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-   -   Oct 8, 2002 - Vat Update with Deloitte Touche Tohmatsu (http://www.pngbd.com/forum/showthread.php?t=4263)

aussie 01-10-2002 10:14 AM

"On Friday 27 September 2002, the Supreme Court of PNG ruled that VAT is illegal
 
The effect of the decision is that businesses no longer have to pay VAT or complete and lodge VAT returns.

The implications to the State and all people of PNG of withdrawing VAT as a revenue collection mechanism are significantly negative.

The Government would need to revise its budget for the lost VAT revenue of approximately K600m per annum, and then payback to businesses the K1.2 billion in VAT collected since its introduction in July 1999. This could immediately result in the Government having insufficient funds to pay public servants and provide basic public services.

Currently, there is a question of the ability of the IRC to appeal the decision. We understand the PNG Government is seeking a review from the Supreme Court of their decision and will also be seeking an order that the decision does not apply until further directions are obtained from the Supreme Court.

Should the Government fail to receive a positive response to the review process of the Supreme Courts' decision, it will most likely seek to make legislative amendments to the Organic Law to ensure VAT is legal and valid. Such changes may take until early next year to pass, and would also be made with retrospective effect from 1 July 1999.

In the event that this approach in not successful the Government will need to recover the VAT shortfall from other tax bases with customs duties likely to attract significant hikes across the board (including items currently duty free) effectively reversing the duty concessions given when VAT was initially introduced.

The Mining sector would be among those hardest hit by the removal of VAT and imposition of customs duties, as in the past they have been treated as zero rated for VAT purposes and do not attract customs duties on imports.

As VAT is applied across a broad range of goods and services, the replacement of the VAT revenue forgone by a narrower tax base such as customs duties, means a rate increase in excess of 10% would have to applied to generate the equivalent revenue.

As VAT is cash neutral to most business, in that businesses can claim back VAT paid on business costs incurred from the IRC, we would not expect the removal of VAT to compensate the increased cost in goods due to an higher duty rate. There would be a flow-on effect to any locally generated goods or services where they incorporate any imported goods in their components including wheat, chicken feed, bread, rice, etc.

The cost of services may reduce as services are typically based on an hourly rate and do not incur duty. However, the rural sector, which represents some of the poorest people in the country, rely more on goods than on services, and would probably experience an increase in their costs. Consequently they would not significantly benefit from a reduction in service costs.

The current situation places businesses in an extremely difficult position. Whilst the tax has been declared illegal it appears there is a strong possibility that steps will be taken to effectively restore the status quo within a short period of time.

Therefore, businesses should continue to prepare, lodge and pay their VAT liability as per normal. If businesses wish to "sit out" of VAT until such time as the PNG Government passes the required legislative amendments to return VAT to being valid and legal, then they must consider the likelihood of having late lodgement/payment penalties being imposed on any VAT returns/payments not made on time.

"Deloitte Touche Tohmatsu”

aussie 04-10-2002 01:39 PM

Vat Update 4th October, 2002
 
Since our last email on Monday 30 September 2002, various discussions and meetings have resulted in some changes as to how businesses should be dealing with the current VAT situation. We remind you this issue is under continual change and subject to change at any time. We will continue to keep you informed as developments occur.

The uncertainty that results from last Friday’s Supreme Court judgement that VAT was illegal and invalid, contains enormous financial and social implications for everyone in Papua New Guinea.

Faced with the prospect of its revenue source drying up, the public sector will quickly be unable meet its commitments both in the payment of wages and in the provision of basic services. The likely impact of such an occurrence on business, social conditions and law and order are easy to imagine. A solution to the legal impasse needs to be established very quickly or the problems will rapidly accelerate.

We understand that the Government has initiated proceedings aimed at allowing the VAT legislation to continue operating whilst remedial measures are taken to rectify the legislation. On Monday the Supreme Court will be asked to review its decision and either order that the effect of its decision be deferred until further consideration or be suspended until 1 April 2003. It is expected that this process will be contested by the Morobe Governor. This does not seem to offer a quick solution, but may at best provide some temporary relief during which the legislation may be amended. A further motion is before the National Court this morning to prevent provincial governments from collecting any taxes.

