TAXATION FOR GROWTH A Jamaican Perspective

By Joseph B. B. Cox

August 2011

2

FOREWORD

I n these challenging times, for the Jamaican economy to

realize growth, there is an urgent need for bold new initi-

atives which will create the requisite impetus for the

transformation of the country. It is within this context

that the National Association of Parish Development Commit-

tees (NAPDEC) is particularly pleased to be identified with this

consultative process on the Green Paper on Tax Reform. We

would like to commend the Kingston and St Andrew Parish

Development Committee on its initiative to facilitate im-

portant public discourse on this matter but also for its willing-

ness to partner with other critical stakeholders as we collec-

tively engage in a transformational process tailored to effect

economic dynamism and growth and sustainable national

development. Indeed we at NAPDEC have long recognized the

centrality of comprehensive tax reform to the process.

However for such a process to achieve the requisite buy-in

from all stakeholders, tax reform must be comprehensive and

while being protective of the revenue base of the country,

facilitate both social and financial inclusion. Hence this pro-

cess of tax reform must be specifically aimed at broadening

the tax base and a general lowering of rates coupled with a

simplification of processes to better promote equity, fairness

and broad-based development. This will create an environ-

ment of policy certainty and confidence in the economy which

will facilitate the achievement of economic growth and com-

petitiveness.

The Jamaican tax framework has been characterized by the

World Bank in its Growth Diagnostic, as a complex system of

tax incentives which creates economic distortions and is a

major source of the misallocation of resources and inefficien-

across industries. The tax system encourages “enclave’ devel-

opment which has minimal linkages with the rest of the econ-

omy, directs investment flows to industries largely isolated

from the vagaries of a developing economy including crime

and violence. This has resulted in investment concentrating in

areas such as All Inclusive Resorts, Mining & Quarrying and

Export Free Zones.

The tax system remains complicated and inefficient due to, for

example, multiple nonstandard tax rates and the absence of a

uniformed rate structure. The system is also in need of urgent

reform due to narrow tax bases but relatively high tax rates,

high dependence on direct taxes (especially, income and pay-

roll taxes) and based on the fact that only a few taxpayers

generally bear the burden of selected taxes.

Indeed the status quo would be reflective of generally low tax

compliance levels founded upon the principle of “catch me if

you can” and finding the path of least resistance from an ad-

ministrative standpoint. This has led to complaints by some

groups who feel that they are being subjected to unfair scruti-

ny while others are being allowed to operate with impunity.

Whereas it is conceded that the tax base has been narrowed

over the years primarily through the granting of a wide range

of preferential treatments it must be equally acknowledged

that the rent seeking behavioural patterns of some in our

business community must be curtailed. Indeed it is worthy of

note that between January 2010 and March 2011, some $15.9

Billion in discretionary tax waivers were granted by the Gov-

ernment of Jamaica. This is unsustainable.

The Green Paper, albeit conceptually, has laid the foundation

for an important national conversation about fundamental

transformation of the taxation framework. This includes Cus-

toms Reform, GCT Reform and lays the groundwork for Corpo-

rate Income Tax and Personal Income Tax reform and legisla-

tive reform inclusive of the development of an Omnibus Tax

Incentive Law which will allow for the streamlining of existing

tax incentives and waivers

Indeed it is instructive for us to be guided by a recent docu-

ment emanating from the World Bank which reminds us:

“…that while activist government economic policies in devel-

oping countries have historically failed to achieve their stat-

ed objectives, in all successful economies the state has al-

ways played an important role in facilitating structural

change and helping the private sector sustain it across time.”

This has been manifested in Jamaica by way of the perverse

incentive framework that is currently associated with Govern-

ment‘s economic activism. However that is changing rapidly.

Indeed the prevailing economic philosophy which now guides

the transformational processes in Jamaica recognizes that the

role of Government must be to provide the regulatory and

policy framework for economic activity but not to be an active

participant in same. The Private Sector is recognized as the

engine of growth and is expected to rise to the challenges that

such responsibility fosters.

3

Some of the tax reform proposals which have already been

implemented for the current calendar year includes:

The introduction of a nominal Stamp Duty to allow for

portability of loans

The exemption of Registered Corporate securities from

Stamp Duty and Transfer Tax to facilitate the issuance and

trading of these securities and provide an additional fillip

to the local Capital Market

The introduction of a Stamp Duty on Probate and Letters

of Administration of $5,000 and a reduction of the Trans-

fer tax on death from 4 percent to 1.5 percent and the

abolition of the prevailing fee structure that obtained pri-

or to May 16, 2011 inclusive of all interest and penalties

associated with the previous regime. This allows for the

unlocking of latent assets and was needed to give the nec-

essary fillip to the real estate market which had become

dormant as beneficiaries were unwilling to apply for let-

letters of probate for fear of losing the bequeathed asset

totally. Initial fallout in revenue will be covered by an ex-

ponential increase in second sales.

The introduction of a consolidated form to accommodate

the statutory remittance of monthly payroll deductions

which represents the first stage of a process which will

ultimately lead to the introduction of a single payroll tax.

This within a context where there has been increased compli-

ance activity through rigorous forensic auditing and the estab-

lishment and success of both the High Intensity Team and the

Special Enforcement Team of the Tax Administration of Jamai-

ca which has already seen a substantial increase in the num-

bers of registered taxpayers.

Further, the Government of Jamaica has already developed a

Fiscal Responsibility Framework which through the Financial

Administration and Audit (Amendment) Act 2010 establishes

specified fiscal targets. Specifically the Minister of Finance is

charged to achieve the following targets by March 31, 2016:

Reduction of the fiscal balance to nil

Reduction of the total debt to one hundred percent

(100%) or less of the Gross Domestic Product

There is no doubt that the achievement of those targets may

prove challenging particularly in the context of a skittish global

market which has already seen the US credit rating being

downgraded and concerns about other developed countries

being similarly downgraded in due course. We at NAPDEC are

confident however, that with the continued assistance and

encouragement of the International Development community

coupled with our strident advocacy and bullish approach to

economic growth, we will realize gains over the short to medi-

um term. This obviously will redound to the benefit of our

membership and foster meaningful community development

as we equally embrace the concepts of social and financial

inclusion as we collectively journey on the path of sustainable

development for Jamaica.

