ON Tuesday, October 29, the Fiscal Incentives (Miscellaneous Provisions) Act 2013, and the Income Tax Relief (Large-scale Projects and Pioneer Industries) Act 2013 were tabled in Parliament to meet the revised International Monetary Fund (IMF) deadline of the end of October (originally September). Two weeks later, on Tuesday, November 12, two more companion tax bills, the Customs Tariff (Revision) (Amendment) and a Stamp Duty Act (Amendment of Schedule) Order, were tabled. All the bills are effective January 1st, and are due to be debated next Tuesday.

It is impossible to summarise the full impact of the proposed incentive reforms in one short article and no attempt will be made here. Together, the proposed bills represent the most sweeping reform of Jamaica’s system of tax incentives ever, and are the first key part of the wider tax reform agreed with the IMF. International accounting firm KPMG agrees in their note “Business Tax Reform – a Fresh Approach” of October 30th, saying “As a package, these bills represent a significant step towards the long-awaited business tax reform in Jamaica.”

The goal of the reform is to replace discretionary, sector-specific incentives with an across-the-board competitive tax regime that encourages employment. Only three of the existing incentives were retained, namely the Bauxite Industry Encouragement Act, Free Zones and the Junior Market of the Stock Exchange, with certain provisions to “encourage” those under existing incentives to give them up. Moreover, the intention is that the Free Zone incentives are to be migrated to a Special Economic Zone (SEZ) by the end of 2015 (eliminating their export promotion aspect) and the Junior Exchange incentives are to end in 2016 (any company listed after January 1st will be cut back to only five years of relief from corporate tax). As in all previous attempts at tax reform in Jamaica for the last 30 years, a key constraint was the reform had to be revenue-neutral due to Jamaica’s dire fiscal circumstances. The sole discretion retained is the new incentive regime for large-scale projects and pioneer industries (as in the Act of the same name) that have a “transformational impact on the economy of the country” but these now have to be tabled in Parliament and any tax expenditures (meaning tax rates lower than the standard rate of tax) arising are capped at a mere 0.25 per cent of GDP per annum.

In return for effectively ending tax holidays for most industries, the reform reduces the corporate rate of tax to 25 per cent (eliminating the recent surtax of five per cent on corporate profits for large firms with revenues of over $500 million) except for the already established category of regulated companies, mainly in the financial sector, who continue to pay 33.33 per cent. A key general incentive (again except for regulated companies) is an employment tax credit calculated on the statutory payroll levies (education tax, NHT/NIS and HEART) for tax compliant companies that reduces the effective rate of corporate tax by up to 30 per cent, or to a maximum effective rate of 17.5 per cent, for trading income only. In other words, the tax credit is calculated only on trading profits, and excludes investment and other types of “passive” income from the calculation. The overall idea is to encourage economic activity (similar to the approach taken in Ireland), as well as reducing the cost of the tax credit.

Capital allowances have also been improved to correspond more closely to the economic life of the assets, although various capital allowance incentives have also been discontinued including investment allowances and accelerated depreciation for areas such as agriculture and manufacturing. Of particular interest to many would be the increase in the allowable base cost for private motor vehicles to the Jamaican dollar equivalent of US$35,000, with an annual allowance of 12.5 per cent, allowing one to write-off a car over eight years, with a faster five-year write-off period (20 per cent annual allowance) for trade vehicles which include rent-a-cars, tour buses and other passenger vehicles. The improved allowances for industrial buildings are also noteworthy, which now have an initial allowance of 20 per cent, and an annual allowance of four per cent per annum. Most categories of plant and machinery (used in the production of primary products or the manufacture or packaging of goods) will now have an initial allowance of 25 per cent, and an annual allowance of 12.5 per cent.

The most difficult area of the reform for the lay person to understand is the calculation of the proposed claw back of the employment tax credit (ETC) for those companies making a distribution of profits (meaning mainly but not exclusively those paying a dividend). The claw back of the ETC is the lower of 10 per cent of the distribution, less the dividend tax withheld, so if the dividend tax (say 15 per cent) exceeds the claw back, no additional tax is in fact clawed back. However, in the case of a Jamaican company who pays a dividend under a Caricom treaty country with a favourable withholding rate (normally zero per cent), the claw back will operate up to a maximum of what the ETC reduced the corporate tax, essentially restoring the effective rate of corporate taxation to 25 per cent.

The multiple objectives of the reform, and the extremely limited fiscal space (eg none), has meant that the objectives of the reform have been accomplished at the cost of, as PricewaterhouseCoopers put it in their recent newsletter, “the introduction of a degree of complexity into the system”. While tax losses have not been restricted in terms of time, and can still be carried forward indefinitely, the amount that can be claimed each year has been limited to no more than 50 per cent of chargeable income. This article has only addressed the provisions of the first two acts tabled, but the other critical piece of the reforms, meaning a rationalisation of customs duties and some additional stamp duties (ASD) on certain agricultural products will be addressed in a subsequent article.