Tax reform - can we rise to the challenge?

AS THE issue of tax reform returns to the front burner, it is worthwhile to look at what has been happening recently, as well as some of the big challenges we will have to address if we are to facilitate our tax regime in acting as a catalyst for economic growth.

Jamaica's tax system has been extensively studied over the years. Many important and balanced tax policy and administrative reform recommendations have been made over the years, including in the 2004 Report of the Tax Policy Review Committee (also known as the Matalon Report), and more recently in the 2009 Blueprint for Taxation Reform in Jamaica. A range of recommendations have been adopted but comprehensive reform has remained difficult to achieve.

The Government of Jamaica (GOJ) committed in its macroeconomic programme, as outlined in the GOJ's Letter of Intent to the International Monetary Fund in January 2010, to "strengthen tax administration".

This includes a series of specific initiatives to be implemented in the short term and steps have already been taken on a range of these.

In terms of tax policy, the letter of intent stated that the GOJ "remains committed to significantly scale back the system of tax incentives and exemptions in order to significantly broaden the tax base, reduce distortions in the system, and allow a phased reduction in the corporate tax rate to a more competitive level".

In May 2011, an important step forward was taken when Minister of Finance and the Public Service Audley Shaw tabled in Parliament a Green Paper titled 'Tax Reform for Jamaica'.

This paper outlines the GOJ's intention to undertake com-prehensive reform of the country's tax regime, the objectives it wishes to achieve, as well as a menu of reform measures under consideration. The purpose is to stimulate public debate on its content and to enable the GOJ to take account of representations by all stakeholders, prior to formulating its official policy position. This will be subsequently published in a White Paper document.

A bipartisan Parliamentary Tax Committee was established in July 2011 which intends to commence a review of the Green Paper reform proposals in September.

The Green Paper initially stimulated quite a degree of public debate on the topic of tax reform. Public discourse continues to be periodically punctuated by concerns expressed from stakeholders who feel that certain reform proposals will adversely impact their specific sectors.

In contrast, other stakeholders who presumably feel less impacted by the menu of reform measures outlined in the Green Paper have not actively participated in the debate - some, perhaps, in the hope that the status quo remains.

The risk with such an approach, however, is that other reform proposals detrimental to these stakeholders could subsequently emerge without the benefit of their input. The clear message, therefore, is that all stakeholders should inform themselves of the GOJ's proposals and how it could impact them, as well as contribute to the review process.

The difficulty of securing agreement and implementing comprehensive and balanced tax reform should not be underestimated. Separate and apart from evaluating and modelling specific reform proposals, there are also a number of critical "big picture" issues which must be addressed if we are to rise to the challenge of reform.

DEPOLITICISING REFORM

Our current fiscal situation demands urgent tax reform while at the same time it limits our options available, particularly in the short term. The implementation of a comprehensive and balanced tax-reform plan requires time, clarity of purpose and certainty.

It simply cannot be driven by short-term political objectives or within the time frame of each political cycle. This is a reality that faces us as a country, irrespective of which part of the political spectrum you may align yourself to.

The Parliamentary Committee on Tax Reform provides our politicians with a great opportunity to demonstrate that an enlightened sustainable reform can be developed through collaboration, and be properly implemented in the interest of the country.

Such reform should have bipartisan support, or it risks being subsequently reversed or attacked for political expediency. With elections constitu-tionally due in 2012, can we rise to this challenge?

TAX INCENTIVES

Determining the role tax incentives will play in the future will be a particularly challenging one in carving a path for tax reform. Stakeholders within sectors which currently enjoy tax incentives - for example, tourism, manufacturing, agriculture, export - will typically argue that they should continue to be incentivised, and that this is critical to their survival.

In contrast, stakeholders in non-incentivised sectors typically complain that they are consequently called upon to bear an excessive and disproportionate share of the overall tax burden in an effort to meet the tax revenue demands of the country.

This is further compounded by significant non-compliance by taxpayers who evade their obligation to contribute to the pot.

It is argued that if everyone paid their 'fair share' of taxes, the current burden could be significantly reduced, the general - non-incentivised - tax regime could be made more competitive and the country's fiscal position improved.

While the Green Paper proposes a review and overhaul of incentives and waivers, and the pulling of same into an omnibus incentive law, it does not make specific recommendations as to how this will be done.

Irrespective of one's views on incentives, the reality is that doing nothing is not an option.

Jamaica has already committed to the World Trade Organisation to disband export-driven tax incentives for the goods-producing sector by 2015 - not far away now - with similar pressures anticipated in the future for exported services.

If nothing is done, export activities will then revert to becoming fully taxable under the non-incentivised tax regime, which imposes tax at relatively high levels.

Tackling our general tax regime must be a big part of any tax-reform effort. Currently, the regime is characterised by high statutory tax rates which, when combined with certain penal or business unfriendly provisions, make it unattractive and more challenging to operate within.

As a result, it becomes increasingly difficult for Jamaica to attract or stimulate the desired economic investment without granting extensive tax breaks.

In fact, some of these 'incentives' are needed merely to counteract or remove a disincentive which otherwise exists in our general regime. Rather than eliminate the disincentive entirely, there are instances where we have removed it for certain sectors as part of the 'incentive' offered.

For example, GCT-registered taxpayers cannot claim GCT incurred on materials used in the construction or repair of their business premises, so they must absorb the GCT as an additional cost. This is a business-unfriendly provision and inconsistent with general GCT principles.

We then exclude hotels from the application of this provision. So is this an incentive that we give to hotels, or a disincentive imposed on everyone else who wishes to maintain or enhance their business premises? Why not eliminate the provision entirely?

See Sunday Business for part two of this article.

Brian J. Denning is a partner at PwC Jamaica. Email brian.denning@jm.pwc.com