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Tax waivers: Reform's 600lb gorilla; White Paper short on specifics

Published:Sunday | November 25, 2012 | 12:00 AM
Brian Denning

Brian Denning, Guest Columnist

This week, Minister of Finance and Planning Dr Peter Phillips tabled the much-awaited White Paper on Tax Reform 2012 in Parliament. This process began last year when the previous JLP administration tabled a Green Paper in May 2011. This kicked off an extensive process of deliberation ultimately designed to inform Government policy — which is now outlined in the White Paper.

A bipartisan Parliamentary Committee on Tax Reform was formed to consider how Jamaica should overhaul its tax system and make recommendations to Government.

This Committee received multiple submissions from the private sector - including the Private Sector Working Group (PSWG) - wider civil society as well as individual members of the general public.

Having participated extensively in this process through the provision of technical assistance to the PSWG, which was led by Joseph M. Matalon, I can attest that this process actively engaged a cross-section of society and involved extensive collaboration between the public and private sectors.

Why is tax reform such a hot topic in Jamaica? Remember that our tax system is the primary means by which Government generates revenues to run the country. These revenues are critical to enable Jamaica to pursue desired national objectives and to provide the level of public infrastructure and services that we can all be proud.

We clearly have a distance to go and the finishing line seems further away.

Substandard tax system

It is widely perceived that our tax system is neither yielding optimum revenues nor acting as a strong catalyst for economic development. Many view the system as complex, inequitable and administratively challenging with an unequal sharing of the relative tax burden.

This has contributed to a large informal economy at the expense of compliant taxpayers who are left carrying the can.

In the short-term, the implementation of meaningful tax reform is also widely recognised as one of the prerequisites for the Government to secure an agreement with the International Monetary Fund (IMF).

The continued ability of Jamaica to meet its external debt obligations is of primary concern to the IMF. Our ability to do so is contingent on Jamaica maintaining a vibrant and efficient tax regime which yields commensurate tax revenues.

The IMF has placed particular emphasis on the myriad of incentives, preferences and discretionary waivers granted within our current tax framework. Many feel that these distort capital allocation, skew the sharing of the tax burden, impair the tax system's ability to yield optimum revenues and make the system more difficult for administrators to police and taxpayers to comply with.

A contrary view is that these are necessary to address competitive deficiencies in our general tax regime and the wider economy.

The White Paper now tabled, sets out the Government's policy proposals for the future direction of tax reform in Jamaica.

In principle, this must be welcomed, particularly since it has been the product of bipartisan
cooperation and collaboration with of society. It is hoped that this
approach can take some of the partisan politics out of key areas such as
tax reform that require long-term strategic decision making and
implementation in the national interest.

The White
Paper is helpful as a road map, in that, its sets out guiding
principles, general policy directions as well as some specific tax
policy and tax administrative recommendations — some of which have
already been implemented.

The White Paper would have
benefited, however, from greater specificity in terms of measures to be
implemented, targeted tax rates as well as specific timelines for

In particular, while the White Paper
touches on the topic of tax incentives, preferences and waivers, it does
not offer a clear policy prescription as to how these will be dealt
with going forward. In terms of tax reform, this is the 600-pound
gorilla in the room which cannot be ignored.

Our tax
system has evolved over the years into two distinct

(1) a 'general' tax regime applicable to
all; and

(2) a 'special' concessionary tax regime
applicable to some which has been carved out of the general tax regime
through a myriad of incentives, preferences, waivers and administrative

Many of these seek to modify the general
tax regime in an effort to encourage certain economic activities (by
picking 'winners') or to address deficiencies in the 'general' tax

Ministerial waivers

In many
instances these have been implemented by means of Ministerial waivers
which have been criticised on several grounds including being:
discretionary, taxpayer specific, non-transparent and not easily
accessible by all.

Persons who do not undertake
favoured activities or those who cannot easily access waivers, such as
MSMEs, end up operating within a general tax regime which is
characterised by high tax rates, inequities and anomalies,

As waivers and preferences are granted over time,
the tax base narrows further which must then be compensated for by
higher tax rates and new taxes in an effort to pay for annual fiscal

As a country, we have to decide whether
this two-tiered approach to taxation serves us well and therefore should
be continued to be pursued or whether the country would benefit more
from a general tax regime applicable to all, characterised by a broader
base and lower rates and which is competitive for a wider cross-section
of society.

The White Paper tabled does not address
this fundamental question head-on although several recommendations
included suggest a continuation of the current two-tiered

The White Paper refers to maintaining a 25
per cent corporate tax rate plus a 10 per cent dividend tax while at the
same time consolidating existing incentives into an omnibus incentives

In considering this fundamental question, it
should be understood that for the most part, discretionary tax waivers
are not of themselves THE problem — they are merely symptomatic of a
general tax regime which has not been properly maintained or enhanced
over time to meet the country's national objectives. They have become
part of the system.

No loss to

At the risk of sounding like a broken record, it
must be appreciated that many of the tax waivers granted by the
minister of finance do not involve Jamaica foregoing taxes which would
otherwise be collectible. In many instances the taxes waived act as a
deterrent to the desired economic or social activity being undertaken
and therefore neither the activity nor the taxes would arise in the
absence of the waiver.

This is important for both the
Government and the IMF to appreciate in setting their respective
expectations on this topic.

Significantly curtailing
waivers granted without addressing the underlying deficiencies in our
tax regime - which typically cause such waivers to be granted in the
first place - will not yield a commensurate increase in taxes

In the absence of implementing
comprehensive and well designed tax reform, a wholesale curtailment of
preferences and waivers in an effort to meet any IMF preconditions runs
the risk of adversely impacting Jamaica's competitiveness and growth

It is therefore recommended that the
Government addresses this issue as soon as possible if Jamaica is to
pursue comprehensive tax reform.

Brian J. Denning is a
tax expert and Partner at