Implications of the Super Gain Tax (SGT) in the recent budget
SGT no doubt is a high water mark of the “interim budget proposals” or “Soora Saradiyel’s budget” as the Prime Minister has opted to term it. The rationale for imposition of the SGT as expressly couched in the budget speech is to levy a charge on ill-gotten wealth.
“Honourable Speaker, we have observed that there are very few companies/ businesses in Sri Lanka which have earned super normal profits during the last several years with the undue patronage of the previous regime at the expense of the development of many other companies/businesses in the country. This is not a tolerable situation by any means. As a responsible government, we have a duty to provide justice to the society through a proper mechanism. “(Budget Speech page 27)
Ill-gotten wealth
Any prudent and an objective person would commend and applaud the rationale and the stated cause for the new tax. But a few who would dig deep would raise the salient point as to the need to introduce a distinct tax to levy a charge on “ill-gotten wealth” as the existing income tax and other taxes do apply on “legitimate income as well as illegitimate income or ill-gotten wealth”. In 1931 Al Capone, the Mafia boss, was sentenced to 11 years in jail on conviction to pay US$215,000 plus interest due on his back taxes or ill-gotten wealth in addition to a fine of $50,000. The case in point is ill-gotten wealth / illegal income is liable for income tax and there is no mercy in tax law for such income. If any company due to political patronage or otherwise has evaded payment of tax, such companies and persons should be hauled before the law and collect back taxes with severe penalties under the provisions of the Inland Revenue Act and other tax statutes under provisions pertaining to ” Fraud, evasion and willful default”.Besides, how could policy makers ensure SGT would apply on “ill-gotten wealth” and would exclude super gains made by companies and individuals due to their own sweat and blood via legitimate means? Is there a process to differentiate cheese from chalk? Would the scheme of the SGT be any different when the innocent are being led to the same guillotine or shot at from the bullets meant for culprits with ill-gotten wealth? One should keep the fingers crossed to see whether the preamble of the Legal Statute to enact SGT into law would refer to ill- gotten wealth!
The budget speech reads “As a responsible government, we have a duty to provide justice to the society through a proper mechanism”. Hence the mechanism to be adopted should “impose SGT on ill-gained wealth” via a “proper mechanism”.
Interim Budget speech
The budget speech goes on to set out the rudimentary features of the SGT “mechanism” as follows.
“In this context, I would like to propose a Super Gain Tax, which will be one off payment. Accordingly any company or individual who has earned profits over Rs. 2,000 million in the tax year 2013/14 will be liable to pay 25% of their profit. This will help reverse the ill-gotten gains of these companies back to the general public. The expected revenue from this will be Rs. 50,000 million in 2015. ”
Mechanism of payment
The “mechanism” as stated above is a one off payment from both companies and individuals who have “earned” “profits” over Rs. 2 billion during “tax year 2013/14″. Reversing the ill-gotten gains to the general public is the stated cause!
Whilst the rationale or the clearly stated cause of reversal of ill-gotten wealth is a commendable one could not resist from raising the issue “is it the proper mechanism”? Does the mechanism achieve the stated cause? The statement in the budget speech pertaining to the mechanism lacks a reference to any process for identifying companies and individuals with “ill-gotten wealth”. Could one presume every company and individual with earnings more than two billion in tax year 2013/14 to possess “ill-gotten wealth”? Hence the manifest conclusion that there is a deviation between the rationale / stated cause and the mechanism to achieve the same. The critical issue is should the rudimentary mechanism set out in the budget speech be reformed to achieve the rationale / stated cause of reversal of ill-gotten wealth or the rationale / stated cause itself be redefined to achieve harmony with the mechanism.
The rationale to one’s mind that would achieve harmony is simply to impose a tax on deep pockets to gather Rs. 50 billion to state coffers for the expenditure of the government. It is commensurate with the purpose of taxation of distribution of wealth and justifies Adam Smith’s Canon of equity in taxation of “Broader shoulders bearing more burden”.
It may also be reconciled with “he who has two tunics shall give one to that he has none” in the Bible (Luke’s gospel chapter 3 paragraph 11)
Global Corporate Tax Trends
Imposition of additional direct taxes on corporates seems to be occurring in different parts of the world at present. President Barack Obama has proposed a one off tax of 14 per cent on US corporate giants with offshore profits in the federal budget read few days back to raise $238 Billion revenue targeting companies in the industries of technology and pharmaceuticals including Apple, General Electrics, Microsoft, Pfizer (PFE), Johnson & Johnson (JNJ), Google (GOOG), Starbucks and IBM. Extracts from President Obama’s Budget Speech 2015 is reproduced below.
“These proposals will put more money in middle-class pockets, raise wages, and bring more high paying jobs to America. To pay for them, the Budget will cut inefficient spending and close tax loopholes to make sure that everyone pays their fair share. The Budget closes loopholes that punish businesses investing domestically and reward companies that keep profits abroad, and uses some of the savings created to rebuild our aging infrastructure.”
