Betty Ann Jones and Norman Rainford, Guest Writers
Dr Peter Phillips, minister of finance and planning, gave this year's Budget presentation in the context of the global economy, where growth is projected to be approximately 3.2 per cent for 2012. Following three consecutive years of negative growth, real GDP grew in Jamaica by 1.3 per cent in 2011-12.
The economic concerns of high unemployment (12.8 per cent), public-sector deficit (7.3 per cent of GDP), and the ratio of the debt to GDP (128 per cent), remain.
For 2012-13, the fragile economic growth is facing headwinds of concerns over increases in the banking system's non-performing loans, sluggish foreign direct investment, the risk of a collapse in the weakening euro, and tensions in the Middle East which could lead to higher oil prices.
It is within this context that the IMF and the Government agreed to a three-pronged approach.
First, a growth-oriented environment aimed at improving productivity and competitiveness. Second, strong macroeconomic policies through significantly higher primary fiscal surpluses, fiscal and financial reforms, and further strengthening financial sector regulation and supervision. Third, a framework to ensure social cohesion.
The finance minister's Budget presentation was primarily focused on the second of the three approaches through the proposed increase in revenue of J$23.4 billion.
There was an attempt at economic fairness through a J$60,000 minimum tax on all registered companies, and an increase in the personal income tax (PIT) threshold.
We remain sceptical of the Government's ability to raise this projected amount of revenue, given that revenues have been lower than budget for seven of the last eight years. In 2011-12, the primary surplus was lower than the budgeted 5.2 per cent.
Phillips presented the usual list of entities to be privatised such as Clarendon Alumina Partners, Wallenford Coffee Company, Caymanas Track Limited, Jamaica Railway Corporation and GOJ's interest in Windalco.
There were a few surprises, including the proposed divestment of GOJ's shareholding in Jamaica Public Service Company Limited, and the removal of the Norman Manley International Airport from the list of proposed entities for divestment.
Jamaica has not yet, like much of the world, recovered from the global recession.
Given that debt and wages account for 78 per cent of public expenditures, the Government's strategy is to reduce wage expenditures through public-sector pension reform and natural attrition.
We recognise the limited 'degrees of freedom' the finance ministry had to craft this Budget.
Phillips announced that the Parliamentary Committee on Tax Reform has concluded its deliberations but its report has not been tabled in Parliament. Therefore, the anxiously anticipated White Paper on Tax Reform for Jamaica has not been finalised for presentation to Parliament.
The minister did indicate, however, that the tax-reform measures would be tabled before Parliament closed for the summer break.
Some 27 organisations made presentations to the members of the Parliamentary Committee.
This is indeed heartening, in light of the recognition that the citizens of Jamaica "must be the main stakeholders in the development of a sustainable strategic taxation regime", and must be involved at the consultation stage of any tax reform programme.
Some of the short-term measures proposed by the Private Sector Working Group (PSWG) have already been adopted and included in the minister's Budget presentation.
Consistent with the novel recommendations of the PSWG, regulated entities such as financial institutions, securities dealers, general insurance companies, utility companies and telecommunications companies will continue to account for income tax on their tax adjusted profits and gains at the rate of 33.33 per cent.
The minister explained that regulated companies include all entities overseen by Bank of Jamaica, Financial Services Commission, Ministry of Finance & Planning and Office of Utilities Regulation.
All unregulated companies will benefit from a rate reduction. They will account for income tax on their tax adjusted profits and gains at the rate of 25 per cent. The new corporate income tax (CIT) rate will take effect on January 1, 2013, that is, the commencement of year of assessment 2013.
Building societies will continue to pay income tax at the special rate of 30 per cent, and life assurance companies will continue to pay income tax at the rate of 15 per cent and a premium tax at the rate of three per cent.
A reduction in the income-tax rate was one of the proposals made in Green Paper No 1/2011 on Tax Reform for Jamaica tabled in May 2011.
The Green Paper stated that the projected revenue impact of a reduction in the CIT rate to 25 per cent was a revenue loss of J$8.33 billion. The compromise of continuing to tax regulated entities at 33.33 per cent, which was recommended by the PSWG and adopted by the minister, will result in a revenue loss of only J$450 million.
The PSWG submission included a recommendation that the CIT rate of regulated entities be gradually reduced over a period of five years. The minister did not state whether the phased CIT rate reduction would be implemented.
MINIMUM INCOME TAX
All registered companies - excluding charities, companies exempt from income tax under section 12 of the Income Tax Act such as approved educational institutions and companies in the first year of incorporation - will be required to pay a minimum income tax of J$60,000 per annum, effective January 1, 2013.
This flat tax is also applicable to self employed professionals such as lawyers, doctors and consultants.
This was one of the proposals put forward in the Green Paper for implementation in January of this year as a replacement for little trade licences and possibly the assets tax.
Based on the Green Paper, the minimum business tax proposed would have been payable, regardless of whether a loss was made. It is our understanding that this will apply to the minimum income tax. However, we would expect that the withholding tax on dividend would be treated as a credit against the payment of the minimum income tax of J$60,000.
