Saskia Carmichael-Sam
Manager, Tax
KPMG
There’s no doubt that Guyana is on the cusp of unprecedented economic development and transformational growth. This is evidenced by the recent and continuing oil discoveries announced by ExxonMobil. At KPMG, we continue to see increased investment interest from regional and multinational companies seeking to capitalize and strategically position themselves for the plethora of business opportunities about to unfold in Guyana.
It has been our observation in recent times that companies navigating their investments into Guyana are focusing more and more on efficiency—especially tax efficiency.
Some of the recurrent questions we have noted are:
- What is the most tax efficient corporate structure to set up my business?
- Should I establish a branch or subsidiary?
- What are the taxes that my business will be subject to?
- Is there double taxation treaty relief available?
These questions speak to the appreciation that companies now have with respect to the benefits of prudent tax planning and knowledge of their tax obligations ---especially before entry into new markets. In our experience obtaining relevant information to structure operations and gain a holistic perspective from a tax standpoint --- are often overlooked in the initial stages. This oversight may result in a financial nightmare that can rear its ugly head in several forms --- cash flow issues, non-compliance with tax obligations, high tax liabilities which include substantial penalties and interest, inability to pay liabilities and the list can go on.
As a tax practitioner, financial profligacy is a “faux pas” that can be avoided or at least minimized, by companies focusing a small portion of their efforts on optimizing their tax efficiency at the outset. In this article we highlight some tax considerations that investors--- particularly those with regional and international operations, should bear in mind when seeking to infiltrate the Guyana market. It is to be noted that while each tax structure will take into account the uniqueness of each company’s operations and be tailored to suit---it is our aim to give a tax perspective on pertinent issues investors should be aware of when entering the Guyana market.
BRANCH VERSUS SUBSIDIARY?
The entity options in Guyana are relatively simple. Investors may either incorporate a local company/subsidiary or register an external company, referred to as a branch. Though these corporate entity structures are commonly used, it has been our experience that companies are often unaware as to what distinguishes one from the other and the tax impact of each. A non-resident company seeking to establish a distinct legal entity in Guyana, of which it would be the sole or majority shareholder, will incorporate a local company or subsidiary. However, in the case of a branch the exposure lies in the fact that the branch is the same legal entity as its non-resident head office. As such, it is arguable in law that this creates locus standi for the local tax authority to pursue the non-resident head office in the event of default by the Guyana branch in honouring its tax obligations.
The same holds true for other corporate obligations that the branch may have defaulted on. Note also that many directors and shareholders are also apprehensive and concerned about their personal exposure to liability when investing in a foreign market. However, fortunately under trite common law principles on ‘separate legal personality’, the liability of the company is “ring fenced” from its officers ---unless gross negligence and/or fraud can be proven.
DETERMINATION AND TAXATION OF PROFITS
Generally branches and local subsidiaries are taxable on profits arising in or earned in Guyana. However, we have seen some unique provisions in the Double Taxation Relief (Taxes on Income) (Canada) Order (“Canada/Guyana treaty) that allow for the allocation of a portion of profits to a branch. In this context, it is arguable that profits earned by a Guyana branch with a Canadian head office ought to be regarded as the profits of the head office in Canada. Based on the treaty provisions the head office in Canada may then allocate a portion of profits to its Guyana branch, which portion would be subject to tax in Guyana.
In our opinion such allocations must be based on an acceptable methodology. Our research reveals that generally allocation methodologies are usually founded and moulded by transfer pricing guidelines and rules. Since Guyana currently has no transfer pricing legislation we are of the view that the local tax authority may rely on transfer pricing studies and polices of the non-resident head-office to ascertain whether the allocation of profits to the Guyana branch are reasonable.
DETERMINATION AND DEDUCTIBILITY OF EXPENSES
Both branches and subsidiaries are entitled to deduct all expenses wholly and exclusively incurred in arriving at their chargeable profits. These expenses would include, cost of sales, salaries, rent etc. In addition, a branch or subsidiary would be allowed a deduction on capital assets such as plant, machinery or equipment and building in the form of wear and tear allowances at tax depreciation rates ranging from 5% to 33 1/3%. Further, under a branch structure, the head office is generally allowed to allocate a portion of executive and general expenses to its Guyana branch. However, such head office expenses allocated to the Guyana branch are subject to a maximum deduction of 1% of gross sales or gross income. In the case of a subsidiary, management charges paid to a parent will also be subject to a maximum deduction of 1% of gross sales or gross income. Ensuring that your entity is accessing all of the available deductions in arriving at its chargeable profits is an important issue to consider in optimizing tax efficiency.
