Tax debts clarified – By SRC |05 December 2020

1. The process by which a Tax debt arise

Tax debts should not be categorised in the same way that a provider of a service or a supply, accounts for debtors. 

The Seychelles Revenue Commission (SRC) has as its main task to raise tax debt as part of its revenue collection process and this is a daily occurrence.  For as long as SRC enforces compliance, and intensifies its tax audit activities to review assessments submitted, tax debts will continue to increase. As one taxpayer pays his/her tax assessment in full, two or three new assessments are raised for double or triple the amount, which are either settled in full or via a payment plan. It is a never-ending affair. It however needs to be properly managed to ensure that all taxpayers in arrears have been notified of the debt; have a formal arrangement for settlement; and have acknowledged the debt.

The process for collection of taxes (which is enshrined in law) requires the issue of a Tax Assessment (the raising of the debt) be it Business Tax, VAT, or any other taxes and each tax has its own timelines for lodgment of returns or payment of relevant taxes due. The law however also grants the taxpayer the right to object, appeal, go to court or pay by instalments the taxes owed thus delaying or prolonging settlement.

Currently Seychelles has in place a self-assessment system which basically means that it is the taxpayers themselves making the declaration of their earnings / expenses and as a result how much tax is expected to be paid.  These figures are only reviewed and adjusted by the SRC where it is felt that there is a potential for under declaration of income, excess claim of expenses or for other considerations as per the provisions of the legislations in place. These cases are thus referred to our Audit team for review and the law allows for these reviews to cover prior years where it is felt there has been avoidance of taxes. 

It is these assessments raised following an Audit, for which taxpayers generally make use of the objection and appeal provisions contesting adjustments made to their declaration. Such assessments can be for a rather large sum per taxpayer especially if the audit goes back several years or covers several tax types. And until such time that the process of objection and/or appeal is exhausted SRC has limited possibility of collecting the majority of taxes owing for these cases.  The process of objection and appeal could take several months and during this time the debt remains on SRC’s books. Although the law provides that taxes should be collected even if there has been an objection, a taxpayer may disagree with the objection decision, and they have the right to appeal to the Revenue Tribunal. If they disagree with the decision of the Tribunal they can also appeal to the Supreme Court.

2. How much taxes are in arrears.

Without having sight of the Auditor General’s final report for 2018, SRC cannot correlate the figures mentioned but at the time of the last review of revenue collection by the Auditor General’s office which was as at August 31, 2020, the total tax debt stood at R958,835,144.39 and due to the procedure for objections / appeals only R400,361,578.65 can actually be collected. This sum represents 7204 ‘tax debt cases’ not necessarily the number of taxpayers. One taxpayer may owe taxes under several tax types (e.g. Business Tax, VAT, PIT, CSRT or TMT) and each are considered as one case.

In August 2020, the status of debts owed were as follows:

As mentioned by the Auditor General it is unfortunate that over R200 million of these debts have indeed been in the SRC books for quite some years (before 2015) and these despite all recovery efforts. These are cases already with the Attorney General. Companies going through winding down or liquidation process will fall under the 51 write-off cases and for these SRC can only collect what is available following the liquidation procedure.

It should also be mentioned that 43% of the total debts owed is actually related to the accumulation of penalties and additional taxes for late lodgment, late payment or culpability penalty for under declaration of income. Penalties are meant to be a deterrent but for some reason taxpayers are still not taking heed of the cost it potentially adds to their debts. Penalties can be partly waived but subject to the taxpayers’ engagement with SRC for settlement of taxes or for meeting their tax obligations. An interest component is also provided for under the law for late payment, which can be quite excessive, and no waiver is permissible under the laws for interest.

Arrears collected for the past three years as part of revenue collection is:

2017 à R273,504,073.16

2018 à R379,471,634.15

2019 à R182,829,754.76

TOTAL   R835,805,462.07

3. The challenges preventing the SRC from collecting taxes due in a timely manner

The main challenges causing delay in the collection of tax debts are as follows:

• taxpayers have the right to be heard under the tax laws and can thus delay the process through objections, appeals and taking their cases to court;
• with 7,300+ taxpayers with arrears of taxes and the daily number of assessments issued by SRC, enforcement of compliance for payment is a challenge with only 22 enforcement officers in post, 2 legal officers and 3 objection officers;
• an aging Client Management Systems (CMS) causes delays of reconciliation of accounts for issue of Statement of Arrears;
• lack of a case management system within the CMS to efficiently monitor and follow-up on the arrears cases (This have to be done manually);
• a large number of taxpayers have multiple returns outstanding across tax types which means collection of potential taxes are further delayed;
• limitations for enforcement of compliance for lodgment of returns and also the restricted number of cases that can be audited per year due to the number of technical staff. For the 18,452 taxpayers registered, SRC has only 15 officers for processing of returns, 35 auditors and 11 officers for registration;
• the number of taxpayers grew each time a new tax is introduced but the number of officers remained the same. This is across SRC (for both Tax and Customs);
• un-cooperative taxpayers unwilling to meet their tax obligations and using every means to delay / avoid paying the taxes owing;
• taxpayers with other legal issues and court cases impeding on possibility for SRC to further its own case for prosecution;
• enforcement of Garnishee Notices due to lack of understanding of tax laws by the parties involved. Reminders have to be sent and continuous follow-up which delays the process of collection.