Suresh Perera
“Devoting One-Time Savings from
International Reform to Investment in Infrastructure:
As part of transitioning to a reformed international tax system, the Budget would impose a one-time transition toll charge of 14 percent on the up to $2 trillion of untaxed foreign earnings that U.S. companies have accumulated overseas. As explained above, the Budget would devote the one-time revenue from this toll charge to the Highway Trust Fund, financing the President’s six-year Surface Transportation Reauthorization proposal. Devoting one-time transition revenue to infrastructure investments is both pro-growth (see above, The Case for Investing in Infrastructure in Today’s Economy) and fiscally responsible, since—unlike using this temporary revenue for permanent tax cuts or spending increases—devoting it to onetime investments will not increase long term deficits”.
Google tax
It is reported corporates such as Microsoft and Apple will be called upon to pay $10 billion each.
The “Diverted Profits Tax” commonly known as “Google Tax” was introduced in the UK Budget by George Osborne, Chancellor of the Exchequer on 3rd December 2014 targeting “double Irish tax avoidance structures” used by Google Inc, Uber Technologies Inc. and other reputed tech companies.
He emphasised that tax avoidance will not be tolerated in the UK and went on to say “I turn now from those who have paid too much tax to some of those who have paid too little. First, we will make sure that big multinational businesses pay their fair share. Some of the largest companies in the world, including those in the tech sector, use elaborate structures to avoid paying taxes. Today I am introducing a 25% tax on profits generated by multinationals from economic activity here in the UK which they then artificially shift out of the country. That’s not fair to other British firms. It’s not fair to the British people either. Today we’re putting a stop to it. My message is consistent and clear. Low taxes; but taxes that will be paid. Britain has led the world on this agenda. And we do so again today. This new Diverted Profits Tax will raise over £1 billion over the next 5 years”.
As expected both George Osborne, Chancellor of the Exchequer and President Obama are facing a backlash on their proposals. Whilst President Obama’s and the Chancellor George Osborne’s proposals are prospective, the SGT in Sri Lanka could be termed retrospective. The US and the UK proposals are both targeting giant corporates to gather massive revenue for Government expenditure in addition to income tax. For a tax practitioner the commonality evinced in the above is the trend of resorting to slap high direct tax on giant corporates to gather state revenue for the welfare of the people as opposed to levying indirect taxes, which an economist may point out as regressive in nature.
Certainty and investor confidence
The lack of certainty encroaching the tax system and the doubts to be caused in the investors specially the foreign investors, perhaps is the biggest drawback. The Government assures that this is a one off tax not to be repeated and let us believe that this would not dip the investor confidence! In the words of Adam Smith couched in the “The Wealth of Nation” (Page 1043) “The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be cleared and plain to the contributor, and to every other person.” There is no denying that the SGT severely hampers the future investment and expansion plans of the affected corporates, expected to be around 40 in number, and the dividend payout policies to their shareholders.
It is said the art of taxation “consists of so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. Hence one may say the “litmus test” as to the success of the Super Gain Tax imposed in the interim budget is the degree of hissing! However there is a norm for the policy makers to observe when imposing new taxes, particularly direct taxes. – “how a bee does a flower, extract its sweetness but does not damage it”. It is for this reason that the UK Government did not hasten to introduce the Google tax earlier as they were mindful of giant corporates pulling out, affecting the UK economy.
Legislating SGT
Enacting the concept of the SGT into the legislative framework of the country would have to be carried out with utmost care to prevent loopholes or ambiguities invading the tax domain and adding to dilute the much required “certainty” factor in the domain of taxation. The new one off tax may be included in to the statute book of the country by way of a distinct statute or as a chapter of a Finance Act, the latter being the most likely eventuality. The drafters should not deny the right of appeal to the taxpayer whilst including the legislative provision pertaining to charge and imposition of the SGT. As per the budget speech the charge is on both companies as well as individuals. The definition of “profit” referred to in the budget speech that dictates the threshold for changeability requires to be set out clearly in the enacting statute.
Accounting profit before tax, accounting profit after tax, taxable income computed for the purpose of Inland Revenue Act, profit calculated as per a distinct formula (eg:- Excluding profits earned in foreign currency remitted via a bank) are some variants to be considered. Shouldn’t the SGT profit threshold exclude foreign currency earnings in the context country in an effort to attract foreign currency to our economy? Policy makers should also be mindful of the dictates stemming from Sri Lankan Accounting Standards with regard to the year of accounting though profit of tax year 2013/14 may be used as the base for computation of the quantum of the SGT liability. The liability of the directors under the Companies Act as dividends has been declared and should also be factored in the decision. Whilst the new tax is a “one off” measure tax decisions would have to be formulated as to the date of payment, preferably in severasl installments heeding to the “Canon of convenience of payment”.
The concept of the SGT establishes a milestone in the annals of taxation in Sri Lanka. It is perhaps the first one off tax to be introduced (along with other one off taxes introduced in the interim budget) from the inception of the Modern Taxation in SriLanka in 1932 with the imposition of Income tax in Sri Lanka by the Income Tax Ordinance No 2 of 1932. The country awaits the legislation of the Super Gain Tax in the weeks to come, the latest entrant to the fascinating web of taxes in
Sri Lanka!