The government relies very heavily on taxes levied on the income of Jamaican residents, including taxes on interest earned on investments, salaries and business profits. However, the current situation is that only a small number of persons carry the income tax burden owing to low levels of tax compliance.

Background to Tax Reform in Jamaica

Several pundits have made compelling submissions in support of the case for tax reform in Jamaica, particularly having regard to the fact that the last major tax policy reform took place over the period 1986 – 1991, resulting in the introduction of the General Consumption Tax Act in October 1991. In November 2004, when the Final Report of the Tax Policy Review Committee to the Government of Jamaica (commonly referred to as "the Matalon Report") was published, it was believed that this report signaled the beginning of the road to the implementation of modern tax reform measures to match the demands of a more modern Jamaican economy operating in a more competitive and borderless global market. Still, not much happened for almost a decade. The Ministry of Finance and Planning's policy position on tax reform was issued via the White Paper on Tax Reform dated November 15, 2012 ("the White Paper"), which was preceded by the Green Paper of 2011 ("the Green Paper").

All the public and private sector publications on tax policy and structure agree that tax reform should focus on addressing the following issues: (i) broadening the tax base, (ii) eliminating tax concessions and discretionary waivers, (iii) improving compliance, (iv) making the tax system equitable (both vertically and horizontally), and (v) encouraging economic growth.

Time to Assess the Recent Reform Measures

In this article, I will review the significant changes made to the income tax (direct taxation) regime since the White Paper. The Matalon Report expressly stated that its recommendations were not to be treated as "a menu of reform options from which preferred positions may be selected". The report also strongly recommended that reform should be wide-scale and not piece-meal, as was the nature of the reforms of the 20 year period immediately preceding the Report. The Matalon Report recommended greater reliance on indirect taxation relative to direct taxation, which seems to be the preferred approach in a large majority of countries. It is evident from the White Paper and the Green Paper that the government struggles to effect wide-scale tax reform, while at the same time, budgeting to meet fiscal targets (which in any event, are rarely met). 2 ½ years since the White Paper, it is useful to assess how far-reaching the reform measures have been having regard to the stated policy objectives. It is also useful to assess whether there has been any reduced reliance on income tax to fund the national budget.

Broadening the Tax Base 

The policy objective of broadening the tax base, that is, ensuring that more resident individuals and corporations pay their share of taxes, is reflected in a few new laws and tweaking of a few others. The most far-reaching, in terms of the number and cross-section of persons likely to be affected, is the Minimum Business Tax. Under the Minimum Business Tax Act 2015 (which was preceded by the Provisional Collection of Tax (Minimum Business Tax) Order, 2014) a minimum business tax of $60,000 per annum is payable by registered companies, building societies, friendly societies, co-operative societies, industrial and provident societies, with a few exceptions, such as charities and companies incorporated for less than 24 months. The Minimum Business Tax is also payable by individuals (whether operating as a sole trader or partnership) who earn at least $5,000,000 per annum from a trade, business, profession or vocation and any other source of income. The Minimum Business Tax, when paid, may be applied as a credit to income tax due for the relevant year of assessment, but may not be carried forward or applied retroactively to any other year. For all corporations and individuals captured by this legislation, the concept of the "nil tax return" is a thing of the past.

Pursuant to the Income Tax Amendment Act, 2015 (preceded by the Provisional Collection of Tax (Income Tax Order), 2014), 15% is to be deducted and withheld on account of income tax (withholding tax) on insurance premiums paid by residents to non-residents, not including international re-insurers.  Similarly, the Provisional Collection of Tax (Income Tax) Order, 2015 sought to introduce a 3% withholding tax on specified services, but its implementation was very shortly afterwards suspended. Under this law, government ministries, executive agencies, local government authorities, etc and persons with annual gross revenue in excess of $500,000,000 were to be required to withhold 3% of its gross payments (in excess of $50,000 per transaction) for specified services, including legal, accounting, janitorial, management, information technology and landscaping services. Both of these withholding tax measures would have the effect of ensuring that these income streams were captured in the tax net, rather than stay afloat in the "informal economy".

As a result of resuming the Bauxite Levy this year, bauxite companies are now included in the tax net, after receiving a waiver for the period 2008 – 2014. This year an environmental levy on local manufactured goods and CARICOM imports was introduced. Environmental levy was previously applicable only to foreign and non-CARICOM imports.

Eliminating Tax Concessions and Discretionary Waivers

The government's tax reform policy favours a rules-based approach to concessions and incentives which are made available to a wide-cross section of businesses, rather than a discretionary sector/industry based approach. The  Fiscal Incentives (Miscellaneous Provisions) Act, 2013 had the effect of eliminating sector based concessions (except for pre-existing grantees who elected to retain their status as continuing beneficiaries under the old regime) to companies in the following industries: cement, export, motion picture, petroleum refining, resort cottages, shipping, factory construction, hotels and foreign sales. Sector based concessions to export free zones, junior stock exchange, bauxite and alumina, and approved group head office were retained.

The other important aspect of this legislation was the introduction of several rules-based tax credits and allowances, including the employment tax credit available to all unregulated companies who file their monthly payroll tax returns and pay over statutory deductions on time; and revision of the rules applicable to capital allowances for income tax purposes. This legislation also introduced a cap on tax losses carried forward.

At the same time, the Income Tax Relief (Large–scale Projects and Pioneer Industries) Act, 2013 was passed into law. Under this Act, the Minister may designate a project or an economic activity as an approved pioneer industry. Projects so designated will benefit from income tax relief. Potentially, the projects may originate and/or operate in a wide cross-section of industries.