TAXES
While there is a suite of taxes in Guyana --- corporation tax and withholding tax usually feature prominently in tax structuring particularly when there is need to pay dividends or payments to non-residents.
CORPORATION TAX
The corporation tax system in Guyana is based on the categorization of the company’s operations into commercial or non-commercial activity. A commercial entity, whether a branch or local subsidiary, is defined as one that trade in goods not manufactured by them. Such entities will be subject to corporation tax at the rate of 40% of their chargeable profits or 2% of their turnover (whichever is higher). With regard to non-commercial entities, the legislation merely defines the term “non-commercial activity” as anything not covered in the definition of “commercial activity.”
However, in practice, non-commercial companies engaged in non-commercial activity have been acknowledged by the business community and the tax authority to be those engaged in manufacturing and the provision of services. These companies enjoy the lower corporation tax rate of 27.5% on chargeable profits. Where a company has both commercial and non-commercial activities it will be faced with the unnerving task of splitting its operations for corporation tax purposes.
All companies are required to pay quarterly instalments of corporation tax by March 15, June 15, September 15 and December 15 of each year and the corporation tax return for the relevant year of income must be filed by April 30 of the following year of income. The Tax Return must be accompanied by audited financial statements. However, the local tax authority now has the discretion to allow companies to file corporation tax returns with management accounts with the undertaking that the audited financials would be filed by December 31 of the year the return is due to be filed. This measure was introduced by the government to assist companies in filing their tax returns in a timely manner.
WITHHOLDING TAX
In Guyana withholding tax is imposed on distributions (dividends) and payments made to non-residents companies at the following rates:
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- 20% of gross amount on distributions (dividends); and
- 10% on payments under contract.
These rates are subject to the provisions of any applicable double taxation treaty in effect to the extent that such provisions provide relief. Currently, Guyana has three (3) double taxation treaties in effect with The United Kingdom, Canada, and CARICOM.
Distributions (Dividends)
Branches are subject to 20% withholding tax on profits deemed to be remitted to its head office. Branch profits are deemed to be remitted when the tax return is due on April 30 following the year of income. Except that withholding tax would not apply on amounts re-invested by the branch to the satisfaction of the local tax authority. As mentioned, the rate of withholding tax may be reduced by any applicable double taxation treaty in effect.
Local companies/subsidiaries are also subject to 20% withholding tax on distributions (dividends) made to a non-resident shareholder. However, this liability is only triggered when the dividend is paid. In which case the local company/subsidiary has an obligation to withhold and remit the tax to the tax authority within thirty (30) days from the date of payment.
MANAGEMENT CHARGES/HEAD OFFICE ALLOCATIONS
Many companies and tax authorities across the board grapple with the appropriate tax treatment to be accorded to head office allocations and management charges.
Generally, from a transactional perspective, a head office incurs executive and administrative expenses and allocates a portion of same to its operations (branches) in various jurisdictions---including Guyana.
This is quite run of the mill in large multinational corporations.
In our opinion, the reimbursement by the branch of allocated expenses to its head office ought not to attract withholding tax—as it is not to be regarded as a ‘payment’ within the meaning of the tax legislation.
Further, established Caribbean case law and jurisprudence have supported this position with the underlying rationale that a branch cannot be said to be making a payment to itself.
On the other hand, management charges paid by a local company/subsidiary to a non-resident are subject to withholding tax at the standard rate of 10% by virtue of the Corporation Tax.
Unlike head office allocations, management charges are included in the definition of ‘payments’ subject to withholding tax under the tax legislation.
CLOSING THOUGHTS
With the aforementioned said, we are of the view that as investment interest grows in Guyana so should the government’s desire to negotiate additional double taxation treaties.
Guyana is truly a ‘blank slate’ for investment with a wide range of possibilities for investors seeking to make their mark in the market.
Investors are encouraged to familiarize themselves with the unspoken customs in Guyana. While there isn’t a list of “do’s and don’ts“--- understanding the people, their culture and how they do business often augur well for building relationships and ease of doing business.
As Guyana continues to undergo its economic transformation and development catalysed by significant oil discoveries by ExxonMobil--- patience and efficient tax structuring of operations will be the hallmark of those who seek longevity in the Guyana market.
Caveat
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on this information without appropriate professional advice after a thorough examination of their particular situation. We are not responsible for updating our advice for changes in law or interpretation after the date hereof.