The after-effects of withdrawing the 'bank withdrawal' tax
Everald Dewar, Guest Columnist
The arguments put forward by some people campaigning vociferously for or against the bank withdrawal tax was not, as some called it, mindless chatter.
That proposal, which kept many of us awake at nights, has now been withdrawn. In its place will be tax on insurance premiums paid overseas and GCT on imported services. The first being a newly introduced income tax measure, while the second is enforcing an existing provision.
As the finance minister quoted: 'Any weh yu tun maka juk yu'.
Effective April 30, 2014, insurance premiums paid overseas are subject to a 15 per cent withholding tax.
The finance minister, Dr Peter Phillips, explained that this is aimed at captive insurance schemes. That is where owners of group of companies, as part of risk management, can self-insure by incorporating a captive insurance company to serve all the members within the group. The insured businesses pay premiums to the captive in exchange for insurance.
What is gathered from the finance minister's statement is that this is being used more for its tax- shelter effect rather than for its operational and risk-management values.
In an apparent move to remedy this mischief, withholding tax will be imposed on all insurance premium paid to overseas (non-resident) insurance companies by resident persons. Premiums paid by registered Jamaican insurance companies for reinsurance will not be affected. The tax will be recovered by withholding and is collectible through the payer.
The key feature of a withholding tax is the deducting of the tax before it gets into the hands of the recipient.
As with that of the now withdrawn 'bank tax', the concept places the burden on who pays the premium and not from whom it is actually collected. Hence the tax is not directly assessed on the recipient, but is deducted and collected at source from the payer. It is then treated as if it were income charged on and for the payer's account and must be accounted for by him.
In 1975 following an affair, which was popularly known as the 'Iran sugar deal', Establishment Interfibre (KMI) received a notice of assessment in respect of 'technical services rendered', where it was paid a sum of J$9.25 million (US$10 million) by the Sugar Authority. The matter came before the Court of Appeal as to who has the right to appeal against the tax.
The tax department contended that the assessment was on the Sugar Authority and therefore KMI had no right of appeal. The Court of Appeal ruled that the assessment was on KMI and that company had the right of appeal.
However, a difficulty presented itself in collecting tax from a person not resident in Jamaica. Therefore, by instrumentality of law, where the tax is due by a non-resident, there is a mechanism in place for collecting from the resident person making the payment - in that case, the Sugar Industry Authority.
So far so bad for captive insurance. The second line of taxation is a GCT on imported services that may also affect 'captives'.
Each time you use DHL, shipping services, cable service and even buy KFC you may have consumed an imported service. Sounds somewhat cynical, doesn't it?
The feeling is that there is discrimination in the consumption of local services, and effective June 1, 2014, GCT will be imposed on all imported services, except for tourist accommodation, business processing applications and bauxite.
We are more familiar with GCT charged on domestic production, but in this case a reverse-charge mechanism is adopted for the importer of the service to account for the tax - that is to say businesses will account for GCT on the services imported as if they supplied those services to themselves.
Although provided for in the act from its 1991 inception, GCT on imported inputs was not effectively operative as the machinery for applying it was absent from the law.
In 2009, there was a move to implement the tax, but revenue net collection was nil if the importer was eligible for tax credit. The plan now is to prevent him from claiming a credit.
email@example.comEverald Dewar is Senior taxation manager at BDO Chartered Accountants in Kingston.