Budget: A sombre presentation with no new taxes

Audley Shaw, minister of finance and the public service, opened the 2010-11 Budget Debate Thursday on a sombre note stating that the previous fiscal year had been difficult and that the Government had to take "serious and tough measures to secure the future of the country".

No new taxes - except for the previously announced property tax increases - and delayed payments to civil servants were the main highlights.

Shaw announced that Cabinet had examined and deliberated on a number of proposed amendments, to the GCT and income tax acts, aimed at strengthening the compliance and enforcement capabilities of the Tax Administration Department.

These proposed amendments, along with other legislative changes, will complement the work now being done by the tax authorities, who will further intensify their enforcement actions against delinquent taxpayers in the 2010-11 fiscal year.

In an effort to encourage persons who have outstanding taxes to come forward voluntarily, the interest rate charged for late payment of GCT is to be reduced from 2.5 per cent to 1.5 per cent per month.

In respect of the Income Tax Act, amendments have been proposed to reduce the interest charge for late payment of income tax from 40 per cent to 20 per cent per annum.

With the Government's failure to meet recent revenue and expense targets, it is possible that additional restructuring measures may be required.

Failure to undergo additional restructuring could potentially result in either increased domestic interest rates, or slippage in the exchange rate; neither of which is an attractive choice.

CONTEXT TO THE BUDGET

On February 4, the Executive Board of the International Monetary Fund (IMF) approved a 27-month-standby arrangement with Jamaica of approximately US$1.27 billion to support the country's economic reforms and help it cope with the consequences of the global downturn.

A disbursement of approximately US$640 million became immediately available to Jamaica.

The IMF agreement was designed to:

1. Put public finances on a sustainable path that includes public sector reform;

2. Lower high interest costs and help address the problem of the debt overhang, and raise the productivity of public spending; and

3. Facilitate financial sector regulatory reform to reduce systemic risks.

The minister reiterated that the Government has started the process of privatisation of the Port of Kingston, the Norman Manley International Airport, and selected bauxite interests, including Clarendon Alumina Production Limited.

Additionally, there has been the announcement of increases in bus fares, property taxes and the cost of other government services and charges, and the enforcement of onerous penalties for non-compliance with tax laws.

Much of these increases in Government fees is justifiable, and to a large extent understandable, given that the previous levels did not reflect the economic cost of the service being provided.

The increased focus on compliance is also seen as equitable, given the huge burden on the PAYE taxpayer.

IMPLICATIONS FOR ECONOMY

While these projected increases will deliver much-needed revenue, they are not likely to address the significant structural imbalance in the country's finances, and the projected budget deficit is likely to be missed as revenues underperform and expenses exceed projections.

Our structural imbalance is not solely the result of us spending too much on debt.

The budgetary imbalance is the result of a variety of factors each of which is correlated to some degree with each other.

Cutting government expenditure contracts the economy, thereby reducing consumption taxes; reducing interest costs, which, in turn, reduces income in the hands of the wealthy, and impacts profits and both income and consumption taxes.

Reductions in spending on education, health care, water and transport, hurt our long-term economic growth prospects and create a less educated, less healthy and less productive society.

Simply put, we cannot cost-cut our economy out of recession, and we have no ability, based on Government debt levels and fiscal budgets, to increase government spending.

Non-traditional approaches need to be developed to (i) reduce Government debt, (ii) provide stimuli for private sector job creation, (iii) build the social and physical infrastructure to make the economy better able to withstand economic and climate change shocks, and (iv) to create structural reform so that users of public services pay something more closely resembling the economic cost of delivering such services.

At KPMG, we have long argued that non-traditional approaches such as public-private partnerships, which are increasingly used by Governments the world over to solve these very issues, need to be actively considered.

TAX MEASURES

Minister Shaw outlined that 88 per cent or $287.2 billion of the expected revenue for fiscal year 2010-11 would be contributed by taxes.

In the absence of new taxes, this projection has set the stage for the long-expected drive towards the effective utilisation and enhancement of the compliance and enforcement mechanisms available to the Tax Administration.

The minister spoke at length about "the pervasive culture of tax evasion", in the country and sent an "unequivocal message" that the laws will be tightened, and penalties increased, to address tax evasion.

