Op-ed: Taxation | PAYE a conundrum for offshore companies
Anyone whose monthly payslip is subjected to pay-as-you-earn income tax deductions - PAYE - will feel justifiably aggrieved if others succeed in wrongly opting out of the system.
PAYE appears an undue burden to many, and if tested on an outrage metre, would fly way off the scale.
Not so long ago, a prospective client enquired whether an offshore company should apply PAYE deductions to the pay of its workers. Given that the workers were allocated to Jamaica by the company that was registered in Ecuador with its employees operating from Abu Dhabi and were paid in US dollars from Norway, my advice was that if the company has sufficient trading presence in Jamaica it probably should operate under PAYE.
That is to say any employer who makes the payment on account of wages or salaries has, by coming into this country, made himself subject to the Jamaican jurisdiction. If that were not so, many offshore companies would operate their Jamaican business through onshore subsidiaries and, by doing this, possibly leave the offshore companies free of the obligation to deduct PAYE in respect of any of its employees who operate in Jamaica.
In the 1980s, there was an amendment to the PAYE regulations requiring PAYE to be applied to wages paid by an intermediary.
One particular scheme in mind was where employee's remuneration was channelled through an offshore trust. Since, on principle, the offshore trust has no trading presence in Jamaica it could not be required to operate PAYE.
An 'intermediary' is defined as any person acting on behalf of an employer and at the expense of the employer.
It should cover a trust where any of the beneficiaries includes an employee of the employer.
In any case, if the intermediary pays any income to the employee, PAYE should apply. It would also apply where Firm A supplies its staff to do work for Firm B as subcontractors so that the staff remains employed by A throughout.
If it is likely that Firm A will not operate the PAYE properly, is the regulation saying that Firm B should do it? Well, not really, but the employer should at least make a deduction under a special provision of the Income Tax Act which was introduced in 1996, that is, deducting a flat rate of 25 per cent.
This provision aside, it should be recognised that the PAYE tax net is capable of spreading to third-party businesses and applied against invoices issued that have nothing to do with employees' wages. Not to mention how this interacts with GCT.
There is plenty of scope for Firm B to get it wrong. My interpretation is that GCT will still be chargeable on the gross amount of work invoiced.
The situation with Firm A is also open to debate since as far as it is concerned part of its invoice will go unpaid but at the same time it will be expected to include the gross amount in its profit for tax purposes.
I would not even mention the three per cent withholding tax on services, which is on the books yet to be implemented - what a conundrum! Take precaution, dear reader, when dealing with businesses supplying the services of skilled staff.
It is doubtful that the regulation for PAYE would apply if the employee works under a separate contract in Jamaica; he may well qualify to pay tax as a self-employed person on income earned on all the duties performed in this country.
Care must be taken where the employee works partly in Jamaica and partly overseas during the tax year. It is necessary to establish how much of his total emoluments for that year are referable to Jamaica.
Even so, Tax Administration Jamaica may have difficulty collecting tax due from an employee who has left the Island, nor can it proceed against an employer who is not resident here.
The solution may be to issue a draconian directive that the local person to whom the services were rendered is treated as liable to deduct tax. It matters not whether the employee was here one week, or that a double taxation treaty may state that only the wages for Jamaica are to be taxable here.
Foreign businesses will still have the defence that PAYE cannot apply to them because they have no 'sufficient' taxable presence here.
Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston.