Private sector opposes retroactive tax measure

Saturday, December 05, 2015

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THE Private Sector Organisation of Jamaica (PSOJ) is not happy with amendments to the Income Tax Act that will see the implementation of a transfer pricing regime retroactive to April 1 this year.

The PSOJ, in a letter to Tax Administration Jamaica (TAJ) Commissioner General Ainsley Powell in September, had expressed its concerns which were shared by representatives of the Jamaica Hotel and Tourist Association.

In its letter, the PSOJ pointed out that while it was supportive of the need for the amendments, transfer pricing rules must be clearly defined to not only allow for smooth implementation, but also to encourage business investment and economic growth.

"The transfer pricing amendment should not be implemented until the advance transfer pricing agreement framework is established, including the details and the necessary staff and training which are essential for the proper understanding of each business sector and related markets," the umbrella organisation argued.

"Retroactive taxation ultimately results in tax disputes, which is disruptive and costly for all concerned, and not in the best interest of anyone," the PSOJ continued.

A transfer price is defined as the price at which the subsidiaries of a business sell to each other. According to the AccountingTools website, the concept is needed when the financial results of individual subsidiaries are being compiled.

Transfer pricing, the site explains, can be used to avoid paying income taxes in high-tax regions, and so is a significant focus of government auditing activities.

The PSOJ said that while it accepted that the regime is needed in order to create certainty around how the country treats with transfer pricing, retroactivity is ill-advised as the implementation date must be guided by readiness of stakeholders.

"We are therefore proposing an education and sensitisation period, and therefore do not see where it would be practical to have the implementation and assessment for transfer pricing before March 2017," the organisation said, pointing out that the private sector was only recently sensitised to the implementation of the amendments.

The organisation said it was critical that, following enactment of the legislation, time be made available to Jamaican businesses for them to prepare applications for advance transfer pricing agreements to be carefully considered by the tax authorities.

The PSOJ also argued that time should be invested in developing a standardised Advance Pricing Agreement (APA) framework with standard pricing methods for particular industries.

An APA is basically a contract, mostly for multiple years, between a taxpayer and at least one tax authority specifying the pricing method that the taxpayer will apply to its related-company transactions.

It is designed to help taxpayers voluntarily resolve actual or potential transfer pricing disputes in a proactive, co-operative manner, as an alternative to the traditional examination process.

Pointing to the administrative burden that the legislation will place on businesses, the PSOJ also proposed that a general agreement on a transfer pricing framework be reached in order to reduce disagreements and costly litigation.

Transfer pricing, the organisation said, is not an exact science, so it should be introduced "in such a way that is flexible to take into consideration the different transfer pricing methodologies, in addition to the named methods that may not be suitable to some of our existing industries".

Late last week, one private sector business operator, who has been keeping a close watch on the debate, said that the imposition of retroactive tax obligation is frowned upon by investors worldwide.

She pointed the Jamaica Observer to an article in the May 3, 2015 online edition of the Wall Street Journal examining the imposition of a retroactive Minimum Alternative Tax on companies operating in India.

"Narendra Modi won election as India's prime minister last year on an investment-friendly platform that included abolition of retroactive taxation," the Wall Street Journal article said. "He even called the previous government's policy of suddenly demanding back taxes from companies 'tax terrorism'. So imagine the surprise of foreign investors when Indian authorities recently imposed a 20 per cent levy on their years-old capital gains under a law that for two decades never applied to them."

The retroactive application of the tax, the newspaper said, looks like a shakedown, which was basically how Finance Minister Arun Jaitley described it, boasting on television that the levy would raise some $6.5 billion which could allow him to "change the face of Indian irrigation".

Jaitley, the Journal article said, dismissed the complaints and lawsuits from among the 6,000 potentially affected foreign funds.

The article quoted him as saying: "Let it be clearly understood that India is not so vulnerable that every legitimate tax demand can be considered as tax terrorism. We are not a tax haven and don't intend to be one."

Added the Journal: "It's acting more like a rapacious banana republic. The finance minister doesn't seem to understand that capricious tax policy drives away the investment needed to modernise Indian agriculture and manufacturing. That's surprising, because his boss does get it. As Mr Modi explained last year: 'We need to create confidence in our system, which such decisions defeat.'"

According to the article, after the bond, equity and currency markets all reacted negatively, Jaitley softened his rhetoric.

The Wall Street Journal reported that, in a Financial Times op-ed, Jaitley claimed that "all of the disputes now attracting attention are legacy cases" that have come through the courts and hence are outside of government control. "We have little choice but to respect these decisions," he wrote.

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