable fiscal decentralization features embedded in the property tax system?

There is no easy answer. Careful weighing of benefits and costs is required. The overall benefitof implementing a modern property tax is that is a major and efficient source of revenue. Theproblem in Guyana is that the property tax reform and implementation is stalled. There appearsto be as much an issue of the Central Government having an interest in implementing theproperty tax in which it already has a major policy role in terms of property valuation and ratesetting, as there is an obvious interest and benefit to the municipalities In addition, capacitylimitations have held up the implementation of a modern property tax system. In the short-term,the revenue potential is therefore unlikely to be realized, and even if best efforts are put behindthe reform, it will take at least three years to start realizing major revenue gains. To get thereform process on track again, however, it would seem necessary that the Central Governmentactively assist local authorities to implement a modern property tax. The Central Governmentshould be provided with the fiscal incentive of covering the costs of these administrative effortsplus some share of the revenues. Over the long-term, however, more complete transfer of theproperty tax can be made to local authorities to gain the benefits of fiscal decentralizationdiscussed above.

From the revenue perspective, the issue comes down as to what is the true revenue potential ofthe property tax in Guyana. Derived from discussions with insurance companies and banks, theaverage house on the market is higher than G$12 million. Assuming an exemption of G$4million driven by social needs, the average tax base is reckoned to be G$ 8 million per property.Under realistic assumptions, the total number of potentially taxable properties is estimated ataround 80,000 in Guyana.

Following these assumptions and considering an average tax rate of 1%, total revenuecollection expected from property tax is about G$6.4 billion. The latest figure available forurban revenues in Guyana is G$ 1.3 billion, mainly from municipal property taxes. Consideringan average of 0.84 percent of GDP collection during the 2000-2005 period, by 2008 urbanrevenues should turn out to be a figure near G$2 billion, or about one-third of the estimatedrevenue potential for the property tax. This indicates that there is sufficient revenue potentialfor both Central government and municipalities to gain from effective and efficientimplementation of a modern property tax. To keeping the balance in the incentives, theCentral Government should capture at most 50% of these to cover the administrativedevelopment costs and as net revenues. This would ensure revenue gains to both sides. Overthe medium term, as municipalities develop the administrative capacity the Central share shoulddecline (perhaps by 5 percentage points per year) and policy and administrative authority bedecentralized, while the Central Government retains its fiscal oversight powers andresponsibilities. If the Central Government fails to reduce its revenue share over the medium


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term it would then face the prospect of transferring these revenues to local authorities anyway tosupport their service delivery responsibilities. A clear transitional policy and timetable should beestablished at the outset.

The other major revenue reform at the local government level is the legislation for andimplementation of a Single Business Permit (SBP) linked to the registration of allbusinesses active in a municipal area. The SBP would be an annual lump sum charge madeat the time of annual registration. The schedule of charges in any municipality would bescaled to the size of the local market and within each business activity category variousphysical indicators are used to divide businesses into three size categories – small, mediumor large businesses. For example, in hotels the number of beds would be used as an indicatorand in restaurants, the seating capacity. This type of tax acts as a contribution by each businessfor the local services provided by the local government. As discussed in section 5.8, the SBPwould replace all other trade and specific business licenses currently collected by GRA. Thiswould remove a cost ineffective tax from GRA and allow it to focus its tax administration effortson its major tax types.


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6. Refining the Tax Administration Reform Proposals

The ability of a government to raise revenues fairly and efficiently rests on three major factors:the legal tax structure (broadly speaking, tax policy); the ability to analyze the economy and theeffects of tax policy on the economy (tax policy analysis); and the ability to collect and enforcetax policy (tax administration.) Regardless how well crafted the tax legislation is, actual taxpolicy is what actually is administered. For example, the law may require refunds for taxoverpayment, but if refunds are not issued in a timely manner, then the administration of the lawcreates de facto policy that may result in economic distortions and perverse incentive effects.

This section is organized as follows: Section 6.1 introduces the pillars of a modern taxadministration. Section 6.2 reviews current tax administration reforms in Guyana and evaluatesthe progress of those reforms to date. Section 6.3 focuses on tax administration legislativereforms necessary to create a more efficient tax administration.

Recommendations are divided into ones for the long-term (to be completed in 3 to 5 years) andthose that should be addressed immediately (completed in the next 12 to 18 months and throughthe Guyana Threshold Country Plan/Implementation Project.)

6.1 Introduction

A modern tax administration system relies on self-assessment and voluntary compliance. Self-assessment and voluntary compliance occur only when:

1. Taxpayers understand both their rights and responsibilities. This creates aresponsibility of the tax administration to create comprehensive programs to educate the publicon tax issues. It means that the tax administration has a duty to create tax forms and instructionsthat are clear, as easy to use as possible, and that are readily available. It also means thattaxpayers have a responsibility to utilize the services and education programs provided.

2. Tax authorities enforce the tax law fairly and with impartiality. The law must beapplied uniformly, and the government must issue regulations and rulings explaining the law andhow it will be applied in specific circumstances. Tax paid cannot be a function of individualarrangements between taxpayers and tax officials. Uniform application of the law creates a levelof certainty that is vital for lowering the cost of doing business. It also helps create a levelplaying field, whereby each taxpayer knows that her competitor is subject to the same tax(assuming equal economic circumstances.) It also implies a functioning appeals process toadjudicate fairly disputes between taxpayers and tax authorities.

3. Taxpayers are treated courteously and professionally by tax administrators. Thismeans that tax administrators will be hired and promoted based on honesty, correct applicationof laws and fair treatment of taxpayers. This implies an obligation by the tax authorities toprovide professional training for staff and to provide workers with all necessary resources toperform their duties in a professional manner. Note that training is also vital for taxadministrators to enforce the law uniformly and fairly.


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4. Taxpayers understand penalties and fines levied for non-compliance, and suchpenalties are applied in a timely and uniform manner to all taxpayers. This implies thatpenalties and sanctions are published and clearly communicated. While sanctions should besevere enough to have the desired incentive effect, they should not be draconian.

These are the principles, which guide the organization and structure of a modern, efficientrevenue authority. The policy reforms recommended in this study will not have the desiredeffect if significant attention and resources are not directed to the Guyana Revenue Authority.

6.2 Tax administration reform

The Guyana Revenue Authority (GRA) recently committed to change its organizational structurefrom one centered on type of tax to one centered on function.34 This is an important step increating a GRA that functions more effectively and efficiently. A functionally basedorganization allows staff to develop areas of expertise in functional areas such as audit, taxpayerservice, collection and enforcement while simultaneously creating an organization that creates itsown checks and balances. For example, collection and enforcement act as a check on auditors.

Moving to a functional organization will also allow GRA management to take full advantage ofinformation as a key administrative resource, and this is generated by the recently installed TotalRevenue Integrated Processing System (TRIPS). The expertise created by functional lines alongwith better information generated by TRIPS should increase productivity of GRA. Moreover, thenew culture envisioned for GRA is one that is client-driven, where taxpayer service is stressed.Clear laws and regulations and empowering taxpayers with the knowledge needed to complywith tax law are vital for overall success of the new organizational structure.

Such a major organizational change requires astute and steady change management. This isreinforced for GRA particularly in light of the fact that the organization has already beenundergoing major reform since 2006 with the introduction of TRIPS and then in 2007 with theintroduction of VAT. The change process must be sustained deliberately—it cannot be trusted to“happen” organically. The Guyana Threshold Country Plan/ Implementation Project isproviding support to the change management process until January 2010. In addition, a numberof institutional structures have been created or strengthened to sustain the reform momentum,namely a Project Coordination Unit, a Steering Committee for Change Management andImplementation, A Task Force for Human Resource policy reforms, and a Training Committee.The structures will continue to require external technical support over the next two years toensure effective completion of the reforms.

There are myriad issues and details with respect to reforms in human resources, creation ofdivisions and positions, and policy determination on internal communications and performancein GRA, which will have to be addressed.35 The reorganization process will take time and

34 For a full discussion and explanation of the new organizational structure and its benefits, see “OrganizationDesign Report of the Guyana Revenue Authority,” Guyana Threshold Country Plan/Implementation Project(GTCP/IP). March 2008. This report only highlights some main points of that report.35 The GTCP/IP paper provides detailed recommendations on all these issues.


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careful planning. The organizational reform of GRA would benefit from donor support of long-term resident advisors in each of the functional areas who would serve as counterparts to GRApersonnel over a 12-24 month period while the reforms are implemented. Advisors who havehelped manage this process in other countries would be tremendous assets to GRA, and theywould help prevent costly mistakes that can be avoided only through experience.

Recommendation: Ensure ongoing technical support to the steering committees and otherinstitutional structures for change management. Undertake a continual evaluation of theoverall organizational structure and its implications for internal systems and controls and forhuman resource development and management. Improve mechanisms for communicating thereforms and their implications for officials. Seek donor support for resident advisors in each ofthe functional areas, and imbed these advisors in the GRA.

6.3 Legislative Reforms

By rationalizing rates, increasing the tax base, and doing away with “nuisance” taxes, the policyreforms recommended in this report will help create a tax system in Guyana that is transparent,easier to administer, and which should maintain or increase revenues. Presently, there are realconcerns about the powers and ability of GRA to enforce tax law under the current taxadministration provisions in the various tax laws. The policy reforms recommended in thisreport with respect to each of the taxes will only be effective if they are accompanied by reformof the tax administration provisions in the tax laws. Moreover, the tax administration provisionsin the revised law should reflect the four principles outlined in the introduction to Section 6.

6.3.1 Long-Term Recommendations

The reorganization of GRA is a long-term project that will take several years to complete. There-organization effort should be complemented by drafting a comprehensive taxadministration law. Currently, tax administration issues are dealt with in each of the tax laws,and there are conflicting and confusing statutes, which gives rise to myriad interpretations. As aresult, enforcement is uneven, creating unintended economic incentives and underminingvoluntary compliance. For example, in 2003, the Fiscal Enactments (Amendments) Bill waspassed, and new penalties were enacted for late payments and non-filers (Section 99.) Accordingto officials in Inland Revenue, these new rules were so complicated GRA just stopped chargingpenalties for these offences, thereby reducing compliance and penalizing those who obey the lawand pay taxes on time.36

A comprehensive tax law consolidates all tax administration provisions of the tax laws into onestatute. This legislative reform becomes necessary under a functional organization whereofficials administer one function, say debt collections, across all tax types and hence require auniform law to make for more efficient administration and compliance.

36 There are major statutory tax administration issues with respect to assessment, collection and enforcement,interest and penalties, etc. The most egregious of these issues are dealt with in the next section of this report becausethey need to be dealt with immediately. Certainly, a new tax administration law would correct all these issues, aswell.


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The penalty amounts for non-compliance need to be adjusted. (See Section 5.2.8 for morediscussion on the penalties issue.) The general practice for penalties is for them to be in terms oftax due, with flat minimum amounts. Many of the penalties in the income tax law are simply flatamounts, and many of those amounts are far too low. For example, the fine for non-filing ofPAYE returns is $10 per day. These amounts need to be adjusted so that they provide incentivesfor compliance. Low penalty amounts, non-enforcement of penalties, and the appeals process allcombine to create incentives for taxpayers to delay paying tax. (Appeals are discussed later inthis section under Short-Term Recommendations.)

There also needs to be a section in the law delineating the rights of taxpayers. Thefoundation of voluntary tax compliance systems is a clear understanding of not only theresponsibilities of taxpayers, but also of taxpayer rights. Taxpayers have the right to presentdocuments in evidence of income and expenses, to examine records of audits performed, topresent explanations for computations of taxes and payments of taxes, to present explanations ofrecords used for audits, to appeal decisions made by the tax authorities, and to be treated withcourtesy and respect in all matters. Taxpayers also have a right to clear instructions for all taxdocuments and readily available explanatory brochures and documents on tax laws andregulations. It is important that these rights be stated clearly in the tax administration law.

The VAT law is better than the income tax laws on administrative issues, and could serve as amodel for what a unified tax administration law should be. For example, the VAT law has amuch better appeals process than the income tax law. The income tax law allows taxpayers toappeal directly to the courts, while VAT appeals must first go though an administrative appealbefore resorting to the courts.

