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Matalon defends tax reform recommendations
Joseph M Matalon (left), chairman of the Incentives Working Group (IWG), and Minister ofFinance Peter Phillips at the first briefing of the Omnibus Incentive Leglisation. (Photo: JosephWellington)
Business
By Shamille Scott Business reporter scotts@jamaicaobserver.com  
December 5, 2013

Matalon defends tax reform recommendations

It’s the most significant reform in 30 years, says chairman of working group

Entities that currently pay the highest income tax rates are going to be the first beneficiaries when there’s growth in the economy, according to Joseph M Matalon.

The chairman of the Incentives Working Group (IWG), the committee that was consulted by Government in finalising new tax legislations, made the remark against the background of some regulated entities having apparently expressed displeasure that the 33 1/3 per cent corporate income tax rate (CIT) has been maintained.

“The fact is that if this reform has the kind of growth effect that we expect that it will, in terms of investments and employment… it is those regulated entities that provide basic services to the economy that are going to be some of the first beneficiaries,” said Matalon, speaking at the first briefing of the Omnibus Incentive Legislation on Wednesday at the Jamaica Conference Centre.

He outlined two reasons why the IWG recommended that the rate be maintained.

“Many people have asked, primarily some members of the Bankers’ Association why I would do such a thing — why I would recommend that the government maintain that rate,” he said.

All the regulated entities provide better than 70 per cent of the current income tax that is collected by the government from businesses, so any reduction in the taxation of those entities has very significant implications for revenue, he said.

Moreover, this 33 1/3 per cent contribution that has been agreed on is to create a pathway to reform among the unregulated companies, Matalon added.

Hopefully, as fiscal space permits, the rate will be lowered to 25 per cent rate, which all unregulated entitles are required to pay, he noted.

But Scotiabank’s Wayne Henry pressed for a timeline on the commitment to lower rates.

“For enhancing the credibility of the reform programme and signalling intent and commitment, could we begin to speak to a timeline to address the regulated entities paying the higher rates?” asked the bank’s vice president of government affairs.

But Finance Minister, Peter Phillips wouldn’t say.

“Now is not the time or the place for us to engage in that kind of discussion to state a specific date for harmonising — it all depends on revenue flows and availability and in any event I wouldn’t want to try to publicly design a revenue package here,” Phillips said. “We want to reduce rates generally, we want to harmonise the rates.”

The reform is designed to make the tax system more supportive of economic growth and employment creation, which involves simplifying the system, broadening the tax base, eliminating ministerial discretion in the granting of incentives, and reducing tax rates, while keeping the overall tax reform revenue neutral. It’s a part of structural benchmark needed for the Extended Fund Facility (EFF) by the International Monetary Fund.

Though some have dubbed the reform as dramatic, Matalon touts it as “game changing” and will reduce red tape and discretion in addition to lower effective tax rates and streamlining capital allowances regime.

Nearly all non-consumer goods will be liable to customs duty at a rate of zero per cent. This means that many businesses, whether incorporated or not will be able to import their critical capital goods and key operating inputs free of customs duty.

The absence of customs duty on such inputs, Matalon said, will reduce the cost of doing business and will have a positive impact on competitiveness.

Moreover, the importation of such non-consumer goods shall be automatic at the time of importation, by a distributor, retailer or end user and no application, certification or approval will be required.

“It’s the most significant reform of the business tax system in 30 years,” he said.

Specific components of the reform include, corporate income tax rate reform, capital allowance reform, caps imposed on utilisation of tax losses carried forward, employment tax credits (ETC), ETC claw back system, income tax relief: large scale projects and pioneer industries, tariff reform and productive inputs relief.

Matalon noted that the Jamaican business community will be offered an opportunity to operate in an internationally competitive corporate income tax regime.

The proposed CIT regime should reduce tax-induced cost of capital, which in turn should contribute to a more attractive investment environment, he pointed out.

This CIT regime is most attractive for unregulated entities, which can avail of an employment tax credit by reference to payroll statutory deductions remitted in the year of assessment.

He further explained that it offers entities an opportunity to reduce their effective CIT rate to as low as 17.5 per cent and correspondingly incentivise employers to report emoluments paid to employees and account for associated statutory deductions.

“This reduction in red tape represents an incentive in its own right as businesses can focus more on their core activities and less on having to navigate through burdensome tax compliance requirements,” said Matalon.

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