Prepared By: Jeffery Stewart - STEWART & ASSOCIATES
Section 9 (1)(C) and 9(2) (C)- Rates of Withholding Taxes
The rate of 30% on non-residents is far too high. There is hardly any type of business that allows a return on one's investment of this magnitude. To tax people, non-resident or not, at this rate is extremely punitive because it guarantees that there will be no personal benefit to be gained by the person from their investment. A rate in the vicinity of 10% to 15% is much more practical.
In cases where the withholding tax is a final tax, an even lower rate should be contemplated.
PART 111: ALLOWANCES
The new Act has decimated the allowances granted in the present Act, #1 of 1989. Child allowances have been reduced to $1000 (Section 10(1) (B)) from $5000, $2000 and $1000. Life insurance deductions, old age deductions and medical deductions have been totally removed and among other things interest earned from savings with commercial banks is no longer tax-free.
To compensate, the new Act raises the basic allowance from $10,000 to $15,000. On the surface this appears to be great relief and no doubt a lot of political mileage can and will be made from it. However I have never been a believer in these blanket, "across the board" allowances. They tend to benefit persons who do not deserve to be benefited.
Politically it is nice to be able to boast that no one earning $15,000.00 and below will have to pay Income Tax. It no doubt will be promoted as a measure to help the poor. In reality this is not so. A very large element of these persons is made up of the newly employed school leavers.
These are young adults who have for their entire lives so far, enjoyed the benefit of a free home provided by their parents, a free education provided by either their parents or the State and who generally have no responsibilities or commitments.
While it is necessary to grant relief to the poor, relieving everyone who earns less than $15,000.00 is a very costly way of trying to achieve this. Almost all school leavers will fall into this category and they are just the persons who we should start to teach to accept responsibilities and prepare to start making a contribution towards the development of their country.
Letting them earn their incomes free of tax leaves them with a lot of discretionary income at their disposal which will ultimately get spent on clothes, drugs, alcohol, cars and "fete" related activities. The political mileage does not outweigh the social problems that emanate from such a policy.
Tax legislation, especially in our under-developed country, should be used to encourage or force people into the areas and directions that benefit the development of the country as a whole. Blanket allowances such as the proposed $15,000.00 basic allowance are extremely costly to Government. Not only in terms of the revenues lost, but they have a huge social cost as well.
May I suggest that consideration be given to reducing the basic allowance and instead grant relief to persons who do the things that are important to the country's development.
For instance, people who are making the sacrifice to educate their children should not be penalized. Even if not all, but most of the university educated children will return to work and contribute to Saint Lucia's development.
The present allowance for people who are sending their children to a university or an institution of higher learning should not be removed. These are the people who are making a contribution to the country; they are the ones making the sacrifices. Why penalize them for the benefit of young adults who have no responsibilities or commitments.
Tax legislation in general must be used on the one hand to discourage people from doing the things that the country can not afford, and on the other hand to reward those persons who do things that are beneficial to the country.
The removal of deductions for life insurance premiums is another drastic omission. The effect on the insurance industry will be severe. While insurers will be better able to advise you of the consequences this will have on their businesses, I wish to make mention of just a few things.
This measure will have a devastating effect on life insurance companies and I am sure you will agree that it is not in Government's interest to do damage to any class of business, especially one as well established as that. The economy can not afford to be upset and disturbed by such measures at this time.
Another factor is this; it must be recognized that at our stage of development, apart from National Insurance there are not many pension options open to our people. There are hardly any affordable retirement-plans available. People use life insurance as a safeguard for their families if they lose the breadwinner. Insurance coverage allows those families to continue to survive without becoming burdens on the State.
Denying people their premiums as a deduction will definitely discourage them from buying life insurance plans, thereby subjecting families to the risks and consequences of being totally exposed. The social cost will again be very high.
It is for similar reasons that I question the wisdom in removing the old age allowance of $6,000.00. An effort must be made to help and assist our elderly citizens. As stated before, we do not even now have many retirement-plan options available to us, far less 50 years ago. Why remove an allowance that is definitely of great assistance to our elderly taxpayers.
It is being implied that the raising of the basic allowance by $5,000.00 helps to alleviate the problem, but this is unfair. The elderly have lost a $6,000.00 deduction on the one hand to gain a $5,000.00 deduction on the other. The net effect is that they are still $1,000.00 worse off than before. Also it is not fair to treat them in this manner when everyone else has enjoyed a gain in deductions of $5,000.00. They are being cheated when it is our responsibility to help and protect them.
We are giving benefits to our young adults and other non-deserving persons at the expense of the elderly. Socially and politically this is wrong.
The removal of the medical deduction is less offensive to me, though it would be nice to see the deduction continued, possibly with a limit of $2,000.00 or $2,500.00. This would at least enable people to buy medical insurance.
In passing I would like to mention that Section 10 (3) which reads "A credit in respect..." should read " An allowance in respect....".
Before concluding my comments on allowances, I would like to emphasize the underlying principle involved in granting allowances and deductions. Allowances and deductions are intended to reward persons who are involved in activities that Government wants to encourage. People are given deductions for things that Government recognizes as beneficial to the country's development. If they provide themselves with their own homes rather that depend on Government housing, they are rewarded.
If they educate their children instead of waiting for a Government scholarship, they should be rewarded. If they invest in areas that Government identifies as critical, they should be rewarded. Similarly, if they engage in activities detrimental to the country's development, they should be penalized.
The whole question of denying homeowners the deductions that they are now accustomed to is a move in the wrong direction. My advice to government on the matter in the 1980's was as follows:
"The words"... not exceeding such sum as may be prescribed," in lines 3 and 4 should be deleted. Government must not only follow a policy of encouraging home ownership, it must also follow a policy of encouraging the maintenance and up-keep of personal property.