A single tax administration law that applies to all taxes and that is written simply with clearinformational brochures for the public and tax practitioners is the optimal solution for Guyana.Such a law should be drafted to complement the new functional organizational structure.37 Thisis a long-term project, which needs to be approached methodically; however, there areimmediate concerns, which can be dealt with by amending current legislation.

Another long-term legislative objective should be the consolidation of the income tax intoone law. As pointed out in section 5.1.1, the taxation of income and net wealth is divided intosix Acts. Two of these are recommended for repeal – the Property Tax Act and the Estate DutyAct. The remaining four should be consolidated into one act, namely, Income Tax Act, IncomeTax (In-Aid of Industry) Act, Corporation Tax Act and Capital Gains Tax Act. These separateActs require complex cross-referencing between them to maintain consistency of definitions andinterpretations, especially given they were drafted at significantly different times. Aconsolidated income tax act would allow for consistency in definitions, remove the need forcross referencing and be written in clearer legal language consistent with creating improvedunderstanding of the compliance requirements under a self assessment system. Ideally, thisredrafting of the income law should accompany the drafting of a consolidated tax

37 See the Crown Agents report “Debt Management,” April 2008 for a draft collections law, which would be onesection of the new, comprehensive tax administration law.


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administration law, given the latter will require major amendments to all the existingincome tax laws.

6.3.2 Short-Term Recommendations

There is currently confusion over the legal right of GRA (absent court orders) to require self-assessment; audit taxpayers; seize property of taxpayers; amend taxpayer self-assessments ordeem assessments for non-filers; seize property and assets of firms that do not remit PAYEwithholding; and require firms to submit declarations. Many of these issues cannot wait for anew law to be drafted, but should be dealt with by amending the current law. The amendmentsshould be drafted with an eye toward the long-run reform, so that these amendments are pre-cursors to the major reform. The idea is to implement best practice in specific key areas and thenfold those into the major reform.

In addition to making specific amendments to the current law, it is imperative that those chargedwith enforcing and interpreting tax law agree on the meaning and interpretation of the statutes.There are currently major differences in interpretation of the tax laws with respect toadministrative issues by GRA administrators, GRA lawyers, private attorneys, governmentlawyers and the judiciary.38 There has been considerable turnover in GRA legal staff in recentyears, and the current staff, while dedicated and enthusiastic, is young and not specificallytrained in tax law. In the immediate term, the major stakeholders (including tax administrators,GRA legal staff, judges, legal staff in the Attorney General’s office) need to convene and decideon the correct interpretations of the laws and the appropriate channels and practices to deal withdisputes. Workshops or seminars should be held to facilitate this process, and regulations andexplanatory pamphlets need to be written to reflect the shared vision that results. The GRA willperform at a sub-optimal level until these issues are resolved.

A. Self-assessment

Income Taxes

One hallmark of a modern tax system is self-assessment. Under a self-assessment system, thetaxpayer is responsible for accurately calculating the tax base and the tax due. When a taxpayerfiles a return, that return is the assessment of the tax, and tax is due when the return is filed or bythe due date, whichever is earlier. The revenue authority has the ability to review the self-assessment and subsequently determine if an error (either intentional or unintentional) was made,but the taxpayer’s liability to pay the [self] assessed tax is not contingent upon any subsequentassessment by the revenue authority. Guyana’s Income Tax Act violates this principle.

Section 70 (1) of The Income Tax Act requires the Commissioner “to assess every personchargeable with the tax as soon as may be after the day prescribed for delivering the returns.”Sections 76(1) and (2) require the Commissioner to create a list of everyone assessed. Section78 (1) requires the Commissioner to serve every person on the assessment list a notice “statingthe amount of his chargeable income, the amount of tax payable by him, the amount of tax

38 Specific examples are given in the next section.


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withheld or deducted from his emoluments, and informing him of his rights…” Because of theseclauses, tax is not technically assessed until GRA performs this assessment.

In 2006, over 58,000 income tax returns were filed in Guyana. The number of returns filedincreased 7.7% in 2007 to 63,004. In 2006, 42% of filed returns were formally assessed byGRA. That number fell to 36% in 2007 (see Tables 6.1 and 6.2.) GRA appears to haveredirected scarce resources to more productive areas with respect to assessment: in 2006 only20% of assessed returns were of the self-employed. In 2007, 34% of assessed returns were self-employed returns. Nevertheless, this provision of the law, which requires assessment of allreturns, means scarce technical resources are wasted. GRA should spend time examining andamending assessments of problematic tax returns (as determined by a risk-based audit plan), notALL tax returns. The filing of a tax declaration by the taxpayer should be regarded as theassessment of the tax, which becomes payable at the time of filing. Changing the law in thismanner will release scarce GRA resources to pursue activities (e.g. desk and field audits) whichwill improve collection and enforcement.


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Table 6.1 2006 Income Tax Returns and Assessments in Guyana*

2006 Income TaxReturnsfiled

As a % oftotal filed

Returnsassessed

As % oftotalassessed

Assessedreturns as% of filed

employees 35,662 61 19,694 80 55self-employed 21,416 37 4,922 20 23corporate tax 1,392 2 141 1 10TOTAL 58,470 100 24,757 100 42

Source: Guyana Revenue Authority, Annual Report and Statement of Accounts 2006.* columns may not sum to one due to rounding

Table 6.2 2007 Income Tax Returns and Assessments in Guyana*

2007 Income TaxReturnsfiled

As a % oftotal filed

Returnsassessed

As a % oftotalassessed

Assessedreturns as% of filed

employees 37,254 59 13,298 63 37self-employed 24,366 39 7,160 34 33corporate tax 1,384 2 492 2 35TOTAL 63,004 100 20,950 100 36

Source: Guyana Revenue Authority* Columns may not sum to one due to rounding

Another problem is that Section 70(3) authorizes the GRA to deem assessments on non-filers foreight months only. The Commissioner should have this right for the full period as determined bythe statute of limitations on assessing and collecting tax (which in Guyana appears to be seven oreight years.)

Recommendation: Delete Sections 76(1) and (2), delete Section 78(1) and delete Sections70(1), (2), (3) and (4) of the Income Tax Act: Chapter 81:01. Replace Section 70 with languagethat asserts the duties of the taxpayer to self-assess income tax by:

a) reporting all facts for computing tax liability,b) computing the tax liability,c) filing a return showing the tax liability, andd) filing and paying the tax owed at the time of filing the return without assessment ordemand notice from the Commissioner General.

and which:1. asserts the rights of GRA to make all inquiries, determinants and assessments (including

deemed and amended assessments) of all tax, interest and penalties imposed by the Actand not paid in the manner provided by the Act.

2. places on the taxpayer the burden of proving that a GRA assessment is in error or theGRA assessed amount is incorrect;

3. asserts that the filing of a tax return in accordance with the Act shall be treated asa) an assessment of the tax, andb) notice and demand that the tax be paid with the filing of the return.

4. authorizes the Commissioner to make a new, correct assessment when the Commissionerdetermines that the amount shown on the return is incorrect. The corrected amount will


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be duly recorded and the taxpayer will be notified immediately of the correction and ofthe amount of any underpayment or overpayment of tax. Such an amended assessmentmay be based on one or more of the following types of information:

a) the information in a taxpayer’s return;b) information from third party and other informational returns;c) audit materials and any other information known to the GRA.

5. grants the Commissioner the right to assess the tax on the basis of any availableinformation where a taxpayer has not filed a return or failed to provide the informationneeded to assess the tax.

6. authorizes the Commissioner to make or deem an assessment, or amend an assessmentpreviously made, until the period of limitations has expired.

VAT

Section 31 of the VAT law requires taxpayers to complete VAT returns with all informationnecessary to calculate tax, but it does not explicitly require self-assessment and assert that thefiling of the return is treated as the assessment of the tax.

Recommendation: Amend Section 31 of the VAT law to state explicitly that the filing of a taxreturn in accordance with the Act shall be treated as an assessment of the tax and notice anddemand that the tax be paid with the filing of the return.

B. Final withholding for PAYE

Section 60(1) requires everyone to file a return. In 2007, 59% of all returns filed were fromemployees upon whom withholding was done, and GRA spent more than half of its assessmenttime on those returns: 63% of assessed returns were employee returns (see Table 6.2.) Foremployees with only one source of income, withholding should be considered final withholdingand those individuals need not be required to file a return. This will work as long as allemployers are still required to file annual reconciliation returns listing each employee’s name,TIN, address, total remuneration, value of fringe benefits and allowances paid in the taxableyear, and the total amount withheld for each employee. The employer must also notify eachemployee of total remuneration (including fringe benefits and allowances) reported to GRA aswell as total withholding. The employee should sign a declaration agreeing that this is a trueassessment and whether this is the only source income in the year (other than any other incomesubject to final withholding) so that the employee becomes liable once the employer hascompleted the PAYE withholding and payments as required. The employee can then determineif a refund is due or if additional tax is owed. Only if additional tax (more than the amountwithheld by the employer) is owed will the employee be required to file a return.

The TRIPS system can then verify that the correct amount of income tax withholding has beendone. (Ideally, the system will check for all withholding, including interest, dividends, etc. Withappropriate information filing from banks, corporations and others subject to withholding,TRIPS should be able to reconcile and provide notice where additional tax is due.)


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Section 61(2) of the Income Tax Act sets out the requirements for these employer returns;however, Subsection (a) allows firms to NOT submit this information on individuals who werenot employed in any other employment and whose remuneration “did not exceed such amount asmay be prescribed.” For PAYE withholding to be considered final, proper reconciliationrequires all the information in the preceding paragraph on all employees, regardless of level ofincome for the taxable year. Moreover, for general cross-checking, it is normal to require allpersons making payments to provide information to the tax authority and to the recipient on theamount paid and other particulars in accordance with regulations.

Section 61(2) also applies only to employees. Employers are not providing remunerationinformation on independent contractors. Whether workers are legitimately independentcontractors and not employees using that designation to evade tax is an empirical question, anddata were not available to analyze this issue in Guyana. A tight definition of independentcontractors and requirements that all persons making payments for goods, work performed orservices rendered must provide information to the GRA and to the recipient on the amount paidis likely needed to stem this abuse. In the short run, amending Section 61(2) to requireinformation on all payments is recommended. This is important not only to ensure compliance,but also to provide adequate tax analysis and forecasting information to the GRA and Ministry ofFinance.

Recommendation: Amend section 60(1) so that not everyone has to file a return. Section 60(4C) gives the Minister the power to issue regulations on this particular issue. Draft the necessaryregulations so that for employees with only one source of employment income or interestincome or both, withholding should be considered final withholding and those individuals arenot required to file a return.

Amend section 61(2) to require employers to submit annual returns on withholding for allemployees, regardless of income level, and to submit returns showing all payments to allcontractors. These returns must be submitted to both the GRA and the recipient of the payment,showing the total amount paid and total amount withheld.

C. Audit

Income Taxes

Inland Revenue only performed 48 audits in 2006 (the latest year for which data is available)(Table 6.3). Clearly, this is an area of weakness in the GRA. Both the legal department of GRAand Inland Revenue complained that the tax law does not grant the necessary powers forassessment, audit, collection and enforcement.


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Table 6.3: 2006 Income Tax AuditsAudits Individual Corporate TotalDesk 20 8 28Field 16 4 20TOTAL 36 12 48

Source: Guyana Revenue Authority

A careful reading of the Income Tax Act reveals that the law generally provides the powers andauthority necessary for enforcement of the income tax law. For example, Section 60(2) grantsthe Commissioner the power to request the taxpayer “to furnish…any particulars…relating to theadministration and enforcement of this Act…with respect to the income, assets and liabilities ofsuch person or his wife.”39 Section 60(3) appears to extend this power to request income, assetand liability information from “any person” with such information on “the person or of hiswife…” The legislation is unclear whether “any person” is a third party with information on thetaxpayer, or whether the references to “any person” and “the person or his wife” are both thetaxpayer in question. This issue should be easy to clarify and resolve.

Section 63(1) states “Every person who may be so required by the Commissioner shall… giveorally or in writing,…, all such information as may be demanded of him by the Commissionerfor the purpose of enabling the Commissioner to make an assessment or to collect tax.”Subparagraph (2) explicitly states the Commissioner has the right “to inspect any records of anymoney, funds or other assets…” Section 64(1) authorizes the Commissioner to enter anybusiness or trade premises to obtain information. These are the broad powers necessary toperform audits and assess tax liabilities.

