The new tax on nothing
Debbie-Ann Gordon, Guest Columnist
On April 1, 2014, which coincidentally was All Fools' Day, the Provisional Collection of Tax (Minimum Business Tax) (MBT) Order, 2014 took effect. While the idea of an arbitrary exaction imposed on all 'specified taxpayers', in addition to their existing income tax obligations, may sound like a prank, for all companies, individuals and businesses (save for registered charities, cooperatives and persons below the threshold), the requirement to pay a minimum tax of $60,000 annually is very real.
Taxes in Jamaica are customarily paid by reference to some criteria, such as the amount of income, value of assets, or consumption. However, the MBT is not an income tax, asset tax, or consumption tax. For companies, their statutory income is irrelevant, and for all specified taxpayers, it matters not what the taxable value of your assets is. In fact, even if you have no assets or income, you may still be required to pay the MBT. The first payment is due on or before June 15, 2014, and since this is a day of rest for the collectorate, the first payment was properly no later than Friday, June 13.
What is the MBT?
The MBT is an annual fixed levy of $60,000 payable by:
1) Companies and societies (regardless of whether overseas, newly formed, to be formed within the calendar year, dormant, lossmaking, nil return filing, or income tax exempt); and
2) Professionals (individuals operating a business/trade/profession/vocation)
Put another way, the MBT is more concerned with the fact of your existence, rather than what you have, since even if you have nothing, you may be required to pay something.
Who does not pay?
The only entities exempt from the MBT are:
a) Registered charitable organisations; and
b) Individuals whose gross revenue is less than $3 million per year (gross revenue refers to the statutory income, i.e., income minus allowable expenses, save for income from emoluments and income subject to tax at the nil rate).
Example 1: Dr Rose is a medical doctor who has two sources of income, i.e., he earns (1) employment income of $2 million from his job at the hospital under the PAYE system, and (2) $3 million in statutory income from his private practice. Dr Rose would not be liable to pay the MBT in respect of the former (1), but in respect of the latter (2), he would be required to pay the MBT of $60,000. Dr Rose would further be able to credit the $60,000 against his income tax liability relating to his private practice for that year of assessment.
Example 2: Law Firm & Co has four partners and two associates. Profits are divided equally among partners, while associates are paid a salary of $1.5 million per year. For this year of assessment, $50 million is earned by the firm.
At first glance, one could conclude that as the partnership does not enjoy separate legal personality, each attorney would be required to pay the MBT in their individual capacity. In this scenario, each of the four partners would be required to pay the MBT, whereas the two associates would not be required to pay by virtue of the fact that they earn emoluments; however, their income tax obligations continue to run.
The order imposing the MBT states at Section 3 that the provisions of the Income Tax Act shall apply to the MBT. With respect to the taxation of partnership income, the Income Tax at Section 69 states:
"... Where a trade, profession or business is carried on by two or more persons jointly, the income of any partner from the partnership shall be deemed to be the share to which he is entitled for the year of assessment in the income of the partnership ... ."
Despite the fact that the partners each pay tax on their individual share of the partnership income, it is clear that the Income Tax Act treats with the income as the income from ONE BUSINESS 'the income of the partnership'. The question, therefore, is whether each individual partner is operating a separate business on which he ought to pay MBT or whether the partnership is one business that generates income ('of the partnership'). If the latter is the case, as applies to all other forms of businesses identified in the act (companies, building societies, friendly societies, industrial and provident societies), only one MBT would be payable by 'the partnership'. It is admitted that this could be a controversial interpretation, but it is submitted that in applying the purposive rule (of statutory interpretation), it has to be the more logical of the two alternatives.
Postulating that the tax should be computed on the basis that each partner should be treated as having income from a separate business would result in the absurdity that a firm with 20 partners that has annual profits of $60 million would pay $1.2 million (i.e., 20 partners each paying $60,000), whereas the same 'business' operated through a company (with the same 20 individuals being shareholders) would pay MBT of $60,000. Of course, the analysis would be incomplete without taking into account the fact that the company would pay tax at the level of the legal entity as well as a further tax on distribution of the after tax dividends, but the logic of aligning the treatment between the partnership and other business forms is compelling.
When to pay, how to pay and what happens if you fail to pay ...
No doubt due to the haste, there is no prescribed form or return provided by the revenue for payment of the MBT; instead, one will get a 'receipt' upon payment, which payment cannot be made online.
The tax is payable in two equal instalments due on or before June 15 and September 15 of each year and is applicable to this year of assessment (2014) onwards. Failure to pay the MBT results in a monthly penalty of 1.5%, which begins to accrue as of July 1 (or October as the case may be) until paid in full.
Confusion Already Prevails
In last Sunday's Gleaner (June 15), the Revenue published the first in its Tax Educator series, on the very day the tax became due; likening the act to the lesson being taught on the day of the exam.
The Educator not only failed to provide answers but it also made some statements that only add to the apparent confusion, namely:
"The cash-flow projection of the business should assist in the determination of revenue in absence of a prior year financial statement."
We ask, how does cash-flow projection assist a newly self-employed individual to determine whether or not they are above the $3-million threshold and, therefore, liable to pay the MBT?
The Educator further states:
"Where penalties are levied on an individual's account and the commissioner general determines that his/her income tax liability is equal to, or less than, the minimum business tax, the MBT liability of the individual will be discharged along with all penalties."
This assertion is not found anywhere in the new law. One interpretation is that where an individual is able to accurately estimate his income tax liability as being less than the MBT, he can elect not to pay the MBT, as the commissioner general will, being so satisfied, discharge him of the penalties associated with failing to pay the tax. Is this what is intended?
To add to the riddle, in an 'educational' seminar on the 19th, the Revenue, in seeking to explain the tax, advised the public that the new MBT Act is to undergo an immediate review, which will result in some of its provisions being deleted, amended, and the scope of the tax expanded. Can a tax law be valid with such uncertainty? The Revenue agent did say, "These are not normal times" and "taxation is not about fairness"!
Despite the numerous uncertainties surrounding the new law, it seems the expectation is simply for taxpayers to pay. In fact, if the more than 62,000 companies registered at the Companies Office of Jamaica which are now mandated to pay the MBT do account for the tax, the Revenue should see an immediate $3.7-billion tax yield or receivable, without even a glimpse of the individuals/partnerships subject to the tax (although according to the Private Sector Working Group, only 10 per cent of registered companies even file income tax returns).
Still, one cannot discount the view that the tax appears inequitable for several reasons, including the fact that a company and an individual are subject to the same amount of tax and that the tax came with no proper consultation, which invariably undermines awareness, understanding and compliance.