Bank withdrawal tax - be afraid!

Everald Dewar GUEST COLUMNIST

"No! Be afraid. Be very afraid". That was the reaction from the journalist in the 1986 horror film, The Fly.

This is a film about a scientist experimenting with teleportation which went terribly wrong. He started mutating into an insect, whereas he pleads with one of the characters: "Don't be afraid."

This reaction is suggested by a prominent university lecturer in economics on the proposed controversial 'bank withdrawal tax'. The tax will be imposed on deposit-taking institutions and securities dealers.

During an interview on Nationwide radio, the lecturer suggested that the levy is acceptable as not burdensome or necessary if there is no alternative.

What economists and political scientists see when discussing the issues surrounding this tax are obscure terms such as 'tax incidence', 'tax regression' and the 'tax burden'.

This is the kind of tax that would fit into the classical theoretical application of a good or smart tax.

In the year 1696 in England, campaigners argued that the window tax was a tax on health, and on light and air, and that the greatest burden was on the middle and lower classes.

The campaigners eventually won the argument, and the Act was eventually repealed and replaced by a house tax.

As well as being an unequal tax, the window tax was relatively easy to assess and collect as windows are clearly visible from the street.

The proposed withdrawal tax for Jamaica is similarly a classically easy to assess and collectible tax, but as with the windows tax, is it an unequal tax - what is its objective, intention and future?

This tax is similar in nature to GCT and will affect both employed and unemployed individuals alike. And this is just for starters, as it will affect pensioners' net interest after suffering a 25 per cent withholding tax. This is not make-believe; it is what effectively will happen starting June 1, 2014.

Detrimental to most

If you were asked to design a system of raising a tax that would be offensive to the majority, you should come up with something just like a tax on withdrawal of money. This is like imposing GCT on a natural contraceptive method.

Banks have always been a happy hunting ground for finance ministers. The turning point of taxation on commercial banks in Jamaica was the surtax on bank profits which was introduced in 1984.

There were no official explanations given for the measure and all research failed to unearth any.

However, it appears the rational for this surtax may have stemmed from a perception that commercial banks had enjoyed levels of profitability above the company sector average for a number of years and that banks had not been paying their fair share of taxes.

Although I am not aware what has been the recent profit history of Jamaican commercial banks, there has not been any published evidence that banks have been disguising their profits to avoid taxes.

The question surrounding the taxation of commercial banks in Jamaica and their alleged high and extraordinary profitability was further acted upon with the introduction of the 1992 asset tax which was first singularly imposed on the banks and then other entities in 1993.

The idea of extraordinary profits is conceptually ambiguous. To the extent that increased profitability of the commercial banks may have been a windfall from transactions in the parallel market for foreign currency, then any additional tax measure may be justified.

There have been discussions that the tax is imposed on the banks but this argument, however, is similar to saying that GCT is imposed on the registered taxpayer. The Ministry Paper presented to the House of Representatives on April 17, 2014 states clearly that the levy will be chargeable on all withdrawals. Therefore, whether the tax is imposed on the banks or the depositors, we know the incidence of the tax and it is the withdrawals that will trigger it.

There is no question as to whom the burden will fall on - the Ministry Paper clearly provides: "the tax will be collected by the financial institutions and paid over on a monthly basis."

Will the Minister withdraw the tax? Whether he does or not, the intentions are clear: the additional tax is to come from the financial and banking sectors.

Arising from the various discussions it is now emerging that there is a change in intention in that the institutions are expected to bear the tax burden.

Therefore, any change or modification will be with this in mind.

Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston. Email feedback to everald.dewar@bdo.com.jm.