The need to widen the tax net was again stressed by the minister and, in its continued effort to address this issue, the Golding administration has placed an obvious focus on improving the investigative capabilities of the Tax Administration.

The minister noted that the Caribbean Technical Assistance Centre and the IMF have given their commitment to assist with the development of the auditing and compliance techniques currently being employed by the Tax Administration.

Also, the Revenue Protection Division will assume a greater role in the detection and prosecution of delinquent taxpayers and any tax officials who are involved in tax-evasion schemes.

This shows a recognition that, while the imposition of penalties will address a particular type of tax delinquency, effectiveness in addressing persons outside of the tax net will only be realised where the investigative powers of the Tax Administration are optimised.

ENFORCEMENT TOOLS

The Government has reiterated its intention to intensify its enforcement actions against delinquent taxpayers in the fiscal year 2010-11. (See graphic of the new measures proposed by the Government highlighting elements of the existing enforcement tools, which may be applied more regularly under the proposed efforts.)

The minister mentioned no implementation date for the new measures. He proposed that a Tax Compliance Certificate (TCC) will be required for the registration for professionals to practise in Jamaica.

And with the increased emphasis on compliance, Shaw has also proposed certain amendments to the GCT Act, which are intended to act as a deterrent to tax evaders.

The fines and penalties put forward by the minister are much more stringent than before. They include custodial sentences up to 12 months, and fines varying from $10,000 to $500,000 for offences.

Offences subjected to increased penalties include failure to supply records, return a GCT certificate, and issue a tax invoice.

The current general penalty for offences is $5,000 and/or incarceration for up to six months.

Since companies often encounter challenges in locating records requested by the tax authorities and in producing the GCT certificate for return to the tax authorities upon GCT de-registration, the proposed penalties may be significant.

More important, companies should note that, in addition to the penalty imposition, its directors may be imprisoned for up to one year.

The failure to display a GCT Certificate of Registration, which currently attracts no penalty, is to attract a penalty of up to $50,000 and/or imprisonment for up to three months.

Shaw indicated that the penalty for failure to file a GCT return would increase from $1,000 and $2,000, for individuals and bodies corporate respectively, to $10,000.

We note, however, that under the present provision of the GCT Act, the applicable penalty is the greater of the $1,000 or $2,000 as the case may be, or 15 per cent of the tax due.

It is assumed, therefore, that the increased penalty would be the greater of $10,000 or 15 per cent of the tax due. The minister also indicated that the penalty for failure to register as a "registered taxpayer" will increase from $5,000 and $10,000, for individuals and bodies corporate, respectively, to $100,000. Taxpayers with outstanding GCT balances will benefit from a 40 per cent decrease in the interest payable, as the interest rate on late payment of GCT is to be reduced from 2.5 per cent to 1.5 per cent per month.

In addition to the penalties and fines, the tax authorities have additional enforcement tools.

In recent times, high-profile individuals and companies have been the target of such enforcement activities. These tools include the power to:

Seize goods and chattels belonging to, or in the possession of, the delinquent taxpayer;

Sell goods and chattels seized to recover tax due; and

Issue a 'stop order' to prevent delinquent taxpayers from departing the island subject to proof that tax due has been settled, or that satisfactory arrangements have been made for the payment of same.

It is expected that the tax authorities will utilise these powers with more regularity as they intensify their efforts against tax delinquents.

We note, with interest, that although the minister has announced a reduction in the interest rate payable for the late payment of income tax, there was no mention of an increase in the interest rate payable by the Government on amounts owed to taxpayers. Currently, no interest is paid by the Government where income tax refunds arise from tax withheld at source.

The interest rate payable by the Government on refunds for estimated payments of income tax is only 4.0 per cent.

This seems inconsistent with the thrust towards encouraging greater compliance, as the nominal rate of interest paid by the Government encourages persons to be conservative in their declarations of estimated income.

Betty Ann Jones is a senior partner at KPMG in Jamaica, head of the firm's tax practice and chairman of KPMG Caricom. Feedback to: jmallen@kpmg.com.jm

Recurrent Expenditure:

Finance/Public Service 50%

Education 21%

National Security 11%

Health 9%

Local Government 2%

Other 7%

INSERT 2:

Capital Expenditure

Finance/Public Service 76%

Transport & Works 9%

Office of Prime Minister 6%

Education 2%

Health 1%

National Security 1%

Other 5%