Trying to prescribe or restrict the amounts spent on repairs can never be fair because of the vast differences in the types of properties that exists. People should just be required to document each dollar claimed and the Department physically investigate whatever cases it considers suspicious.
It would be unfair to deny someone a genuine repair claim of $11,000.00 while allowing another a false $1,500.00 claim because it is below the prescribed amount. The $11,000.00 expenditure does so much more for the economy, for the merchants, for the labour force etc.
I firmly believe that restrictions on the maintenance and upkeep of property contributed significantly to the decline in what were once decent housing areas. One has only to look at Sans Souci and Entrepot to realize that our problem as a nation lies not only in providing housing, but also in encouraging the upkeep of the properties. Prescribed amounts and restrictions go contrary to this.
If a person is given relief on a large repair claim, that is so in recognition of the contribution his expenditure has made to the general economy. He has borrowed and put to use money saved by others, he has given hardware merchants sales, he has employed people, he has improved the look of his property and in turn his area and in turn his country"
Why remove the deductions homeowners are now entitled to? By denying homeowners such expenses as repairs and maintenance, property insurance, property taxes etc., we are significantly raising the cost of owning and maintaining one's property. These costs are already high and not being able to get a tax break on them, pushes them even higher.
Why punish homeowners? By building their own homes they are making a significant contribution to the development of the country. Not only by taking the pressure off of Government to provide adequate or suitable housing, but in several other ways as well.
It is the explosion of homeownership that fuels the building industry. If people are discouraged from building their own homes it will have a severe effect on the housing industry. Several types of people and businesses will be adversely affected, and here I refer not only to building contractors, but also to real estate agents and carpenters who survive on the maintenance business. These peoples' futures at best will be uncertain. Very uncertain.
The general insurance industry will also be threatened. Faced with higher costs or should I say higher taxes, people will be forced to consider not insuring their properties as a means of trying to cut costs. We are in a hurricane zone and on an earthquake belt. Natural disasters can occur at any time.
Why would Government create a situation that forces people to not insure their properties at the risk of it, Government, having to face the severe consequences of a natural disaster? That would be catastrophic and we all know that Government now or in the future, will never be able to provide anywhere near the level of assistance people will need to re-build and restore things to their original positions.
The famous economist, Alan Greenspan, recently expressed the view that "Houses remain the single most important store of wealth for much of the population." How true. Even more so in our developing country. We must realize that it is the equity in our homes that cushions us against hard times. It is on this equity that we are able to borrow money from a bank to help us achieve what we need to achieve, whether it be to send our children to school, start a new business etc.
The value of homeownership must be recognized for what it truly is. Government should not embark on a policy that threatens homeownership in anyway. Homeownership is vitally linked to many other sectors; it fuels growth in the insurance industry, the construction industry, the real estate industry and many others.
To jeopardize a sector that has contributed so much to our economic growth, because officers of the Inland Revenue find it tedious to deal with claims for repairs and maintenance, is a very poor excuse for implementing such drastic and backward thinking measures.
My advice to Government is that homeowners should be left with all the deductions that they presently enjoy. No attempt should be made to tamper with this. If any tampering is done it should be done with a view to encourage, not discourage, home building and ownership as that has contributed in a very large way to Saint Lucia's economic development over the past several years.
Finally the $5,000.00 increase in the basic allowance should be broken up and granted in areas that are important and meaningful to our development. Rewarding everyone, regardless of his or her contribution, can not be the right direction to head in.
Section 11- Resident Individual
I must confess that I am at a loss to understand Section 11. It may be my own intellectual inadequacy, but I suspect that the section, especially subsections (2) to (4) contain contradictions that will be a source of many future administrative difficulties.
May I suggest that Section 11 be looked at again with a view to rewriting it in clearer terms.
CHAPTER 3 - INCOME TAX BASE
Part 11: Assessable Income
Section 19 defines what is assessable income and breaks it into three types of income- employment income, business income and property income. The new Act makes no distinction between "earned income" and "unearned income".
Tax administration relies entirely on "Income Tax Law" and "Income Tax Practice". "Practice" implies a heavy reliance on precedent and usually for precedent we have relied heavily in the past on English tax cases. I wonder if the elimination and removal of the distinction between "earned and unearned" income will have an adverse effect on us sometime in the future.
Consideration should be given to including definitions for "earned" and "unearned" income in the new Act's definition section, Chapter 1, Section 3.
Section 20(1) (E) - Reimbursement of expenses
Section 20 (E) reads "any discharge or reimbursement by an employer of expenditure incurred by an employee". I suggest the insertion of "private or personal" between "of" and "expenditure".
To tax an employee on business expenses he incurs on behalf of his employer would certainly be wrong. As the section now reads, it is all embracing and borders on being ridiculous.
How can the Act attempt to tax an employee on the reimbursement he receives from his employer for personal funds he uses to pay for say the repair of the business' computer?
It may be possible to re-introduce the notion of "necessary" business expenses. If the expense was "necessary" for the successful operation of the business, it should be allowed and disallowed if it was not "necessary" or "reasonable".
Section 20(1) (F) - Conditions of Employment
Again this is an all-embracing provision which I believe I am misunderstanding. There are so many possibilities that would make the imposition of this section grossly unfair that I suggest that it be looked at again with a view to making it more specific or removed entirely.
