Asset tax roll-back a year away for banks
Minister of Finance Dr Peter Phillips has followed through on plans to reduce the asset tax for insurance companies, from one per cent to 0.25 per cent, but has otherwise signalled that any similar concessions to other regulated financial institutions are more than a year away.
During the current fiscal year, which closes on March 31, the asset tax paid by regulated companies was raised from 0.14 per cent to 0.25 per cent. No changes are anticipated until the 2016-17 fiscal year, although the minister had initially said the tax would have reverted to the standard rate this month.
Phillips said the structure of the asset tax would be included in the broader review of the financial sector.
Since the near doubling of the tax rate last year, both Scotia Group Jamaica and National Commercial Bank Jamaica, which are listed on the stock market, have reported that the asset tax as well as new accounting rules have taken a toll on their first-quarter profits.
Scotia Group's Q1 report for the period ending January 2015 reflected a decline of $698 million to $1.48 billion.
Adoption of IFRIC 21
The reduction, the group report noted, was primarily due to the adoption of International Financial Reporting Interpretation Committee (IFRIC) 21, which requires a change in the accounting treatment for asset tax, as well as the increase in the asset tax rates in May 2014.
"If the impact of the IFRIC change was excluded, net income would be $2.45 billion, representing a four per cent decline over last year," Scotia reported in disclosures to the stock market.
NCB made $2.13 billion in the quarter ending December 2014, after adjusting for the effect of IFRIC 21. Without the IFRIC effect, profit would have been $2.77 billion or $645 million higher, the bank indicated in its earnings report.
"IFRIC 21 identifies the obligating event for the recognition of a liability as the activity that triggers the payment of the levy in accordance with the relevant legislation, and is triggered in full on the first day of the reporting period," said NCB.
"As such, asset tax is no longer eligible to be accounted for on a periodic accrual basis, but must be recorded in full when triggered. The full liability of this expense for the current financial year was recorded on October 1, 2014, based on the assets on record as at September 30, 2014," the bank said.
Richard Murray, the executive director of the Jamaica Bankers Association (JBA), said Friday that the group hopes for critical consideration of taxation challenges facing the sector, noting that with the exception of Guyana, Jamaica has the highest corporate income tax rate in the region.
"The imposition of this ad valorem asset tax was always of great concern to JBA members and has been generally a burden on the financial services sector. The financial services sector has routinely been called upon to bear a disproportionate tax burden when compared to other sectors and is perceived as an easy target for additional taxes," he told Wednesday Business.
For life insurance companies, the asset tax was raised to one per cent for a year, and a 15 per cent withholding tax on
insurance premiums paid to
foreign companies, and GCT on imported services were imposed at the same time.
The changes announced last Thursday include the reduction of the asset tax on insurance down to 0.25 per cent and removal of the gross premium tax and net investment income tax.
Insurance companies will instead pay corporate tax on total income at a rate of 25 per cent.
Local accounting firm KPMG suggested in its post-Budget bulletin on Friday that the proposed changes may mean more tax on income, overall.
"The news may not be all good for life insurance companies. The minister announced that the gross premium tax (three per cent) and the net investment income tax (15 per cent) will be replaced by a new corporate income tax regime with an applicable tax rate of 25 per cent. By the minister's own accounts, this will likely result in increased income tax to life insurance companies," the accounting firm noted in its bulletin.
The Insurance Association of Jamaica (IAJ), however, appears to have no such qualms at this point. On Friday, IAJ Vice-president Eric Hosin said the association welcomed the new tax structure for the life insurance industry. Hosin is also president of Guardian Life Limited.
"In 2014, the industry's asset taxes were increased to one per cent. This was to provide the Government with an additional $1 billion in revenue. Based on preliminary estimates, the actual out turn will be approximately $1.5 billion," he said.
Hosin added that the existing tax structure was not in the best interest of either policyholders or shareholders, and that while the sector would "still pay the same amount of taxes under the new structure, we are pleased that the team from the Ministry of Finance was prepared to sit with our team to collaborate to work out a win-win tax regime - effectively carrying out tax reform in the process. We look forward to a day when we are past the worse and we can all pay lower taxes."
Hoping for fewer taxes
The Jamaica Bankers Association is hoping that the pending review of the financial sector will lead to a similar outcome - fewer taxes.
"As regulated entities, Jamaican banks are required to pay just over 50 per cent in taxes, including a corporate tax of 33.33 per cent, GCT of 16.5 per cent, and an asset tax of 0.25 per cent," said Murray.
The JBA spokesman said most countries in the region do not single out the banking sector or regulated sectors and apply to them a separate corporate tax rate. And none of them have imposed an asset tax or similar tax, he added.
Murray said "a more enabling and competitive tax environment would provide the JBA with the necessary platform to stimulate greater business opportunities and enhance growth prospects for the economy".