Some banks have claimed that they are exempt from providing such information, and GRAbelieves that the audit provisions in the Income Tax Act need to be reinforced.40 Some of theambiguity may stem from the lack of definition of “person” in the Income Tax Act. “Person” isused throughout Chapter 81:01, but it is never defined. A person should include both physicaland juridical persons, as well as governmental agencies and organs, religious, charitable and non-profit institutions.

Recommendation: Add a definition for person in Section 2 of the Income Tax Act:

“Person”— means any individual (a physical person) or entity (corporation, cooperative or anyother organization having legal status as a juridical person, any government agency, charitable orreligious organization, and non-profit organizations)

39 References to “wife” or “husband” in the laws should be changed to spouse, to avoid creating opportunities for taxarbitrage between spouses.40 Guyana Revenue Authority, “Proposed Fiscal/Legislative Amendments Section D: Issues Under the Income TaxAct”, Nos. 4 and 6.


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VAT

There is concern that the VAT law does not explicitly grant the right to perform field audits oftaxpayers, but this seems to be a misinterpretation of the law. Section 63 gives theCommissioner the right to access all records with written notice. Section 61 gives theCommissioner the right to access records with no prior notice if a writ of assistance or warrant isobtained from the court. These two sections give the Commissioner rights to perform fieldaudits, both with and without prior notice.

This is another example of the need for workshops on intent, interpretation and actual practice ofthe laws. If after such workshops, there is agreement between the legal community and taxauthorities that audit powers need to be strengthened, appropriate amendments can be drafted.

D. Appeals and Enforcement

Income Tax

The tax appeals process in Guyana is not working effectively. As shown in Table 6.4, GRA andthe court system are unable to keep up with the number of objections filed by taxpayers. At theend of 2006, the number of outstanding objections was 8.5% of the number of income tax returnsfiled in 2006. The number of corporate tax objections outstanding was almost 43% of thenumber of corporate tax returns filed in 2006. The number of taxpayer objections is too high,and the number of unresolved objections is unsustainable. Consultation with tax administrators,the High Court, and the Attorney General’s office revealed great disparity in interpretation of taxlaws and regulations. Taxpayers are likely taking advantage of this confusion to delay taxpayments, and taxpayers are being denied their rights to swift resolution of legitimate issues.Both problems undermine confidence in the system and create economic distortions andinequitable treatment of taxpayers.

Table 6.4: 2006 Income Tax ObjectionsObjections Companies Individuals Totalcarry over from 2005 512 3,874 4,386registered during 2006 254 2,389 2,643Sub-total 766 6,263 7,029less: finalized during year 168 1,886 2,054Un-finalized end of 2006 598 4,377 4,975

Source: Guyana Revenue Authority, Annual Report and Statement of Accounts 2006.

In theory, the current system works as follows: first, a taxpayer appeals an assessment to theCommissioner; second, if the taxpayer can not reach agreement with the Commissioner, thenthere is a Board of Review (the law prescribes at least three of these Boards) to which taxpayersmay appeal assessments and audits (Section 79 of the Income Tax Act). Section 86 states thatany taxpayer who has failed to agree with the Commissioner OR having appealed to the Board ofReview and not being satisfied, may appeal to a judge in chambers. The use of OR allowstaxpayers to bypass the Board and go directly to court, and because in practice the Board ofReview is not functional this is exactly what happens. According to officials in GRA, once anappeal is made with the courts it takes up to two years to schedule the initial hearing and


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resolution takes up to four years. The law should require taxpayers to first appeal to the Board ofReview before going to court.

The appeals system should be structured so that taxpayers are forced to exhaust all administrativeappeals before taking an objection to court. This will require making the Board of Review aneffective route for appeal. The current law authorizes creation of at least three of these Boards,but the expertise of the individuals comprising the Boards is not specific enough. Members ofthe Board of Review must have expertise in finance, accounting and tax law. They need to betrained in adjudicating tax issues. Moreover, they must be beyond reproach.

The incentive to dispute assessments is increased because the practice appears to be to hold inabeyance 100% of the tax liability, and not just the disputed amount, until the matter is settled(Section 97(2)). According to statute, the Commissioner MAY enforce payment of tax amountsnot held in dispute. This does not appear to be occurring. Sections 97(2) and 82(5) conflict,because 82(5) requires payment of two-thirds of the disputed tax amount before a matter can beappealed to the Board of Review. Section 98 requires payment of 100% of tax, including thedisputed amount, before the matter can be taken to court. In practice, Section 97(2) takesprecedence, and taxpayers can delay 100% of tax liability by filing objections and taking thematter to court. The practice of holding 100% of the tax liability in abeyance appears to beoccurring because of precedent and because there is general disagreement on interpretation of thelaw between tax administrators, the legal profession and the judiciary.

Enforcement of Sections 97(2), 82(5) and 98 is further hindered because Inland Revenue rarelypays refunds. Unlike VAT, Income Tax refunds are paid directly from the budget. If too littlehas been allocated for refunds in a given year, then refunds are simply not paid. As a result,taxpayers have begun reducing, on their own, other tax liabilities by the amount of income taxrefund owed to them. Knowing that once tax is remitted to GRA it can be difficult, if notimpossible, to recover creates incentives on both the part of the taxpayer and the judiciary todelay payment of any disputed tax amount. This serious issue must be resolved. Whentaxpayers are owed legitimate refunds, the collected monies do not belong to the government ofGuyana. Not paying legitimate refunds undermines the authority of the GRA.

The problem of appeals is exacerbated because GRA is reluctant to use powers granted by lawfor collection and enforcement. Section 97(5) grants the Commissioner the authority to collecttax via parate execution 30 days after notice of payment has been given. This can be donewithout going to court. Section 102 gives the Commissioner the right to garnish via registeredletter or a letter served personally to the taxpayer, again without court intervention. GRA doesnot currently use these powers. Presumably, this is result of precedent, interpretation of the lawand presumed constitutional conflict.

Recommendations: Make the Board of Review a functioning appeals body and amend the law(section 86) to clarify the appeals process. Taxpayers should exhaust internal appeals measuresbefore appealing to the courts. Amend 97(2) so that on appeal to the Commissioner, only thedisputed amount of tax is held in abeyance, and enforce current law which requires two-thirds ofthe disputed amount to be paid upon appeal to the Board of Review and 100% of tax paid uponappeal to the courts. These tax payments should be held in trust until the matter is decided. In


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addition, an account should be kept of the taxes in dispute that are tied up awaiting resolution ofa dispute.

E. Fines and Penalties

Income Tax

A final issue with respect to enforcement is fines and penalties. Many fines are incredibly small($10 per day for failure to file a PAYE return; $100 for failure to keep proper books and records,etc.) Such small amounts do little to promote voluntary compliance. The fines and penalties arealso scattered throughout the law, which makes them difficult to know and understand. Asdiscussed in Section 5.2.8, penalties and fines need to be rationalized so that they provide a realincentive to pay tax on time. Section 99 of the Income Tax Act sets out penalties for latepayment and failure to file. As already noted, the calculations are cumbersome and result in veryhigh annual rates of 47 percent of tax due in the first year and 80 percent in subsequent years.Severe penalties negatively affect compliance. These penalty provisions should be reduced andmade functional. It is also important that the government receive interest on tax payable. Thereappear to be no interest provisions in the Income Tax Act. The interest rate should reflect thecost of capital in Guyana so that non-payment of tax is not an inexpensive source of funds forfirms. Interest should be charged on the tax plus penalty.

Recommendations: Make sure tax authorities understand the penalty provisions in Section 99for late or non-payment, late filers and stop-filers and reconcile the calculation procedures withthe TRIPS system. It is imperative that there be real repercussions for noncompliance with taxlaws. Simplify the penalty provisions in Section 99, reducing the effective annual penalty to 15to 20 percent of tax due. Add an interest charge to late payments. The interest should be chargedon both the tax payable as well as the penalty amount. Set the interest rate so that it reflects thecost of capital plus the inherent risk of non-payment being borne by the government, but not sohigh that it becomes a de facto penalty.

F. Electronic filing

Before electronic filing can become a reality, Guyana needs an e-commerce law. Such a law isnecessary to make electronic records legal documents and to ensure enforcement of contractsmade electronically. The Ministry of Trade and Tourism in Guyana has already drafted an e-commerce law. It provides a starting point. The proposed draft does not have provisions fordata protection. Before e-filing can be implemented at GRA, procedures must be developed tosafeguard the integrity of the computer system, validate users and protect the privacy oftaxpayers. For example, files from taxpayers must be cleaned before they are introduced intoTRIPS, and TRIPS must be programmed to accept payment verification from outside sourcessuch as banks. Taxpayers must also be positively identified before they can submit returns. Thiscan be done by instituting a log-in ID and password.

These are all serious issues that must be resolved before e-filing can be implemented. Moreover,any systems and safeguards must be thoroughly tested before they are adopted and placed intouse by GRA.


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Recommendation: Proceed with caution to finalize a draft of an e-commerce law and allnecessary regulations, practices and procedures for its implementation. Do not begin using thesystem until it has been thoroughly tested and de-bugged by outside experts.


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7. Estimation of the revenue impact of proposed tax policymeasures

The following table gives estimates of the revenue impacts over 2009-2013 of the proposed taxpolicy changes measured in 2008 constant prices and with applying any real economic growthfactors. Overall, the package of reforms recommended is slightly revenue positive, which at thesame time improving the efficiency and equity of the tax system. The major tax changesinclude:

a. Staged reduction of the corporate tax rate to a uniform 30% over five years along with hasthe introduction of a withholding tax of 5% on dividend distributions. The corporate tax ratecuts should be announced ahead of time and all efforts made to improve the competitive ofthe Guyanese economy so that these corporate tax cuts attract added private investment. Ifthese measures are not taken then the tax cost of the corporate cuts will be significantlyhigher.

b. At the individual level, a 20% tax bracket should be phased in over five years such that thetop of the 20% bracket equals the maximum annual NIS contribution. This improves theequity of the individual income tax and removes a significant disincentive to job creation formiddle-income earners.

c. The tax cost of this new 20% bracket is offset by phasing in the explicit taxation ofemployer-provided fringe benefits including a new fringe benefits tax on motor vehiclebenefits, low-interest rate loans and tax exemptions gained as a result of employmentpositions. In addition, the contributions to pensions and NIS will be made non-deductible inline with the pension income and NIS benefits being tax exempt.

d. It is recommended that the estate duty and net property tax be phased out. The revenue losscan be more than offset by implementing a modern system of property tax on all municipalproperties on their market values. The Central Government would assist the local authoritiesin property tax administration and over the medium term retain 50% of the revenues.

e. The structure of the taxation of passenger car imports should be radically reformed by (i)removing the age distinction in taxation, reducing the excise rates and making them moreuniform across cars of different sizes, and introducing minimum excise tax amounts by carsize; (ii) imposing VAT on all cars; (iii) removing customs exemptions from cars; (iv)making employer-provided car benefits subject to the fringe benefits tax under the incometax; and (v) significantly increasing the motor vehicle license fees along with thecomputerization of motor vehicle licensing in conjunction with customs database. Over thelong-term, the excise tax could be removed as the vehicle license fees are raised and replacethe need for the excise tax.

f. Reviewing and restricting customs and income tax exemptions provides major scope forrevenue increases. In the short-term, all goods imported under conditional exemption shouldbe subject to a 2% minimum duty.


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g. Major VAT reforms include the simplification and acceleration of VAT refunds by makingexcess input tax carry forwards be subject to choice by taxpayer. A one-time tax cost arisesas the VAT catches up with refund claims and clears the backlog. In addition, the zero-rating schedule needs significant revisions to remove difficult-to-administer and wastefulzero rating items. Some should be converted to exemptions. A VAT deferral system canalso be introduced to deal with major capital equipment imports.

h. Finally, greater efficiency and effectiveness in tax administration holds large scope for taxincreases. There are large one-time gains to be achieved from accelerating collections. Thisshould arise from more rapid collection of arrears and removing the backlog of tax cases indispute. Improved field audits are more difficult to achieve but will have a lasting impact onenhanced annual revenue collections.