Section 20(1) (L) - Meals, Refreshment and Entertainment
This provision is very penal and in fact goes directly against very established business practices. Certain types of employees such as sales persons earn their income and generate business depending on how much they spend on meals, refreshment and entertainment. It is in many cases a legitimate business expense. To tax an employee on the reimbursement he receives is ludicrous. I am sure that Ministers of government will find it just as ludicrous to be told that they will now be taxed on any meals, entertainment or refreshment they receive.
Section 20(1) (M) - Medical Expenses
This is again a very penal provision. There are circumstances that warrant an employer to pay medical expenses for an employee. What if the employee gets injured on the job? Are we really attempting to tax a factory worker who has an arm cut off by a piece of equipment while at work on what his employer pays to have him treated medically?
This section needs to be looked at again, and be either written or removed.
Section 20(1) (N) - Loans to Employees
I am fully aware of the intentions of this section, but again hold a contrary view as to the need to go after this sort of employer/employee arrangement.
It must be borne in mind that in such situations the employer is not allowed to expense the amount loaned to the employee. The business or the employer has gained no tax benefit from the transaction. If the employee does not repay the loan, the employer loses. No tax is lost to Government.
The same principle applies to owners' drawings and loans to directors and higher paid employees. I will comment more fully when dealing with Section 20(1) (0), but with regard to this section I must remind you of the possible social and economic consequences of this section.
Several employers assist employees from time to time with loans. These usually are employees who will not qualify for a bank loan. The loan can not be expensed by the employer and therefore there is no loss of tax to Government at the time it is granted or at any other time for that matter. Why then include a provision that interferes in these private arrangements between two parties?
Section 20(1) (O) - Drawings Accounts
I am at a loss to understand why an attempt would be made to interfere with such an established business practice.
This section attempts to tax owners' drawings from their businesses. This is a very punitive measure. As mentioned before, drawings can not be expensed by a business and therefore results in no loss of tax to Government.
"Drawings" is a practical and convenient arrangement between the business and its owners/employees. The amount drawn by a person in no way affects the business's net income or loss. How can any attempt be made to tax persons on what they draw? The business has already paid tax on that money by virtue of it not being able to claim the amount drawn as an expense.
"Drawings" is a private and personal arrangement between the business and an employee. It would be unwise for Government to meddle in such arrangements and I suggest that it could be detrimental for Government to do so.
For instance, if the Act proposes to tax employees' drawings then it would only be fair and ethical for the Act to allow the business the amount drawn as a business expense so that those funds are not taxed twice.
Even if Government wants to be unfair and disallows the amounts to be expensed, the private sector merely has to deem the amounts to be salary or directors fees etc. and get them expensed legitimately.
In the case of a company, government will lose tax on the amount expensed at the rate of 33.33%. The employee will be taxed on that same income at 10%, 15%, 20% or 30%. Government will stand to lose taxes.
The provisions of this section can only be detrimental to Government's revenue collections and I strongly suggest that the reasoning behind it be looked at again. In an attempt to generate additional revenue, Government is opening a can of worms that can only result in a loss of revenue.
Section 20(3) (I)
This section is a direct contradiction to section 20(1) (M) if I understand it correctly.
Section 20(3) (G) - Termination Pay
This section exempts redundancy and termination payments. While I am aware of this being a universal practice, I differ in my thinking. Such payments are made as a result of a person's past employment and should be taxed.
I do not see or appreciate the "capital nature" of the payment and believe that this is a source of extra revenue for Government if such payments were to be subjected to tax.
If the payment is "capital" in nature, then the business should not be allowed the expenses (Section 25(3) (B). I however contend that it is not capital in nature and the employee should be taxed on the payment received.
Section 21 (B) - Disposal of Assets
This section actually introduces Capital Gains Taxes in Saint Lucia. I wonder if legislation as simplified as that presently contained in the Act is adequate for such a complicated form of taxation.
Also, is Government fully aware of the consequences of introducing Capital Gains Tax?
The brief legislative treatment granted to it here suggests not.
Section 21(H) - Insurance Proceeds
This section taxes insurance proceeds. This is again a very questionable piece of legislation. There are circumstances that would make this a very unethical thing to do.
Suppose a business was to lose a building or vehicle from a fire or hurricane, this section will tax the compensation it receives from its insurers. But such compensation merely allows the business to attempt to replace the assets lost. Where is the gain to the business?
Insurance proceeds are taxed under certain circumstances and I suggest that no attempt be made to change those circumstances. If the asset is a non-depreciable asset, it would be very unfair to tax the insurance proceeds.
Section 22 - Property Income
This section defines property income and that definition includes dividends, interest, annuities, pensions, gifts etc. I think it is ill advised to include so many different types of income that bear no relation to property in its definition.
Why not increase the types of income form 3 to 4, by adding a class for "other income" in Section 19? It is unwise to break established principles and practices.
Section 23(1) (F) - Insurance Premiums
This section is confusing and possibly contradictory. It refers to a deduction for life insurance premiums when in fact there is no such provision in the Act.
Section 23(1)(K) (V) - Bank Interest
This section exempts from tax any interest earned from any bank in Saint Lucia once it does not exceed $500.00.
This is a section that will have a very adverse effect on the economy in general as it will encourage everyone to immediately remove his or her money from the banking system. Savings should be encouraged, not targeted for taxation.
Small underdeveloped countries like ours, depend on our ability to save to fuel economic development and growth. It is really all we have to finance developmental projects. No attempt should be made to tax bank interest earned.
Since I am sure that many others will be dealing with this section in their submissions, I will only point out that giving consideration to raising the amount of the exemption is not a solution either.
The flight of capital will occur once the banks are required to report this kind of information to the Inland Revenue Department. It is the fear of Government finding out about their deposits, which makes people scared. Raising the quantum of the exemption will not help. Interest should just be left as exempt income; otherwise there will be an immediate flight of capital.
One must realize that people who are in a position to earn meaningful interest, probably have part of their savings outside of Saint Lucia already and will certainly have no difficulty in moving the rest overseas. What we should be concentrating on is trying to find ways to encourage them to move what is already overseas back home. Not forcing them to move all out.
The taxes that would be collected from this source could never compensate for the devastating effects such a policy will have on our economy and development in general.
In 1988, when Government planned to tax bank interest I commented on the matter in the following manner:
"I strongly urge the removal of this subsection completely. This will scare the general public and has already started to do so. For the couple of people who the Department may get useful banking information on, it will not be worth it.
Firstly, people will stop dealing through banks if it is going to leave evidence that they do not want uncovered. All that is likely to happen is that the banking system will be looked at with suspicion and people will keep away. People will start to hoard money and our savings will dry up. The economic woes this section will cause are just not worth the couple of extra dollars it may earn in the first year, because after the first year it will certainly not earn Government much money.
Underdeveloped countries like ours, have to earn their tax dollars by means of voluntary compliance. Anything that hinders the development of trust, the willingness for discussion and compromise, or the willingness to allow privacy, will prove detrimental in the end. Government must not stretch so far into people's private affairs. There are other ways and means of collecting information that will not destroy our banking system, deplete our money supply and savings and risk the entire destruction of our economy and development."
Section 25 (3) (E) - Travel
This section denies the travel expenses incurred by a company for anyone other than a "whole-time service director". Now this is truly a very parochial view of how businesses operate. It borders on being absurd.
In this day and age of communication and travel, we are moving several years backward by introducing such legislation. It is by travelling and seeing and meeting people and by expanding our horizons that we will develop. Why does the Inland Revenue Department want to discourage this?
Travelling both locally and overseas is a necessary part of business and should not be restricted to Service Directors.
It is a brave man or woman who will have to tell the Ministers that they and their entire entourage, or civil servants for that matter, that they will all have to pay income tax on the subsistence allowances that they receive when they are travelling overseas. Not to forget the value of any meals, refreshment or entertainment they may happen to receive by virtue of their jobs.
Section 25 (3) (F)- Non-Resident Employee
Businesses are being denied a deduction for remuneration paid to a non-resident employee. It is hard to understand why. It is quite possible for a business to pay a salary to a non-resident employee who is providing the business with a valuable service.
What is wrong with a business bringing in an expert to perform a valuable function for it such as to repair its equipment, train its staff, and install complicated equipment or whatever? What if LUCELEC brings in an expert to repair its very complicated equipment at Cul-De-Sac? Why would the company be denied the cost of doing so as an expense? It would be a legitimate and necessary expense for an invaluable service.
Businesses should not be denied these expenses because Government chose to exempt the non-resident's salary under the provisions of Section 20(3)(H). It would be better to delete Section 20 (3) (H) rather than to deny the business the expense.
The new Act is delving too far and wide. It is creating too many gray areas, the underlying principles of which are hard to understand. On the one hand the Act guarantees one's ability to claim expenses which are "incurred in the production of assessable income" (Section 25(1) (A), yet it blatantly contravenes those provisions throughout the Act for unclear reasons.
Section 25(3) (G) - Meals, Refreshment and Entertainment
My comments here are exactly the same as those on Section 20(1) (L).
The Act is trying to say that expenses on meals, refreshment and entertainment are not legitimate business expenses and this is just not so. Entertainment is an integral part of many business relationships. It would be very myopic to ignore this fact. I suggest that some effort be made to restrict the expense to say, a percentage of gross income, or to disallow the payment of such allowances, or to require some proof of income having been earned as a result of the expense (as the USA does). However those sorts of expenses should not be disallowed entirely.
The relief given under the provisions of Section 26 just does not cover the circumstances under which entertainment is undertaken. One can understand the difficulty in controlling such expenditure, but to deny it entirely would be wrong.
There are two sub-section three's in Section 25, one should be 4 and 4 should be changed to 5 and likewise 5 to 6.
Section 25(3) (D) (Should really be 25(4) (D)) - Staff Education
This section disallows businesses the cost of educating its employees. This to my mind should be encouraged because it takes the pressure off Government to provide higher education for at least some of its citizens.
I am at a loss to understand why such expenses would be disallowed. My firm for instance has been engaged in this practice for years and we feel it has worked well. We have paid the fees for all staff members pursuing an accounting qualification and we feel that it is worth it by having a better quality worker on staff. Even when such employees leave our employ we feel that the country as a whole has still benefited.
The provisions as now written would allow a factory to charge the cost of sending a machine operator overseas for training, yet disallow an accounting firm the cost of getting a member of staff qualified as an accountant. Surely this is unfair and makes no sense.
I believe that the relevant factor is that the qualification must be relevant to the taxpayer's business for it to qualify as an allowable expense. Once that criterion is met, the expense should be allowed.
Section 31(2) (B) - Depreciable Assets
It may be prudent to add "Furniture & Fixtures" as a specific item in spite of having the sweeping clause "all other tangible depreciable assets."
Section 60 - Taxing International Shipping and Air Transport
I must confess that I have not had the time to digest this section entirely. However I must comment on Section 60(9).
This section gives the Comptroller the right to make a shipping agent pay any taxes owed by the ships' owners, once he instructs them to do so. This must be read in conjunction with Section 60(8) that gives the Comptroller the right to tax ship owners on any amount he wants. Section 60 (8) says "... the Comptroller may determine the amount of tax payable." The more one reads this Act, the more one has to wonder what has caused this desire for such drastic changes.