The overall success of these initiatives which is deemed to be

foundational to economic expansion rests exclusively on the

emergence of a positive psychology and positive expectations

by households, workers and firms in the economy. Economic

agents must be convinced of the credibility of the tax reform

programme, i.e. timely and/or sustainable and/or irreversible,

for them to extend their rational expectations beyond the

short term and imagine a rise in their permanent wealth and

income.

As we face this moment in our history as planners and as a

country, set within the context of global and national dynam-

ics, it is a good time to reassess our approaches, and put in

place strengthened initiatives that facilitate a true integration

of all our skills, ideas and practices.

The National Association of Parish Devel-

opment Committees (NAPDEC) was

formed in March 2007, as the umbrella

organization for all Parish Development

Committees (PDCs) and was incorporated

under the Companies Act as a Limited

Company in October 2009. NAPDEC’s

overarching goal is to represent and pro-

mote the interests of all 13 PDCs and the

Portmore Citizens Advisory Council (PCAC)

by providing on-going focused advocacy

and policy direction, and ensuring full pro-

tection of the rights of PDCs as an im-

portant local governance structure.

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TAXATION FOR GROWTH

F or decades, Jamaica has been engaged in an ambi-

tious reform agenda which in large part is shaped by

the International Development Partners, most nota-

bly multilateral institutions such as the International

Monetary Fund, the World Bank and the Inter-American De-

velopment Bank. These institutions, in conjunction with the

Government of Jamaica and some elements of the local pri-

vate sector, have designed what is dubbed by its proponents

to be a far reaching tax reform agenda. However, whereas

there is little doubt that there is urgent need for tax reform in

Jamaica, for too long the majority of Jamaicans have sat idly

by and not engaged in the process, while being buffeted by

empty rhetoric from persons articulating strategies that most

realize are not only self-serving but have almost zero chance

at success. It is now time for an honest conversation about tax

reform, if Jamaica is to enjoy any real development over the

medium term.

The process of fundamental tax reform in Jamaica must be

founded upon the tenets of modernity and hence be central-

ized around the concepts of Efficiency, Equity, Adequacy, Fair-

ness and Simplicity. The Green Paper on Taxation though pur-

ported to be guided by these fundamental principles does no

such thing. There is no coherent philosophy which is seeming-

ly guiding the proposed tax framework and indeed upon care-

ful review the document boasts characteristics of economic

schizophrenia.

Indeed whereas the document actually claims to be focused

on economic growth, competitiveness and efficiency, the poli-

cy mix being advocated would achieve the opposite results.

There are relatively few initiatives which would facilitate

growth and competitiveness with the overall policy actually

fostering a compression of demand through an effective re-

duction of disposable income of the average wage earner. This

is compounded by the exposure of certain industries to unfair

competition by way of a proposed significant alteration in

duties, particularly in the face of extraordinarily high energy

costs in Jamaica. Further the proposed imposition of a Cus-

toms Administration Fee (CAF), even if temporary, will place

severe pressure on the cash flow of several businesses. In fact,

the expressed intent by GOJ to impose this CAF is curious as

within the document it is noted that its imposition would be in

breach of WTO rules and would likely be subject to legal chal-

lenge. Therefore,

at the outset the

GOJ is acknowl-

edging that this is

not a legally sus-

tainable strategy

and hence the

logic for pursuing

this particular

path remains

unclear. This in

conjunction with

the maintenance

of a high GCT

threshold which

precludes small

and micro enter-

prises from

claiming their input tax and thus creating an effective barrier

to expansion as their operating costs, relatively speaking,

remain appreciably higher than their larger industry counter-

parts thereby hindering competition.

Of similar concern is the expressed intention to reduce the

CET to 20 percent on the over 600 tariff lines on which a rate

in excess of 20 percent currently obtains. This could prove

detrimental to Jamaica’s Agriculture and Manufacturing sec-

tors with a notable case being the Poultry industry which

would be adversely affected by an 80 percent reduction in

duty on imported poultry. This would destroy the local poultry

industry. Whereas some are liable to dismiss this matter as

mere ‘rent seeking” behavior, we need to remain cognizant

that Agriculture globally is perhaps the most subsidized sector

and the proposed strategy over the short to medium term will

not only lead to substantial contraction in the local industry

and a bolstering of Jamaica’s propensity to import but will also

manifest itself in the depreciation of the exchange rate as well

as an increased imbalance in our external account.

The Jamaican system of taxation, at best, can be characterized

as a quasi-flat tax or hybrid system which is regressive by defi-

nition but periodically exhibits progressive elements as evi-

denced by the temporary utilization of a three tiered Personal

Income Tax (PIT) system in the recent past. However, the

Joseph Cox

Chairman, KSAPDC

5

system seems to be driven more by administrative ease than

by equity, as the PIT system in particular, basically precludes

nearly all standard deductions which obtain in comparable tax

jurisdictions and therefore degenerates into a highly discrimi-

natory and extremely unfair mechanism which yields effective

rates of taxation of approximately 29 percent at the higher

personal income levels.

However on the other hand, contrary to oft repeated senti-

ments, corporate entities in Jamaica, based upon a generous

mechanism of deductions, pay effective rates of taxation rang-

ing from 2 to 10 percent across sectors. [See Appendix 1] This

is not unique to Jamaica as the same obtains in several other

tax jurisdictions as businesses are merely availing themselves

of the various allowable expenses / deductions which mini-

mize their tax liabilities. Yet the emphasis continues to be on

the misleading headline rate for Corporate Tax of 33 1/3 per-

cent which no company actually pays but which only yields

approximately 10 percent of Tax revenues. However the doc-

ument has specified January 1, 2012 for the reduction of the

headline rate for Corporate Income Tax (CIT) whereas January

1, 2013 is set as merely a tentative date “to determine if PIT

can be reduced” and any such reduction would be based on a

review of the performance of the tax measures previously

implemented in their totality.

