THE TOKAUT BLOG
IRC to clampdown on Mano-style tax evasion
The Internal Revenue Commission is cracking down on tax evasion by senior executives who divert their salary payments through ‘associated or related’ companies in order to avoid paying taxes.
According to the IRC, such arrangements are “prevalent in many industries operating in the country”.
PNGi first alerted its readers to the existence of such scams in June 2017, when we exposed how the Managing Director of the Mineral Resource Development Corporation (MRDC), Augustine Mano, was using a company he owns to evade tax on his salary and benefits.
The MRDC is a State owned entity that manages landowner equity interests in mining and petroleum projects on behalf of landowner companies. Augustine Mano has been the Managing Director since March 2008.
In his report for 2009, the Auditor General revealed Augustine Mano was avoiding paying any income tax on 80% of his K750,000 a year salary package.
According to the Auditor General, rather than being directly employed by MRDC, a “Professional Services Agreement” had been signed between MRDC and Augustine Mano as the “Incumbent Professional” of SMA Investment Limited.
Under the agreement, MRDC was only paying Mano K150,000 as his direct salary while K600,000 was being paid to SMA Investment Limited. SMA is a company set up and owned by Mano.
This arrangement meant Mano was only paying income tax on K150,000, not K750,000. With a top rate of tax at 42%, this was potentially saving Mano, and defrauding the State, of K252,000 every year.
The Auditor General was scathing:
A managing director or director of a company is always a natural person. The Managing Director of MRDC is an employee of MRDC. All benefits of any employees are classed as salary and wages and must be taxed according to the tax rules applicable. The current arrangement of the Managing Director can be viewed as a measure to reduce or evade tax.
The Auditor warned “there are penalties for both the employer and employee pursuant to Section 361 of the Income Tax Act, 1959. Such a scenario can lead to undesirable consequences for both parties”.
Despite these cautions, in later audits the Auditor General found the practice was still continuing.
PNGi reported the Auditor General’s findings on the situation at the MRDC to the IRC and, its seems, they have taken the matter seriously. Their investigations have revealed Mr Mano is not the only senior executive, and MRDC is not the only company, using such schemes.
News that the IRC is cracking down on these tax evasion schemes is very welcome. They are not just a way for the wealthy to avoid paying their fair share; they also deprive the government of much needed revenue for health, education and other services; they create greater inequality; and, they put a larger and unfair tax burden on low and middle-income earners, while the privileged grow ever more wealthy.
But while we applaud the IRC for its crackdown, we must also question why those who have been unlawfully evading hundreds of thousands of kina in taxes are not being criminally prosecuted. Ordinary people who are accused of much lesser crimes do not receive such favourable treatment and are publicly dragged through the courts for offences as minor as shoplifting. Why should companies and individuals who have been defrauding the State not receive similar treatment?