The Act will decimate our middle class which is the backbone of our economy and also the backbone of the very Government structure that exists today. This could never be Government's intention.
One is left to feel that the persons responsible for this draft had no clear policies in mind and certainly no clear vision. Government has got to decide what it wants to achieve. The present Act #1 of 1989 has all the foundations that are necessary for it to be effective, progressive and successful. A little fine tuning here and there will be perpetually necessary, but this drastic change in approach throws us in uncharted waters.
Section 60 needs to be looked at again bearing in mind how the tourist ships reacted to our attempts to increase the passenger levy a few months ago.
Section 86 - Returns not required
I strongly advise against the inclusion of this section. It is absurd to pretend that our working population is sophisticated, tax conscious or tax aware enough, to accurately assess themselves. The vast majority of our population knows little or nothing about taxation.
To assume that people will read the Income Tax Act and become familiar with all of its provisions is totally ridiculous. An Income Tax Return Form, whether being prepared for personal use or to be formally submitted to the Inland Revenue Department, requires a taxpayer to prepare or compute it in accordance with the Income Tax Act. One has to read the Act. The vast majority of taxpayers know nothing about tax beyond the fact that a deduction is made from their salaries, which they assume is correct.
The Provisions of Section 86 (A) give people the right not to file a Return form if after assessing themselves they owe less than $10.00. Hardly anybody will ever be able to assess himself or herself accurately and I am certain that the vast majority, if not all of those self-assessments, will result in the tax liability being less than $10.00.
It is again only the honest minority who will prepare the Return fairly. Everybody else will prepare it to suit themselves so that they owe less than $10.00 so that they do not have to file and claim ignorance of the Law if they are ever caught. I know that ignorance of the Law is no excuse, but I am being realistic. That is what is going to happen.
I honestly think that we are fooling ourselves if we believe that everybody will ever do a self-assessment. The entire working population will just not file Income Tax Return forms, "unless expressly requested in writing by the Comptroller" to do so. (Section 86).
We must view this situation facing the fact that Government's inability to refund taxpayers over the past several years, has cultured in us the belief that it is a waste of time to hope we will ever get back any taxes already paid.
Rather than doing self- assessments to see if they are required to file or not, people will exert their energies towards finding ways to force their employers to deduct very little tax from them. The only people who will file Income Tax Return Forms will be those who are certain that they are entitled to a refund of taxes. Believe me, the Department is creating an administrative nightmare.
The provisions of Section 86 (1) are just as ridiculous. The assumption that the P.A.Y.E. system will ever result in the correct amount of tax being withheld is false.
There are just too many factors involved in making the correct deduction from an employee for it to ever be accurate. Not even the most sophisticated businesses in Saint Lucia will ever be able to make an accurate deduction from its employees on a consistent basis. It may be right one year, but it will not continue to be.
It is absurd to assume or believe that employers will be able to keep up with which employees have cancelled life insurance policies, whose children have become overage, what their mortgage interest is annually, whose dependent relative died etc.
I could go on and on trying to explain why this section will never work, but I believe that it is already known that this is so. The perpetrators of this Act must know this.
I must ask however, what is the logic in including the provisions of Section 86 in the Act? Why doesn't Inland Revenue require everybody to file and then decide internally, by whatever criteria it chooses, which Returns to examine.
Why take away the Department's authority to require a Return form to be filed automatically? That requirement is the essence of tax administration. Why take it away and then put the Comptroller in a position where he is required to write and ask people to file? I believe this will be administratively more difficult than having to deal with all of the Return forms being filed automatically. Deciding who to ask to file can also be very subjective and is definitely a move in the wrong direction. Why allow employees of the department to decide whom to let go and who to force to file?
I strongly urge that this section be removed. Instead include Section 86 with provisions requiring everybody to file, and let it be an internal decision as to which Returns to examine.
PART 11: Installments of Tax
Section 92(1) - Payment of Installments
I just wish to point out that the installment deadlines are stated as 30 June, 30 September and 31 December. Only recently the department found that the end of a month proved unsuitable for its purposes and legislatively changed these dates to the 25th of each month. I therefore wonder if for administrative and cash flow purposes it would not be in the department's best interest to change these dates back to the 25th in the new Act.
Section 96 (1) - Withholding Taxes on Contractors Etc.
The definition of "contractor" has been expanded to include persons engaged in management or any other service "whether or not goods are also provided under the contract". This section is confusing since it implies that it is intended for services relating to construction or transportation.
As written however it catches all services. Is this the intention? One notes that the old section exempting certain types of services has been removed. This may not be wise for administrative purposes.
If I may, I will take the liberty of providing some background on the introduction of the provisions relating to withholding taxes on contractors in Saint Lucia. The provisions came about because it was felt that several building contractors employed large numbers of workers from whom they made P.A.Y.E. deductions and never paid those monies into the department.
As a means of forcing them to file financial statements and Income Tax Return Forms, the 10% withholding tax on these contractors was introduced. At least that way some form of tax would be paid by these people. It was also intended to catch the small contractors who did not employ many or any workers and who operated without the department's knowledge.
While I can not attest to the success or failure of these provisions in terms of their value to the revenue collections, I would like to once again ask that they be looked at bearing the following in mind:
1) These withholding tax provisions make everybody who engages the services of any contractor, carpenter, mason and now anybody who provides a service, an authorized agent of the Government with the authority to collect taxes on Government's behalf. This is certainly a very unwise thing to do.
2) The possibility of persons collecting the withholding taxes on Government's behalf and never paying them into the department is very great. I daresay that this is very rampant today.