There is no consistency in the treatment of taxpayers in the

document, with strident commentary being included about

the plan for substantial reformation to, if not abolition of, dis-

cretionary waivers but elsewhere in the same document, it is

maintaining the status quo for selected industries. Conceptu-

ally, this is a useful initiative, although it is incomplete. This as

the process of waiver reform must include both discretionary

and statutory waivers as on a monthly basis, discretionary

and statutory waivers amounting to billions in tax expendi-

tures are provided to private entities, which are not only dis-

tortionary but serve to foster inefficiencies and perpetuate a

cycle of mediocrity. [See Appendix 2] Nevertheless, whereas

there is need for waiver reform, such reform must not only

comply with the precepts of a modern tax system but cogni-

zance must be taken of the fact that Jamaica does not operate

in a utopian bubble but in a real competitive and dynamic

marketplace where tax competition is a viable strategy used

to influence investment activity in competitor markets. Due

care must be exercised so that we do not place our country at

an economic disadvantage.

Additionally, as a comprehensive document on Tax Reform it

is somewhat perplexing that one entire arm of Government

has been excluded in this process and that is Local Govern-

ment. In fairness though, the document speaks to the aboli-

tion of certain trade taxes (which it derogatorily refers to as

nuisance taxes) which are to be replaced by a `minimum busi-

ness tax’. However, the revenue stream from a lot of these

trade licensing fees etc. currently forms part of the core fund-

ing of the local authorities. Will this business tax be going to

the local authorities or to the consolidated fund? Are the Local

Authorities or Parish Councils being defunded? Further, rather

than seeking to encourage new business growth, the strategy

will be to impose a business tax whether that entity is making

losses or otherwise.

Specifically, the plan articulated through the Green Paper, is

highly discriminatory. It advocates and places as a precondi-

tion for subsequent proposed changes to Personal Income tax,

the application of GCT to items including foods at 12.5 percent

but not only continues a special rate of 10 percent for tourism

but is silent on the taxation of financial services. Also for the

GOJ revenue to satisfy its self-imposed preconditions to re-

duce PIT rates, it will have to reduce GCT sheltered supplies

from 41.7 percent to approximately 30 percent to yield some

$10 billion in revenue. At this juncture, it might be useful to

take cognizance of the fact that though approximately one-

third of those persons who would normally be liable under the

PAYE system, are exempt from same as their income falls be-

low the current annual tax threshold of $ 441,168 , they still

pay GCT.

However as saying goes the devil is in the details. Will the GCT

on foodstuff also include agricultural produce or what is collo-

quially referenced as ground provisions? It is well known that

some persons have been lobbying for GOJ to impose GCT on

the provision of sewerage services and other utility offerings,

educational and religious materials, prescription drugs and

other miscellaneous items including strata maintenance fees

to name but a few. At this point it is worthy of note that elec-

tricity costs would be increased further. This as the current

rate of GCT paid on electricity is 10 percent and the Green

Paper suggests a rate of 12.5 percent across the board. Hence,

I would urge extreme caution as I fail to comprehend the in-

herent logic in decreasing the effective disposal income of the

wage earner and increasing the misery of the poor and mar-

ginalized, while seeking to exempt highly profitable corporate

entities from paying their fair share. Nevertheless, at this junc-

ture, the strategy as enunciated suggests that any relief likely

to be realized by the wage earner from the reduction in the

rate of tax and the increase in the threshold is likely to be ne-

gated by the changes to the GCT base.

6

In that regard it is instructive to note that the document aside

from establishing onerous pre conditions for any rate reduc-

tion in PIT also speaks to the amalgamation of Education Tax

with the PIT ostensibly to simplify payroll taxes. However be-

cause both taxes currently are calculated using different tax

bases and given that there is no explicit mention of the con-

cept of tax neutrality in any such amalgamation process, it

seems fair to assume that such an amalgamation might well

have the perverse impact of leading to a marginal increase in

the overall PIT rate.

The document also outlines a 3 year plan for compulsory filing

of tax returns by all Jamaicans, including PAYE but interesting-

ly it stipulates that in Year 1 – March 2012 all large taxpayers

and professionals are required to file returns but these re-

are to be filed electronically. This in a country where internet

penetration is a little over 50 percent and the utilization of

credit and debit cards is still at a relatively rudimentary stage.

The plan also speaks about the strengthening of the penal

provisions under the relevant acts to strengthen enforcement.

There are also some obvious difficulties even for the Treasury

that will arise from some of the policies enunciated in the

Green Paper. The document articulates the intent to reduce

the headline CIT rate to 30% by 2013 and 25% by 2014 but

clearly has little stomach to effect any reduction in PIT rates.

This would lead to the possibility that by 2014 CIT & PIT rates

would be equalized. However, all this would translate into is

the formation of single person Corporations or some similar

arrangement in order to take advantage of generous entitle-

ments which are available to Corporations, thereby leading to

an actual decline in revenue as has occurred in the past. Simi-

larly, the argument about the set off against tax type

(automatic transfer of funds from one tax type to pay anoth-

er) is a little curious. With the publicly expressed difficulties

with the current Integrated Computerized Tax Administration

System, ICTAS, the feasibility of this concept at this juncture is

dubious. This also has serious implications for GOJ cash flow.

Similarly, the proposed elimination of the Asset Tax and the

rolling of same into this “minimum business tax”, is likely to

be discriminatory against the MSME group and start-ups in

particular and in any event could lead to a decrease in reve-

nue flows, a notion that would be affirmed if this minimum

business tax is actually remitted in full to the Local Authorities,

since it has subsumed at least part of their legitimate revenue

stream.

Jamaica, as evidenced by this Green Paper is at risk of devolv-

ing into a mélange of sector, class and regional interests.

Therefore to continue to pander to the machinations of the

special interest groups in Jamaica at the expense of the PAYE

wage earner will not only perpetuate a highly skewed system

of taxation that is particularly injurious to the more vulnerable

in the society but is likely to derail any strategy for economic

recovery. The only way forward is to focus on strategies that

will induce economic growth and job development. The path

to recovery lies in upgraded skills, increased exports and pub-

lic investments in infrastructure and low carbon energy all

within a context whereby effective disposable incomes are

expanding.