In addition, for the year 2020, due to the tax measures introduced allowing for deferment of payment of taxes thus giving taxpayers some breathing space during this Covid-19 period, we have an increased number of taxpayers on extended payment plans. There are 138 taxpayers on extended payment plans for this period. The economic impact of the Covid-19 pandemic will result in a decrease of approximately R1.2 billion for the year 2020 as compared to the year 2019.

4. Mechanisms being put in place to collect these dues or tackle other non-compliance issues

Our Standard Operating Procedure for Enforcement of tax debts is presently under review in an effort to tighten the net (so to speak) with regards to debt collection. As soon as an assessment is issued it should be picked up by an Enforcement Officer for follow-up on settlement and timeline for payment of these new debts are now rather stringent (within 7 days).

Old debts on account for which the taxpayer is not showing sufficient interest in settlement will be pursued through the Courts. 22 such cases are already with the prosecution team with 17 filed in court (both Tax and Customs) and submissions are being prepared for another 3 cases to be forwarded to the Attorney General’s Office before the year end. 20 more have been identified for prosecution next year should they not make the necessary efforts to resolve their tax issues. SRC has also increased the application of Garnishee Notices under Section 24 of the RAA for settlement of taxes through third parties (monies held by the banks or other creditors). We have 36 Garnishee Notices in place from which we are collecting taxes. We also placed restrictions on properties / assets owned by taxpayers in debt (8 cases) and enforcement of court judgments are in progress for 2 cases.

Taxpayers with multiple tax returns outstanding have lately been receiving formal notifications that default assessments will be raised should they not voluntarily lodge their tax returns within a set deadline and SRC has the right to take necessary legal action for non-lodgment. A right it intends to pursue as of early next year given the large number of repeated ‘offenders’ and recalcitrant taxpayers for non-lodgment.

With the various avenues for access to information it now has, including under the Exchange of Information Agreements in force and the use of Section 34 Notices, SRC has started to also collect data for the potential under declaration of income cases it is presently auditing. 7 audit cases have outgoing requests to other competent authorities for information on earnings.

Several projects across certain economic activities with the highest risk for tax avoidance are being undertaken by the tax audit team to ensure that the right amount of taxes is being collected.

SRC is presently making use of all available avenues as provided for under the laws to ensure that it collects the maximum amount of taxes owed.

5. In what category is the most money outstanding?

Business / Presumptive Tax had the largest number of cases as at August 2020 with arrears at 6,560 (including 3,938 under Presumptive Tax) and total taxes owed was R528.7 million representing 55% of total tax debts outstanding.

VAT audit and VAT default assessments in arrears run second at R202 million for 82 cases.

6. Other issues impacting on revenue collection

In addition to non-lodgment and non-payment of taxes, local businesses are slowly starting to make use of tax planning mechanisms including splitting of tax income in order to fall under existing thresholds (especially for VAT); and transfer pricing methods to erode their tax base. We have observed the use of IBC’s for the latter, which brings an element of complexity to the work being undertaken by our Auditors. There is also the issue of cash intensive businesses under declaring income and not maintaining appropriate records.

The enabling environment for a business owner to create a tax debt and be still permitted to register a new licensed entity for the same business activity whilst the tax debt remains unsettled, is becoming an issue for SRC.

It is unfortunate that we have some of our Tax Agents embracing certain unsavory practices rendering our work more difficult, an issue being tackled with the assistance of the Tax & Customs Agent Board (TACAB). Anti-avoidance and transfer pricing rules under the RAA as well as the PE rules under the Business Tax Act will soon be strengthened to enable SRC to tackle these areas of weakness.

Businesses operating under an unlicensed regime or as we say the “informal sector” are not necessarily exempted from paying taxes. The minute a person or entity engages into a commercial activity, business or a trade, they should register for Tax purposes. It is encouraging to see the engagement of politicians in promoting a policy whereby all who are undertaking a business activity should contribute towards some form of taxes. Policy reviews to that effect will be brought to stakeholders soon.

7. Tax contribution to the economy

Despite all the challenges, the revenue collected by SRC over the past three years has been rather consistent as per below making a positive contribution towards the Seychelles economy and to the GDP. Even this year being the most difficult one for SRC and for Seychelles, we have been able to maintain our collection more or less at par with the budgeted figures:

2017 à R6.5 billion

2018 à R7.2 billion

2019 à R7.19 billion

2020 à R5.39 billion (as at November 27, 2020)

SRC encourages ALL taxpayers to meet their tax obligations as provided for under the Revenue laws be it for domestic tax or customs. There will be no more leniency for either non-lodgment, under declaration of income or non-payment of taxes. The relevant structures and mechanisms are being put in place to ensure that the provisions of the tax laws will be applied more strictly for those who are repeated offenders. If you feel that you are not fully aware of your tax obligations, PLEASE get in touch with our Provision of Advice Unit for Domestic Tax on advisorycentre@src.gov.sc or CVO for Customs and educate yourself. We take this opportunity to thank those taxpayers who respect the laws and who diligently ensure that their tax obligations are timely met each month or every year as applicable.

Contributed by SRC