On February 12, 2013, the Minister of Finance & Planning, Dr. the Hon. Peter Phillips presented a tax package that is expected to raise $15.9 billion in additional tax revenue to plug the gap in revenues for the Government to meet the primary surplus balance target of 7.5per cent of GDP that was promised to the IMF for the 2013/2014 fiscal year.

Executive Summary of the announced revenue measures

* Inclusion of the Telephone Calls Tax as part of the GCT Base effective March 1, 2013;

* Inclusion of all fees and taxes paid at the ports (Environmental Levy, CUF/CAF, CET, and ASD) as part of the GCT Base effective March 1, 2013;

* Account for GCT on the face value of prepaid vouchers/airtime effective April 1, 2013;

* Increase Dividends Tax on Dividends paid by Jamaican companies to Jamaican Residents effective April 1, 2013 to 15 per cent;

* Imposition of a 5per cent Surtax on the Taxable Income of Large “unregulated companies” effective April 1, 2013;

* Increase in the Education Tax rate effective April 1, 2013 to 2.25 per cent and 3.25 per cent for employees and employers respectively;

* Application of Customs Administration Fee (CAF) on all imports (except for imports by Charitable Organizations & Bauxite Sector) effective April 1, 2013;

* Increase Transfer Tax to five per cent and Stamp Duty to 4per cent on properties effective April 1, 2013 ;

* Reform of Property Tax rate regime and initiate measures to increase Property Tax compliance rate effective April 1, 2013;

* Amendment to fee and gross profit structure for Betting, Gaming and Lotteries effective April 1, 2013;and

* Introduction of “Transfer Pricing” and “Thin Capitalization” Rules

I analyze below some of the measures that were announced.

Increased Dividend Tax on Jamaican residents

It is proposed that the tax on dividends, except preference dividends, payable to Jamaican residents be increased to 15 per cent. Therefore, Jamaican residents, which receive dividends paid by a non-resident company, should account for and pay income tax at the rate of 25 per cent for individuals and unregulated companies and 33 1/3per cent for regulated companies, subject to the provisions of double taxation treaties. In addition, non-resident shareholders who receive dividends on their income will continue to be taxed as before such that they would be subject to:

* an applicable Double Taxation Treaty; or

* the rates of 25 per cent for individuals and/or unregulated companies or 33 1/3 per cent for regulated companies.

Commentary

The 2012/2013 budget measures imposed as at June 1, 2012, a 5per cent tax on dividends paid by a Jamaican resident company to a resident of Jamaica so this new measure will increase that tax to 15per cent as at April 1, 2013. The announced 15per cent dividends tax is higher than the 10per cent dividend tax that was recommended and discussed in the White Paper on tax reform 2012. Also, it is noteworthy that residents of the Caricom tax treaty member states such as Barbados and Trinidad will have no income tax either in Jamaica or in their country of residence on dividends received from Jamaican companies. Therefore, Jamaican residents will now pay 15per cent more income tax than residents of Caricom tax treaty member countries on the dividends they receive from Jamaican resident companies.

Imposition of five per cent Surtax on taxable income of large “unregulated companies”

It is proposed that a Surtax of five per cent be imposed on the taxable income of large “unregulated companies”. The Minister of Finance explained that the definition of “large” for this tax would be unregulated companies that earn gross income that is equal to or greater than $500 million. For the purposes of this tax the term “unregulated companies” refers to all companies other than companies regulated by the:

* Financial Services Commission

* Bank of Jamaica

* Ministry of Finance and Planning

* Office of Utilities Regulation

However, entities that are currently under income tax incentives are exempt from this Surtax.

Commentary

The income tax on unregulated companies was reduced to 25 per cent on Jan 1, 2013 so it appears that this surtax will increase that income tax rate to 30 per cent for unregulated companies that earn gross income of $500 million or more. Countries such as Canada use certain Surtaxes as an emergency measure to close fiscal deficits. In several instances, Canada removed some of their surtaxes when they no longer had budget deficits. However, it remains to be seen whether this will become a permanent impost.

CAF on all imports (except for imports by Charitable Organizations, Bauxite Sector)

Commentary

Currently there exists a Customs User Fee (“CUF”) that is imposed at the ports on goods imported into Jamaica However, this CUF breached WTO guidelines so it appears that the CAF was implemented to correct this breach. This measure was discussed in the Green Paper that was tabled in Parliament, on May 11, 2011, as a proposal from the IDB so this is an implementation of a proposal from the Green Paper.

Increase Transfer Tax to five per cent and Stamp Duty to four per cent on Properties

Commentary

The transfer tax and stamp duty rates on land and building transfers were reduced on January 1, 2010 from five per cent and 4.5 per cent, respectively to four per cent and three per cent, respectively, so the proposed increase returns the rates to approximately where they were in 2009 but still lower than where they started prior to May 1 2008. Prior to May 1, 2008, the transfer tax was 7.5 per cent and stamp duty was 5.5 per cent on the transfer of land and buildings.

Introduction of “Transfer Pricing” and “Thin Capitalization” Rules

Commentary

The Income Tax Act in Jamaica contains anti-avoidance rules that require the application of the “arms length” principle to related party transactions but there are no clear rules in the Income Tax Act that indicate how to determine the “arm’s length” amount, particularly in situations where an entity is a monopoly or operates in a highly specialized area. The decision to adopt Transfer Pricing Rules is consistent with international best practice because these guidelines have widespread acceptance among tax authorities and multinational enterprises. Currently, there are more than 75 countries that have legislated transfer pricing rules and regulations. Some of the countries that have adopted these rules include the United Kingdom, the US, Canada, Argentina, Brazil ,Chile, Colombia, Dominican Republic, Ecuador, Mexico, Peru, and Uruguay. Trinidad recently also announced its intention to enact Transfer Pricing Guidelines.

A thinly capitalized entity is one that is funded mainly by debt and has very little equity. Thin capital rules are generally expressed as a ratio that is also referred to as “gearing” and if an entity has a 3:1 thin capital ratio this means that the entity has $3 of debt for every $1 of equity. Countries such as Canada have thin capital tax rules that prevent non-resident shareholders from excessively financing their operations in the country with debt, the interest on which is tax deductible, instead of equity which is not tax deductible. For many years Canada had a 3:1 thin capital rule for income tax purposes but this ratio was reduced to 2:1 in 2001. The Minister did not indicate what ratio would be used by Jamaica and whether the thin capital tax rules would only be applicable to non-resident companies.

Allison Peart is a managing partner at Ernst & Young.