PROPOSED GROWTH STRATEGIES

Jamaica is at a crossroads in its development and there is

need for the fundamental reorientation of this economy on a

sustainable growth path. However the policy mix that must be

employed must be pragmatic and innovative. To facilitate

growth it is proposed that the following strategies be imple-

mented:

Creation of a tax and incentive framework to facilitate Ven-

ture Capital Investment

A tax regime needs to be established which will allow individu-

al investors to deduct a specified portion of their total income

for amounts invested in qualified venture companies. In this

regard a venture company would be defined as a small or me-

dium sized entity under 3 years old. Alternatively investors

could be allowed to take their entire investment into account

for the year in which they sell the venture company shares. If

losses occur, they could offset them against gains from the

sale of shares, carry any excess losses forward for a specified

period and apply those losses against future gains from selling

shares. If the investor opts to take a deduction for their invest-

ment in the year of acquisition that amount must be deducted

from their cost of investment in the year of disposition to de-

termine losses..

The introduction of tradable tax credits with particular refer-

ence to start ups in emerging growth areas

These tax credits would be allocated to start-ups and can be

linked to capitalization levels and tiered to reflect Govern-

ment’s long term developmental objectives. For example a

start-up in an area with a history of high crime or other anti-

social behavior but which provides high employment potential

would be a prime candidate for these tax credits. However as

is well known most start-up’s make losses for at least the first

few years of operation and therefore might not be in need of

these tax credits. The start-up operator would have the

7

option of trading these credits on the capital market albeit at

a discounted rate for cash which could be injected into the

business. The purchaser of the tax credits would then be able

to apply same to their profits and benefit in terms of their

corporate tax planning endeavours.

Allow Carry-forward of net operating losses for 15 years and

permit carry-back for 3 years

Currently under Jamaican law, tax losses incurred may be car-

ried forward indefinitely to shelter future profits. However

from a policy standpoint this has been subjected to some

abuse and clearly untenable. Therefore a mechanism has to

be developed to treat with those entities that report persis-

tent losses. Nevertheless, the new mechanism that is being

proposed must take account of market dynamics and the

need to facilitate growth dynamics in a changing market envi-

ronment. Indeed businesses, particularly start-ups, which

incur significant costs during the early stages of their exist-

ence, would require a relatively long period to successfully

commercialize their operations. This occurs precisely because

they invest substantially in research and development, facili-

ties and equipment, marketing and promotion and sales infra-

structure to achieve long term growth.

Further, when externalities such as the global economic

downturn occasions rapid deterioration in business perfor-

mance and causes significant loss, the opportunity to deduct

those losses over an extended period of time thereby facili-

tates ease of recovery. A 15 year net loss carry forward peri-

od would also be an effective way to help companies in Jamai-

ca retain and hire employees and invest in employee training

from a long term perspective as it would allow them to recoup

the costs at any time without an excessive tax burden. Simi-

larly, a carry back of 3 years would allow for a company to

reclaim at least a portion of the taxes it paid in a prior period,

providing an immediate boost to entities that may have fallen

on difficult times. This would also aid in business retention

and stability in employment while allowing for businesses to

engage in some amount of risk taking. Limitations could be

put on the entities qualifying for this facility by linking the

benefit to capitalization levels and disallowing losses from

overseas subsidiaries.

Removal of the GCT Threshold to allow for small and micro

businesses to not be placed at a tax disadvantage with re-

spect to their larger industry competitors

Jamaican businesses benefit from the General Consumption

Tax which by design shifts the burden of taxation from pro-

duction to consumption. This only benefits businesses with an

annual turnover of $3 million or more. Hence, micro business-

es are placed at a significant cost disadvantage under the cur-

rent regime as they are required to absorb their input taxes

and are not allowed to net them off as do larger businesses.

Where it is readily acknowledged that a micro business is a

business in transition which over time must either expand or

stagnate and die, the status quo constitutes a real barrier to

entry into larger markets by the artificial distortion of prices

and makes the longevity of these businesses more tenuous

than is necessary.

The capping of deductible total executive remuneration in

terms of Corporate tax liabilities

The cost of compensating high-value corporate executives

remains a considerable and on-going expense for any business

in Jamaica. However, in recent times a particular market per-

versity has crept into the market which has manifested itself

in terms of high executive compensation, high profits, lower

levels of employment both at middle management and line

staff levels but decreasing effective levels of taxation. It is

therefore being proposed that the total quantum of corporate

income deduction that is allowed for executive compensation

be limited. Such restrictions could be developed to treat with

compensation that is fixed or periodic and has been approved

through normal corporate procedures. Such restriction could

be guided by the average income for the class of employee as

determined by the Jamaica Employers Federation Survey or an

average of all such surveys. If therefore for example, an entity

decides to compensate an Executive at more than say 50 per-

cent of the comparative industry average, the total compensa-

tion level above that 50 percent above industry average mark

would not be allowed as a deduction for corporate tax purpos-

es. This would include bonuses which could arguably consti-

tute a disguised distribution of corporate profits. It would be

recommended that this measure be subject to legislative re-

newal every 3 years.

Capped tax credits for each new employee within a multi-

tiered mechanism based on the quantum of persons em-

ployed

This would be founded upon a three tiered mechanism which

accords a tax credit for each new employee that an entity

hires and retains for a period of 3 years. These benefits would

be linked to quantum of employees currently employed with

an entity with higher tax credits being accorded to start ups

and MSMEs versus large firms which have a turnover in excess

of $200 M which would receive a lower tax credit for

8

additional employees. The credits would have to be applied in

equal tranches across the three year period and if the employ-

ee contract is terminated for whatever reason under 1 year,

no credit is applicable. This is to avoid attempts at employee

shopping or ever greening – basically hiring someone for a

very short period just to obtain the tax credit and then replac-

ing that person with another new employee and claiming an

additional credit. Any loss of revenue associated with this

credit would be compensated for from the increased PAYE

contributions at the minimum.