Remember that this article is focused on income tax reform and so the amendments to customs tariff and stamp duty, which were a major part of the 2013 legislative reforms, will not be addressed here.

In 2013, there were also amendments to the Income Tax Act which eliminated certain allowances granted to individual employees, that is accommodation allowance and gratuity (which affected mostly workers in the hospitality industry).

The 2013 introduction of the Charities Act also played a significant role in streamlining the grant of tax relief and waivers. As a result of this Act, upon completion of registration, a charity is immediately entitled to 6 tax concessions, namely: GCT, income tax, transfer tax, stamp duty, property tax, and minimum business tax. Under the old regime, separate applications for each tax relief were required and some charities were granted some and denied others because of the varying standards applicable under the relevant pieces of legislation.

Equity

The concept of tax equity generally means that persons pay according to their capacity to pay (so the rich should pay more than the poor) and also that persons in similar income categories pay similar taxes. The policy objectives of broadening the tax base and eliminating discretionary waivers and concessions should have the effect of making the tax system more equitable. The following additional reform measures should also assist with that objective.

Since the White Paper, the personal income tax threshold has increased twice and is due to be increased again in January 2016. In 2013, the threshold increased by 15% to $507,312 up from $441,168; in 2015 it was increased by 9.8% to $557,232; and will be increased by 6.4% to $592,800 in 2016. This incremental increase in the personal income tax threshold is intended to reduce the tax burden on the persons at the lower end of the wage scale; that is, persons earning no more than twice the minimum wage will pay no income tax.

Since January 2013 the corporate income tax rate has done quite a dance. Specifically, the rate imposed on large unregulated companies did a shimmy starting at 331/3% (the usual pre White Paper corporate tax rate) to 30% and has now settled at 25%, which is the rate applicable to all unregulated companies. Regulated companies continue to be taxed at 331/3%. It seems, perhaps, that the rationale for the differential between the corporate income tax rate applicable to unregulated companies and regulated companies is that the regulated companies, which include banks and financial institutions, are the wealthier companies in the island. The tax rate fluctuations for large unregulated companies seems to have been an attempt by the government to establish the most equitable position.

Earlier this year, the tax imposed on life assurance companies was amended to abolish the 3% gross premiums tax and the 15% investment income tax. This was replaced with a flat 25% income tax.

Encouraging Economic Growth

The country's tax policy and structure may encourage economic growth by making certain kinds of investments attractive to investors because of low tax rates. The 2013 amendment to the Income Tax Act introduced a nil rate of tax on dividends received by a company resident in Jamaica from another company resident in the island in which the receiving company holds at least 25% voting rights in the paying company. This tax break benefits group and affiliate companies, where the local parent company or investing company receives dividends from its local subsidiary or affiliate, respectively. Up to recently, the most tax efficient corporate structures would usually include an international business company in a CARICOM jurisdiction. There are now obvious tax benefits of establishing a local group structure and so this should be taken into account going forward; but we shall have to wait to see whether this law will have longevity.

Additionally, the withholding tax on dividends paid to individual shareholders resident in Jamaica was reduced from 25% to 5% with effect from June 1, 2012 to March 30, 2013. As of April 1, 2013 this tax rate is 15%, which is more favourable than the income tax paid by individuals on other taxable sources of income, including wages, salaries and interest income.

Further Changes In the Pipeline

The Income Tax (Amendment) (No. 2) Act, 2015 when passed into law is expected to effect a paradigm shift in tax law and administration in Jamaica. This legislation will introduce transfer pricing rules to Jamaica.

The effect of this legislation is that transactions between connected companies or business organizations, including companies with common shareholders, will be more closely scrutinized. The rules of engagement for such scrutiny will be clearer than before. The current Income Tax Act contains provisions indicating that for tax purposes, the value of transactions between connected persons should be the arms length value. However, there were no detailed rules regarding how the tax authorities would make that assessment.

The proposed rules in the Income Tax Amendment (No. 2) Act, 2015, if passed into law, will affect the tax treatment of connected party transactions, but does not in principle impose any new tax on the relevant companies. These transfer pricing rules are heavily premised on the tax authorities being able to ascribe a value to connected party transactions based on "comparable independent transactions". This approach is likely to pose some difficulties, for example in the area of intellectual property licensing.

The Assessment

The tax reform measures introduced to eliminate tax concessions and discretionary waivers, as well as, the Minimum Business Tax Act are the most far-reaching reforms since the 1980s. The income tax regime applicable to insurance companies has also received quite an overhaul. These reform measures represent radical changes relative to the tax culture that we are accustomed to and seem to be moves in the right direction in terms of consistency with tax policy objectives. However, to date, the reform measures are still best characterized as piece-meal. This has been most evident in the fact that since 2013 a few new tax measures have been announced and/or legislation passed, and then shortly afterwards, their implementation suspended because certain consequences were not fully considered.

Most of the new tax measures seem to have the potential to improve revenue collection by improving compliance rather than the imposition of new taxes. However, there has hardly been any reduction in the income tax burden imposed on residents (that is, those who comply). Individual taxpayers, in particular, have only benefitted from the increased personal income tax threshold, which is hardly adequate. Corporate businesses have fared a little better with employment tax credit and reduced tax rate for unregulated companies.

It is encouraging to see that the government (whether for the purpose of meeting IMF benchmarks or otherwise) is effecting well-needed legislative change. I hope that as more persons are brought into the tax net to share the fiscal burden, the burden on PAYE individuals and compliant businesses will reduce.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.