In his letter to the Guardian last weekend, Wilfred Espinet raised two issues around the unfairness of the current system of tax administration.
First, repayment of VAT refunds to businesses is neither a favour nor is it ‘relief’ for COVID-19 disruption. The Government owed businesses those monies and simply did not pay as it was legally obliged to do (Section 35(3), VAT Act).
Espinet was in error in asserting that the so-called VAT bonds would not be paid until businesses had cleared outstanding liabilities to the BIR. However, as it turned out they will indeed receive VAT bonds, but net of any liabilities which the BIR claims that they owe.
Now the ability of the BIR to set off is legal (Section 35(2)(c), VAT Act), but it is surely unconscionable and unfair. My reasons are as follows. First, if the BIR can set off, why can’t the business set off VAT refunds owed to it against VAT payable in subsequent periods?
Businesses have been consistently refused this option. Second, the set-off is made against the business’s Corporation Tax liability. But VAT is an expenditure tax not an income tax. Businesses collect the VAT on their sales on behalf of the BIR, net of the input tax and remit the difference to the BIR.
VAT is neither revenue nor an expense for the business. So why should VAT refunds which have nothing to do with the company’s own tax status, and which have extracted cash from the business, be subject to set-off? This is wrong.
The original VAT Act of 1989 did have set-off, but only against liabilities incurred under the VAT Act itself. That was changed by amendment in 2004 allowing the BIR to set off against any other liabilities to the BIR.
Third, the Corporation Tax liability which is being set off have been assessed by the BIR. The BIR’s data and systems are at best unreliable. Some of those assessed tax liabilities may be unknown to or under protest by the business. The BIR might be wrong. The company will now have to pursue the BIR to correct its mistake.
Given that, as companies claim, letters go unanswered, that might take years to be resolved.
The second issue relates to quarterly installments of Corporation Tax.
In normal times, small and medium sized businesses in particular, are disadvantaged by these installments which are calculated based on the previous year’s activity and tax paid.
The fact that the company’s invoices may be unpaid does not relieve it of finding the cash to pay Corporation Tax installments. Those with seasonal sales are also impacted. Now, when a large part of the economy has shut down and revenues have dropped significantly, it is extremely onerous, even for large companies, to be asked to remit tax based on last year’s activity levels.
Yes, that is the law, but is it fair? The BIR will say: Write to us and ask for relief. Businessmen claim that such letters typically elicit no response!
A third issue, though not raised by Wilfred Espinet is the absurdity in 2020 of the taxpayer’s inability to make payments online, a facility most serious countries, including Barbados, implemented many years ago.
Being able to prepare returns and declarations online, but then having to lose hours of productive time to journey to a BIR office to make payment is ridiculous and just punishes the compliant taxpayer.
The administration will no doubt claim that its finances are strained and it needs all the revenue it can get, and that it is acting within the laws as they stand (although the withholding of VAT refunds, the Hobson’s choice of ‘VAT Bonds’, and non payment of interest which is compulsory under Section 35(3)(b), could arguably have been challenged in a court of law).
But because a policy or practice is legal does not mean that it is right. The unfairness of the system for those who are in the tax net and who try to comply is surely a disincentive to better compliance. Why hand over cash, make a forced loan to the government and be required to accept bonds three or more years later. One might be better off not complying. To get better tax compliance, the system needs to be fair to the taxpayer as well as to the society which needs the revenue.
If ‘morality in public affairs’ is to mean not just ‘no corruption’ but also fairness, taxpayers should be allowed to set-off future VAT payments against refunds owed to them, small businesses should be allowed to pay half-yearly, and online payments should be implemented urgently.
We also need to know about the Green Fund and the health surcharge which disappear into the maw of the Consolidated Fund. We do need a Revenue Authority with efficient information systems and with courteous, accessible and efficient staff. I have no doubt compliance will improve and frustration and vexation will be reduced.