Correction & Clarification
We incorrectly reported Brian Denning, a partner at PricewaterhouseCoopers, as saying that the Private Sector Working Group had proposed the introduction of a personal income tax rate of 15 per cent for the first $1.1 million to $1.3 million. The correct figure is $1.123 million. Denning also indicated, in relation to the proposed five per cent tax on dividends, that there were a number of matters which required clarification concerning its application. We regret any misunderstanding.
The rate at which profit is taxed for companies will be equalised with the income tax rate paid by their employees and individual Jamaicans, starting January 1.
The proposed eight-point reduction in the corporate income tax rate from 33.33 to 25 per cent should positively impact the competitiveness of local businesses, according to Brian Denning, partner, tax services at PricewaterhouseCoopers Jamaica, who says it will boost their competitiveness in the region.
"I think the reduction to 25 per cent is a welcome move in terms of essentially recalibrating our corporate income-tax structure," Denning told Sunday Business on Friday.
It's a partial victory for the private sector, which has long argued for personal income tax and corporate taxes to be equalised, but the Private Sector Working Group (PSWG) had more recently been pushing for both rates to be reset at 15 per cent.
The concession will not extend to 'regulated' firms overseen by the Bank of Jamaica, Financial Services Commission, the finance ministry and the Office of Utilities Regulation, including building societies whose rate remains at 30 per cent.
Denning, who is also a spokesman for the PSWG, said Jamaica's corporate tax rate was "perhaps the highest" among key regional trading partners and has had an impact on competitiveness.
J$29 billion in corporate taxes
Government collected J$29 billion in corporate taxes within the fiscal year ending March 2012 - well shy of the expected J$35 billion.
Contrastingly, employees paid J$60 billion in income or PAYE taxes, overshooting the targeted J$56 billion.
Denning acknowledged that the level of tax compliance among companies was not high, but said it was one of the reasons the PSWG recommended a minimum income tax, which was also introduced by Phillips as one of several measures outlined by him in his J$23.4-billion tax package to help close funding gaps in his J$612-billion budget for fiscal year 2012-13.
"At the same time, I think it needs to be recognised that there are a lot of companies out there - medium and larger companies - which ... I believe, in good faith, try to be tax compliant and to maintain tax compliance," Denning said.
He said, however, that those companies, "... when one of several measures outlined by him in his J$23.4-billion tax package to help close funding gaps in his J$612-billion budget for fiscal year 2012-13.
He said, however, that those companies, "... when they are not benefiting from incentives, they are under a very uncompetitive regime and they are paying tax at 33 1/3 per cent."
Phillips has proposed that a flat-rate minimum tax of J$60,000 applicable to professionals and companies excluding start-ups in year one of operation, charities, and companies exempt under Section 12 of the Income Tax Act.
The reduction to 25 per cent was not "where the PSWG would have wanted it to go as a mechanism to replace incentives. But at this point, the incentives are being looked at. In fact, the Government hasn't made a determination other than indicating that the existing incentives will be consolidated into an omnibus incentive act," Denning said.
The tax expert emphasised that "generally speaking, when you reduce taxes, you reduce the incentive to evade; when you increase taxes, you increase the incentive to evade."
J$450 million revenue loss
The Government is estimating revenue loss of J$450 million from the reduction in the corporate tax rate.
Denning said the driver behind the introduction of the minimum income tax was a perception that a lot of companies and businesses - self-employed traders, consultants and professionals such as doctors and lawyers - are not paying their fair share of taxes.
The minimum tax also takes effect on January 1, 2013 and is estimated to yield revenue of J$660 million in revenue.
Commenting on the increase in the personal income-tax threshold from J$441,168 to J$507,312, also effective January 1, 2013, Denning said the PSWG had proposed an income-tax rate of 15 per cent for the first J$1.123 million to J$1.3 million of income.
"The problem is that it's not a very accurate mechanism because everybody gets the benefit of the threshold, whether you are earning J$300,000, J$500,000, J$1 million or J$10 million or even more," he said.
The threshold as a policy tool was also expensive, he said.
"A more efficient approach, as recommended by the PSWG, was to move to an income-tax exemption combined with a lower rate of income tax on initial income levels and that would allow you to skew the tax advantage to the lower paid, more so than through the threshold."
The income-tax threshold becomes effective January 1. Government projects revenue loss of J$100 million from the measure.
Phillips also announced the imposition of a five per cent tax on dividends, effective June 1, to raise J$300 million.
Denning said the ministry indicated that the five per cent tax would be a final tax. But he was sceptical of its application.
"If a subsidiary pays dividend to its parent company - currently taxable at zero per cent - if that dividend is now going to be taxed at five per cent, one would need to confirm — and I expect that to happen — when the parent company pays out that dividend to its shareholders that there isn't a second round of dividend tax of five per cent."
He said he understood that the move to introduce the dividend tax was consistent with the proposal to reduce corporate income tax.
The PSWG had recommended a reduction to 15 per cent for the corporate tax rate and a 10 per cent rate for dividend tax.