Annual publication of a draft GOJ Fiscal Budget inclusive of

proposed revenue measures which is subject to broad public

consultation

With the onset of entities such as the Partnership for Trans-

formation which has been notably referenced in the Green

Paper and which really constitutes an amalgamation of the

principal private sector lobby groups, specified senior public

sector representatives, the trade union lobby and the political

directorate, there is need to broaden and deepen public con-

sultation on matters relating to fiscal management. Since the

varying lobby groups are being made privy to all this material,

which were hitherto deemed secret and their input sought in

determining public policy there is no discernible reason why

the general public should not be allowed to make their contri-

butions on such matters as well. This will facilitate greater

levels of social inclusion in the determination of public policy.

Introduction of a Research and Development (R&D) tax cred-

it

A R&D tax credit would reduce a corporate entity’s tax liabili-

ties, based on the amount spent (on wages, patent attorneys'

fees and so forth) to develop a new product or improve exist-

ing products. This should also incorporate improvements in

production methods (process R&D). The most immediate ben-

efit of a R&D tax credit is the creation or retention of jobs.

Increased social benefits over the long term include increased

innovation. Further in a global environment of tax competi-

tion, it would be particularly germane to be guided by the

quantum of credits offered in other jurisdictions. For example,

in 2006 Spain offered a R&D tax credit of 44 cents per dollar

spent; Mexico – 37 cents per dollar spent on R&D; Canada –

17 cents per dollar spent on R&D, USA – 7 cents per dollar

spent on R&D. The low levels offered by the USA have seen

the relocation of several of their indigenous business overseas

seeking to benefit from the relatively more attractive environ-

ment. Jamaica would be well served to be guided by this as it

holds the potential of facilitating increased investment both

local and international.

Re-introduction of annual tax credits for residential mortgag-

es paid under PIT

This would allow for increased and more effective participa-

tion in the real estate market by wage earners. The status quo

in effect constitutes a tax on housing and constitutes a barrier

to entry for persons and therefore constrains market efficien-

cy and development. It is therefore being proposed that an

annual tax credit for mortgage interest be introduced and that

said credit could be capped at for example a specified per-

centage of the recipient’s gross income and would only be

applicable to the primary residence of the recipient of the

benefit. This process would be subject to periodic audit to

maintain programme integrity.

Re-introduction of annual tax credits for education, health

Despite pronouncements about free health and education in

Jamaica, these two expenditure heads, periodically accounts

for a substantial portion of the disposable income of the aver-

age household. Since it is the intent of GOJ that all Jamaicans

by 2014 must file their income tax returns this creates an op-

portunity for the expensing of the items and the requisite

proof being provided upon submission of the tax return. Alter-

nately, the requisite tax credits could be re-introduced into

the tax system to allow for reasonable relief of same. This as

the status quo actually amounts to the taxation of both health

and education expenditures, which not only encourages sub-

optimal behavior by the citizenry coupled with heightened

rent seeking activity but it also hinders human and social capi-

tal development.

Introduction of provisions for dependent care under PIT

Section 10 (1) of the Maintenance Act in Jamaica dictates that:

“Every person who is not a minor has an obligation to the ex-

tent that the person is capable of doing so, to maintain the

person’s parents and grandparents who are in need of such

maintenance by reason of age, physical or mental infirmity or

disability”

Failure to comply with this edict may attract penal sanctions.

However whereas the State has adopted this legal posture on

a matter of great social importance there is no commensurate

relief for those persons who are capable of providing such

maintenance and hence the status quo makes such interven-

tion particularly onerous and in some cases mitigates against

participation. It is therefore being proposed that all mainte-

nance costs associated with the care of a relative be fully

9

expensed under PIT. This will allow for greater degrees of

effective participation by relatives and reduce the costs to the

State. This would be subject to periodic audit and evidence

must be provided to verify expenditures in this regards. This

could be extended whereby a specific tax credit is provided

up to two children, provided they are below the age of 18 or

attending a tertiary institution and below 23 years of age. .

Retain deductions allowable under PIT for Travelling, Uni-

forms and Laundry Allowances, Gratuities for hotel workers

Any attempt to tamper with these provisions would lead to a

decrease in the effective disposable income of the recipient

and would have immediate implications for productivity and

efficiency at the level of the firm. Given that there is the ex-

pressed intent to broaden the GCT base which will lead to a

higher cost structure, for employees, particularly in the lower

socioeconomic groupings, this would prove particularly oner-

ous. Therefore any plan to alter the status quo should be

strongly discouraged.

Application of withholding taxes to interbank deposits

For some time now GOJ had decided to exempt inter-bank

deposits from withholding taxes. The theory at the time was

that there was need to encourage the savings habit in Jamaica

and by providing this level of relief, financial institutions

would not resort to the utilization of fees to drive costs unnec-

essarily higher and militate against the national objective.

However currently, Banks continue to enjoy this relief,

amounting to billions in tax expenditure annually while now

instituting an onerous fee structure on their clients. There is

therefore no need to continue this tax incentive programme

as the institutions must be made to compete. Further, the

Government should seek to encourage local and overseas

investment to expand the quantum of financial institutions in

Jamaica. Increased competition will keep costs low and opera-

tions more efficient without additional distortions to the eco-

nomic framework.

Remove all differential rates of CIT

There are differential rates for Corporate Income currently in

place in Jamaica. Whereas some are informed by statutory

waivers other are not. A particular case in point is that the

headline CIT rate applicable to Building Societies currently

stands at 30 percent versus the headline rate of 33 1/3 per-

cent which obtains for all other commercial enterprises. There

is no discernible reason for this concessionary rate and there-

fore it is recommended that unless afforded by a statutory

waiver regime currently, that all concessionary CIT rates be

normalized. Similarly life assurance companies pay 15% tax

on net investment income and 1.5 percent tax on premium

income. This issue should also form part of a comprehensive

reform strategy which necessarily includes a forensic review

of all Statutory and Discretionary waivers.

Scrapping of the tax compliance certificate or extension of

period of validity

In light of the fact that it is expressed intent of the Jamaican

tax authorities to require all Jamaicans to file tax returns by

2014 and that there is the intent to strengthen the penal pro-

visions under the relevant Acts to facilitate compliance en-

forcement, which are slated to brought into effect during FY

2011/12, the need for the continuation of the Tax Compliance

Certification programme over the medium term becomes du-

bious. This as along with the strengthening of the legislative

framework, the forensic data mining and compliance method-

ology currently being employed by Tax Administration Jamaica

and Jamaica Customs, has yielded considerable success.

Hence a two tiered reform process is being advocated:

From Sept 1, 2011 until March 2014 all TCC’s issued to

taxpayers adjudged to be in good standing at the time of

application be extended to a period of one year

From April 1, 2014 the requirement for a valid TCC will be

scrapped.

Continued maintenance of the requirement after these sub-

stantive amendments replete with the implementation of a

new IT platform will therefore be redundant and merely rep-

resent an administrative impediment and increase the cost of

doing business. This is particularly germane if there is the in-

tent to establish a single payroll tax rate (amalgamating In-

come Tax, NHT, NIS, and HEART contributions).

Indexation of the Tax Threshold

The Green Paper highlights various scenarios involving the

adjustment of the tax threshold commencing in January 2012.

It is proposed that whatever the tax threshold that is deter-

mined as at that date, said threshold should be indexed to the

rate of inflation and automatically be adjusted annually. It is

further proposed that this tax threshold be subjected to Par-

liamentary review every 3 years to determine whether further

adjustments are required. It is further proposed that all

changes to the tax threshold take effect commencing January

1 to avoid any confusion associated with changing it during

the tax year. This leads to certainty in treating with the tax

threshold and facilitates increased efficiency.

10

Elimination of non-standard rates of GCT

Currently in Jamaica you have a plethora of non-standard

rates in the application of the General Consumption Tax which

is not only discriminatory but also creates unnecessary admin-

istrative activity which is cumbersome to manage, creates

economic distortion and opens the floodgates to misreporting

and fraudulent conversion. It is therefore being advocated

that a single GCT rate be applicable to all classes of purchases.

This would end for example the three tiered GCT regime

which is applicable in the provision of telephones services

where some activities are taxed at 17.5%, another set of ser-

vices taxed at 20% and the others at 25%. But if for example

you are successful in gambling yet another GCT regime is ap-

plicable.

Treat with GCT leakage

In an attempt to preserve its revenue base, some attention

must be paid to GCT leakage. This issue has to be dealt with

very carefully as a broad brush approach in seeking solutions

could create more difficulties than it solves. However, there

are some low hanging fruits which could easily be implement-

ed and which will create no real issues. The phone card is an

obvious case in point whereby by simply including GCT in the

face value of the card, a substantial area of potential leakage

could be stemmed. Similarly, GCT should be re-imposed on

and included in the face value of all gambling tickets. Another

area of leakage which is not as easy to address would involve

the zero rating of Government purchases (goods and ser-

vices). Whereas, removing that status to foster increased

compliance among Government contractors would be an obvi-

ous choice, due care has to be given to the implications for

the cash flow of the Government Ministry or Agency that cur-

rently enjoy zero-rated status. This as these entities would

have to find the resources upfront to meet the payment due

and then await reimbursement at some point in time from the

Ministry of Finance, which is not known for its timely reim-

bursements. Alternatively these agencies would be forced to

cut expenditure which will also impact on the fortunes and

viability of several private sector entities. This as GOJ remains

the single largest procurer of private sector goods and ser-

vices.

Introduction of Pigovian taxes for those entities which con-

tribute to pollution and other anti-social practices

The Government of Jamaica or ideally the Local Authorities

(Parish Councils) could be allowed to charge Pigovian taxes (a

tax levied on a non-market activity that generates negative

externalities such as pollution) on the producers of specified

products which are deemed to be economically and socially

harmful as obtains in Canada. For example, a factory does not

financially take into account the damage its emissions cause

to the air, since there is no market for air pollution. By impos-

ing a Pigovian Tax, the Local Authority can artificially create a

cost for such activity - ideally a cost equal to what the price

would be had a market for such activity existed. Indeed, in

Jamaica the taxes applied to cigarettes and alcohol acts as a

Pigovian tax - it (more than) raises the revenue necessary to

offset the expense to the health care system generated by

smoking. However in this regard, it is being suggested that

such taxes could be applied to producers of paper, plastics,

glass, chemicals and alumina. This will not only seek to en-

courage pollution control, but also recycling, while providing a

substantial revenue stream to the Local Authorities and / or

Central Government.

Introduction of an unemployment insurance mechanism

It is being proposed that an unemployment insurance mecha-

nism be introduced. Such a facility would allow for the provi-

sion of an income for unemployed persons who are actively

seeking work for no more than one (1) year and payment of

redundancy for workers so displaced. However to qualify the

unemployed person must have been previously employed on

a full time basis for at least three years. This facility which

would be mandatory for all commercial enterprises would be

funded by the removal of the NIS cap for corporate entities.

Employee contributions would be voluntary and would be

refundable after a 7 year period has elapsed but would be a

determining factor in the calculation of the actual monthly

income received upon becoming unemployed. These contri-

butions would be hypothecated and placed in a designated

Unemployment insurance Fund. This fund would be managed

by private enterprise but be governed by the same legal

framework as the NHT. This would ensure that though per-

sons are unemployed they will continue through the receipt of

this conditional cash transfer be able to continue to contrib-

to economic activity and in terms of redundancy would intro-

duce certainty about the receipt of payments for displaced

workers.

Imposition of a limited capital gains tax

There is need for a detailed study to be commissioned to de-

termine the potential viability of the imposition of a limited

capital gain tax. Nevertheless it is being specifically proposed

that if the feasibility of this exercise is established after suita-

ble scientific rigour, that a capital gains tax be imposed on

11

realized gains from financial instruments and commercial real

estate. This tax would exempt the sale of residential real es-

tate as long as it is verified that it has been used as a resi-

dence for at least 2 years. Residential property that has been

sold to commercial interests will be afforded no tax relief and

realizable gains will be subject to the full capital gains tax.

Unrealized gains would not be subject to a capital gains tax.