It seems most likely that Parliament must meet to pass legislation resolving the issues raised by the Supreme Court judgement and that at some stage in the future we will once again operate in a fiscal environment where a 10% sales based tax is effective. Minimising the time frame to getting us there is critical for the continued stability of many functions within the country.

Business is faced with many problems relating to how it operates during the period before the status quo can be legally restored. The IRC have indicated that they cannot force business to collect VAT but warned that if the Government successfully legislates to restore the tax retrospectively, they will seek to assess liability to the tax based on revenue figures. Consequently any business that fails to charge a notional VAT would be caught out and be assessed for tax irrespective of the fact they have not received it from their customers.

The PNG Chamber of Commerce have suggested that businesses adopt a new pricing policy which should take into account the possibility of retrospective tax legislation. Without charging the tax separately this would leave them in a revenue neutral position were the tax to be reimposed retrospectively. Clearly some businesses such as those governed by the price controller are unable to take advantage of this.

It should be noted that 'carrying on as normal' can be viewed as being contrary to the Supreme Court order previously issued and therefore in contempt of Court. To avoid being held in contempt of Court, businesses should remove all references to 'plus VAT' or 'including VAT' from their invoices, statements, or receipts. Businesses can charge a surcharge instead, and hold the collection of those 'surcharges’ as a 'notional VAT' to be held until such time as VAT is reinstated (if it all). Therefore, the cash price to the purchaser remains the same.

aussie 04-10-2002 01:40 PM

Customs Office:

The Customs office is not charging VAT on any imports since the September 27 decision. At this stage, no increases to duties have been actioned. Therefore, importers of goods into PNG will gain a small window of opportunity until such time as any changes are made to the either the Supreme Court ruling or to the Customs Tariff Act. It is possible excise and customs duty may be increased in the near future to compensate for lost revenue.

Provincial Governments:

Provincial Governments are unable to implement a Sales Tax regime as the legislation that allowed such action has since lapsed. Therefore the Provincial Governments are facing a serious funding problem, as they will not be receiving any distributions of VAT.

aussie 04-10-2002 01:42 PM

Internal Revenue Commission:
IRC are continuing to process their backlog of VAT returns and refunds. However, no refund cheques will be issued by IRC, no enforcement action will be pursued by IRC, and IRC will no longer action any offsets of VAT credits to pay other taxes (e.g. group tax or income tax). A request for VAT offset can still be made, but IRC will not action it until such time as VAT is reinstated as legal and valid. IRC have indicated they will not penalise clients for the taxes outstanding, where a VAT credit will cover that arrear and a request for offset is made. Assuming VAT is reinstated, the offsets will be actioned at that time.

IRC have advised us they wish businesses to continue 'as per normal'. IRC have also indicated they do not want businesses to pay over the VAT to them. As the first payment deadline for VAT post the Court decision is 21 October (for the month of September), businesses should consider not paying any VAT to IRC until closer to 21 October. This provides 17 days in which to assess the situation. It is hoped that greater certainty will be available by this date as to the appropriate course of action to take. If no certainty is obtained by 21 October, IRC have discussed the possibility of businesses paying the VAT into a separate trust account for holding until such time as VAT is reinstated as valid and legal, after which it can be passed back to the IRC.

Businesses should record the notional VAT in their accounting systems. Assuming VAT is reinstated as legal and valid, IRC will be seeking retrospective application of the amendments required and businesses will then be required to pay over to the IRC any VAT collected, or deemed to be collected. Where businesses did not collect a notional VAT on sales (on VAT saleable goods), there is likely to be a deemed VAT calculated on those sales. Therefore businesses that reduce their sale price by the VAT portion and sell those goods at the VAT reduced price may be forced to pay 1/11 of the sale price to IRC.

