Jamaica Budget 2009-10: Difficult decisions in challenging times
Published: Sunday | April 26, 2009
Jamaica had been bracing itself for significant tax measures in light of recent Government pronouncements against the background that the nation faces significant fiscal and other economic challenges at this time.
These have been exacerbated by the global recession, recent devaluations of the Jamaican dollar as well as interest-rate increases.
The country's anaemic economic performance is reflected in the 0.6 per cent contraction in output in fiscal year 2008, a 12.4 per cent inflation rate and a US$105 million decline in net international reserves in calendar year 2008.
Expenditure estimates
The Government had previously tabled its 2009-10 Estimates of Expenditure totalling $547.75 billion - now increased to $556.7 billion according to the minister in his presentation in Parliament on April 7. The following represents the allocation of the recurrent expenditure budget over major heads of expenditure.
Of particular note, the country's public-debt obligations (principal and interest) amount to nearly 56 per cent of the total Budget while interest obligations amount to nearly 45 per cent of the 2009-10 recurrent Expenditure Budget.
Overview of 2008-09 revenue performance
Revenues for the fiscal year 2008-09 were 9.8 per cent below budget.
Tax revenues of $246.2 billion fell short of budget by 7.1 per cent, with GCT being 19.6 per cent less than budgeted. This reflects reduced consumption due to the economic downturn.
Fiscal deficit
The country's fiscal deficit as a percentage of gross domestic Product (GDP) is regarded as an important indicator of Jamaica's ability to control and manage its national finances. Balancing the budget is, therefore, a critical milestone that must be achieved in order to improve the country's financial health.
A fiscal deficit of 4.5 per cent of GDP was programmed for 2008-09 but the country performed much worse, achieving an actual outturn of 6.8 per cent of GDP.
The Government announced Thursday that it is programming a fiscal deficit for 2009-10 of 5.5 per cent of GDP.
Specific tax measures
The following represents a preliminary review by the Pricewater-houseCoopers (PwC) specialist tax team of the specific tax initiatives which were announced by Shaw.
SCT on petrol
The minister indicated that the special-consumption tax (SCT) on petrol shall be increased by $8.75 per litre with effect from April 27, 2009. The ad valorem component of the SCT will remain unaffected at levels that have prevailed since 1999.
It would appear that this increase will only apply to automotive fuels but clarification on this point would be welcomed, particularly whether the increase shall apply only to gasolene (unleaded 87, unleaded 90 and E10) or whether automotive diesel oil (ADO) is also included.
It is estimated that this measure - along with the increased customs user fees - will yield additional revenues of $13.328 billion in the current fiscal year.
The minister indicated that 20 per cent of these revenues shall be placed in the Road Maintenance Fund and devoted exclusively to the repairs of all classes of roads.
Set against the background that Jamaica does not produce oil, gasolene has historically been taxed in Jamaica at low levels, by international standards.
The need to modify this tax regime, to permit rebalancing of our tax system, has been long recognised, including by the Matalon Report on Tax Reform (2004), which recommended that general-consumption tax (GCT) be imposed on auto-motive fuels.
Attempts were made to reform the regime in 1999 by the then People's National Party administration but were abandoned after the announcement sparked widespread riots and public disorder.
The imposition of the tax as SCT, as opposed to GCT, means the tax will be levied at importation or manufacture and avoids imposing the responsibility on retailers to collect the tax.
Furthermore, unlike GCT, the SCT will not be claimable as an input tax credit by registered taxpayers, eliminating the uncertainty of how much tax revenue would be lost to credits claimed by businesses.
Increased Customs user fees
The minister also announced that customs user fees (CUF) applicable to the importation of finished petroleum products - excluding products imported under the PetroCaribe Agreement - shall increase from 2.0 per cent to 5.0 per cent of the customs value of applicable imports, effective April 27.
Removal of GCT exemptions
GCT is currently imposed at the standard rate of 16.5 per cent on the supply within Jamaica by registered taxpayers, or importation of most goods or services.