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Table 7.1 Summary of Revenue Impact of Proposed Tax Policy Measures

Changes in tax policy 2009 2010 2011 2012 2013Staged reduction in corporate tax rates: commercial from 45% to30% in steps of 5%, non-commercial, 35% to 30% in steps of 1%over five years (1.1) (2.0) (2.5) (2.5) (1.6)New 20% PIT bracket expanded to NIS contribution maximum overfive years plus three year freeze on basic deduction (1.1) (1.9) (2.1) (2.2) (2.6)Reform taxation of fringe benefits, including Fringe Benefits Tax(FBT) on motor vehicle benefits, low interest rate loans and importduty exemptions 0.8 1.7 1.7 1.7 1.7Non-deductibility of pension and NIS contributions 0.7 0.7 0.7 0.7 0.7

Clarify and streamline legislation and practice with respect tosettling appeals, payment of tax in dispute and application ofenforcement measures to collect arrears; full self assessment andacceleration of completion of assessments (one time gains) 0.7 0.7 0.7 0.7 -

Cancel estate duty and phase out net property tax (0.3) (0.6) (1.5) (1.5) (1.5)Phase in taxation of market values of municipal property withadministrative capacity building - 0.5 1.0 2.0 2.5Provide option of VAT refund request or credit carry forward (onetime cost) (1.0) (1.0) - - -

Reform indirect taxation of motor vehicle imports (excluding FringeBenefits Tax) 0.8 1.0 1.2 1.2 1.2Review and impose a minimum import duty of 2% on all conditionalimport duty exemptions 0.5 0.5 0.5 0.5 0.5Double motor vehicle license fees and then increase annually by20%; improve registration coverage and compliance; reviewminibus and taxi fees as a potential presumptive tax; double driverslicense fees 0.4 0.5 0.6 0.7 0.9Subtotal 0.5 0.1 0.2 1.2 1.8VAT and Excise Tax "dividend" remaining 2.0 2.0 2.0 2.0 2.0

Measures with large, but unknown positive revenueimpactsRationalization of zero rating and exemption items under VATFreeze and review discretionary exemptions under income taxOil extraction royalties, production/profit sharing and income taxesImplement Single Business Permit at municipal level

Measures with small positive impactsReplacement of investment deductions with partial expensing withdepreciation base offsets

Alternative minimum tax on life insurance premiumsGovernment and public agencies pay import duty on all purchasesTax interest earned at the general income tax rate. The withholdingtax would no longer be final on interest paid to residents, except inthe case of interest paid by financial institutions to residentindividuals.Rationalize and harmonize penalties, fines and interest chargesacross all tax types

Measures with small negative impactsIndexation of capital gains taxElimination of stamp dutiesElimination of trading license fees by central government

Tax impact in year measured in billions of G$in 2008 constant prices


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8. Implementation of the Proposed Tax Measures

The Government must execute a decisive and orderly implementation process as it movesforward in implementing recommendations of this Review, in order to ensure that the signalssent to taxpayers are credible and that measures are brought into effect in a manner thatminimizes disruption to businesses and the tax administration and safeguards the growth ofrevenue. This is particularly critical since the GRA is already an organization in transition, stilladjusting to the ongoing streamlining of the new IT system, TRIPS and the concurrentimplementation of new business processes and strategies. The following is a high-levelimplementation process that may be developed and adopted.

1. Convene a Cabinet level sub-commitee to review the recommendations against theGovernment’s overall policy agenda for the medium term and confirm a revised matrix withagreed measures for implementation.

2. Identify and convene a technical taskforce to oversee the technical review of the taxmeasures approved by the Government and identify a Team Leader within the taskforce tochair and lead the process.

3. The technical taskforce should develop a detailed action plan of the accepted tax measuresthat provides for a phased, incremental and orderly introduction of tax changes, addresses thekey implementation processes identified below, and identifies the institutions to be involvedwith their roles and responsibilities.

4. Cost the revised action plan and determine a reasonable timeline for implementation.

5. Implement the technical and administrative changes needed to ensure the establishment andmaintenance of a robust database capable of supporting tax analysis at the Guyana RevenueAuthority.

6. Conduct an in-depth technical review of all revenue estimates of the accepted policy changesbased on updated and verified tax databases

7. Identity in detail an internal and external communication strategy for the GRA to bring intoeffect the new measures agreed on.

8. Identify and coordinate with government institutions, programs and other projects involvedin the fiscal and investment policy areas, including the legislative arm of government, toensure that there is cohesiveness in the implementation of these and that overall policyobjectives are met.

9. Convene a workshop or other similar forum to sensitise stakeholders in the government, theprivate sector and the donor community on the detailed action plan and updated impactanalysis results.


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9. Summary of recommendations and Action Plan

This section summarizes the proposals contained in the sections above in terms of an action planover the coming years:

Actions in 2008

1. Urgently address the sustaining of the GRA high-level steering committee to overseethe continued implementation of change management required in operationalising thenew functional organization of GRA and ensure sufficient donor support overmedium term to provide further technical assistance with the reorganization andrequired concurrent capacity building.

2. Establish tax policy analysis and revenue forecasting capacity with the EconomicPolicy Analysis Unit (EAPU) in the Ministry of Finance. For details, see NathanAssociates, Plan for Development of an Economic Policy Analysis Unit in theMinistry of Finance, Guyana Threshold Country Plan/Implementation Project(GCTP-IP), March 2008.

3. Establish Tax Analysis Unit (TAU) in GRA. For details, see Nathan Associates, Planfor Establishing a Tax Analysis Unit, Guyana Threshold CountryPlan/Implementation Project (GCTP-IP), March 2008.

4. Review all revenue estimates of recommended policy changes based on updated andverified tax data bases

5. Review and prepare draft legislation to harmonize all penalties and fines and interestcharged on late payments or paid on overdue refunds in income tax, VAT, excise andcustoms legislation and finalize recommended structure.

6. Facilitate workshop for tax administrators, GRA legal staff, judges, and legal staff inthe Attorney General’s office to resolve interpretation of tax enforcement and appealsprovisions of the law and the appropriate practices for implementing the theseprovisions efficiently and effectively, and where necessary making recommendationsfor amendments to the tax laws. Guidelines and public information documentsshould be prepared for the education of officials and taxpayers.

7. Draft and approve all short-term recommendations for changes to income tax andVAT legislation and regulations concerning:

ii. Clarification and implementation of self-assessed taxes

iii. Define circumstances and procedures for PAYE being a final tax foremployees with a single source of income (except for other sources of incomesubject to final withholding) and for employers to file complete and detailedreturns on employee income and taxes withheld.

iv. Introduce definition of “person” in Income Tax Act


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v. Make the Board of Review a functioning appeals body and amend the law toclarify the appeals process, including the requirements to pay undisputed or alltaxes prior to different levels of appeal.

vi. Following the review of penalties, fines and interest charges and payments,amended the laws accordingly.

8. Finalize, approve tax policy proposals and prepare draft legislation forimplementation in 2009:

vii. Announce commitment to lower and harmonize corporate tax rate at 30% byphasing in rate reductions over five years starting in 2009. A finalwithholding tax would be imposed on dividends paid to residents to the extentthat the corporate tax rate was lowered below the top marginal tax rate in thepersonal income tax. The lowering of the corporate tax rates would beaccompanied by measures to improve Guyana’s country risk rating and itsbusiness competitiveness.

viii. Reintroduce the 20% tax bracket to have the top of the tax bracket coincidewith the maximum amount of income for contributions to the NationalInsurance Scheme phased in over five years. This measure would beaccompanied by a major reform of the taxation of employer-providedallowances and fringe benefits. The basic deduction amount would be frozenfor three years.

ix. Amendments to make all cash allowances taxable and put explicit restrictionson cash reimbursements or payments of benefits on behalf of employees andprovide explicit rules for the valuation of all in-kind fringe benefits. Allgratuities, and station, entertainment, leave entitlement, security and telephonebenefits be made taxable. No benefit exemption be provided to the publicsector that is not also available to the private sector. Clarify that contributionsto pensions and NIS are not tax deductible.

x. Introduce a Fringe Benefits Tax within the Income Tax charged on the cost ofemployer-provided personal use motor vehicles, any tax exemption arisingfrom employment, and on low-interest-rate loans.

xi. Place a freeze on all discretionary exemptions under the income and customslaws while a thorough review is conducted of the tax cost, effectiveness andefficiency of these incentives. Introduce a minimum import duty rate of 2%on any import receiving a conditional exemption.

xii. Remove import exemptions from the public sector and its agencies, but adjustcentral government budgets and local government transfers to offset importduty costs.

xiii. Convert all investment deductions to partial expensing with offsets of thedepreciation base

xiv. Tax interest earned at the general income tax rate. The withholding tax wouldno longer be final on interest paid to residents, except in the case of interestpaid by financial institutions to resident individuals.


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xv. Impose a tax on life insurance premiums at a rate of around 5% either as afinal tax or as an alternative minimum tax

xvi. Under the capital gains tax, introduce inflation adjustments for all assets heldat least one year for each full calendar during which an asset has been held.

xvii. Under the VAT, reduce and rationalize the zero-rating cases, but introduceVAT deferral on major capital equipment imports by registered businesses.

xviii. Simplify the VAT refund system so that all taxpayers in a net credit positionhave the option whether to carry forward net credits or request a refund. Inaddition, modify the VAT return so that all refund requests are netted out ofcredit carry forwards

xix. Amend the indirect taxation of motor vehicles as follows:

a. Remove the excise tax on CKDs of vehicles from the excise tariff andCKD tariff codes only be allowed by an excise registeredmanufacturers of vehicles.

b. Drop the complex set of excises on vehicles aged four years or morefrom the excise tariff, but apply a simple alternative minimum unitexcise tax for passenger cars of all ages.

c. Drop the zero-rating of any passenger cars aged four years or more forimported by a public official or officer.

d. Strictly limit access to import duty exemptions.

e. Reduce the excise rate for cars under 1500cc in phases over two yearsfrom 30% to 20% and then 10%, and reduce the tilt in the excise rateson larger engine capacity cars from 30% up to 140% to smaller rangeof 10% up to 25%. Once motor vehicle license fees are capable ofeffectively collecting sufficient revenues, phase out excise taxes.

xx. Double the annual motor vehicle license fees in 2009 and then increase themby at least 20% each year until a study of the appropriate rate structure iscompleted. Introduce higher motor vehicle licenses on small buses and taxisas a form of presumptive tax.

xxi. Increase driver’s license fees by 100%.

9. Prepare draft legislation to eliminate the following taxes and non-tax revenuessources

xxii. Discontinue revenue stamps.

xxiii. Discontinue trading license fees, but consolidate all fees into a SingleBusiness Permit to be administered by the municipalities

xxiv. Discontinue estate duties

xxv. Phase out the property tax, but strengthen the property rates of the municipalgovernments


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Actions in 2009

1. Pass legislation to implement new penalty, fine and interest charge/paymentstructures for all taxes

2. Pass legislation to implement tax policy proposals starting in 2009

3. TAU capable of:

a. monitoring and reporting on a continuous basis revenue collections,exemption amounts, arrears, refunds, VAT credit carry forwards, amounts oftax in dispute, etc for all taxes administered on TRIPS

b. Maintaining detailed data bases for purposes analyzing taxes

c. Capable of forecasting revenues based on economic and tax data.

4. EAPU capable of

a. interpreting reports on tax collections and administration performance

b. using detailed tax data bases for tax policy analysis

c. capable forecasting revenues

5. Draft and pass E-Commerce Act to provide for e-filing of tax returns

6. Develop and test e-filing software and procedures that integrates with TRIPS

7. Prepare draft Tax Administration Act and consolidated Income Tax Act

8. Undertake a special study to model the cash and tax flows of typical oil extractionprojects expected in the Guyanese context so that the impacts of different tax, royaltyand profit sharing rates and arrangements can be analyzed to fine tune the taxation ofoil extraction

9. Sign up Guyana to the Extractive Industries Transparency Initiative (EITI)

10. Re-activate Urban Development Program with a specific focus on revenueenhancement, including:

a. Reform of the property valuation law to shift from a rental value basis to acapital value basis for urban properties.

b. Implementation of a simple computer-assisted mass appraisal (CAMA) systemin the urban areas to complete and sustain the revaluation of properties.

c. Capacity building program to strengthen the property valuation and ratesadministration

d. Implementation of property taxes with Central Government assisting in taxadministration and retaining up to 50% of revenues over medium term.

e. Introduce legislation for and implement a Single Business Permit (SBP)linked to the registration of all businesses active in a municipal area. The SBPwould be an annual lump sum charge made at the time of annual registration


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that varies by simple criteria of business size and the size of the municipallocal market.