Increase financial autonomy of local authorities

Local Authorities should be given the latitude to vary property

tax rates and other local rates and charges in an effort to at-

attract new business activity to their particular locale. Howev-

er such latitude must be determined within a well-defined

waiver framework. This will allow for inter-parish competition

for investments (whether local or overseas) and would be in

keeping with the defined and published development objec-

tives of the particular municipality. There is also need for the

establishment of a third party collection mechanism for the

local authorities whereby persons who are required to attend

at the offices of the Local Authority to make certain payments

can easily do so through a third party (Financial institutions,

Bill payment agencies, tax collectorate etc.). Similarly, Local

Authorities could also utilize Mobile banking (already func-

tional at a number of local financial institutions) as a mecha-

nism to transmit any conditional cash transfers that they are

required to make. Aside from facilitating increased efficiencies

this also allows for reduced transactions costs.

Publication of annual budget by each Local Authority (Parish

Council) and a public report on the performance in the im-

mediate past year.

There is need for transparency in the budgetary process of the

Local Authorities in Jamaica. This arm of Government though

the recipient of a substantial quantum of funds from the Con-

solidated Fund among other sources is not required to provide

a full and detailed account of their performance over the fis-

cal year. Currently what is provided at best is a truncated re-

port on the overall revenue performance of Local Authorities

Island wide. However in an effort to facilitate transparency,

efficiency and accountability each Local Authority (Parish

Councils, Portmore Municipal Council and the KSAC) should be

made to submit to the Parliament in time for the annual publi-

cation of the Fiscal Budget by Central Government, a fulsome

report on their financial activity inclusive of revenue flows and

waivers granted for the fiscal year just ended and their pro-

posed plans and programmes over the medium term.

Establishment of a waiver policy for Local Authorities

There is an urgent need for the establishment of a waiver poli-

cy for Local Authorities in an effort to streamline the granting

of discretionary waivers. Such a policy should stipulate the

publication of a complete list on a monthly basis of such dis-

cretionary waivers as was granted by the local authority re-

plete with reasons for granting of same. This will increase ac-

countability and transparency but should also allow for some

flexibility so that the Local Authorities can vary fees within pre

-determined guidelines to facilitate inter-parish tax competi-

tion as the municipalities clamour to attract businesses

(domestic and foreign) to their particular locale. This will not

only facilitate increased efficiencies and protection of the rev-

enue it will force municipalities to market their jurisdictions

on the basis of the comparative or competitive advantages

that obtain in their specific area.

Introduction of a three-tiered regime which allows for differ-

ential rate structure for lands used for Commercial and In-

dustrial purposes

Jamaica currently utilizes a regressive system of property taxa-

tion whereby no distinction is made about current property

usage. Whereas it is not being advocated that any modifica-

tion be made to the current system of assessing unimproved

land values there is nothing which precludes the implementa-

tion of a multi-tiered property tax regime. In this context, it is

recommended that the current rate of 0.75 percent of the

value of unimproved residential property be maintained with

no change to the mechanism offering relief for agricultural

property and the elderly. However, it is suggested that a dif-

differential rate structure be applied to lands which are used

for commercial and industrial purposes as obtains in several

countries around the world including the USA, UK and even in

Trinidad and Tobago. This as commercial property creates

higher demands on the infrastructure and basic services and

therefore as a matter of equity should attract a higher rate of

property taxation than a residential property. Indeed in a re-

cent survey it was recognized that, for example, residential

communities are served by streetlights equipped with a 100

W High Pressure Sodium Lamp, whereas in the Commercial

Zones and Industrial Zones they were served by lamps ranging

from 150 W to 400W. This translates into monthly energy

costs per lamp of $753 for residential areas versus costs rang-

ing from $1,066 to $2,626 per lamp in the commercial areas

and industrial zones. In any event property taxes paid by com-

mercial enterprises are fully expensed in their tax computa-

tions

12

Establishment of a Hierarchy of Liability

It is being proposed that Jamaica adopt a system akin to that

which obtains in the United Kingdom known as the “hierarchy

of liability” in which the liability for payment of property tax is

determined. That is, if one person lives on a property they

would be the liable person. If more than one person resides

on the property then those persons nearest to the top of the

hierarchy are liable. Two or more persons at the same point in

the hierarchy would be jointly liable.

The hierarchy of liability is:

A resident owner /occupier who owns either the lease-

hold or freehold of all or part of the property;

A resident tenant;

A resident who lives on the property and who is a licen-

see. This means that person is not a tenant, but has per-

mission to stay there;

Any resident living on the property, for example, a squat-

squatter;

An owner of the property where no one is resident.

However, this must be designed in a way that it does not dis-

turb the regular owner / tenant relationship or give solace to

those who would seek to acquire land by Adverse Possession

(Limitations of Action Act) by the mere payment of property

tax. The fact that the occupier of the land would now be legal-

ly liable, it is likely that compliance rates will increase consid-

erably.

Implementation of a Homestead Exemption Mechanism

It is also being recommended that a Homestead Tax Exemp-

tion mechanism be introduced in Jamaica, as obtains in sever-

al parts of the United States. It is primarily a subsidy whether

expressed in percentage terms or as a specified monetary

value, of the overall value of the property which is defined as

the primary residence of the applicant. This is a benefit that

could be applied to only one property, whether it is within the

municipality or not and for which a specified application to

the Local Authority would be made. In this context, it is being

advocated that this exemption be applied only to property

taxes and would only be applicable to a prescribed portion of

the unimproved value of the land. For example, the first

$500,000 of the unimproved value of a primary residence

could be exempted from property taxes as long as it is veri-

fied, that this is indeed the primary residence of the applicant.

The remainder is taxed at the regular property tax rate. The

Homestead tax exemption would not be transferable. Further,

periodic adjustments to the unimproved value of the land

would be capped at 3 percent on these primary residencies

and would not be adjusted until the person either vacates the

property or if there is a change of use, the property is sold or

any other variation thereto. At that point, all exemptions are

removed and the property is now subject to the full rate of

property tax at the current unimproved assessed value. Such

an exemption would only be applicable to Jamaican nationals

and allow for only one exemption per family. Indeed for pur-

poses of the exemption spouses (common law or otherwise)

would be regarded as a single applicant and would not be eli-

gible to apply for such exemptions on any other property on

the island. This would not in any way diffuse benefits or the

discretionary relief currently provided to the elderly, infirm

and others with special needs.

