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$48b w/tax refund plan - Phillips to clear arrears in four years; dealers yawn

Published:Wednesday | May 14, 2014 | 12:00 AM
Julian Mair, JSDA president.

Avia Collinder, Business Reporter

Finance Minister Dr Peter Phillips has given a four-year commitment to reimburse financial institutions and pension funds for withholding taxes amounting to billions of dollars, a promise that appears influenced by the IMF agreement that has put new limits on arrears.

But having pushed so long for Government to pay the refunds that extend back a decade or more, securities dealers have chosen not to hail Phillips' four-year plan as a victory - not until the Government starts cutting the cheques.

"We welcome the stated intent by the Government to correct this long outstanding matter but remain cautious in our optimism, as this commitment has been shared with us many times over the years," said Julian Mair, president of the Jamaica Securities Dealers Association (JSDA).

There was more optimism in the pension sector, albeit tinged with realism, with managing director of Prime Asset Management Limited, Rezworth Burchenson, noting that fund managers were ready to work with the finance ministry to make sure the payments happen.

The sector is more relaxed, having been granted a window about six years ago to avoid withholding taxes.

Still: "The outstanding arrears need to be dealt with," said Burchenson.

"We have had a number of comments and commitments from the Ministry of Finance going back as far as the first debt exchange. We have had some success, but I think a lot more could be achieved with concerted effort," he said.

Mair said JSDA members are owed more than $10 billion, while pension fund managers say their sector is owed a similar amount - totalling more than $20 billion.

The finance ministry has not responded to a request for confirmation of the total outstanding for all institutions, which also includes banks, building societies and insurance companies. However, its new Fiscal Policy Paper 2014-15 discloses plans to start paying refunds at a rate of $1 billion monthly.

"The GOJ intends to eliminate the stock of outstanding withholding tax refunds (over 90 days) over the next four years," said the fiscal paper tabled with other budget documents in Parliament. "Within this context, the medium-term fiscal profile entails payment of withholding tax refunds at an average of $1,000 million monthly from FY 2014-15."

That clearance rate suggests the Government has projected the liability, inclusive of arrears, at around $48 billion over the four-year span.

Significant refunds

Phillips who spoke to the issue in Parliament as he closed the Budget Debate on April 30, merely defined the outstanding tax refunds as "significant" while making the argument that it was in the interest of the capital markets to make good on the obligation.

"This inefficient use of financial resources is undermining the growth of our industries, returns to investors; it is undermining financial sector capitalisation, and the ability of the industry to play its role in the form of onlending to the private sector that needs the money for productive reasons," the minister told lawmakers.

The move to clear the arrears is in line with a broader commitment under the Jamaica-International Monetary Fund agreement to ensure that tax refunds do not accumulate beyond 90 days, as noted in the Fiscal Policy Paper. The ministry said it's been adhering to the agreement since last year.

The initial plan to withhold tax at source was first gazetted in 1999, says Mair. Then, companies were told that refunds would have been made in 45 days.

But: "That has not occurred. We have monies owed to us in excess of 10 years," said the JSDA president. "Every time there is a coupon payment made by the Government, the amount goes up."

Dealers are required to withhold or deduct tax from interest earned by clients on taxable investments. It is then the responsibility of the company to reclaim the tax, but the Government has not held to the fast-track window for refunds.

Additionally, dealers who acquire taxable instruments are themselves subject to the tax, leading in some cases to a mismatch of tax liability.

"Let's look at an example," said Mair, "a GOJ bond pays eight per cent and we pay a client six per cent, we therefore earn a two per cent spread. We are required to withhold tax on all interest earned by clients at a rate of 25 per cent. Therefore, on the client's six per cent income we withhold 1.5 per cent representing 25 per cent of overall interest income," he said.

"However, the Government would have withheld from us two per cent, being 25 per cent of our eight per cent bond interest income. You realise that there is a gap in withholding tax withheld by us of 1.5 per cent and that withheld on us by the GOJ of two per cent - a gap of half a per cent, which you will also notice is 25 per cent of my interest spread."

Mair adds that while the nominal amount owed is now in excess of $10 billion, the liability is triple that when measured against lost investment opportunities and inflation.

"The total value, inclusive of income forgone, would be closer to $30 billion," he said.

The private pensions sector at last disclosure had more than 70 per cent of invested assets in government paper, mostly issued by GOJ. Burchenson, however, says pension fund managers no longer have the same running balances on tax refunds as banks and dealers, due to the introduction of a facility which allows fund managers to avoid withholding taxes.

A certificate

"What was introduced about 2008 was that pension funds could apply to the TAJ [Tax Administration Jamaica] and they would receive a certificate. You would then provide that certificate to your investment broker and when taxes are being paid on repos and various investments, it would be paid gross, without tax being withheld," he told Wednesday Business.

The certificate had only one condition - that the applicant's tax filings were all up to date.

"That has contributed to the fact that arrears are not increasing," Burchenson said.

Mair notes that financial institutions are effectively "subsidising" the Government, while facilitating inefficient use of capital.

"This year we will be connecting the dots, pointing out how these things affect people ... It is putting inefficiencies between money invested and money borrowed. It slows down growth and slows down the possibility of employment," he said.