Finance Minister withdraws bank tax to maintain economic policy consensus


Friday, May 02, 2014    

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IN his budget speech on Wednesday to close the debate, Jamaica's Minister of Finance Dr Peter Phillips advised that the Government had taken the decision to not pursue the levy on withdrawals from deposit-taking institutions and encashments from security dealers. He suggested that this was in order "to maintain the consensus that we have built and to carry every one of our stakeholders with us as we move forward".

In his speech, despite what he described as numerous calls of support, and commendation of the "creativity and consideration" which guided their proposals, in perhaps classic understatement, he noted "I do not think we have all our stakeholders on board". He advised that meetings had been held with the unions, the Insurance Industry of Jamaica (IAJ), "I want to pay tribute to them because clearly this is an instance where national interest triumphs over narrow self- interest", and on Tuesday with the Jamaica Hotel and Tourism Association (JHTA) who "approached the discussion with a spirit of openness, and recognition of the need to secure the necessary revenue".

In place of the bank tax, expected to yield approximately $2.25 billion, the minister proposed two measures designed to yield $2.3 billion on a combined basis.

The first measure is the introduction of a 15 per cent withholding tax on all insurance premiums paid by Jamaican residents to non-residents, excluding premiums paid to non-residents by registered Jamaican Insurance Companies, to be implemented with immediate effect on April 30th, 2014. His justification was that large Jamaican companies have been increasingly purchasing insurance from overseas insurance companies, often creating a captive insurance company in an offshore jurisdiction.

"The captive charges the local operating company an insurance premium which is treated as an expense and is totally deductible from Jamaican corporate income tax. The imposition of the 15 per cent tax on such payments would immediately mitigate the benefits these captive arrangements enjoy, and increase tax compliance. It would also bring this into line with interest payments made by resident Jamaican companies, other than banks to overseas lenders."

Importantly, he notes, "The proposal to exempt local registered insurance companies from this tax would not penalise the payment of re-insurance premiums by these companies".

The second proposal, effective June 1, 2014, is to amend the GCT Act to allow for imported services not to be subject to an input tax credit, a measure that will be applicable to all services except the supply of electricity, business processing operations, tourist accommodation and services imported by the bauxite/alumina sub-sector.

These exclusions appear to be designed to avoid increasing the price of a critical input to all production (electricity) and to avoid disadvantaging further our three main export sectors. Much of the specialised services the latter require would in any case simply not be available here, and to the degree they can't claim the tax back, such a tax would represent an effective tax on exports.

The minister provided a rationale for the imported services modification in his speech, quoted in full below, as this is a complex area that has presented implementation difficulties in the past. "Unlike imported goods, most services imported into Jamaica are not subject to GCT. Registered taxpayers who provide services are at a disadvantage to non-resident service providers, since the Jamaican service providers must charge GCT, whereas non-resident service providers are not generally required to do so.

The absence of GCT on imported services encourages domestic consumers to substitute imported services that are not subject to GCT for domestically supplied services that are subject to GCT. It discourages the domestic production of services since domestic suppliers may not be able to pass on the cost to consumers who are able to switch to imported services. It discourages use of domestically produced services by some Jamaican businesses.

This move to remedy the imposition of GCT on imported services, is designed to stem future revenue losses from this source, as purchasing services supplied offshore is becoming increasingly common. It will also stimulate the development of a domestic service sector in the overall growth strategy".

The minister also advised he will withdraw the proposed increase in the premium tax for Regionalised and non-Regionalised Life Assurance Companies to 5.5 per cent and an increase in investment tax for insurance companies to 20 per cent. The revenue lost is to be replaced by an increase in the Asset Tax by an additional 75 basis points to one per cent for Life Insurance Companies only as a temporary measure for one year. Thereafter, the rate is to revert to the new standard rate of asset tax for entities regulated by the Bank of Jamaica (BOJ) and Financial Services Commission (FSC) of 0.25 per cent, an increase from 0.14 per cent to 0.25 per cent. This appears to be in line with proposals from the IAJ, reflecting his consultation with the industry.

Finally, the minister delayed the implementation of the unification of the specific SCT on all alcoholic beverages at a rate of $1,120 per litre of pure alcohol for "one month for the tourism industry only" in response to a request from the JHTA for additional time to discuss the implementation of this measure by the tourism industry. He advises the delay will cost a relatively insignificant $36 million. He also announced some tidying up of the special consumption tax (SCT) on cars, advising that the SCT on hybrids was inadvertently increased from zero to 10 per cent (this was reversed), and all categories of hybrids and pickups will now attract the reduced customs duty rate (common external tariff) of 20 per cent.





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