Withholding tax just won't work
It was with great amusement that I listened to the minister of finance announce a three per cent withholding tax on payments to suppliers over $50,000 to commence May 1, 2015 (subsequently pushed back to June 1, 2015).
Amid the chaos and angry expressions of my colleagues, I sat back and could only think, "There goes the minister again, artificially tampering with inflation with the view to achieving the revenue targets which must be met as part of the IMF deal."
This is not the first time that the minister has attempted to indirectly tamper with the inflation rates. It was merely a year ago that the withholding tax on payments to an overseas entity was introduced. At the time, many wondered as to the merits of such a system, but I knew that sinister plans had to be afoot.
As a man of figures, I wish to highlight the impact that the new three per cent withholding tax will potentially have. I find it far easier to explain with suitable examples, so bear with me.
Let us imagine a company, 'Burdened Ltd', provides services to 'Buy Jamaica Ltd' in exchange for $100,000. Prior to the three per cent tax, the invoice would be quoted as $100,000 + $16,500 (GCT). The Government would also be entitled to a maximum of $25,000 in income tax (at 25 per cent) on the $100,000, giving the Government, potentially, $41,500 in revenue, and 'Burdened Ltd', $75,000 in after-tax profits. With the change in the system, many persons assume the following will ensue:
- Invoice: $100,000 + $16,500
- Withholding tax (due within 30 days): $3,000
- GCT (due within 30 days): $16,500
- Potential additional income tax: $22,000 (due by March 15 of the following year or sooner if quarterly returns are made).
It is argued that this is burdensome, and I agree, especially for marginal businesses that may find themselves in a refund position at the end of the day. I, however, submit that this is not the desired result the minister was going for, nor is it the result that will ultimately obtain in a homogeneous market.
My proposal is that any well-thinking businessman who has read his scripture will be reminded of the sayings of Christ, paraphrased: Render unto Peter that which is Peter's and unto me that which is mine. As a result, the only logical thing to do will be to mark up that invoice so that 'Burdened Ltd' will not become overburdened.
- Invoice: $100,000*100/97 $103,092.78 + $17,010.31 (GCT)
- Withholding tax (due within 30 days): $3,092.78
- GCT (due within 30 days): $17,010.31
- Potential additional income tax: $22,680.42
- Potential after-tax revenue for 'Burdened Ltd': $77,319.59 (Better off than before)
In the immediate term, 'Burdened Ltd' would still receive $100,000 in hand and the three per cent withholding tax would pass to 'Buy Jamaica Ltd'. The benefits to the Government are seen almost immediately in the form of additional cash upfront from the withholding tax, an increase in GCT revenue through an indirect three per cent rise in the GCT intake, and potential higher final tax inflows once liabilities by the taxpayer are settled.
Of course, 'Buy Jamaica Ltd' is not going to sit and absorb the cost, and this will ultimately be passed on to the end user of most services in this country - you and me. All this effectively creates an artificial increase in the inflation rate, allowing more income to flow into the government coffers and allowing it to meet surplus targets as set out by our 'new colonial masters'.
There are, of course, other implications, and academics may argue about whether companies can afford to pass on the increased costs associated with the additional prepayment of taxes, the additional accounting resources required to track the three per cent computations, and the additional costs in filing and paying these returns.
Some will argue on the benefits, stating that it brings many of the non-paying individuals into the tax net. However, if history is anything to go by, the prior inaction of our revenue agents in the vigorous pursuit of tax dodgers does not inspire me to think anything other than that the Government is going the route it has always gone, i.e., squeezing just a little more out of those taxpayers who are willing to pay for fear of prosecution and persecution.
I submit that it will have no impact on those who continue to act with impunity because our revenue agents are ill-equipped and uninterested in going after those who do not render unto Peter what ultimately belongs to Peter.