Everald Dewar | Law hazy on definitions under 3% withholding tax
As a taxpayer operating a business, are you not overwhelmed by having to create paperwork to prove that you have comply fully with various tax requirements: customs imports, employment taxes, GCT and statutory payments, environmental levy, pending transfer pricing and since September 1, the 3 per cent withholding tax on specified services?
We already know that this 3 per cent withholding is income tax to be deducted from payments made for specified services supplied to companies designated as tax withholding agents (TWA).
The tax is applicable on 14 types of services. Appearing among the list are three services that give cause for concern: 'management' 'consultancy' and 'entertainment'.
The amendment to the income tax law gave no definition to the meaning of the individual words, so I sought assistance from Tax Administration Jamaica's website.
The publication on the TAJ website is a mixed blessing, but it provided no expansion on the meaning of the three service categories. Perhaps it should carry a health warning that it be followed at the taxpayer's own risk.
It is important that one has some idea how to identify these services.
The term 'management' is expressed in the Income Tax Act in association with 'industrial or commercial information or advice, technical or similar services'. Therefore, in so far as we are able to apprehend it, management is limited to these terms.
In spite of this limitation, it still covers almost all professional services for technical work and advice 'to enable a business to carry out its management function of taking decisions' or assisting in the process of managerial decision-making.
Consultancy is a wider concept and is not specifically mentioned in the law. It may cover any professional giving expert advice for a fee. Therefore, consulting can cover almost all professional services for technical, literary, artistic, educational and scientific nature.
It includes services of physicians, dentists, lawyers, accountants, engineers, architects, etc. It should not, however, accommodate payments for services from amateurs or apprentices, who are not qualified or at times registered in practising a skill. This should not include fees reserved for activities which may fall under entertainment.
Entertainment means different things, because individuals have different preferences in entertainment. But that is not what is important for tax. Entertainment could cover almost all forms of artistic expression. In everyday discourse, we are more familiar with the visual art mostly used in entertainment - for example, musicians, but not necessarily the high arts associated with mastery and prolific composers such as Wolfgang Amadeus Mozart. It would include artistic expressions, such as in plays and theatrical performances.
One could consider a disc jockey making selections of dance music at a staff party or banquet, or ceremony, or religious festival, as someone providing an entertainment service. But what about the comedian associated with amusement, fun and laughter at the same event?
Entertainment may include service fees from the licensing of cinematographic films, or films or tapes used for radio or television broadcasting. Therefore, while cable companies, for example, FLOW and Logic One, are considered cable operators, and television stations such as TVJ and CVM, are not, both may fall under the heading of providing entertainment.
But how do we classify sporting events? And what services is a racehorse jockey providing? How about the publications of this newspaper?
There is no doubt that these three services were included as a catch-all to cover a wide field. However, until there is a challenge and the courts give an interpretation, let us bear in mind that the service must be supplied under contract and involving performance of a personal nature.
Distinctions should also be made between someone supplying services that are normally regarded as provided in connection with employment or an office - in which case, the tax is not applicable.
It should not include inter-group recharges where there is no profit element. The receipt to the supplier should not be capital or compensation for loss of profits, reimbursement of trading expenses or rectification due to, say, negligence or breach of contract.
It does not include payment for the use of tangible personal property, hence receipt that relates to goods (not sure about goods on hire) other than a rented car, are not to be included. Therefore, services that are attached to supplying goods must be separated from the goods themselves.
In order not to withhold tax where not specified, TWAs should tread carefully and seek professional advice.
Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston.