The Jamaican economy has certainly been undergoing structural changes over the past year, with the government compelled by the International Monetary Fund (IMF) to take steps toward stimulating long-term economic growth. Nonetheless, deterrents to growth such as successful tax reform still linger, with very discerning yet different views on the matter. Some are advocating for a complete overhaul of the tax system, while others are stressing that the remedy to the problem is will and courage, not simply reform. The fact is, while it may be relatively easy to develop good plans and ideas; the implementation of these strategies always proves difficult. As such, it is inherent that while reform is necessary, it must be accompanied by leaders who are willing to make the necessary decisions.

While the economy has undergone a period of economic stability, this is not in and of itself, a sufficient driver of economic growth, given the depressed state of demand both locally and internationally. Jamaica’s tax policy is one critical issue that we must get right if we are to move from staggering along with international help to export led economic growth. The Country’s high tax burden has become a disincentive to investment and therefore employment and sustained growth. In the World Bank and PricewaterhouseCoopers report entitled ‘Paying Taxes 2010 – The Global Picture’, Jamaica ranked 174 out of 183 countries, being among the economies where it is most difficult to pay taxes due to the number of different tax types, payment dates and tax rates. Coming out of this report, it is evident that significant corporate tax rates, which pose challenges particularly to smaller companies, coupled with an extensive set of tax exemptions and other privileges, continue to hinder Jamaica’s long-term growth prospects.

However, it is important to note that Jamaica’s cumbersome corporate tax system has not been the only deterrent to achieving growth. The “Matalon Report” of 2004 stated that the current customs regime has a wide range of very high rates, creating complexity, and an inequitable distribution of customs burden due to a myriad of concessions and exemptions. It implied that if Jamaica applied a uniform tariff rate of five per cent, with no exceptions of any sort, we would collect approximately the same amount of revenue as we do today. Moreover, Jamaica’s location means that it has the opportunity to become a create a significant duty free, distribution and transshipment business, similar to Panama’s – creating jobs, bringing in revenues and spurring growth.

We should perhaps, take a page from Singapore’s book. During the Asian financial crisis in the late 1990’s, Singapore lowered business costs through a series of tax cuts, rebates and exemptions. As a transshipment centre, Singapore has traditionally levied import duties on only a limited number of demerit goods such as alcohol and tobacco. The government actively used fiscal incentives to not only attract desired investments in manufacturing and services, but also to help facilitate a transition to newer areas of activities. The tax reform process in Singapore has been continuous one, with emphasis on professional planning and investing in physical and human capital to increase the capability of the tax administration. Today Singapore is still one of the easiest places in which to pay taxes, ranking fifth in the World Bank’s latest “Doing Business” report.

While tax exemptions are important incentives for industries such as tourism, lack of proper management only leads to leakages which deprive the government of well needed revenue, stifling development. Countries such as Slovakia and Bogota, have successfully reduced or abolished incentives, while lowering and simplifying their corporate tax structure. In 2004, Slovakia, introduced a flat tax rate of 19% on all personal and corporate income, as well as consumption, with minimal deductions or exemptions. This has resulted in increased compliance, an improved business environment and has aided in substantial economic growth.

Between 1997 and 2000, Bogota managed to double public sector income through a series of tax reforms, from an increase in tax on gasoline to merely the simplification of others. Similar to Bogota, Jamaica in 2009 increased tax on gasoline, as suggested in the “Matalon Report”. Unfortunately, the increased revenues were used to plug a fiscal gap, instead of as a means to spur growth. Likewise, the advanced GCT at the port of entry in January, identified to help level the playing field between formal and informal importers by replacing the import cess, was used to plug the gap in the tax package required for the IMF programme.

As Keith Collister stated at SSL’s recent Quarterly Investor Forum, “The successful implementation of comprehensive tax policy reform measures requires fiscal space. It is nearly impossible to undertake significant policy reforms when new tax measures are required annually.” If tax reform is to be successful in Jamaica, the approach must be comprehensive across all tax types and allow for a level of public engagement and education that convey a real understanding of the options that we face as a country. It should be a policy that promotes economic growth and acts as a catalyst for development that is characterised by simplicity, equity and competitive rates and is administered in an efficient and effective manner. However, we should bear in mind that while we can always plan successfully, without the courage and will to properly implement and restructure as the need arises, we will certainly not be able to foster economic transformation in the long-term.

Deirdre Witter is an Investment Analyst at Stocks & Securities Ltd. You can contact her at dwitter@sslinvest.com.