3) Even if taxes are never paid in, Government is forced to give the contractor a tax credit for the taxes deducted as the deduction was made by an authorized agent of Government.
4) The tax deducted from the contractors is not a final tax, as credit is given to the contractor when he is assessed.
5) The only benefit Government derives from these provisions is the early collection and use of the funds since a tax credit is subsequently given to the contractor.
6) A 10% withholding tax can prove to be very punitive, depending on the type of contract. In the case of building contracts for instance, to take 10% of the material and labour element of the contract is very high.
It must be borne in mind that building contractors also have a 6% retention fee withheld from them usually for 6 months or a year. This means that 16% comes off the top. In such a competitive field, it is unfair to these contractors since they must bid low to be awarded the contracts in the first place and then have to do without 16% of the fees for one year.
It is not surprising that no local contractor can remain large and successful for any length of time. The withholding tax legislation is partly responsible for this.
It is for those reasons I have always been opposed to this legislation. Not only does it stifle certain types of businesses, but also Government has no guarantee that it collects anywhere near the amount of revenue that it should from these provisions.
Added to this, it is not new or additional revenue being collected, but really only an early collection of money Government would get later anyway. It works out to be early collection at great cost because I suspect that most of the taxes are never paid in to Government.
I must add that these provisions are usually blatantly ignored by the majority of the population, many of whom may not even be aware of them. It is therefore unfair for the honest few to be penalized when the majority, especially the skilled craftsmen, get away entirely. By broadening these provisions to include all types of services, Government exposes its tax collections to all the risks associated with these withholding tax provisions. This is an ill-advised thing to do.
My advice to Government in 1988, which still holds firm today, was as follows:
"I have always been in disagreement with the introduction of this section which is already in our present Law. It is bad for Government to make every Tom, Dick and Harry its agent with authority to collect money on its behalf. I do not believe that the majority of these collections will be made in the first place and even if they are made most will never reach the Inland Revenue Department.
Unenforceable laws should not be passed. The cost of enforcing this law will be uneconomical and experience has shown it to be so unpopular that it is ignored in most cases.
I suggest that nobody be allowed a deduction for wage and labour expenses unless they can thoroughly document the expenses by providing the Department with all details including dates, names and addresses of the recipients.
Government will collect or save more money by denying undocumented claims than by having unscrupulous people being authorized to collect money on its behalf."
I strongly urge therefore, that the need for, usefulness and success of these provisions be looked at again.
Section 98 - Rents and Royalties
Again, I totally disagree with the provisions of this section. My comments on the withholding tax provisions contained in Section 96 apply in full to Section 98. In addition, I must comment further on Section 98 since it introduces withholding taxes on rental income.
To introduce a 10 % withholding tax on rents paid to locals is a very backward step. Government stands to lose by introducing this measure. The deductions may be made by tenants, but the vast majority of it will never be paid in. Government will therefore be forced to give the landlords credit for taxes withheld but never paid in.
The administrative cost of collecting such unpaid taxes from the tenants will be very high and totally unnecessary. I am at a loss to understand why legislation such as this would be introduced when government only stands to lose revenue from it.
If the tax administration is efficient, then all landlords will declare their rental income and pay their taxes at the time of filing. By introducing the 10% withholding tax government now appoints every tenant in Saint Lucia as its agent, with authority to deduct the taxes, the majority of which will never be paid over to government. What happens when tenants change address or go overseas? Whose responsibility is it to locate these people when problems and discrepancies arise?
Problems and discrepancies can only be avoided if the tenant, or the landlord on the tenant's behalf, maintains records in accordance with the provisions of Section 105, Section 107, Section 108 and Section 109. We are only kidding ourselves if we believe that either the normal landlord or normal tenant will be capable of this.
Even if some are capable of doing so, why burden people with such administrative and record keeping responsibilities over such a simple transaction as renting a property? The department's administrative responsibilities will also be greatly increased to monitor such transactions.
Nothing in the history of Inland Revenue's recording keeping performance can inspire any confidence that even the department will be able to cope with the rental transactions relating to the rental of a property in La Clery, far less those in Banse, Desbarra, Roblot or Au Leon.
Another question is, has anyone considered the vast increase in paperwork involved? Or the pressure this requirement will put on our postal services? Here is what complying with this requirement involves.
Section 105 requires a " withholding agent", really the tenant in Desbarra or anywhere else, to maintain or keep records of his rent payments available for inspection by the Inland Revenue Department. Records must show:
a) Payments made to the "Payee", really the landlord.
b) Taxes withheld from these payments.
c) Must within 30 days after the end of the year file on "the prescribed form" a statement which shows:
1) The landlord's name, address, and registration number. Registration number? Not tax account number? It looks like every landlord will have to register.
2) The amounts "paid or payable" (payable being definitely more likely) along with the value of all benefits provided to the landlord.
3) The amounts of tax withheld (no mention of "paid or payable").
4) Any other information that the Comptroller may require.
Trust me, this section means a lot of business for me because a lot of honest people will have to engage my firm to maintain those records. But I honestly cannot support, far less encourage these measures. They are ridiculous.
They are ridiculous because apart from Section 105, more is still required by Section 107, accounting for the tax. Here the tenant is supposed to follow the rules of paying in the tax. So he buys envelopes and goes to the Post Office to buy stamps and to post the completed "prescribed forms" along with his cheque or cash to the Comptroller of Inland Revenue. Hopefully it will reach before the deadline date.
