WHILE the Doing Business Report, published jointly by the World Bank, International Finance Corporation and PricewaterhouseCoopers suggests that an oppressive tax policy might result in reduced investments, some local experts suggest that this may not be the case in Jamaica.

The Paying Taxes Survey, which is a part of the Doing Business Report 2010, ranks Jamaica at 174 out of 183 countries for ease of paying taxes. It looks at regulations that promote and inhibit business activity and suggests that increased corporate taxes cause an overall decline in investments within the economy.

According to the Doing Business Report: “A 10 percentage point increase in the effective corporate tax rate is associated with a reduction in the ratio of investment to GDP of up to two percentage points and a decrease in the business entry rate of about one per cent.”

According to the Report, this one per cent tax increase reduces the likelihood that a subsidiary would be established in the country by about 2.9 per cent.

However, the effect of taxation measures on Foreign Direct Investment (FDI) to Jamaica may prove counterintuitive. Dr Densil Williams, lecturer of International Business at the University of the West Indies, Mona, says that a low score for Jamaica on the index may not affect the country’s access to FDIs — even though Jamaica is rated among the 10 most difficult countries in the world to pay taxes.

“Theoretically, Jamaica’s low rating would imply that the flow of inward FDIs would be reduced because investors would not want to do business in an environment that is not enabling. However, the empirical evidence does not support this theoretical proposition in its entirety. I say this because even when the Caribbean is witnessing a reduction in FDI flows, Jamaica has recorded increased inflows,” notes Williams, who is the author of Understanding Exporting in the Small and Micro Enterprise.

Williams adds: “Between 2004-2006, when other Caribbean economies like Trinidad and Tobago were seeing a decline in FDI flows, Jamaica recorded increases for the entire period. We still have a high stock of FDI. Also, the investment-to-GDP ratio is one of the highest in the region. It therefore begs the question: How much weight do investors give to these official statistics when making the decision to invest?”

However, Brian Denning, Partner-Taxation Services at PricewaterhouseCoopers, says that while FDIs are not directly impacted by a low tax rate, investors favour Jamaica for other “tax reasons”.

“Our corporate income tax rate in Jamaica has remained static at 33.33 per cent for many years, while our key regional counterparts have been bringing their rates down. Notwithstanding this, we have still achieved respectable levels of foreign direct investment over the years,” Denning tells Caribbean Business Report, adding that there are other reasons for the investments to continue to flow in Jamaica’s direction.

“This is because our tax regime contains a variety of incentives, tax holidays and other preferences targeted at certain activities and not surprisingly it is these activities that have been the focus of FDI,” Denning explains. In addition to the tax incentives, Jamaica’s high interest rates environment and tax-free Government instruments also add to the investment appeal, Denning argues. He says the removal of the tax-free status for investments, and the reduction in interest rates following the Jamaica Debt Exchange will influence how and where these investors put their money, one of the reasons for the urgent need for tax reform.

Denning says that although the survey focuses on the ease of paying taxes in each jurisdiction surveyed, he would expect that a strong rating also sends a broader positive signal to investors to the effect that the jurisdiction is committed to providing a pro-business environment which is not stifled by bureaucracy etc.

“While investors obviously need to conduct detailed due diligence and weigh up many issues in coming to their investment decision, investors do take note of the findings of these kinds of surveys which may serve to support the investors’ perceptions or cause them to re-examine their analysis, if inconsistent,” he opines.

Williams stresses, however, that the fact that Jamaica has still managed to attract FDIs should not be interpreted as a reason to ignore tax reform.

“When it becomes too onerous to pay taxes, it will eventually hurt the economy through the fiscal channel. Higher budget deficits will mean increased macro economic instability, which eventually will lead to higher cost of doing business. It is therefore critical that taxes can be collected in the most effective and efficient manner,” says Williams.

Additionally, Williams says, improvement in the rankings send the right signals to potential investors.

“It is nice when you have the right signals coming from rating agencies, so I think we should implement the necessary measures to ensure that the next time around, our rating can be improved,” explains Williams.