Currently, the IRC are waiting on an answer to their application for a stay on the operation of the Supreme Court ruling issued on 27 September making VAT illegal and invalid. A decision on the stay should be issued at 10:00am Monday 7 October, with the IRC holding a general meeting with businesses at 2:00pm the same day to discuss their position based on that decision. We will be issuing a statement immediately after that meeting for your information.

In the event IRC are unsuccessful in reinstating VAT, alternative options are to introduce a replacement surcharge and/or levy, reimposing tariffs, declaring a state of emergency, or any combination of the above.

Such action is obviously dependant on proceedings over the near future.

We are discussing various other issues with IRC relating to VAT and will keep you informed of those, as we are able to obtain more certainty. In the mean time, if you have any queries regarding the impact of the Supreme Court decision on your business operations then please do not hesitate to contact any of the following:


Deloitte Touche Tohmatsu

Partners :

Paul Barber
Managing Partner, PNG
PaBarber@deloitte.com.pg

Larissa Hines
Partner Taxation Services
LHines@deloitte.com.pg

Jenny Sinclair
Growth Solutions Partner
JSinclair@deloitte.com.pg

Andrew Crompton
Corporate Finance Partner
ACrompton@deloitte.com.pg

Colin Hall
Internal Audit Director
CHall@deloitte.com.pg

Hugh Mosley
Corporate Reorganisation
Group Partner
HMosley@deloitte.com.pg

Taxation Managers :

Arunava Basu
Abasu@delolitte.com.pg

Brydon Davidson
brydavidson@deloitte.com.pg

aussie 04-10-2002 02:55 PM

Please do not hesitate to contact them if you would like to discuss any issue arising from the Tax Alert or make an appointment to visit them at 12th Floor, Deloitte Tower, Douglas Street, Port Moresby.

Telephone: +675308 7000
Fax: +675 308 7001

aussie 04-10-2002 02:58 PM

This publication is of a general nature only and is not intended to be relied upon, nor to be a substitute for, specific professional advice :

aussie 07-10-2002 05:45 PM

A meeting that was to be held today at the IRC to provide a briefing on the decision of the Supreme Court has been postponed until tomorrow at 2.00 pm.

The IRC had originally hoped for a stay of proceedings. This would allow the IRC sufficent time until April 2003 to pass "enabling" legislation to amend the organic law and validate VAT. The effect would be that VAT would continue to operate from 27 September 2002 until the end of April 2003. The Supreme Court decision will take effect from April 2003, however provided the enabling legislation has been passed it will not have any effect on the validity of the VAT legislation.

We understand that progress on the matter at the Supreme Court has been very slow and that the State may look at trying to reopen the original case, on the basis that all provinces were not given the opportunity to put forward their case. The timeframe to re-hear the case could be lengthy and there is no guarantee that the Supreme Court will come to an alternative decision that would be any different from the original.

The current progress is slow and does nothing to relieve the VAT vacuum that the business community is currently operating in or the associated stress and problems. As per our VAT Alert on Friday 4 October we recommend that business continue to operate on the assumption that VAT will be retrospective applied.

We will send a further update tomorrow following the scheduled meeting with the IRC at 2pm.

If you require any further information regarding the above please contact me or any of the following:

Deloitte Touche Tohmatsu

aussie 08-10-2002 11:13 AM

VAT UPDATE 8 OCTOBER, 2002
 
Late yesterday afternoon, the Supreme Court suspended the judgement they passed on 27 September and stayed its operation until 4pm next Tuesday.

The impact of this is that at this present time there has not yet been any effective change in the operation of VAT and the concerns apparent during the last week have yet to take effect. 10% VAT has been effective since 27 September and continues to apply until further orders by the court next Tuesday.

The court was adjourned until 9.30 am on Tuesday 15 October 2002. The State was seeking to have the matter suspended and the judgement stayed until April 2003. This would enable National and Provincial Governments to reach agreement and pass enabling legislation through Parliament. The adjournment was to allow lawyers for Morobe Provincial Government to respond by an application.

