After months of postponement, the three per cent withholding tax on specified services took effect yesterday. Since the tax was first announced, many have bemoaned the negative effects that it may have on the private sector. Additionally, there have been several questions raised as to how the tax would be computed and the mechanics of its enforcement, especially for entities that currently do not issue withholding tax certificates.

The tax is in keeping with the government’s continued efforts to broaden the tax base and increase compliance, as part of its perhaps IMF-induced tax reform measures.

Regardless of any lingering uncertainties, its introduction should be embraced, as the tax aims to bring within the tax net those non-compliant taxpayers who have proved elusive. The hope is that, if it is successful in attaining its aim of broadening the tax base, then the increased revenue generated will ultimately allow the government to ease the tax burden, which will enure to the benefit of those who are tax-compliant.

Effect of the tax

The implementation of the tax means that certain bodies have now been designated “tax withholding agents”, and are liable to collect from specified service providers, on behalf of the government, a three per cent withholding tax on any invoice exceeding $50,000, or batch of invoices issued within a 30-day period which in aggregate exceeds $100,000. It is understood from discussions between the Tax Administration of Jamaica (“TAJ”) and certain interest groups that in relation to the latter, the batch of invoices must relate to the same transaction.

The specified service providers will initially include those providing the following services: accounting; auditing; catering; consultancy; decorating; engineering (whether architectural, electrical, mechanical or structural); entertainment; information technology; janitorial; laundry; landscaping; legal; management; building or motor-vehicle repairs and maintenance; rental or leasing of motor vehicles or equipment; transportation or tours; and haulage of goods. However, service providers who were previously subjected to certain other forms of withholding taxes are exempted.

The tax is expected to be implemented on a phased basis, and therefore, there might very well be other service providers that will be added in the future to this already expansive list. Indeed, the Minister of Finance may, by Order published in the Gazette, designate any other service provider as being a “specified service provider” for the purposes of this withholding tax.

Specified service providers will have to brace for this new tax as they may encounter issues with cash flow from the reduction in revenue which will result from their clients having to deduct this tax from any applicable payments to them.

On the upside, the taxpayer will be able to claim any tax withheld as a tax credit, and any excess credit may either be claimed as a refund or used to offset future assessments. They will also have the choice of whether to claim the credit against their quarterly obligations or against their annual income tax return. However, they will be not be able to claim the credit if they have failed to meet their quarterly or annual income tax filing obligations.

Tax payment obligations for specified service providers have, therefore, now been front-loaded, with the tax being paid at the source and then later claimed as a tax credit. Through this, the government will be able to secure greater levels of compliance, as it will not need to rely on the goodly and dutiful service providers to pay their income tax to the government directly.

Tax withholding agents

The designated “tax withholding agents” include government ministries, executive agencies, local government authorities, parish councils and other bodies with annual gross revenue in excess of $500 million, which, according to the TAJ, includes regulated financial institutions, tourism operators and utility companies.

These agents will be responsible for not only withholding the three per cent tax, but also to issue the specified service provider with a withholding tax certificate in the prescribed form with respect to any tax that has been withheld from them, and to ensure that such tax is remitted to the TAJ within 14 days of the month following the month in which the tax was withheld.

Tax withholding agents will need to know the names, addresses and taxpayer’s registration numbers for all specified service providers, in order to properly complete the withholding tax certificate. These additional responsibilities will of course increase the administrative task load for these entities. More importantly, they will now be exposed to greater liability as they will face a penalty of up to 50 per cent of the tax due for failure to withhold the tax or failure to remit the payment.

The possibility of hefty penalties means that tax withholding agents will have to take great care to ensure that they meet their obligations and that they do so within the prescribed time.

It also means that if a tax withholding agent is in any doubt as to whether a particular service provider is a specified service provider for the purposes of the Provisional Collection of Tax (Income Tax) Order, 2015, they should err on the side of caution and resolve their doubts prior to making full payment to the service provider. This is because, even if they mistakenly fail to deduct the tax, the tax withholding agent will remain accountable for its payment to the government.

As with the introduction of any new tax measure, it is likely that the withholding tax on specified services will have some teething pains. The government will need to make certain that all prescribed forms are prepared and available so that there will be no further implementation issues.

The speed and efficiency with which tax refunds are processed will also need to be improved to assist with allaying the cash-flow problems that specified service providers are likely to face. Additionally, all businesses will need to assess whether they come within the scope of the Provisional Collection of Tax (Income Tax) Order, 2015, either as a tax withholding agent or as a specified service provider so that they may ensure their compliance, make the necessary administrative arrangements and prevent being subjected to penalties.

René Gayle is an Associate at Myers, Fletcher & Gordon and is a member of the firm’s Commercial Law Department. René may be contacted via rene.gayle@mfg.com.jm or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.