The government relies very heavily on taxes levied on the income of Jamaican residents, including taxes on interest earned on investments, salaries and business profits. However, the current situation is that only a small number of persons carry the income tax burden.

Background to tax reform in Jamaica

Several pundits have made compelling submissions in support of the case for tax reform in Jamaica, particularly having regard to the fact that the last major tax policy reform took place over the period 1986 – 1991, resulting in the introduction of the General Consumption Tax Act in October 1991.

In November 2004 when the final report of the tax policy review committee to the Government of Jamaica (commonly referred to as “the Matalon Report”) was published, it was believed that this report signaled the beginning of the road to the implementation of modern tax reform measures to address the issues of a more modern Jamaican economy operating in a more competitive and borderless global market. Still, not much happened for almost a decade.

The Ministry of Finance and Planning’s policy position on tax reform was issued via the White Paper on Tax Reform dated November 15, 2012 (‘the White Paper’), which was preceded by the Green Paper of 2011 (‘the Green Paper’).

All the public and private sector publications on tax policy and structure agree that tax reform should focus on addressing the following issues: (i) broadening the tax base, (ii) eliminating tax concessions and discretionary waivers, (iii) improving compliance, (iv) making the tax system equitable (both vertically and horizontally), and (v) encouraging economic growth.

Time to assess the recent reform measures

In this three-part article, I will review the significant changes made to the income tax (direct taxation) regime since the White Paper. The Matalon Report expressly stated that its recommendations were not to be treated as “a menu of reform options from which preferred positions may be selected”. The report also strongly recommended that reform should be wide-scale and not piece-meal as was the nature of the reforms of the 20-year period immediately preceding the report.

The Matalon Report recommended greater reliance on indirect taxation relative to direct taxation, which seems to be the preferred approach in a large majority of countries. It is evident from the White Paper and the Green Paper that the Government struggles to effect wide-scale tax reform while at the same time budgeting to meet fiscal targets (which are rarely met anyway).

Two years since the White Paper, it is useful to assess how far-reaching the reform measures have been having regard to the stated policy objectives. It is also useful to assess whether there has been any reduced reliance on income tax to fund the national budget.

Broadening the tax base

The policy objective of broadening the tax base, that is, ensuring that more resident individuals and corporations pay their share of taxes, is reflected in a few new laws and tweeking of a few others.

The most far-reaching, in terms of the number and cross-section of persons likely to be affected, is the Minimum Business Tax. Under the Minimum Business Tax Act 2015 (which was preceded by the Provisional Collection of Tax (Minimum Business Tax) Order, 2014) a minimum business tax of $60,000 per annum is payable by registered companies, building societies, friendly societies, co-operative societies, industrial and provident societies, with a few exceptions, such as charities and companies incorporated for less than 24 months.

The Minimum Business Tax is also payable by individuals (whether operating as a sole trader or partnership) who earn at least $5,000,000 per annum from a trade, business, profession or vocation and any other source of income.

The Minimum Business Tax, when paid, may be applied as a credit to income tax due for the relevant year of assessment, but may not be carried forward or applied retroactively to any other year. For all corporations and individuals captured by this legislation, the concept of the “nil tax return” is a thing of the past.

Pursuant to the Income Tax Amendment Act, 2015 (preceded by the Provisional Collection of Tax (Income Tax Order), 2014), 15 per cent is to be deducted and withheld on account of income tax (withholding tax) on insurance premiums paid by residents to non-residents, not including international re-insurers.

Similarly, the Provisional Collection of Tax (Income Tax) Order, 2015 sought to introduce a three per cent withholding tax on specified services, but its implementation was very shortly afterwards suspended. Under this law, government ministries, executive agencies, local government authorities, etc and persons with annual gross revenue in excess of $500,000,000 were required to withhold three per cdent of its gross payments (in excess of $50,000 per transaction) for specified services, including legal, accounting, janitorial, management, information technology and landscaping services.

Both of these withholding tax measures would have the effect of ensuring that these income streams were captured in the tax net, rather than stay afloat in the “informal economy”.

As a result of resuming the bauxite levy this year, bauxite companies are now included in the tax net, after receiving a waiver for the period 2008 – 2014. This year an environmental levy on local manufactured goods and CARICOM imports was introduced. Previously the environmental levy was only applicable to foreign and non-CARICOM imports.

Look out for Part 2 next week.

Andrea Scarlett-Lozer is a partner at Myers, Fletcher & Gordon. She specialises in commercial transactions and advisory, as well as, intellectual property law. Andrea is the Head of the firm’s Intellectual Property Department. She may be contacted via andrea.scarlett@mfg.com.jm or www.myersfletcher.com.