The Inland Revenue Department receives the mail, processes it and mails back out the receipt. Not in the same envelope with that tenant's P.A.Y.E. receipt, installment receipt and three other monthly receipts that the Department has for that same tenant. Each in its own separate envelope. No wonder mail is slow.
The tenant receives the rental receipt so he now has to make a copy of it in order to give the original to the landlord for his records.
Remember that this is being done monthly only for rent. Not NIS, or P.A.Y.E. or Installments or Arrears of Tax of any kind or House Tax or whatever. Apart from these monthly responsibilities, we must not forget the annual responsibilities imposed by Section 105.
All of these administrative burdens are to be undertaken for the sole benefit of collecting taxes early? It could never be worth it even if all the taxes were to be paid in, far less when one knows that the majority of those taxes will never reach the Government treasury.
My advice here is to not contemplate this any further, remove Section 98(1) because Government only stands to lose a tremendous amount of money from it. Not only will it not collect the $100.00 in withholding tax from John Public's rentals, but it will be forced by law to give John Public a $100.00 tax credit for money deducted from him that Government never received.
Section 98(1) (B) - Withholding Taxes on Non-Residents
The provisions of this section are even worse than the previous section. The withholding tax here has been increased to 30% of the gross rental income and it is a final tax.
This means that a non-resident homeowner will have to pay 30% of his rental income as a final tax, with no possibility of deducting his expenses relating to ownership, maintenance or upkeep of the property.
Since our firm represents dozens of non-residents from Europe, Canada and the U.S.A who own and rent properties in Saint Lucia, especially in the North of the island, I am very familiar with these persons finances relating to those properties.
First, not one of them earns a profit from these rentals in excess of 30% of their gross rentals. It would therefore be very unfair to tax them at such a high rate. Secondly, I think it would be very parochial and myopic to look at their contribution to Saint Lucia's development only in terms of the amount of income taxes they pay.
Most if not all of these people spend large amounts of money up-keeping or renovating their properties. All of that money is money that comes into Saint Lucia from
overseas. I am referring here to large sums of money. In one instance in 1997 one owner spent in the vicinity of $0.75 million renovating his property.
These non-resident owners keep full time employees such as housekeepers and gardeners. They all rent vehicles from local car rental companies while they are here. They also spend large sums of money at our local restaurants, with local land tour operators, boat operators etc. while holidaying here. When they can not be in Saint Lucia they often rent their properties to people from their countries. Their marketing and promotion of Saint Lucia as a tourist destination can not be discounted.
I can assure you though, that as wealthy as they may be, they will not continue to come to Saint Lucia or keep their homes here if the cost of doing so is prohibitive. They will sell them and move to Antigua or Grenada.
Saint Lucia only stands to lose if we try to measure their contributions in terms of the amount of income tax they pay. I know this for a fact and Inland Revenue should know that as well, because it tried this method of taxation before and was forced to remove it.
This method of taxation was first imposed on non-resident homeowners by means of the Income Tax Ordinance (Amendment) Act # 13 of 1980, which imposed these withholding taxes at the rate of 20%. Note not 30%, but 20%. The effect on non-resident homeowners was so devastating that they reluctantly, but gradually, were forced to start selling their properties.
This caused some concern to the then Government, not only in terms of the unemployment it caused among the people of Gros Islet, but also the pressure it put on the island's foreign reserves when they started to repatriate the funds generated from the sale of their homes. Inclusive of the Capital Gains.
Government examined the position and decided in 1986, by means of the Income Tax Ordinance (Amendment) Act # 4 0f 1986 to remove the withholding tax on rental income earned by the non-residents. They from that time onwards were treated almost in the same manner as residents. They were allowed to deduct their property-related expenses from their gross rental income and pay taxes on the profits made at the same rates as locals.
The only difference in their method of taxation was that while treated as locals in every other respect, they were not allowed any personal or other allowances provided under the Act.
I therefore, being very familiar with our previous experiences, strongly urge Government not to make the same mistake again. Let's learn from our past experiences. Do not impose this method of taxation on our non-resident homeowners. It is wrong to measure their value and contributions only in terms of the amount of income tax they pay. They truly are valuable to our tourist industry, to local employment and to local commerce.
Having sat on both sides of the fence I also appreciate Inland Revenue's concerns, it wants these non-residents to make an Income Tax contribution. I have represented dozens of those non-residents for the past 15 years and I also know that they have no objection to making a tax contribution, if it is fair. In fact they would be happy to.
As a consequence, I make the following suggestions with regard to Section 98 of the proposed Act:
1) Delete Section 98(1) (A) for the reasons mentioned earlier.
2) Reduce the rate in Section 98(1) (B) to 7.5% if it is to be a final tax.
Section 104 and 105 - Withholding Tax Certificates
My comments here relate to those already made concerning Section 98. Since everyone is being made an agent of Government with regard to withholding taxes, I am certain that the vast majority of them will not be capable of fulfilling the requirements of these sections.
Section 115 - Recovery of Tax from Directors
This is a new section and I think that sub-section (1)(C) which makes the directors liable for a company's unpaid taxes is wrong. It dilutes and possibly ignores the whole principle of "Limited Liability."
Section 119 - Access to Books and Records
This whole section by removing the requirements for a warrant to be first obtained from a Magistrate gives too much power to officers of the Inland Revenue Department. Checks and balances must not be ignored and I strongly urge that the requirement of first obtaining a warrant be re-introduced.
One can't help but feel that the whole tone of this Section and what it attempts to do, is indicative of the proposed Act in its entirety. What has happened to require such drastic changes?
Why is it necessary for officers of the Revenue to be able to walk in any and everywhere, seize records, computers or whatever, without first proving to our judiciary that it is absolutely necessary to do so? Not even the police have that power.