Withholding tax on dividend
The Minister announced the re-imposition of a tax on dividends payable to residents at the rate of five per cent and will take effect on June 1, 2012.
It is categorised in Ministry Paper No 32/2012 as a final tax. Like all other withholding taxes, it must be deducted at source with the payer accounting to the Collector of Taxes for the amounts deducted.
The PSWG had been the only group recommending a reimposition of the tax on dividends paid by Jamaican companies to their Jamaican shareholders.
The minister adopted this recommendation, with a measure of compromise in relation to the applicable rate. A single rate, applicable to both corporate and individual shareholders, is also a change in the recent two-tiered system of imposing a higher rate of tax for corporate taxpayers. This may be seen as a move towards bringing about the promised equity and simplicity in the tax system.
Phillips did not indicate whether this withholding tax on dividend tax would be applicable to shareholders of companies listed on the Jamaica Stock Exchange. Since April 1, 2002, Jamaican shareholders of listed companies have received their dividends tax-free.
There is also some uncertainty as to whether the PIT threshold would apply to such dividends. We understand that the intention is that the PIT threshold should not apply to relieve such dividends from withholding tax. Therefore, a person in receipt of solely dividend income, which is below the current PIT threshold of J$441,168, or as of January 1, 2013, the increased PIT threshold of J$507,312, would still be subject to the five per cent withholding tax on dividend.
INCREASES IN ASSETS TAX
It is proposed that, effective June 1, 2012, the asset tax regime will be modified as follows:
The filing date for the declaration of assets and the payment of the asset tax will move from September 1 to March 15.
This announcement raises the question as to whether companies will be relieved of the obligation to pay asset taxes for 2012 which would have been due by September 1, 2012.
It is unlikely that the Government will forego this tax in the current fiscal environment, therefore, we look forward to receiving further details to clarify the implementation of this measure.
Additionally, the convergence of the income tax and asset tax filing deadlines will put additional administrative and financial pressures on companies in the period approaching the March 15 deadline.
The proposed annual asset tax rate scale for non-financial institutions are:
|Asset Value||Proposed Annual|
|Less than J$50,000||J$10,000|
|At least J$50,000 but less than J$500,000||J$25,000|
|At least J$500,000 but less than $5m||J$50,000|
|At least J$5m but less than J$50m||J$75,000|
|At least J$50m||J$100,000|
This represents a significant increase over existing asset tax rates, which range from a low of J$1,000 for asset values up to J$50,000, to a high of J$35,000 for asset values exceeding J$100m.
This move is a clear rejection of the recommendation by the PSWG for the removal of this tax which it referred to as a 'nuisance tax'.
The proposed annual asset tax rate scale for financial institutions and securities dealers governed by the BOJ and the FSC will be 0.2 per cent of the asset value. The asset value for these purposes will be based on the total assets - including guarantees/letters of credits.
Loan loss provisions based on International Financial Reporting Standards and accounting prudence will be allowed as deductions in arriving at the asset value.
Effectively, the financial institutions and securities dealers will bear the brunt of this tax. Several commercial banks report assets valued in the billions of dollars in 2011.
Where, for example, a bank has assets valued at J$1b, it will be liable to pay an asset tax of J$2m. This far exceeds that payable by a non-financial institution whose asset tax is capped at J$100,000.
The Government's use of the assets tax regime may be an effective measure for increasing tax revenues as substantially all companies are subject to pay the tax.
Further, the tax is not based on profit generation and so cannot be avoided due to the existence of tax losses as in the case of income tax, neither can the tax be mitigated by the use of credits as in the case of the GCT.
The asset tax is not applicable to the relatively few companies licensed by the Minister of Industry Investment and Commerce to remove the word 'limited' from their names. These include charities and other entities established to promote commerce, science, art and religion.
The modified asset tax regime, along with the minimum tax imposed on registered companies, is expected to generate additional revenues of J$1.95b for the Government.
The following revenue measures are slated to take effect on June 1, 2012.
GCT will be reduced from 17.5 to 16.5 per cent. This is expected to result in a reduction in revenue of J$2.4b.
GCT on electricity will increase to 16.5 per cent for all consumers and the monthly non-taxable threshold to 300kWh for residential consumers. The previous rate was 10 per cent for both residential and commercial consumers with a monthly non-taxable threshold of 200kWh for residential consumers.
It is estimated that approximately 80,000 residential consumers will receive a tax break on their electricity bills as a result of the change.
The measure is expected to generate revenue of J$430m.
Certain government accounts will continue to enjoy exemption from GCT, such as schools, hospitals, clinics, government agencies and government offices; and private institutions such as hospitals and schools will also continue to receive special waivers for GCT on electricity.
There will be a partial widening of the GCT base to include agricultural produce, food items and educational material. However, exercise books and school bags remain exempt. The GCT applicable to books is expected to significantly impact parents' budgets for the new school year.
