Commentary: Pitfalls of the Employment Tax Credit
The Fiscal Incentives (Miscellaneous Provisions) Act brought about the Employment Tax Credit (ETC), an incentive that reduces income tax payable in March 2015 and ensuing years.
The law contains several snippets concerning how the ETC should be claimed. Still, crucial criteria may have been largely ignored in the process of making a claim by many businesses, and this can spell disaster in the long run.
For the uninitiated, let me explain where the pitfalls may lie. First, the ETC can only be granted on activities relating to carrying on a trade, profession or vocation.
A profession involves the use of purely intellectual skill but also covers manual skill that is controlled by the intellectual skill of the operator such as painting and sculpture or surgery. This is distinct from an occupation consisting substantially of the production or arrangements for the production or sale of commodities/goods or providing a service. The meaning of profession is wide, but the three learned professions - the church, medicine, and law - are good examples.
As for 'trade', the word is defined in the law to mean: "every trade, manufacture or concern in the nature of a trade". All this leaves us with is the famous elephant test. What the courts appear to have assumed is that although trade is somewhat difficult to define, it is recognised when you meet it, the evidence of which is obvious to the senses.
Trade is not comprehensively defined, but it includes 'any venture in the nature of a trade'. Given its ordinary meaning it normally involves commercial operations and the exchange of goods or services for rewards.
Business is a wider concept than trade. The making and holding of investment such as insurance or banking is the carrying on of a business. One can carry on the business of renting and letting of property, but this is never a trade.
The drafters of the ETC were careful to exclude the word 'business' as this would cover a wider activity than trade. This newspaper will be carrying on both a trade and a profession. It has a commercial role as publisher combined with the intellectual role of the writers and perhaps the editor, too.
On the other hand, a 'loader-man' or a tipster at the race track is carrying on a vocation.
It follows that the ETC will not be granted on income from banking, insurance, or the renting of properties, except the renting of a hotel or resort cottage that is licensed as tourist accommodation. Financial institutions regulated by the Financial Services Commission and the Bank of Jamaica will not qualify for ETC. This is clearly set out in the act.
Second, where business activity also obtains income from the making of investments such as interest, dividends, royalty, etc, it is not profit arising from a trading transaction, and this - along with a proportion of expense, including brought-forward losses - has to be excluded from the calculation.
Third, if a business year ended in a month other than December 31, 2014, then only a proportionate amount from January 1, 2014, to the end of the financial year of the business can be utilised for ETC.
Finally, the credit that can be allowed after taking into account all the above is a maximum of 30 per cent of 25 per cent of the result, or the lesser of all the payroll statutory deductions - that is, education tax, and National Housing Trust, National Insurance Scheme, and HEART Trust contributions.
After all the above, the ETC claimed will not become final until Tax Administration Jamaica validates whether the employer is compliant and is entitled to claim the credit, that is to say the taxpayer has paid the taxes on the due dates and the returns were filed on time.
Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston. email@example.com