Section 144 (2) - Hearings
The persons who can represent a taxpayer at these hearings are too limited. Personally I would like a "Tax practitioner" added to the list. But even that would be unfair to the taxpayer who may want his "intelligent brother" or his priest to represent him.
It is unjust to tell people who can represent them. The whole section should be opened up to allow the taxpayer any form of representation he chooses.
Section 150 - Official Secrecy
The whole question of official secrecy will be undermined if the Inland Revenue Department is authorized to share taxpayer information with so many government departments and institutions.
It would be wrong for any such information to be divulged or shared without the taxpayer's prior approval or consent. One must bear in mind how Section 144 allows the Revenue to get the information.
I hope that I will be afforded a second opportunity to comment on the Act before it is finalized. I must confess that I found the time granted to me to respond this time around totally inadequate.
As a result I was unable to pay attention to several sections which, while important, were left out of my comments at this time.
I therefore take the liberty of suggesting that the next document (2nd draft) be circulated for public comment, at which time I will hopefully be able to devote more time and attention to it. It is also difficult, mainly because of time constraints, to deal with a document which one suspects will be drastically changed between now and its final draft.
May I also suggest that future drafts change the emphasis of this Act. I truly believe that the present Act, #1 of 1989, is in essence an adequate piece of legislation. Not that a new and improved Act should not be contemplated or introduced, but I believe that Government's interests would be best served by concentrating on the following:
1) Gearing their tax administration policies towards broadening the tax base, not by means of new legislation, but by operating efficiently enough to "catch" all persons and businesses in the tax dragnet.
There are too many income earners and businesses in operation who are not even on the tax rolls. It is grossly unfair to the present tax payers to keep having the noose tightened around their necks, while such a large number of persons operate outside of the tax system entirely.
Blood can not be gotten from stone. A conscientious effort must be made to make everyone file Returns and pay their fair share. The present revenue loss to Government is tremendous and if resources would be devoted to this exercise, the revenue collected would be in excess of any additional revenue to be collected from the introduction of the new proposed Act.
I must take this opportunity to remind the Comptroller of Inland Revenue, a senior official within the Ministry of Finance, as well as all other finance Ministry officials, that Income Tax is but one of a multitude of taxes and levies imposed on the populace.
The ordinary citizen doesn't have to deal only with the payment of Income Tax. As large a slice this is out of his income, he still has to contend with:
a) Custom duties and tariffs
b) Consumption taxes
c) Stamp duties
d) Gasolene taxes
e) Motor Vehicle licenses
f) Firearm licenses
g) Parking tickets
h) Land and House taxes
i) Departure taxes
j) Trade licenses
k) Liquor licenses
l) Restaurant licenses
m) Foreign Exchange levies-until recently
n) Boat licenses
o) Telephone levies
p) Registry fees
q) Stamp taxes
r) Electricity surcharges
s) Entertainment duties
t) Hotel accommodation taxes- yes locals pay this too
u) Department of Planning fees
v) Insurance premiums taxes
w) Enforced national insurance contributions
x) Passport fees
There is absolutely no doubt in my mind that if the collection of all of these taxes, tariffs and levies was to be efficiently done, then there would be no need to introduce new legislation, especially such penal legislation.
What is the point of introducing new revenue collecting legislation when so many are already in place? Instead of concentrating on collecting them efficiently, Government always tends to keep trying to squeeze more out of the honest few who comply.
Surely Government must now try to improve its efficiency rather than simply pass laws that burden the honest few any further. More revenue will be earned from the efficient administration and collection of the taxes already in place, than could ever be earned from imposing stricter laws on the honest few who will try to comply.
2) Achieving voluntary compliance. The real benefits of this would be twofold. Firstly it would greatly reduce the department's administrative costs, and secondly it would increase revenue collections. If people feel the system is fair and universally applied, they would be more prepared to pay their fair share and not devote so much time to tax avoidance or evasion.
The proposed Act has generally introduced new measures and new ways of treating things that are not only foreign to our culture but also offensive to our instincts.
The Revenue should not embark on a policy that forces the working population to defend itself and practice evasion in order to survive. The general economic conditions cry out for co-operation, communication, understanding, a willingness to help and contribute, a willingness to be fair to all others and all sectors in this whole of several parts, called our economy or our country.
It has been many years since Saint Lucia has enjoyed the general feeling of good will towards Government that exists now. Everybody, despite whatever reservations each individual may have, wishes the Government well. The majority is hoping things work out well for Government because their individual circumstances require an improvement in the economy.
People are willing to participate in any programme introduced that will improve their communities or their way of life. Why this salvo from the Ministry of Finance? Could it possibly be a lack of understanding of how tax legislation makes or breaks economies? Surely this cannot be the case. So what makes such a drastic Act necessary? Even in the form of a first draft this Act is bad. It unveils to the public a view of governmental intention that we never thought existed or possible.
Government should harness the general feeling of goodwill and cement a spirit of voluntary compliance. The Act should exude a feeling of fairness, everyone having to pay their fair share, everyone jumping on board, no more hiding. To Government's detriment it does not do this.
Past experiences with tax relief such as those given in 1981 and 1990, show that the economy flourished thereafter. Why change direction now, when so many businesses are hurting? It must be understood that voluntary compliance is the only successful route to successful tax administration.
Efforts towards achieving the two goals mentioned here proved extremely successful
in the early eighties and I believe that they would prove even more successful now with
the tremendous development which has occurred between then and now.
I thank you for giving me the opportunity to comment on the proposed Income Tax Act
and look forward to being granted another opportunity to do so before it is finalized.