Dividend tax seen as unlikely to dissuade stock market investors
Market analysts are still weighing the full implications, but the initial reaction to the proposed dividend tax is that it is unlikely to dissuade stock market investors.
Finance Minister Dr Peter Phillips plans to raise J$300 million from the introduction of a five per cent tax on dividend payable to resident investors.
"Apart from maybe Carreras, dividends are not generally very big," said Neilson Rose, business development manager at Barita Investment Limited. "Companies don't normally pay out big dividend so we don't expect to see any big impact," he said.
Rose said investors tend to buy stock for capital gains, and are generally more concerned about companies' earnings prospects rather than their dividend policy.
Phillips said the new measure should be treated as a final tax payable to the collector of taxes, starting June 1.
However, tax expert Brian Denning said there is need for further clarification on how the tax is to be administered.
"They still need to clarify the tax and whether when it is paid to a group - subsidiary to parent - there is no further tax when that is distributed further up the chain," said Denning, a tax partner at PricewaterhouseCoopers Jamaica.
Denning, who is also a spokesperson for the Private Sector Working Group, said the dividend tax should have been set at double the rate proposed by Phillips.
"I would have liked to see a lower corporate tax rate at 20 per cent and the dividend being taxed at 10 per cent," he said.
Non-residents are already subject to a withholding tax on dividends. Ministry Paper No 32, outlining the revenue measures for this fiscal year, says the dividend tax is meant "to address the existing anomaly". Still, the non-residents investing in listed companies in Jamaica are taxed at the much higher rate of 33.33 per cent set in 2009.
"The fact of the matter is that the five per cent tax will not stop investors from investing in equities," said another analyst who requested anonymity.
"The reduction in the corporate tax rate should, however, provide some balance and help to push improvement in companies' bottom line," he said.
Marlene Street-Forrest, general manager for the Jamaica Stock Exchange, said she would not comment on the implications of the tax until more details become available.
Wednesday Business calculations show that stock market companies paid out more than J$21 billion in dividend in 2011, up from J$17 billion the previous year. The spike was due to a special distribution by Lascelles, which ended up paying out a total but unusual J$42.20 per share for the entire year.
Lascelles was one of five companies to pay dividend ranging between J$2.4 billion and J$4.6 billion to shareholders. The others were Scotiabank Jamaica, National Commercial Bank, Carreras and Sagicor Life Jamaica.
All five are among the most profitable companies on the stock market.
Phillips has said that his intent is to drive companies to reinvest in their operations and spur the growth of business.
"The consideration was that we want to induce investment; we want to induce investment through the reinvestment of equity rather than the distribution of dividend," the minister said at his post-budget press briefing on Friday.
"In other words, when there are earnings we want to get companies to face squarely the challenge of whether they want to distribute the equity or if they were to invest that equity back in the company and expand their productive or service activity," he said.
The dividend tax amounts to 1.55 per cent of the J$19.36 billion new tax package announced by Phillips on May 24.