Actions in 2010

1. Initiate e-filing of tax returns

2. Make draft Tax Administration Act and consolidated Income Tax Act available forpublic discussion. Finalize and pass laws.

3. Develop the conceptual framework and analytical methods to produce tax expenditureaccounts.

4. Commence implementation of systems and capacity building of new property ratessystem for municipal areas

5. Implement Single Business Permit system in all municipal areas.

Actions in 2011

1. Implement Tax Administration Act and consolidated Income Tax Act

2. Start estimation and publication of tax expenditure accounts.

3. Commence administration of new property rates system in municipal areas.


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Annex A. Analysis of excise and other indirect taxation of motor vehicles

Basic import duty, excise duty and VAT rate structure

Motor vehicles in Guyana are all imported and subject to three basic taxes: import duty, excisetax and VAT. The import duty structure arises from the CARICOM Common External Tariff(CET) and the VAT is 16% for all types of vehicle. The import duties (with a few exceptions)are structured as follows: buses, 10%; passenger cars, 45%; trucks, 10%; motorcycles, 20%; andchasses fitted with engines and bodies (including cabs), 20%. In addition, for completelyknocked down kits of motor vehicles import duties are reduced to 5% affording protection toauthorized vehicle assemblers. This provision is not used in Guyana. This implies that if theexcise tax was zero for motor vehicles the following effective tax rates would apply on importedmotor vehicles:

Table A1. Import duty and VAT rates for broad categories of motor vehicle

Type of motorVehicle

Import duty VAT Combined rate

Buses 10% 16% 27.6%Passenger vehicles 45% 16% 68.2%Trucks 10% 16% 27.6%Motor cycles 20% 16% 39.2%Chasses with engines 20% 16% 39.2%Bodies 5% 16% 21.8%

The exceptions to the above are diplomats and aid-funded technical advisors who can importduty and tax free motor vehicles. In addition, (a) motor vehicles of all types are zero rated underthe VAT if they are 4 years or older, and (b) motor vehicles imported by a member ofparliament, judge, magistrate, or public official or officer under section 23 of Customs Act areboth free of import duties and zero rated under VAT.41

On top of this relatively simple rate structure, a complex set of excise taxes is charged thatrecognizes a number of different categories in addition to these broad categories for purposes ofexcise tax rates. (See Excise Tax Act, Act No 11 of 2005 and Regulations.)

(viii) Buses are divided into commercial and private use categories.(ix) Private-use buses and passenger cars are divided into four engine capacity

categories, but petrol-engine passenger cars aged 4 or more years are divided into6 engine capacity categories and diesel-engine passenger cars into 5 enginecapacity categories.

(x) Trucks are broken down by 4 gross vehicle weight (GVW) categories.(xi) Buses for less than 30 passengers, passenger cars and trucks are divided between

vehicles aged less than 4 years and those aged 4 years and more.

41 Under section 23 of the Customs Act introduced in 2003 the public officers and officials can apply for exemptionfrom import duty every 3 years for a used car or every 5 years for a new car. Pro rata recapture of the exemption isrequired on the transfer of the vehicle in less than 3 or 5 years as the case may be.


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(xii) Buses over 4 years old are broken out by passenger capacity.(xiii) Passenger cars are divided into fully built up vehicles and completely knocked

down kits.(xiv) All motor vehicles are divided based on the importer: judges, magistrates,

members of parliament, public officers, re-migrants and other importers. (Inaddition, tax-free imports are permitted by diplomats and aid-financed projects oras sports awards.) Judges, magistrates and members of parliament pay no excisetax, while public officers and re-migrants pay reduced rates.

The excise rate categories are captured in the following three tables.

Table A2. Taxes on vehicles of any age

Vehicle category Excise tax rate Combined import,excise & VAT rate

Chasses with engines 10% 53.1%Bodies 10% 34.0%Motor cycles 10% 53.1%

Table A3. Taxes on vehicles aged less than 4 years

Vehicle category Excise taxrate

Combinedimport, excise& VAT rate

Reduced exciserate for publicofficers/officials

Reduced exciserate for re-migrants

Commercial buses, lessthan 30 passengers

10% 40.4%

Private use busesUp to 1500cc 30% 65.9%1500 to 2000cc 50% 91.4%2000 to 3000cc 100% 155.2%Over 3000cc 145% 212.6%Passenger carsUp to 1500cc 30% 118.7% 10% 5%1500 to 2000cc 50% 152.3% 30% 10%2000 to 3000cc 100% 253.2% 30% 10%Over 3000cc 140% 303.7% 30% 10%Trucks 10% 40.4%


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Table A4. Taxes on vehicles aged 4 years and over

Vehicle category Excise tax rate BreakevenCIF value 1

Reducedexcise ratefor publicofficers

Commercial busesLess than 21 passengers US$2,600 US$23,63621-30 passengers US$6,900 US$62,727Passengers cars, petrolUp to 1000cc (1.5*CIF+US$4200)*10%+

US$4200US$16,211 US$430

1000 to 1500cc (1.5*CIF+ US$4300)*10%+US$4300

US$16,596 US$430

1500 to 1800cc (1.5*CIF+ US$6000)*30%+US$6000

US$28,364 US$1800

1800 to 2000cc (1.5*CIF+ US$6500)*30%+US$6500

US$30,727 US$1950

2000 to 3000cc (1.5*CIF+ US$13500)*70%+US$13500

US$42,110 US$8950

Over 3000cc (1.5*CIF+ US$14500)*100%+US$14500

US$54,717 US$9950

Passengers cars, dieselUp to 1500cc (1.5*CIF+ US$6200)*10%+

US$6200US$23,930 none

1500 to 2000cc (1.5*CIF+ US$8200)*30%+US$8200

US$38,764 none

2000 to 2500cc (1.5*CIF+ US$15400)*70%+US$15400

US$48,037 none

2500 to 3000cc (1.5*CIF+ US$15500)*70%+US$15500

US$48,349 none

Over 3000cc (1.5*CIF+ US$17200)*100%+US$17200

US$64,906 none

Trucks (goods vehicles)GVW less than 7 tonnes US$2000 US$18,182

7 to 10 tonnes US$3000 US$27,273

10 to 20 tonnes US$4500 US$40,909

Over 20 tonnes US$5000 US$45,455

1. CIF breakeven value is the CIF import value at which the same excise duty is collected if the import dutyand excise taxes are collected at rates as if the vehicle was less than 4 years old or as if it was 4 years orolder. For vehicles 4 years and older, if the declared CIF value is lower than this breakeven value, theeffective excise tax rate rises, but if the CIF value is higher the effective rate falls below that charged onvehicles less than 4 years old.


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Two types of analysis are applied to motor vehicle taxation. The first involves reviewing the problemsinherent in the tax structure for motor vehicles. The second involves the actual analysis of importedvehicles into Guyana in 2007 to identify further issues and quantify the size of some the taxationproblems.

Recommended policy solutions in the tax structure for motor vehicles

1. Trade protection through the excise schedule: A reduced excise tax rate of 5% isoffered for completely knocked down (CKD) kits of buses, passenger cars and trucks importedby licensed manufacturers. This effectively adds to the trade protection offered for the assemblyof these vehicles through the import duty tariff. This differentiation of a domestic tax in favorof domestically produced goods over imports essentially adds to the effective import duty ofthese items and runs counter to compliance with the CARICOM Common External Tariff (CET).In addition, the provisions are largely redundant in the current globalized motor vehicle marketwhere economies of scale in vehicle assembly are critical to competitiveness. Given the verysmall size of the Guyanese vehicle market, the location of car assembly in Guyana would have tobe based on export competitiveness and not on protection of the domestic market. Highlyprotected domestic assembly could lead to negative domestic value added compared toimportation of the assembled vehicles causing economic waste.

It is recommended that the excise tax on CKDs of vehicles be removed from the excisetariff and CKD tariff codes only be allowed to be used by an excise registeredmanufacturer of vehicles. If vehicle assembly is undertaken in Guyana, such a business shouldbe licensed under the excise act and the excise tax should be charged on the fully built up vehicleproduced and sold in Guyana at the same excise tax rates as are charged on imports.

2. Importation of vehicles 4 years and older. Most motor vehicle imports into Guyanaare used or pre-owned vehicles to make the vehicles more affordable given the relatively lowaverage income level of Guyanese and the high duty and tax rates on motor vehicles. Todiscourage the importation of very old motor vehicles Guyana has introduced a complex set ofexcise taxes that result in very high effective excise tax rates on cheap vehicles aged 4 years ormore. See Table A4 above. For vehicles with CIF values below the breakeven values incolumn three of Table A4, the effective excise tax rate will be higher than the regular excise ratefor that class of vehicle and will rise as the CIF value falls. For values above these breakevenrates, the effective rate will actually be lower than the regular excise rate and will fall as the CIFvalue rises. For example, as illustrated in Table A5 below, the regular excise rate on 1300ccpassenger car with a CIF value of US$8,000 and aged less than 4 years is 30% and the combined(import duty, excise and VAT) effective tax rate is 118.7%, whereas if the car is 4 years or olderthe effective excise rate is 51.1% and the combined rate is 119.1%. Note, however if the CIFvalue is US$20,000 on a 4 year or older car, the effective excise rate is 26.7% and the combinedeffective rate is 83.7% or significantly less than 118.7%.


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CIF value of1300cc passenger

car in US$Effective

excise rateCombined

tax rateEffective

excise rateCombined

tax rateEffective

excise rateCombined

tax rateTax saving in

US$Effective

excise rateCombined tax

rateTax saving in

US$

2,000 30% 118.7% 173.4% 296.5% 10% 10.0% 2,173 21.5% 21.5% 5,500

4,000 30% 118.7% 91.9% 178.3% 10% 10.0% 4,346 10.8% 10.8% 6,700

6,000 30% 118.7% 64.7% 138.8% 10% 10.0% 6,520 7.2% 7.2% 7,900

8,000 30% 118.7% 51.1% 119.1% 10% 10.0% 8,693 5.4% 5.4% 9,100

10,000 30% 118.7% 43.0% 107.3% 10% 10.0% 10,866 4.3% 4.3% 10,300

16,596 30% 118.7% 30% 88.5% 10% 10.0% 18,033 2.6% 2.6% 14,258

20,000 30% 118.7% 26.7% 83.7% 10% 10.0% 21,732 2.2% 2.2% 16,300

25,000 30% 118.7% 23.4% 78.9% 10% 10.0% 27,165 1.7% 1.7% 19,300

30,000 30% 118.7% 21.2% 75.8% 10% 10.0% 32,598 1.4% 1.4% 22,300

CIF value of2300cc passenger

carEffective

excise rateCombined

tax rateEffective

excise rateCombined

tax rateEffective

excise rateCombined

tax rateTax saving in

US$Effective

excise rateCombined tax

rateTax saving in

US$

5,000 110% 253.2% 389.0% 609.0% 30% 30.0% 11,161 123.4% 123.4% 24,278

10,000 110% 253.2% 230.7% 379.5% 30% 30.0% 22,322 61.7% 61.7% 31,778

15,000 110% 253.2% 177.9% 303.0% 30% 30.0% 33,483 41.1% 41.1% 39,278

20,000 110% 253.2% 151.6% 264.8% 30% 30.0% 44,644 30.9% 30.9% 46,778

22,000 110% 253.2% 144.4% 254.3% 30% 30.0% 49,108 28.1% 28.1% 49,778

30,000 110% 253.2% 125.2% 226.5% 30% 30.0% 66,966 20.6% 20.6% 61,778

40,000 110% 253.2% 112.0% 207.4% 30% 30.0% 89,288 15.4% 15.4% 76,778

42,110 110% 253.2% 110% 204.5% 30% 30.0% 93,998 14.7% 14.7% 79,943

45,000 110% 253.2% 107.6% 201.0% 30% 30.0% 100,449 13.7% 13.7% 84,278

50,000 110% 253.2% 104.1% 195.9% 30% 30.0% 111,610 12.3% 12.3% 91,778

Less than 4 years old 4 or more years old Less than 4 years old 4 or more years old

Import at reduced rate for public officers/officials

Less than 4 years old 4 or more years old

Import at reduced rate for public officers/officials

Table A6. Excise and combined tax rates on passenger car of 2300cc of different ages and CIF values imported by public officer/officialor by person without tax privileges

Importer with no tax privileges

Less than 4 years old 4 or more years old

Table A5. Excise and combined tax rates on passenger car of 1300cc of different ages and CIF values imported by publicofficer/officials or by person without tax privileges

Importer with no tax privileges


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Similarly, Table A6 illustrates the situation for a 2300cc passenger car. If the CIF valueis US$15,000 for a car less than 4 years old, then the excise tax rate is 110% andcombined effective rate is 253.2%, whereas if it is 4 years or older the effective excise taxrate is 177.9% and the combined rate is 254.3% -- a massive discouragement for theolder vehicle. The effective rates on the older vehicles fall as the CIF rises and passbelow those for cars below 4 years at CIF value of US$42,110. In addition, the totaleffective tax falls below that of the older car falls below that of the less than 4-year-oldcar if the value rises above about US$22,000.

