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Minimum business tax or poll tax?

Published:Sunday | September 21, 2014 | 9:00 AM
The tax audit centre in Kingston. - File

Everald Dewar, Guest Columnist

Life is complicated and getting more so. I remember as a child I was given a piece of wood or bamboo and a knife to fashion a toy such as a kite. Now there are all sorts of electronic gadgets, while wood and knives are considered potential weapons.

Likewise, the Minimum Business Tax (MBT) is another excellent example of complexity arising from the start of a simple idea.

The second instalment of the MBT was due and payable on September 15; the rate of tax is $30,000. This date was not a deadline but the due date and if missed, there will be a penalty of 1.5 per cent per month.

According to Tax Administration (TAJ), the MBT is payable by all companies, even if the company is inactive or dormant. This seems very peculiar.

This sounds like a 'three card trick' or a sort of hocus pocus science, that 'smiles in your face while picking your pocket'. Let us go back and get the facts. As Mark Twain once said: "Get your facts first then you can distort them as you please".

Idea distorted

It was in June 2012 that the Government announced this tax measure to take effect January 1, 2013. As was foreshadowed in a consultative White Paper, the idea was for the imposition of a minimum income tax on the businesses of all entities, thus ensuring that everybody carrying on a business pays a minimum amount of tax.

However, given the current state of the legislation, it is clear that this idea has been distorted.

According to the Provisional Order (2014), the MBT is to be imposed in accordance with the provisions of the Income Tax Act and is drawn up in general terms so that it can be applied to all types of registered companies and other entities - except charities - and on an individual, whose sales are over $3 million and carrying on a trade, profession or vocation but will never include employment or a hobby.

The word 'trade' is not comprehensively defined in the law. Trade then takes its ordinary meaning which involves some commercial operation in providing goods or services.

Profession involves the exercise of intellectual skill rather than the production and sale of commodities or provision of services. For example the proprietor of this newspaper controlling the, advertising printing and publishing is carrying on a trade while the journalist responsible for the literary or artistic content exercises a profession.

An artist, a sculpture and an exotic dancer are carrying on a vocation. From that prospective, we know that an individual will have to be either carrying on a trade, profession or vocation before he is required to pay the MBT, but for companies the law is not so prescriptive.

First, it does not say whether the company should be carrying on a trade or business. Therefore, it would appear that the MBT applies to all companies, whether it is doing business or not.

As 'business' has a wider concept than 'trade', we have to be extremely careful not to interpret this descriptive word too rigidly. The term business meant some form of economic activity. This could be commercial, financial or industrial or even just investing. However, it does not have to have an element of bounty in the activity to make it a business.

Head tax

The term 'business tax' tells us its purpose but does not help to define its precise boundaries. If the MBT is a 'business tax' isn't it then a matter of common sense that the entity must be carrying on a business before it is required to pay the tax?

Otherwise we would have no choice but to conclude that the MBT is not taxing business but it is akin to a poll or head tax where a fixed amount is applied to companies in accordance with a census, as opposed to a percentage of income.

Head taxes were important sources of revenue for many governments from ancient times until the 20th century. It would be more honest then - although honesty is not, we gather, a matter of enormous significance to politicians - were the government to admit that this is just a 'poll tax' on registered companies.

Given the minimum amount imposed, it is not yet something businesses feel disturbed or uneasy about.

However, in my estimation, if there is a duty to pay the MBT, the fact that this is a tax that is governed by the Income Tax Act means there has to be business activity taking place.

A dormant company should therefore never qualify.

Everald Dewar is Senior Taxation Manager at BDO Chartered Accountants in Kingston.everald.dewar@bdo.com.jm