Beware that ‘specified services’ withholding tax
WITH TAX reform in overdrive, there has been enough paperwork in amendments and secondary legislation to make a dent in a tropical rainforest.
The changes have been coming fast and furious, and now we now have another piece of legislation which imposes a withholding tax on 'specified services'.
It appears that by a policy decision, the measure will be introduced on a phased basis starting June 1, 2015. And it is almost a certainty that there will be teething pains during its implementation. Let's first look at the elements of this tax.
The 'withholding agents', such as government ministries and departments, financial institutions, and utility companies, that make payments to the providers of some 16 'specified services' - including accounting, legal and transporta-tion haulage or tours - will be required to withhold tax of 3.0 per cent from the 'gross payment' of $50,000 or more made to these 'service providers'.
Some of the issues that will be made manifest in the performance of withholding includes duplication of tax. In order to avoid duplication, the law makes the tax not applicable where withholding is already taking place, such as with PAYE deductions, or in the case of certain independent contractors, personal representatives and service providers overseas. It should not be confused, however, with GCT withholding on government purchases.
It would also not apply where the service provider is exempt from paying tax under the Income Tax Act or other legislation such as charities. However, challenges may arise in the case of providers that are listed on the junior stock market, where these entities, although liable to pay corporate income tax, are - by way of ministerial order - relieved from paying corporate taxes for several years.
In theory, the tax should not apply to services already subject to the Contractors Levy. Nevertheless, there is a potential problem with the word 'repairs' appearing in both pieces of legislation.
The expression 'gross payment' raises the question: should the tax be accounted for on the full payment, that is, including GCT? In my opinion, GCT itself being a tax, the withholding would not apply to it.
One of the practical difficulties is defining 'a payment'. For that reason, the law makes 'a payment' to include any loan granted to the service provider on account of the service.
The key feature of a withholding tax is the deducting of the tax before it gets into the hands of the recipient. The concept is to place the tax burden on those who pay for the service and not on those who provide it; hence, the tax is not directly assessed on the service provider, but is deducted and collected at source by the payer. It is then treated as tax owed by the payer and is on the payer's account, and must be accounted for by him. The payee will be provided with a certificate showing the tax deducted.
The withholding agent, acting as a collection agent, has the obligation to deduct the tax on a straight objective basis even when it is possible this may adversely affect the cash flow of the receiving entity.
It would have been helpful if the Government had legislated provisions for a company to be exonerated if it failed to withhold taxes in circumstances where it reasonably believed it ought not.
Tax Administration Jamaica will try to recover the tax not from the supplier of the service but the recipient, even where he fails to withhold for whatever reason. So even if there were a reasonable but mistaken belief that tax should not be withheld from the payment, it does not excuse the withholding agent from its duty to account to TAJ for the tax by the 14th day of the following month.
It must be understood that this 'specified services' tax is not the imposition of a new tax but is being introduced as a compliance measure. The service provider can get a credit when filing final and estimated taxes.
Back in the 1980s, the Government's decision to broaden the tax base included imposing tax on interest income on deposits in banks and other deposit-taking institutions - called 'prescribed persons'. This measure expanded the concept of taxable income, but there were some last-minute compromises granted to powerful banking groups. One of those compromises was that deposits of a 'prescribed person' with another 'prescribed person' would not be subject to withholding of tax on interest earned.
This, however, is not the position with divided 'withholding agents'.
Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston.