How to solve the tax mess
FINANCIAL experts have said prioritising compliance, removing tax exemptions and making it easier to pay taxes are among the most effective ways to reforming Jamaica's tax system.
In response to the latest Doing Business 2010 report, a joint publication of the World Bank, International Finance Corporation and PricewaterhouseCoopers, experts say Jamaica's way out of the tax conundrum must take a multifaceted approach. The report ranked Jamaica one of the 10 most difficult countries in the world to pay taxes -- 174 out of 183 countries.
The paying taxes study measures the world's tax system from the point of view of businesses and should give policymakers the ability to measure tax regulation performance in comparison to other countries, learn from global best practices, and prioritise reforms. Some reforms undertaken by countries examined by the study include lowering the tax burden on businesses and simplifying the tax compliance processes by enabling electronic filing. However, experts have said Jamaica's tax problems must be addressed firstly by dealing with the exemptions and the complexity of the system.
"The large number of tax exemptions is costing the country a significant sum of money. Also, the complexity of the tax system provides a strong motivation for people to evade and avoid paying their taxes. Our number one priority is to modernise the tax regime and make it less complex and provide greater incentive for persons to pay their taxes," Dr Densil Williams, lecturer of International Business, Department of Management Studies, UWI Mona, told Sunday Finance.
"We should also ensure that punitive measures be put in place for persons who do not pay," he said.
Financial analyst Sushil Jain added that eliminating or combining some taxes that have a low collection rate should also make the process of collection leaner. "Remove many different exemptions, simplify GCT (General Consumption Tax) by removing some categories, reduce penalties and interest and consider indexing some dollar limits or exemptions to inflation and change this automatically every year," Jain said, adding that capital allowances and the income tax threshold should be reviewed yearly as well.
The financial analyst suggested that one method that can be used to bring more persons within the tax net is to do more enforcement.
"Follow up, inspect, issue notices to people who have registered properties, cars, businesses, professionals to bring more people in the tax net," said Jain.
The Doing Business Report detailed some international standards that would bring countries up to the level of easy tax administration. "World-wide, economies that make paying taxes easy tend to focus on lower tax rates accompanied by wider tax bases, simpler and more efficient tax administration and one tax per tax base. They also tend to provide electronic filing and payment systems, which reduce the tax burden for firms while lightening their administrative requirements," the report outlined.
Over the 2008/2009 period in which the study was done, 45 economies implemented measures which made it easier for companies to pay taxes, 18 of which introduced electronic filing and payment systems. Seven of these countries reduced the number of taxes paid by consolidating or eliminating taxes. Timor Leste, ranked at 19, cut the profit tax rate from 30 per cent to 10 per cent, allowed depreciable assets to be completely written off within the year of purchase and eliminated the minimum tax and tax on interest. The policymakers also allowed corporate income tax to be paid quarterly rather than in monthly instalments where the turnover was less than $1 million. As a result, the time required to pay taxes fell by 364 hours per year.
Jamaica's dismal ranking is in the company of countries within the African region, where firms face the highest average tax burden in the world, among them: Gambia, 176, Central African Republic, 179, and Congo, 180. On average, African firms pay 68 per cent of their profits in taxes and spend 38 days a year complying with 37 taxes.
While Jamaica's profit tax rate at 28.6 per cent is not as high as those of the African countries, Jamaica is seen to have too many tax payments. There are 72 payments for businesses: Four different taxes on profits, 48 labour tax payments and 20 'other' tax payments, placing the country at 177 on the total tax payments rank.
Maldives, which comes in at the top of the global list sees businesses making one tax payment for the year, and within one day. On the other hand, Jamaican businesses need to utilise substantially more time to complete tax payments than those in other countries within the region. Jamaican businesses must use 414 hours per year (approximately 18 days) to comply: 30 hours for corporate income tax, 336 hours on labour tax and 48 hours on consumption tax. Businesses in St Kitts and Nevis, St Lucia and Trinidad and Tobago use 155 hours or seven days, 92 hours or four days and 114 hours or five days per year respectively to comply with the same taxes.
This, according to the report, does not bode well for equity and competitiveness of local firms. "Where tax compliance imposes heavy burdens of cost and time, it can create a disincentive to investment and encourage informality," The report stipulated. "Particularly in developing economies, large informal sectors contribute to the creation of an uneven playing field for formal small-and-medium-sized enterprises..."
Jain opined that the number of hours it takes to pay taxes in Jamaica can be significantly reduced if there are simple reforms.
"They should consider increasing the opening hours of the Tax Office so that people can find it easier to pay taxes. Tax offices should open on Saturdays also. The country is losing millions of man hours in people lining up to pay taxes," he said, adding that Government should "consider the introduction of a facility to pay for longer periods, for example, allow people to register vehicles for more than one year for those who want to save the time and effort of doing it every year."