Capital Gains

Apr 21, 2010 Editorial

According to a report in the Sunday Stabroek of April 18, Mr. Odinga Lumumba purchased a tract of land from the Government in 2004 for $1.5 million and sold it in 2008 for $38 million. After selling it, but prior to passing transport to the purchaser, Mr. Lumumba increased the value of the land to $38 million.
It was only after doing so that transport was passed to him. His transport therefore showed a value of $38 million.
Mr. Lumumba took great umbrage at the publication and issued a strong statement explaining the circumstances of the sale. In his riposte, he claimed the purchase price was “approximately” $2.5 million, which does not affect the point we wish to make. But Mr. Lumumba did not deal with two issues.
The first is his position as, in his words, “an Advisor to His Excellency, the President, and a Member of Cabinet”. The second is whether he paid capital gains tax.
Neither Mr. Lumumba nor the government appears to understand that there is something inherently objectionable for a member of the Government to engage in private business activities – and egregiously so when the activities involve the property of the state.
This places the member, in principle, in a situation of grievous conflict of interest. That is why it is not allowed anywhere.
This land transaction is not the first that this conflict of interest has been raised. Unfortunately, these standards are not applied in Guyana. And Mr. Lumumba is allowed to engage in all kinds of business activities at anything but arms length while he sits in Cabinet and advises the President.
In India the Minister of State for External Affairs, Mr. Shashi Tharoor, was made to resign by the Prime Minister when it was exposed that in helping to secure a new IPL franchise for some businessmen, his close “friend” Ms. Sunada Pushkar received “sweat equity” in the franchise to the tune of millions of dollars.
Even though he vigorously denied it, it was felt that Ms. Pushkar was merely a proxy for Mr. Tharoor and he had to go. Even the implicit conflict of interest was too much for the Congress Party – in India, long regarded as a hotbed of official corruption.
In order to complete the passing of transport, a Certificate of Compliance (COC) is required from the Guyana Revenue Authority (GRA). Capital gains tax is calculated and is required to be paid before the COC is issued.
By section 6 of the Capital Gains Tax Act, capital gains tax is assessed upon the amount by which the value of property, when acquired, increases when a change in ownership occurs.  Therefore, the base figure for calculating capital gains tax is either the cost of acquisition, or the value of the property, when it was acquired.
Where the property was purchased, the GRA rarely goes behind the purchase price, or value stated in the transport, in calculating capital gains tax.
On the basis of the cost of acquisition of a property of $1.5 million, and a sale price of $38 million, capital gains tax of 25 percent of the difference between the two figures would be payable. This would amount to $9,125,000.
If the GRA had before it only Mr. Lumumba’s transport, which would have shown not the purchase price of $1.5 million, but a valuation of $38 million, and the agreement of sale between himself and the purchaser, which would show the sale price as $38 million, the GRA would hardly look behind those documents unless it had information which would suggest that it should.
If it did not, then the assessment would be that no capital gains tax is payable by Mr. Lumumba.
Since these matters are confidential there is no way of knowing what information was provided by Mr. Lumumba to the GRA in relation to this transaction and there is no way of knowing if Mr. Lumumba was assessed for any capital gains tax. The question is not just that Mr Lumumba made a “killing” on the sale of the property purchased from the government, but whether matters were manipulated so that no capital gains tax were paid. Mr. Lumumba might be willing to enlighten us.