In contradiction to the excise policy which is generally targeted against older motorvehicles, the VAT zero rates motor vehicles 4 years and older.

It is recommended that this complex set of excise rates for cars of 4 years or more bedropped and replaced with a simple alternative minimum unit excise tax thatapplies to passenger cars of all ages and that VAT apply to cars of all ages. For eachclass of imported vehicle a minimum CIF value could be established which is then usedto set the minimum amount of excise tax payable on that class of vehicle. For example,for passenger cars in the 1000cc to 1500cc range, if a minimum CIF value for a 4 yearold car is $8,000 then at the current 30% excise rate and import duty rate of 45%,US$3,480 would be payable in excise taxes. Hence, the excise tax rate for all passengercars of this class (irrespective of age) would be the higher of 30% or US$3,480. Underthe proposed policy, the breakeven CIF value is US$8,000, and the effective excise ratenever falls below 30%. Rather it rises above 30% for all cars valued at below US$8,000,thereby discouraging the importation of highly depreciated older vehicles.

3. High and differentiated composite tax rates. The combined tax rates (importduty, excise tax and VAT) on motor vehicles are very high, particularly for private-usebuses and passenger cars. For persons without any tax privileges importing vehicles, thecombined tax rate on passenger cars ranges from 118.7% on small cars of less than1500cc engines to 303.7% for cars with engines over 3000ccs. See Table A.3. Theeffective rates can even be higher for cars 4 years and older where combined tax ratescould be easily 30 percentage points higher for a moderately valued small car and 100percentage points higher for a large car in the typical lower price ranges. See Tables A3,A4 and A5.

Unfortunately, high tax rates do not necessarily mean high tax revenues. Evenwithout the problems of high tax rates resulting in smuggling, under valuations, taxarbitrage and other methods of tax evasion, consumers are expected to cut back on theirdemand as tax rates raise the final price of any good. This contracts the tax base, whichlimits the tax revenues. The higher is the price responsiveness of demand, then thegreater this base contraction effect. This ultimately limits the tax revenues. If the tax rateis raised on a good without any taxed close substitutes, then the maximum revenues isreached at a tax rate equal to –[1-t(1-/(2) where is the price elasticity of demandobserved with tax rate t in place. Hence if observed is in the -1 to -1.5 range ateffective tax rate below 50%, then the tax rate giving the maximum revenue yield is lessthan 100% and may be as low as 50%. This means that tax revenues will decline if


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the rate is raised above the revenue maximum yielding rate. This is the so-called“Laffer Curve” effect where tax revenues decline if tax rates are raised too high.

Typically, most goods have price elasticities of demand around -1. The priceresponsiveness tends to rise for luxury or non-essential goods. While in high-incomecountries, the price elasicities of demand for cars tends to fall in the -0.4 to -1 range, forlower income countries, the purchase of a passenger car is a major expense (a high shareof average income), and hence, the price elasticity of demand would be expected to be atthe upper end of this range, if not higher. A further consideration is the price elasticity ofdemand for a narrowly defined category of goods that has close substitutes also tends tobe high as consumers have the choice of switching between consumption categories.Hence, the differentiation of vehicles by size and age leads to many categories of closesubstitutes with higher price elasticities of demand than the category of vehicles taken asa composite whole. While the price elasticity of demand for small passenger cars (lessthan 1500ccs) of less than 4 years age may be near -1, it is expected those of all the largerand older cars with higher composite tax rates will be much higher as consumers areencouraged to substitute smaller cars for larger cars. Hence, the maximum revenueyielding rates for these other categories of cars would be expected to at or below those forthe small new cars. Given the composite tax rates are actually higher for the larger andolder cars, this rate structure would be expected to concentrate purchases in the smallercar category and shrink the overall tax base and revenue yield.

The very high overall tax rates tend to make car prices unaffordable for Guyanese. Thisputs pressure on employers to provide access to vehicles or provide transportationallowances to their employees or for the Government to offer tax breaks to public officersand officials. As discussed under the income tax, the taxation of vehicle andtransportation employment fringe benefits are not clearly defined and are not reported.This opens up opportunities for charging vehicle costs as business costs. While indirecttaxes more than double the domestic cost of vehicles, if this becomes a tax deduction at35% or 45%, then much of this indirect tax is forgone as a reduction in income taxes.Similarly, there would be large incentives for self-employed persons to charge private usevehicles as business expenses to pass on some of the indirect tax cost as reduced incometaxes.

It is recommended that the excise tax rate on passenger cars below 1500cc belowered to 10% and the upward tilt be lowered significantly to a maximum excisetax rate of 25% to reduce the differentials in the tax rates and expand the tax baseand tax revenues. This would reduce excise rates that currently range from 30% to145% to a range from 10% to 25%. The alternative minimum unit tax rates would alsobe set in line with these rates. This change in conjunction with eliminating the agedistinction and generally apply the VAT would simplify and flatten the rate structureacross cars of different size. In the medium term, consideration could be given toeliminating the excise on motor vehicles particularly if more effective implementation ofmotor vehicle registration fees can be achieved. A table summarizing the excise raterecommendations is provided and discussed below. The revenue impacts also will beviewed when the whole package of changes are considered.


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4. Motor vehicle import tax privileges. Guyana provides car import duty, excisetax and VAT privileges as noted above in Tables A4 and A5 and already discussed abovefor judges, magistrates and public officials and officers and for re-migrants. In addition,these persons can import VAT free and all vehicles over 4 years can be imported VATfree. For qualifying public officials, the reduction in ad valorem rates for passenger carsis from the range of 30% to 140% down to 10% to 30% depending on the value, age andsize of cars. This opens up a tax differential, for example, of over 100% for large cars.In addition, major reductions in the unit excise taxes are provided for. This not only cutsthe excise tax by more than 90%, for the cars of 4 years or more, it typically lowers theeffective tax rate below the tax rate that would be paid on a car less than 4 years in age.See Tables A4 and A5. For example, the effective excise tax rate on an older car is onlyin the range of about 1% to 6% compared to the 10% a public official pays on a carbelow 4 years in age. This is the opposite of the case for importers without theseprivileges who pay higher effective tax rates on the older cars.

These import tax privileges raise a number of issues. First, given the major overall taxdifferentials between privileged and other importers of cars (Tables A4 and A5 show taxsavings ranging from US$2,000 to over US$100,000 per car depending on size, age andvalue), opportunities for tax arbitrage between privileged and other Guyanese aresignificant. For example, a public official could import a large high-value car on behalfof another person and generate so much tax savings that the other unprivileged personcould buy another small tax-paid car out of the tax savings. This type of tax arbitrageoccurs in other countries with similar tax differentials on vehicles as well. For example,Table A4 shows that a privileged person could import a new 2300cc car with a CIF valueof US$40,000 and save about $76,778 in taxes. This tax savings could be used to buy a3-year old 1300cc car with a CIF value of US$10,000 for US$21,187 including taxes andhave a net saving of US$54,485. Hence, a qualifying public official can trade his/herimport privilege for a free car with a wealthy person without privileges at the expense ofgovernment revenues.

A second issue is that these import privileges are derived from the employment positionof the importer and, hence, any reduced tax charge on vehicles imported by suchprivileged persons should be reported as taxable income as a benefit of employment.This is not the case. As a result, significant revenue losses arise in the income tax.

Analysis of Excise Tax Collections based on 2007 Imports

The first year of application of excise tax in conjunction with the introduction of the VATwas 2007. Based on data from TRIPS for customs imports in 2007, Table A7summarizes this data for 6,476 motor vehicles with an import value of $12.7 billion andtotal excise taxes collected of $5.26 billion of which $4.35 billion came from passengercars. The excise collections reported by GRA from motor vehicle imports for 2007 was


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$4.54 billion (see Table 3.1).42 This data covers 241 tractors worth $1.2 billion, 702buses and mini-buses worth $1.7 billion, 4,208 cars worth $5.1 billion and 1,295 trucksworth $4.7 billion. The data does not include imports of vehicle chasses with engines,vehicle cabs and motor cycles, which are also subject to excise taxes. This data alsoexcludes all vehicles entered into warehouses, but includes withdrawals fromwarehouses.

Overall, a number of observations arise. First, 94% of the total taxes collected on allthese motor vehicle categories are excise taxes. Customs and VAT revenues only form6%. Second, curiously, 23 vehicles of various kinds are reported to be imported ascompletely knocked down kits (CKDs) with no or low taxes collected on them.43 Third,the bulk of the import duty and VAT chargeable has been exempted or zero-rated. Thiscan be most easily seen for the VAT, which has an effective VAT rate of 1.3% ratherthan 16% showing that some 92% of the vehicle VAT base has been zero rated orexempted. Fourth, 83% of excise taxes and 81% of total taxes were collected frompassenger cars. Fourth, as discussed above, given the much higher tax rates on largercars, the imports of cars are concentrated in small cars below 1500cc: 76% of cars bynumber, 48% by value and 69% of tax revenue from car imports in 2007. Hence, theanalysis below will focus on the taxation of passenger car imports given its revenueimportance, its complex tax structure (just explained above), and the clear proliferation oftax preferences.

Table A8 summarizes the tax collections, values and effective tax rates on passenger cars(petrol and diesel) by engine cylinder capacity categories for 2007. First, excise taxes onpassenger cars were $4.35 billion out of the $5.26 billion in excise for all the motorvehicles in Table A7 and formed 96% of the total taxes of $4.52 billion collected frompassenger car imports in 2007.

Second, only 4% of the passenger car entries paid any import duty and only 5% paid anyVAT. A rough estimate indicates that about $1.9 billion was exempted in import dutyand $1.6 billion in VAT. About 7% of the entries paid no taxes of any type and are likelyto represent imports by diplomats, aid-funded projects, etc, though analysis of theCustoms Processing Codes (CPC) of the entries only shows that these types of importsconstitute only 10% of this 7%. In addition to the fully tax free cars, some 85% ofimports that are receiving customs duty exemptions and/or VAT zero rating throughmechanisms such as the import privileges afforded to public officers and officials orvarious other imports for approved uses. Data available for 2006 indicates only 172public officers and officials were awarded exemptions costing $261 million in exempt

42 It is not clear where the difference between the excise collection figures based on Customs records andGRA revenue reports arises – possibly timing differences between charging an importer and delivering thetax collections to the Ministry of Finance could explain the approximately 10% difference.

43 Guyana has no motor vehicle assembly industry and CKDs require expensive specialized equipment toassemble them. Major motor vehicle manufacturers are typically only willing to ship CKDs on large scaleto licensed manufacturers capable of assembling their vehicles to their standards. CKDs specificallyexclude the importation of car parts separately and if an assembled car is imported for its parts, it isclassified as a car.


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taxes and 92 re-migrants were awarded exemptions worth $144 million. CPCs for 2007entries show 378 entries corresponding to public officials/officers and re-migrants. Thisis a significant number, but it still leaves a large unexplained number.