A single specific special consumption tax will be reintroduced on overproof rum to replace the ad valorem rate currently in place.
Overproof rum will attract SCT at the rate of J$960 per litre of pure alcohol, which brings it in line with the SCT currently payable on alcoholic beverages such as local and imported wines, cordials, liqueurs, vodka, whiskey, brandy and gin.
Similarly, the preferential ad valorem rate currently in place for the tourism sector will be replaced by a single specific SCT rate of J$700 per litre of pure alcohol.
Currently, a 30 per cent ad valorem SCT is imposed on overproof rum.
The announced change runs counter to the recommendations of the rum industry, but is an attempt by the GOJ to bring about uniformity in the SCT regime on alcoholic beverages.
The players in the rum industry have consistently advocated for a single rate ad valorem SCT, which they argue would give rise to a progressive SCT regime on alcoholic beverages, while the existing regime is a regressive one.
There appears to be a problem with using specific SCT amounts which are indexed in Jamaican dollars, in light of the frequent revisions that would need to be done in response to changes in the rate of inflation and rates of exchange. It is recommended that the specific SCT amounts should be set in US dollars.
SCT on denatured ethanol will be introduced at a rate of J$16.32 per litre.
Denatured ethanol is an ingredient in petroleum products blended by local suppliers. Ethanol imported in a denatured state attracts no tax at the ports.
The intention is to equalise the tax treatment of locally produced and imported denatured ethanol.
The additional revenue of J$540m, which is expected from this measure, will result from an increase in the price of petroleum products to all consumers of blended petroleum products.
SCT on unprocessed tobacco will be applied at a rate of J$10.50 per 0.7 gram of unprocessed tobacco product - popularly referred to as 'grabba'.
NEW TOURISM REGIME
Effective September 1, 2012, a specific GCT will be imposed on occupied rooms in hotels, villas, resort cottages/apartments and other similar tourist accommodation as follows:
|No of rooms/hotel size||Room rate per night|
|Less than 51||US$2|
|51 to less than 101||US$6|
|101 to less than 201||US$10|
|At least 201||US$12|
Persons engaged in tourism activities will no longer be able to claim overseas travel agent and tour operator commissions and transportation expenses between hotel and airport in computing their output tax for GCT purposes.
Tourism revenue remains subject to GCT at 10 per cent and gratuities paid remain deductible in arriving at output tax for persons engaged in tourism activities.
With effect from January 1, 2013, the annual personal income-tax threshold will increase from the current J$441,168 to J$507,312.
An additional annual income-tax exemption of J$66,144 will be made available to individuals for 2013, which is a monthly increase in their tax-free income of J$5,512.
As the minister noted, the benefits presently afforded to employees in the hotel and tourism sector in the form of the tax-free gratuity will now be redundant. This benefit is only available to persons in receipt of a maximum annual income of J$500,000, and so, currently, they benefit from an additional tax- free amount of J$58,832, over the existing PIT threshold of J$441,168.
With the proposed increase in the PIT threshold, those employees will no longer derive a benefit from the tax-free gratuity scheme, as the increased threshold effectively affords them a greater tax-free benefit than would be available under the gratuity scheme.
With the reduction of the termination fee imposed by the Office of Utilities Regulation, it is proposed that, effective June 1, 2012, the following be imposed:
J$0.30 per minute on all domestic calls for termination to a mobile network and fixed lines and
US$0.075 per minute on all international calls for termination to a mobile network.
This appears to be a new tax type and it is unclear how it will be administered and collected. This tax would add to the existing tax charge of 25 per cent GCT on telephone services, including telephone cards and telephone instruments, and is likely to result in increased charges to customers.
CET ON SELECTED GOODS
It is proposed that, effective June 1, 2012, the common external tariff on selected goods be increased by 10 percentage points.
The selected goods are those specified under List C of the Harmonisation Tariff and may include motor vehicles and spare parts; jewellery - diamonds, wristwatches; glass; and alcohol - gin, vodka, liqueurs, cordial, etc.
The minister indicated, however, that this measure will not be implemented for more than three years and would exclude the importation of buses, trucks and agricultural vehicles. He further indicated that the measure will not apply to motor vehicles with ratings of less than 2,000 cubic centimetres.
RESTRICTION ON DISCRETIONARY WAIVERS
Effective June 1, 2012, it is proposed that discretionary waivers be eliminated. This measure will include the following approaches:
Cancellation of all blanket discretionary waivers;
Give effect to the 2011 decision to eliminate the Modernisation of Industry (MOI) waiver programme;
All incentives which have not been in use for a number of years will be repealed in the 2012-13 financial year.
The MOI programme provided GCT exemption on the importation of capital goods for manufacturers involved in the export industry. Notwithstanding the proposed removal of this concession, manufacturers can still qualify for tax concessions under other regimes/facilities, example the Export Industry Encouragement Act, Special Capital Allowances and the Jamaica Export Free Zone Act.
Betty Ann Jones is senior tax partner at
KPMG.firstname.lastname@example.org Norman Rainford is tax partner at
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