As far as IRC are concerned VAT payments, refunds and offsets are continuing as though the September 27 decision was never made. Customs are now collecting VAT as they did pre 27 September. This will continue until 4.06pm on Tuesday 15 October 2002.

As yet there is no trust account procedure in place. September VAT payments are not due until 21 October and it is hoped that a clearer way forward will have been established by then.

It is anticipated that something more certain will be resolved in readiness for next Tuesday session of the Supreme Court. The meeting at IRC this afternoon remains scheduled.

We will keep you advised of any developments.

DELOITTE TOUCHE TOHMATSU


aussie 08-10-2002 06:17 PM

VAT UPDATE 8 October, 2002 - 3 PM
 
Internal Revenue Commissioner, David Sode chaired an open meeting with Business Houses and Importers this afternoon to update the public on the IRC view of where the matter stood and to seek consultation in the areas to be addressed looking forward.

He confirmed that following yesterday’s Supreme Court stay and suspension of its earlier judgment declaring VAT invalid, the IRC was continuing to conduct its operations as it had prior to the Court’s initial ruling.

This meeting did not and could not provide much in the way of clear directional advice but did provide some pointers as to how things may work out should the suspend and stay order not be extended.

Mr Sode expressed confidence that the suspension and stay order would be extended to April 2003 when the Supreme Court reconvened on Tuesday 15 October. This timing would enable National and Provincial Governments to reach agreement and pass legislation through Parliament enabling the tax to operate validly.

Mr Sode took confidence from the Court’s approach yesterday when it effectively asked both parties how long they needed to resolve their differences. He felt an agreement between National and Provincial Governments on a redistribution of the VAT “cake” could produce an environment where the method of collection could be allowed to remain in place until the legislation was amended to formally validate it.

In the “worst case” scenario where the suspension and stay order was not extended the State continues to need to raise K600m per annum in one form of taxation or another. The option preferred by IRC was that business maintained a “quasi” or “shadow” VAT system operating until the legislation was amended. Business would charge an amount equivalent to the VAT component on goods and services (but not called VAT) and pay this amount over to a trust account set up for the purpose and administered by Treasury. Refunds would continue to be processed and paid out of the Trust Account.

Should such a voluntary system fail to operate the options included a 15% surcharge on all imports entering the country.

The voluntary scheme has its pitfalls and no assurances could be given to businesses whose customers refused to pay the “shadow - tax” component other than that pressure could be brought to bear after the retrospective legislation amendments had been passed.

We raised the situation of suppliers of price controlled goods being unable to "adjust prices" to allow for a non-VAT “tax component” where VAT is illegal and invalid, thereby maintaining the price to the user. Mr Sode advised that Treasury may be able to approve an adjustment to compensate for this and advised he would look into this.

The extension of the suspension and stay of the Court’s earlier judgment is seen by many in business as by far the best outcome of next Tuesday's session of the Supreme Court.

On Friday, the courts will rule on a hearing brought by the National Government to prevent any Provincial Government from levying a sales based tax. Should the National Government be successful, the pressure will be on the Morobe Provincial Government to reach an agreement with the National Government to resolve the matter

We will continue to keep you advised of any developments.

DELOITTE TOUCHE TOHMATSU

aussie 11-10-2002 05:36 PM

Vat Update 11th October, 2002
 
Discussions with IRC this morning have indicated that they are confident that there will be no changes to the VAT situation until after 4pm on Tuesday 15 October 2002 when the stay of the Supreme Court order expires. IRC have indicated that a major announcement is expected this weekend on the longer term prospects of the Value Added Tax but were unwilling to disclose any details of the announcement at this stage.

We have been unable to confirm if a decision has been made by the Supreme Court as to the ability of the Provincial Governments to levy provincial sales tax. There are a number of rumours circulating as to the outcome, however we will advise as soon as the confirmed details are available.

Regards

Larissa Hines
Partner Taxation Services


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