TODAY, the Senate is expected to pass the most significant business tax reform since the 1980s, meaning the four bills that collectively are designed to replace our current incentive regime. In my last Observer article of November 15th, entitled “Jamaica tables most dramatic tax reform bills since the 1980’s”, I covered the Fiscal Incentives (Miscellaneous Provisions) and the Income Tax Relief (Large Scale Projects and Pioneer Industries Act). The first act effectively ended most sector-based incentives, substituting a non – discretionary general tax regime, whilst the second act allowed some discretion for large projects in new industries, to be further defined.

A critical component of the overall reform package, however, is the impact of the second two acts, the Customs Tariff (Revision) (Amendment) Resolution and the Stamp Duty (Amendment of Schedule) Order, amending the Customs and Stamp Duty Act respectively, on the tariff structure.

Where feasible within the framework of Caricom’s Common External Tariff (CET), duty rates on all non-consumer (capital) goods are to be reduced to zero, with the default higher rate of duty capped at 20 per cent. The exceptions to the default higher rate are prescribed goods (motor vehicles, alcohol, tobacco, firearms etc), and higher rates imposed for the protection of certain locally produced products, primarily agricultural.

The Customs Tariff Act imposes a duty of 5per cent on more than 460 categories of goods, including many agricultural products that used to be free of customs duty. One of the principal goals of this measure is to reduce the cost of potential misclassification on customs revenues, or as incentive working group member Joe Matalon put it, where

the goods imported “miraculously coalesced around the lower rate”. For example, under the old regime, virtually all the hair imported into Jamaica is apparently “human” hair, with a 0per cent rate, rather than synthetic hair, with a much higher duty rate.

The new regime reduces customs duty for approximately 100 mostly higher rate categories, often in the jewellry and auto parts sectors. Upon investigation, many of these higher duty items had in the past been relieved of duty by waiver, or were recorded as duty-free items sold to foreigners, with the very high duty rates almost inevitably providing incentives for abuses.

However, a non -discretionary statutory “productive inputs relief” or PIR will provide relief from customs duty to support local production. This relief includes raw materials, intermediate goods, consumables, packaging materials and equipment (including parts) which are directly used in the production of primary products (agriculture) or the manufacture of goods. In addition, the tourism, healthcare and creative industries have specific additional lists of goods that get relieved from customs duty.

There is a similar arrangement for partial or complete relief from additional stamp duty (ASD), mainly covering agricultural products e.g certain cuts of meats for the tourism industry. This will also allow goods to be imported duty- free on a temporary basis, for example due to events such as a hurricane.

One of the important issues to consider carefully in the application of the productive inputs relief is the issue of the definition of manufacturing, which has been a tricky issue to define worldwide.

The “manufacture of goods” is defined as “the production of goods by a process of manufacture”, but this, for example, excludes the production of goods which result primarily from “cooking, baking or otherwise preparing food or drink for human consumption which is intended to be consumed at or about the time it is prepared, whether or not in the building or structure in which it is prepared, or whether or not in the building to which it is delivered after being prepared.” This might be more simply called “the bar or restaurant exclusion”, and is just one example of the difficulty of defining manufacturing.

As an aside, when Ireland introduced its special 10 per cent corporate tax rate

for manufacturing and internationally traded services in the 1980s to attract foreign investment, a well known tax court case at the time was whether the ripening of bananas counted as manufacturing, and there are many other examples from both Ireland and a host of other countries. All this means that great care (and additional resources) will be needed in the implementation process.

In summary, Jamaica has embarked on a major reform of its incentive system which should, for the most part, minimise tax-induced increases in production costs and therefore reduce the cost of doing business, as part of a rules-based and non-discretionary tax regime that incentivises employment and tax compliance.