In the case of no VAT being collected, an investigation of the ages of the car importsoffers the best explanation. Table A9 shows that 86% of imported cars in 2007 wereaged 4 years or more. Hence, along with the 5% that paid VAT, this leaves some 9% ofzero-rated car imports to be explained by other reasons such as imports by diplomats andother privileged persons.

The explanation of why only 4% of imported cars in 2007 paid any import duty leaves amajor challenge. Imports by privileged persons (diplomats, public officers, etc) onlyaccount for a small share of these exempt imports. An investigations of the CPCs forpassenger car imports shows that out of all the import duty free car imports, only 28%had CPCs other the regular normal import code (C400), that is they had codes indicatingsome reason for an exemption. Interestingly, the same ratios apply to other motor vehicleimports (buses, trucks, tractors, etc): only 6% paid import duty and only 29% of the dutyfree imports had CPCs other than C400. This leaves major questions about whether thewrong CPCs were used in 2007 or whether the wrong import duties were charged.Reports of import exemptions for 2006 show some 78 companies were awarded importexemptions covering an unspecified range of business imports costing $6.3 billion inimport duties. No data is available to date indicating what is any share of this exemptamount was motor vehicles, or specifically passenger cars. If these reports for 2006 areaccurate and the pattern was repeated in 2007, then a large share of duty free car importsmust be explained by import exemptions awarded to private businesses. Given thatoutside of car rental companies, tourist services and taxi services, passenger cars are usedfor personnel benefit rather than as a cost of earning income in a business, the issue of thetaxation of fringe benefits from employment again appears to be an important issue –both for public and private employees. Overall, this analysis indicates an urgent needfor more continuous monitoring of customs compliance on motor vehicle importsbased on the on-line TRIPS data as well as the increased use of post-release audits.The issue of fringe benefit taxation is dealt with under the income tax.

Third, as already noted above, given the strong bias in the tax structure towards smallercars, cars below 1500cc formed 76% of car imports by number, 48% by value and 69%of tax revenue from car imports in 2007. Interestingly, small cars formed a higher shareof revenues than of import value. As Table A8 shows that the effective total tax rate oncars of 1000cc to 1500cc was the highest at 134% compared to only 24% for cars over3000cc. This is in part because only 34% of the large cars paid excise tax compared to87% of the small cars and most of the small cars were 4 years or older and hence subjectto high effective excise tax rates. Even if the effective tax rate on the large cars weretripled, it would still fall short of the average on the small cars. This indicates that theselarge cars are typically only imported by persons with some tax privileges, includingreduced excise tax rates. This is consistent with expectations of the effect of high taxrate: excise tax of 140% and combined tax rate of 303% on cars over 3000cc as shown inTable A3. Hence, the higher tax rates are being applied to the lower value cars or only


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48% of the import value. For example, the average CIF import value of the smallcategory of cars (1000-1500cc) was only US$3,813 compared to US21, 269 for the largecategory (over 3000cc). This erodes the value of the tax base and total tax collections.

Fourth, the average effective total tax rates within each size class hides a huge variationin tax rates applied across cars. For example, for the 1000cc to 1500cc cars, which werenot fully exempt, the effective tax rates varied around 134% from a low of 4.2% to a highof 1, 197.5%. 44 What does this variation in rates mean in terms of total tax collections?As discussed above, the maximum revenue yielding tax rate for small car imports isprobably about a total rate of 100% or less. Hence, all the low rates are losing revenuescompared to a uniform rate, and the high rates over 100% are also losing revenuesbecause they are causing the value of cars being purchased to shrink faster than the taxrate is rising once the maximum revenue-yielding rate is exceeded. For example thehighest rate of 1, 197.5% was charged on an imported car valued at only US$400. Aboutthe same taxes would be collected by a 20% tax on a US$25,000 car. This conclusioncomes about even without considering the effects of high tax rates on the incentives toundervalue car imports, smuggle cars, and seek exemptions officially or unofficially.Hence, tax revenues can be raised by moving the rate structure to a lower moreuniform set of tax rates.

Fifth, while the excise tax has been set up to discourage the importation of older cars,Table A9 shows that 86% of car imports were actually 4 years or older. In the mostpopular import category of 1000-1500cc passenger cars, cars aged 4 years and over are99% of the imports. While the effective tax rate, on the older cars is effectively higher,the average import value per older cars is generally less than half the value of the newercars in each size category. This results in a lower average value per older car afterincluding the effective tax rate. While the newer car clearly has more years ofoperational life left in it, the lower gross-of-tax price of the older cars is clearly stilldominant. Importantly, the effective total tax rate on the older cars is lower thanexpected given both the general zero rating of cars aged 4 years and older and moresignificantly the wide spread exemption from the 45% import duty rate that underminethe effect of the high excise duty rates on cars 4 years and older.

44 Interestingly the weighted average total tax rate charged on these 2,960 cars was 134 % which issurprisingly close to the total tax rate excepted if 45% import duty, 30% excise and 16% VAT werecharged which has a combined rate of 118.7%. This turns out to be share chance. In fact, only two out the2,925 tax-paying vehicles actually paid 118.7% as an effective total tax rate. Some 709 imported cars paidat effective total tax rates ranging from about 4.2% up to 118%, but a much larger number, 2,214 paid atrates from 119.6% up to a high of 1,197.5%!! Clearly, cars paying above 118.7% had to be over 4 years inage. (See Tables A8 and A9)


123

HarmonizedSystem Code

Description Entries orvehicles

Customs duty Effectiveimport duty

rate

Excise tax Effectiveexcise tax

rate

VAT EffectiveVAT rate

Total tax Effectivetotal tax

rate

Import value Average importvalue

Average importvalue in US$

8701101000 Pedestrian controlled tractors: for use inagriculture

61 - 0.0% - 0.0% 8,313,991 5.2% 8,313,991 5.2% 158,733,908 2,602,195 13,011

8701109000 Other pedestrian controlled tractors 14 - 0.0% - 0.0% 3,571,992 1.7% 3,571,992 1.7% 211,689,831 15,120,702 75,604

8701200000 Road tractors for semi-trailers 48 6,666,948 2.9% - 0.0% 8,868,160 3.8% 15,535,108 6.8% 227,735,387 4,744,487 23,722

8701301000 Track-laying tractors: for use in agriculture 29 - 0.0% - 0.0% 5,187,468 9.4% 5,187,468 9.4% 55,090,947 1,899,688 9,498

8701309000 Other track-laying tractors 2 - 0.0% - 0.0% 977,981 14.8% 977,981 14.8% 6,592,380 3,296,190 16,481

8701901000 Other tractors for use in agriculture 71 - 0.0% - 0.0% 41,944,179 10.8% 41,944,179 10.8% 389,158,529 5,481,106 27,406

8701909000 Other tractors 16 - 0.0% - 0.0% 344,091 0.3% 344,091 0.3% 107,021,105 6,688,819 33,444

8702102000 Coaches, buses and mini-buses, of a seatingcapacity not exceeding 21 persons (including thedriver)

234 - 0.0% 132,460,121 18.9% 3,126,926 0.4% 135,587,047 19.4% 699,479,392 2,989,228 14,946

8702103000 Coaches, buses and mini-buses, of a seatingcapacity exceeding 21 persons but not exceeding29 persons (including the driver)

1 - 0.0% - 0.0% - 0.0% - 0.0% 3,282,488 3,282,488 16,412

8702104000 Other coaches, buses and mini-buses, of a seatingcapacity exceeding 21 persons but not exceeding29 persons (including the driver)

2 - 0.0% 1,405,875 14.0% - 0.0% 1,405,875 14.0% 10,042,000 5,021,000 25,105

8702106000 TOYOTA COASTER 11 - 0.0% - 0.0% 1,132,665 2.7% 1,132,665 2.7% 41,735,332 3,794,121 18,971

8702109000 Other motor vehicles for the transport of ten ormore persons, including the driver.

3 203,500 3.7% 1,151,297 20.3% 410,256 6.0% 1,765,053 32.2% 5,479,394 1,826,465 9,132

8702901000 Other coaches, buses and mini-buses, of a seatingcapacity not exceeding 21 persons (including thedriver), completely knocked down for assemblyin plants approved by Competent Authority

1 - 0.0% - 0.0% - 0.0% - 0.0% 1,725,500 1,725,500 8,628

8702902000 NISSAN URVAN 15 SEATER MINIBUS 452 600,105 0.1% 227,786,441 24.1% 1,946,944 0.2% 230,333,490 24.4% 945,908,788 2,092,719 10,464

8702906000 Other coaches, buses and mini-buses, of a seatingcapacity exceeding 29 persons (including thedriver)

4 - 0.0% - 0.0% - 0.0% - 0.0% 18,785,759 4,696,440 23,482

8702909000 Other motor vehicles for the transport of ten ormore persons, including the driver.

1 - 0.0% - 0.0% - 0.0% - 0.0% 2,713,500 2,713,500 13,568

8703100000 GOLF CAR 1 - 0.0% 235,408 4.0% - 0.0% 235,408 4.0% 5,894,330 5,894,330 29,472

8703211000 Passenger cars, petrol, of a cylinder capacity notexceeding 1,000 cc, completely knocked downfor assembly in plants approved for the purposeby the Competent Authority

8 - 0.0% 473,023 6.6% 394,212 5.2% 867,235 12.1% 7,156,120 894,515 4,473

8703219000 Passenger cars, petrolof a cylinder capacity notexceeding 1,000 cc

171 10,493,382 7.0% 67,511,685 42.2% 19,960,121 8.8% 97,965,189 65.5% 149,631,648 875,039 4,375

8703221000 Passenger cars, petrol of a cylinder capacityexceeding 1,000 cc but not exceeding 1,500 cc:completely knocked down for assembly in plantsapproved for the purpose by the CompetentAuthority

11 - 0.0% 1,173,897 6.9% 405,184 2.2% 1,579,081 9.3% 16,979,536 1,543,594 7,718

8703229000 Passenger cars, petrol, of a cylinder capacityexceeding 1,000 cc but not exceeding 1,500 cc

2,949 14,283,070 0.6% 2,986,110,215 132.0% 10,512,985 0.2% 3,010,906,270 133.9% 2,248,371,739 762,418 3,812

8703231000 TOYOTA MARK 2 3 - 0.0% 506,673 13.7% - 0.0% 506,673 13.7% 3,688,216 1,229,405 6,147


57 2,748,565 3.3% 82,696,820 94.9% 2,369,874 1.4% 87,815,259 104.0% 84,424,886 1,481,138 7,406


679 26,599,502 2.2% 905,751,501 72.9% 26,019,420 1.2% 958,370,422 78.8% 1,216,154,156 1,791,096 8,955


136 12,477,916 2.3% 143,992,429 25.9% 14,484,633 2.1% 170,954,978 31.4% 543,915,810 3,999,381 19,997

8703241000 Passenger cars, petrol, of a cylinder capacityexceeding 3,000 cc, completely knocked down forassembly in plants approved for the purpose by theCompetent Authority

2 - 0.0% 486,678 10.0% - 0.0% 486,678 10.0% 4,866,777 2,433,389 12,167

8703249000 Passenger cars, petrol, of a cylinder capacityexceeding 3,000 cc

74 2,701,422 1.0% 65,898,724 23.3% 3,595,696 1.0% 72,195,842 25.8% 280,300,723 3,787,848 18,939

Table A7. Import values and taxes for selected import categories of motor vehicles, Guyana, 2007


124

HarmonizedSystem Code

Description Entries orvehicles

Customs duty Effectiveimport duty

rate

Excise tax Effectiveexcise tax

rate

VAT EffectiveVAT rate

Total tax Effectivetotal tax

rate

Import value Average importvalue

Average importvalue in US$

8703319000 Passenger cars, diesel or semi-diesel, of acylinder capacity not exceeding 1,500 cc

11 1,341,050 15.2% 1,743,365 17.1% 970,324 8.1% 4,054,739 45.9% 8,835,421 803,220 4,016

8703322000 Passenger cars, diesel or semi-diesel, of acylinder capacity exceeding 1,500 cc but notexceeding 2,000 cc

8 1,439,494 11.5% 5,278,227 37.9% 1,241,164 6.5% 7,958,884 63.7% 12,496,038 1,562,005 7,810

