End waivers and tax incentives!
If Jamaica is to achieve economic success and growth, the taxation system must be characterised by equity, efficiency and simplicity.
In pursuit of these goals, the Government needs to strike the right balance between an attractive tax regime for investment and sustainable growth, while securing the necessary revenue for public spending.
This is no easy task, as Jamaica's well-documented fiscal deficit challenges are formidable, requiring the Government to reduce expenditures while stabilising and increasing revenues.
Furthermore, globalisation has exacerbated the fiscal problems.
Internationally, mobile capital has become more difficult to tax, causing a race to the bottom among developing countries as they position themselves, offering all sorts of incentives and waivers, to be the most attractive to investors, foreign and domestic.
In last week's submission, The Council dealt with consumption tax, which is generally deemed to be one of the least distorted sources - bettered only by property taxes - that has the potential benefit of broadening the tax base.
We also looked at lowering the effective personal tax rate by increasing the threshold and reducing rates of both personal income and payroll taxes to offset possible increases in consumption tax, as well as stimulate aggregate demand in the economy.
This week, we examine whether Jamaica really needs the current cumbersome array of sector-based incentives and waivers or if there are feasible and better tax alternatives that will have the characteristics of equity, efficiency and simplicity while enhancing the country's competitiveness.
Determining the role tax incentives will play in the future is particularly challenging in carving a path for tax reform. Stakeholders within sectors that currently enjoy tax incentives - for example, tourism, manufacturing, agriculture and export - will typically argue that they should continue to be incentivised and that this is critical to their survival.
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 needs of the country.
no gct claim
In the case of investors who are GCT registered taxpayers, they cannot claim the GCT incurred on materials used in the construction or repair of their business premises, so they must absorb the GCT as an additional cost.
In our view, this is a business unfriendly provision and inconsistent with broad GCT principles.
In the very same tax regime, 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?
Furthermore, where existing statutory incentives are unable to address the disincentives in specific instances, the only mechanism left in the short term is a ministerial waiver of tax.
The issue of tax waivers has been the subject of much public discourse recently, but many fail to appreciate that the number and extent of waivers is symptomatic of the deficiencies in and the burdensome nature of our tax regime.
It also reflects our tardiness over the years in implementing comprehensive legislative reform.
To put it simply, if our tax regime was more competitive, business friendly and efficient, the pressure for tax waivers would dissipate.
In addition to allowing for a more transparent distribution of the tax burden, public-sector officials, including at the ministerial level, would be relieved from the very significant administrative burden that the current web of incentives, concessions and waivers place on them.
If we do not address this situation, then matters will get worse.
As our tax regime becomes more burdensome, we will be increasingly pressured to give further tax breaks - whether by incentives, waivers or other methods in an effort to stimulate desired investment.
In doing so, we will drive ourselves further along a path we do not want to go, further narrowing our tax base, imposing new or higher taxes to sustain revenues - thereby enhancing the incentive to evade taxes and further undermining the competitiveness and viability of tax-compliant businesses.
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 Organization to disband export-driven tax incentives for the goods-producing sector by 2015, with similar pressures anticipated in the future for exported services.
If nothing is done, export activities will become fully taxable under the non-incentivised tax regime, which imposes tax at relatively high levels.
The Council's prescription
We believe that the current tax system, with its clumsy and costly waivers and incentives, cannot continue.
The reformed system must be characterised by equity, efficiency and simplicity.
The effective marginal corporate tax rates must be regionally and internationally competitive in order for Jamaica to achieve high and sustained rates of economic growth going forward.
In turn, the achievement of higher growth rates is the surest and least painful means of solving a wide range of our economic and social ills.