Don’t overstate tax income again

For years, successive governments may have overstated taxation revenue by not paying VAT and income tax refunds promptly, thereby constraining investment and increasing financing costs.

In 2020, businesses are faced with another tax-related dilemma. Most if not all businesses will have lower profits than they did in 2019 as many operations were either closed for some time or had significantly reduced activity which may extend to the end of year. However, they are obligated to pay quarterly instalments based on the prior year’s chargeable profits.

Section 79 of the Income Tax Act states that taxes shall be paid quarterly, based on the prior year’s chargeable profit/tax liability. It also provides that where the business expects to make lower profits in the current year than it made in the prior year, it can apply to the board for approval to reduce the quarterly payments. specifically, the legislation provides:

“…on an application by such person for the purpose, the board may revise the estimated chargeable income of that person and the amount of tax chargeable thereon, and the provisions of subsection (1) shall apply accordingly.”

This provision requires the Board of Inland Revenue (BIR) to receive and consider the application and if adequately supported, to accede to the request to reduce the quarterly payments. While the BIR has a discretion and “may revise the estimated chargeable income”, in exercising that discretion it must be fair and reasonable.

As has been customary, where the board approves an application to reduce instalments, it would normally inform taxpayers that if their total quarterly tax payments are below the actual tax liability for the current year interest will be charged on the shortfall.

Notwithstanding the above-mentioned provision taxpayers who have made such applications have been met with a consistent refusal by the BIR, regardless of the merits of the application. It is our understanding that taxpayers have submitted such requests and the BIR has responded stating that, “We are unable to accede to your request at this time." It is unclear why the BIR has adopted this approach. One is left to conclude that this is based solely on a policy decision of the BIR, thereby creating another layer of uncertainly for compliant taxpayers in unprecedented turbulent times.

In adopting this approach we maintain that the BIR is failing to properly discharge its responsibility under the act, to the detriment of the taxpayers and ultimately the country.

Given the uncompromising position of the BIR, and its failure to exercise the discretion given to it under the law, coupled with the lengthy delay in refunding overpaid taxes, taxpayers are forced to make the decision to either pay reduced quarterly instalments based on the current year’s profits without approval (and thus be exposed to interest penalties) or possibly wait years to receive a refund for overstated quarterly taxes paid on the basis of the prior year profits. This could also have the impact of overstating taxation income for the State.

Cash flow is critical for businesses to survive this period of uncertainty. This seemingly unfair treatment to those who are making every effort to be tax compliant could result in increased unemployment and business closures. It could also lead to an increased number of non-tax compliant business and ultimately reduced taxation income for the state.

This matter must be addressed urgently as the next quarterly tax payment is due at the end of June. It is therefore incumbent on the board to utilise the discretion granted under the act to approve applications for reduction in the quarterly instalments in a fair and consistent manner.

(Content courtesy the TT Chamber of Industry and Commerce)