8703324000 Passenger cars, diesel or semi-diesel, of acylinder capacity exceeding 2,000cc but notexceeding 2,500 cc

51 - 0.0% 31,641,208 15.7% 8,537,163 3.7% 40,178,371 20.0% 200,903,167 3,939,278 19,696

8703331000 Passenger cars, diesel or semi-diesel, of acylinder capacity exceeding 2,500 cc: Completelyknocked down for assembly in plants approvedfor the purpose by the Competent Authority

1 - 0.0% - 0.0% - 0.0% - 0.0% 5,842,137 5,842,137 29,211

8703339000 VEHICLE 66 6,349,382 2.0% 57,622,770 17.9% 8,115,921 2.1% 72,088,072 22.8% 315,850,513 4,785,614 23,928

8703900000 Other motor cars and other motor vehicles for thetransport of persons, diesel or semi-diesel

3 - 0.0% 684,749 5.3% - 0.0% 684,749 5.3% 12,928,542 4,309,514 21,548

8704211000 Motor vehicles for the transport of goods, withcompression-ignition internal combustion pistonengine (diesel or semi- diesel), g.v.w notexceeding 5 tonnes, Completely knocked downfor assembly in plants approved for the purposeby Competent Authority

1 413,751 5.0% - 0.0% 1,390,203 16.0% 1,803,954 21.8% 8,275,020 8,275,020 41,375

8704219000 Motor vehicles for the transport of goods withcompression-ignition internal combustion pistonengine (diesel or semi-diesel), g.v.w notexceeding 5 tonnes

836 19,554,815 0.7% 326,189,779 11.5% 39,868,876 1.3% 385,613,470 13.7% 2,816,134,711 3,368,582 16,843

8704229000 Motor vehicles for the transport of goods withcompression-ignition internal combustion pistonengine (diesel or semi-diesel), g.v.w exceeding 5tonnes but not exceeding 20 tonnes

192 3,797,403 0.5% 113,398,341 15.5% 7,607,723 0.9% 124,803,466 17.1% 729,936,280 3,801,751 19,009

8704231000 Motor vehicles for the transport of goods withcompression-ignition internal combustion pistonengine (diesel or semi- diesel), g.v.w exceeding 20tonnes, completely knocked down for assembly inplants approved for the purpose by CompotentAuthority

1 - 0.0% - 0.0% - 0.0% - 0.0% 1,076,589 1,076,589 5,383

8704239000 Motor vehicles for the transport of goods withcompression-ignition internal combustion pistonengine (diesel or semi-diesel) g.v.w exceeding 20tonnes

19 298,372 0.0% 5,501,145 0.8% 601,518 0.1% 6,401,036 0.9% 678,488,582 35,709,925 178,550

8704319000 Motor vehicles for the transport of goods withspark-ignition internal combustion piston engineg.v.w not exceeding 5 tonnes

218 6,539,324 1.5% 82,616,190 18.4% 12,821,494 2.4% 101,977,008 23.0% 442,535,445 2,029,979 10,150

8704329000 Motor vehicles for the transport of goods withspark-ignition internal combustion piston engineg.v.w exceeding 5 tonnes

28 - 0.0% 15,060,250 18.4% - 0.0% 15,060,250 23.9% 63,090,182 2,253,221 11,266

6,476 116,508,001 0.9% 5,257,376,810 40.9% 234,721,163 1.3% 5,608,605,974 44.0% 12,742,950,806 1,967,719 9,839

2.1% 93.7% 4.2% 100.0%

Table A7. Import values and taxes for selected import categories of motor vehicles, Guyana, 2007 (continued)


125

Passenger cars (petrol or diesel) by engine capacity import duty excise tax VAT Totalnumber

Total tax Cumulativeshare of total

tax

Average importvalue US$

Average Minimum Maximum

Cylinder capacity not exceeding 1,000 cc. 37% 84% 63% 171 97,965,189 2.2% 4,375 65% 10.2% 184.3%Cylinder capacity exceeding 1,000 cc but not exceeding 1,500 cc. 1% 99% 1% 2,960 3,014,961,009 68.8% 3,813 134% 4.2% 1197.5%Cylinder capacity exceeding 1,500 cc but not exceeding 2,000 cc: 5% 73% 5% 747 1,054,651,238 92.1% 8,814 80% 4.2% 668.8%Cylinder capacity exceeding 2,000 cc but not exceeding 3,000 cc 6% 31% 9% 187 211,133,348 96.8% 19,915 28% 10.0% 1249.8%Cylinder capacity exceeding 3,000 cc 3% 40% 3% 143 144,968,663 100.0% 21,296 24% 5.0% 652.4%

All passenger cars 4% 89% 5% 4,208 4,523,679,448 6,033 89% 4.2% 1249.8%

% of cars paying Effective total tax rate

Table A8. Summary statistics of taxes collected, average values of cars, and effective tax rates on passenger cars of different engine capacities in 2007

Passenger cars (petrol or diesel) by engine capacity Numberimported

Import value Total taxes

Cylinder capacity not exceeding 1,000 cc. 23% 24% 32% 4,298 4,636 59% 86% 6,831 8,622Cylinder capacity exceeding 1,000 cc but not exceeding 1,500 cc. 99% 97% 98% 7,183 3,763 79% 135% 12,876 8,847Cylinder capacity exceeding 1,500 cc but not exceeding 2,000 cc: 72% 58% 86% 13,310 7,055 26% 120% 16,746 15,532Cylinder capacity exceeding 2,000 cc but not exceeding 3,000 cc 34% 21% 42% 23,631 12,600 21% 55% 28,599 19,579Cylinder capacity exceeding 3,000 cc 42% 25% 47% 27,685 12,459 17% 46% 32,305 18,148

All passenger cars 86% 65% 90% 15,033 4,560 26% 123% 18,918 10,179

Average valueof car aged lessthan 4 years in

US$

Average valueof car aged 4

years and overin US$

Average valueof car includingtaxes aged lessthan 4 years in

US$

Average valueof car including

taxes aged 4years and over

in US$

Cars of age 4 years and over as share of total Effective taxrate for carsless than 4

years

Effective taxrate for cars 4or more years

Table A9. Comparison of imports of passenger cars aged 4 years and over with cars less than 4 years, Guyana, 2007


126

Vehicle category

Passenger cars (petrol or diesel) by engine capacity

Importduty rate

Excise taxrate

VATrate

Combinedtax rate Combined

tax rateCombined

tax rate

Minimumimport value

in US$

Cylinder capacity not exceeding 1,000 cc. 45% 30% 16% 118.7% 20.0% 1,000 101.8% 10% 500 85.0% 3,500





Cylinder capacity exceeding 3,000 cc. 45% 140% 16% 303.7% 70.0% 14,000 185.9% 25% 5000 110.3% 14,000Private use buses by engine capacity

945 to 1500cc 10% 30% 16% 65.9% 20.0% 2,000 53.1% 10% 1000 40.4% 9,000

1500cc to 2000cc 10% 50% 16% 91.4% 30.0% 3,800 65.9% 15% 1900 46.7% 11,500

2000cc to 3000cc 10% 100% 16% 155.2% 60.0% 10,600 104.2% 20% 3500 53.1% 16,000over 3000cc 10% 145% 16% 212.6% 70.0% 17,700 116.9% 25% 6300 59.5% 23,000

Table A10. Suggested excise tax rates for passenger cars

Existing tax ratesExcise tax is higher ofad valorem or unit tax

(US$)


(US$)

Phase 1 Phase 2

Vehicle category

Passenger cars (petrol or diesel) by engine capacityCombined

tax rateCombined

tax rate

Cylinder capacity not exceeding 1,000 cc. 10% 500 28% 10% 500 28%

Cylinder capacity exceeding 1,000 cc but not exceeding 1,500 cc. 10% 650 28% 10% 650 28%



Cylinder capacity exceeding 2,000 cc but not exceeding 3,000 cc 30% 3,975 51% 20% 2,650 39% Cylinder capacity exceeding 3,000 cc 30% 6,000 51% 25% 5,000 45%


(US$)


(US$)

Excise tax rate, lessthan 4 years

Excise tax, US$, 4 ormore years

Phase 1 Phase 2

30%30%

8,9509,950

Existing tax rates

Table A11. Suggested excise tax rates for passenger cars imported by public officials and officers

430

430

1,800

1,950

10%

10%

30%

30%


127

Suggested new excise tax rate structure on vehicles

It is recommended that the excise rates be reduced, made more uniform for cars of similartype and the tilt in the rates between car size categories be flattened in order to reduce theoverall tax rate on passenger cars and personal use buses into a range where it is at or belowits maximum revenue yielding rate. The suggested new rate structure is given in TableA10. The changes can be phased in over two years. The package of measures should raisebetween $1 billion and $2 billion in added revenues depending on the components of thepackage implemented. The effective total tax rate should be raised by 10% but with themore uniform rate structure and the tax base will also expand as higher value cars areimported so that total taxes on imported cars should increase by at least $1 billion. Thepackage of measures should include:

9. The complex set of excise rates for cars of 4 years or more be dropped andreplaced with a simple alternative minimum unit excise tax for passenger carsof all ages and VAT would apply to cars of all ages and to imports by 2009.For all group given reduced excise duty rates, the alternative minimum unitrates would be scaled according to the reduction in ad valorem excise rates.This will ensure that in no case will the effective tax rate fall below the advalorem rate. It will also help guard against undervaluation and discourage theimportation of highly depreciated motor vehicles.

10. The excise rate for cars under 1500cc would be reduced in phases over twoyears from 30% to 20% and then 10%. This would offset the imposition ofVAT on all cars. The tilt in the excise rates would reduce from 30% up to140% to smaller range of 10% up to 25% as shown in Table A10.

11. Customs duty to be charged on all vehicle imports unless explicit import dutyexemption recorded in CPC. Continuous monitoring based on TRIPS dataand random audit of vehicle imports to be used to ensure enforcement.

12. For public officers and officials the VAT should be restored on all passengercar imports and the differentiation of cars by age should be removed. Analternative minimum unit tax should be introduced based on the minimumimport values and the ad valorem rates. After the second phase of excise ratereductions, the excise tax rates for the larger cars imported by public servantswill also come down. See Table A11. Leaving the import duty exemptions inplace will leave public officers and officials with combined tax rates of less thanhalf those of the regular combined rates after rate reductions. A salaryincrease for all public officers and officials could be introduced based on theexpected added tax collections.

13. The linking of the TRIPS and the vehicle registration systems, which is alreadypart of the work plan of the Guyana Threshold Country Plan ImplementationProject, will allow more control over tax evasion by vehicles through post


128

release audits of vehicles as well as more complete registration of the existingstock of vehicles.

14. Raise the annual registration fee on all vehicles. This is discussed in Section5.7.

15. A fringe benefits tax at the personal income tax rate of one-third should bepaid by public and private employers on all motor vehicle employment benefitsincluding tax exemptions arising from employment.

16. The excise tax on CKDs of vehicles should be removed from the excise tariffand CKD tariff codes only be allowed to be used by an excise registeredmanufacture of vehicles. Fully built up vehicles sold by such a registeredmanufacturer would be subject to excise tax.

The fringe benefits tax on motor vehicle and other employment benefits is discussed furtherunder the income tax. The vehicle licensing fees are reviewed elsewhere as a potentialsource of revenue to cover the provision of road infrastructure and administration.

These changes to the excise taxes and VAT and fringe benefits taxes applying to motorvehicles should be phased in over two years. At the same time further work is required to(i) analyze in more depth the role and use of motor vehicle exemptions and (ii) monitor theimport and tax collection response to these changes, which effectively eliminate the VATand excise exemptions for most importers. This is important given the simplification ofthe current highly complex structure that is recommended above to assess accurately theresponse. It is expected that the tax rates can be further lowered and exemptions on importduty further eliminated in ways that will increase revenues further while still simplifyingand lowering the tax rate structure. Tracking the responses to the first two rounds ofchanges should inform a possible third phase of changes. In addition, as the administrationof the vehicle registration system becomes effective and comprehensive, the possibility ofsubstituting broad-based annual license fees for upfront excise and import duties becomespossible. Over the medium term, the excise duty on motor vehicles could be phased out.