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

Published: Sunday | November 25, 2012 Comments 0
Brian Denning
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 implementation.

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 components:

(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 practices.

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 regime.

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, etc.

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 shortfalls.

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 strategy.

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 act.

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 government

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 collected.

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 prospects.

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 PricewaterhouseCoopers.brian.denning@jm.pwc.com

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