Development of an tradable renewable energy tax credit

mechanism

There is an urgent need for the development of a tradable

energy credit mechanism to encourage the use of alternate

energy and conservation strategies. This would be segmented

and tailored to facilitate both the residential and commercial

markets as the case may be. Such a strategy could reward

households for utilization of specified alternate energy equip-

ment or even for the use of energy efficient appliances by way

of tax credits which could be utilized in the determination of

PIT liability. Though the residential market would be subject to

a predetermined lifetime ceiling in terms of the utilization of

tax energy tax credits to offset personal income tax liability

they would still be eligible to receive these credits for new

household acquisitions (with certain restrictions to avoid

abuse) and trade them on the capital market albeit at a dis-

counted rate for cash. This will likely lead to the re-injection of

at least a portion of those funds into the economy. Similarly,

commercial enterprises would be eligible for renewable ener-

gy tax credits which they could use to offset CIT liability. In

scenario a commercial enterprise, using these energy credits

would be subject to a predetermined limit (normally a per-

centage of their tax liability) but be eligible to trade the rest

on the capital market. This would not only encourage alter-

nate energy use or at least approved energy conservation

techniques (e.g. rooftop energy farm) but for also provide the

opportunity for the re-injection of some cash into the business

enterprise while still benefitting from the normal depreciation

allowances and lower energy costs among other benefits.

13

Removal of GCT on Electricity Consumption

The imposition of GCT on electricity consumption has been

counterproductive and has only served to increase even fur-

ther the effective cost of electricity. In Jamaica as at March

2011 the average cost of electricity was 39 US cents per kWh

versus 9.66 US cents per kWh in the United States our main

trading partner. Hence it is counterintuitive, with such a

skewed cost structure for an additional 10 percent GCT to be

added. Further it has proven to be particularly injurious to

that part of Micro business sector with a turnover of less than

$3 million. This as they are not eligible to claim the GCT

charged on their electricity usage as they are below the

threshold set for the tax. Hence this group, similar to residen-

tial households is subject to this discriminatory pricing strate-

gy. However for medium to large commercial enterprise this

has been somewhat of a boon, in so far as they actually remit

less GCT to the State, as fostered by the higher input tax.

From the perspective of the average household, the only im-

pact this has had is to reduce effective disposal income and

minimize their participation in economic activity. Hence this

additional tax has proved to be inimical to economic expan-

sion and merely distorts the economic marketplace.

Introduction of Privacy legislation

Most international instruments require that trans-border

flows of personal information are restricted to countries that

do not have a certain level of privacy protection - the “safe

harbour” principle (as evidenced in the European Union Data

Protection Directive). In most instances this requires at a mini-

mum that countries enact legislation specifically intended to

protect personal information. This will inter alia govern what

is considered an appropriate means and purpose for the col-

lection of personal information. Privacy is thus a critical issue

in that it could potentially form a barrier to international

trade. Constitutional and common law right to privacy cur-

rently exist in Jamaica .However it is not an absolute right to

privacy but rather one that is balanced against competing

interests. Current legislative trends worldwide tend towards

the drafting and enacting of legislation specifically designed at

protecting privacy and this is an area in Jamaica which is impa-

tient of reform. When information is provided in one context,

it should not be used in another. This has come about due to

concerns around the power and enhanced surveillance ability

of computer systems.

The above listing is not exhaustive neither is it intended to be.

Nevertheless it is indicative of the belief that in Jamaica today

a unique confluence of events have occurred which creates an

opportunity for fundamental reform. However due care has

to be taken that the process is not hijacked by special interest

group which in a myopic quest to gain some sort of short term

advantage over competitors succeed in derailing the entire

programme. Jamaica’s tax reform programme must consist of

a sound and modern legislative framework founded upon eq-

uity and fairness while preserving the integrity of the revenue.

Whereas the Green Paper provides a point of departure for

the discussion, it is neither necessary nor sufficient to facili-

tate GOJ’s growth agenda.

August 2011

Economic Consultant and Advocate for over 25 years, Joseph

Cox’s contribution to Jamaica’s National Development has

manifested itself in part through the establishment of three

(3) Financial Institutions and the preparation of an Economic

Development Strategy for the parishes of Kingston and St

Andrew. Chairman, Kingston and St Andrew Parish Develop-

ment Committee (KSAPDC) Secretary, National Association of

Parish Development Committees (NAPDEC) and President,

Trafalgar Council, this former Director of Economic Research

and Business Development at the Private Sector Organiza-

tion of Jamaica (PSOJ) and Director of Corporate Develop-

ment, Island Life has also distinguished himself in the Inter-

national Development Community having successfully com-

pleted diverse assignments for the IADB and World Bank.

14

APPENDIX 1

EFFECTIVE TAX RATES BY SECTOR

Categories FY 2010

%

FY 2009

%

Finance 6.6 7.31

Communications 4.81 0.0

Conglomerates 1.52 1.59

Insurance 3.32 4.06

Manufacturing 4.31 5.25

Retail 7.20 10.13

PAYE >20.00 >20.00

Source: JSE Annual Reports & Authors calculation

15

APPENDIX 2

MONTHLY DISCRETIONARY WAIVERS

October 2010 – March 2011

(J$ Millions)

Month CET SCT ASD GCT Trans-

fer Tax

Waiver

October 387.9 40.6 0.8 399.8 1.0 830.1

November 552.9 45.6 67.2 1,017.0 0.1 1,791.0

December 365.3 50.8 4.9 360.4 1.9 783.4

January 341.3 43.8 10.2 242.3 0.0 637.7

February 646.1 21.6 326.3 847.2 0.5 1,842.0

March 626.7 21.8 392.2 743.2 0.4 1,784.0

Source: Ministry of Finance

16

BUSINESS FIRST….PLAY LATER

Email: ksapdc@yahoo.com Skype: ksapdc

Telephone: (876)-618-6009 Twitter: @ksapdc

c/o 85 Hagley Park Road , Kingston, Jamaica W.I