The Third Schedule to the GCT Act sets out a list of goods and services which are exempt from GCT. Shaw announced that with effect from April 27, the following goods will now be subject to GCT at the standard rate:
The minister confirmed that a wide range of goods will retain their GCT-exempt classification, including raw foodstuffs, basic foodstuffs (other than specified above), prescription drugs, certain medical goods, and certain educational or agricultural inputs.
It is estimated that this measure shall yield revenues of J$7.5 billion in the current fiscal year.
From a tax-reform perspective, the reduction of the number of GCT exemptions is an important step in seeking to tackle some of the complexities, imbalances and administrative challenges that exist in the current tax regime.
This was recognised by the Matalon Report, which recommended that the number of GCT exemptions be significantly reduced. The minister has, however, still chosen to retain many of the GCT exemptions on the statute books.
The 'Summary of Measures' makes reference to the reform of GCT on goods and services, but no reference is made elsewhere to the imposition of GCT on services that are currently exempt.
Clarification is needed on this point, particularly with regard to electricity and water, the former rumoured to have been in the minister's cross-hairs for inclusion within the tax base.
GCT on telephone instruments
The rate of tax applicable to the importation or supply of telephone instruments will be increased from 16.5 per cent to 20 per cent, effective April 27.
The minister indicated that this will harmonise the rate of GCT on instruments with the existing 20 per cent on telephone services and sale of phone cards.
This measure represents a departure from the stated policy of simplifying the tax system and eliminating discrimination.
The 2004 Matalon Report also recommended the elimination of non-standard GCT rates.
An opportunity was also missed to address uncertainties and inequities in the GCT regime applicable to telecommunications.
This regime currently imposes GCT at different rates on the same services depending on whether they are procured on a pre-paid or post-paid basis.
Instead, the Government appears anxious to capitalise on the seemingly insatiable appetite of Jamaicans to spend unlimited time on their telephone and upgrade their handsets as new models are launched.
It is estimated that this measure shall yield revenues of J$736 million in the current fiscal year.
,b>Tax on dividends to non-residents
"Dividends paid by companies that are listed on the Jamaica Stock Exchange currently benefit from a zero rate of taxation.
In December 2008, Prime Minister Bruce Golding announced that this relief would be extended to all dividends paid by "Jamaican-owned companies".
Although the legislation to give effect to this change has not yet been promulgated, we understand that the intention is to allow for tax at the rate of zero per cent to be applied to dividends paid to Jamaican tax residents.
In referring to this announcement, Shaw has indicated that dividends paid to "non-resident shareholders of listed companies" shall be subject to withholding tax at the rate of 33 per cent with effect from July 1.
Clarification is needed on whether it is intended to tax only corporate non-resident shareholders at this rate since individuals are normally taxed at 25 per cent.
On this basis, such non-resident shareholders would no longer be able to rely on the tax exemption currently afforded to companies quoted on the Jamaica Stock Exchange.
However, to the extent that a non-resident shareholder is resident in a jurisdiction which has concluded a tax treaty with Jamaica, then the shareholder may qualify for treaty protection to reduce or eliminate his/her Jamaican tax exposure.
It is estimated that this measure will yield revenue of J$1.341 billion in 2009-10.
Removal of preferences on emoluments
Certain employee perquisites were targeted by the minister for removal of the favourable-tax treatment that they enjoyed for many years. This amendment takes effect July 1 and is expected to yield revenue inflows of $1.2 billion in the current fiscal year. Preferences which will be targeted include:
At present, hotel workers are entitled, subject to certain conditions, to receive tax-free gratuities from an approved gratuity scheme of up to $250,000 per annum.
This enables such workers to earn tax-free income up to $470,272 per annum, inclusive of the current general tax-free threshold.
The ministry paper indicates that hotel workers will continue to enjoy this enhanced tax-free limit until the general tax-free threshold reaches this level - that is, $470,272 or above - whereupon the general threshold shall apply to all persons, that is, the tax-exemption afforded to gratuities shall be abolished.
These allowances shall no longer be payable on a tax-free basis. On this basis, employers should review current contractual commitments to employees as well as any agreements with unions which govern the payment of such allowances to assess how these may be affected by the abolition of their tax-free status.
Tax threshold
With effect from July 1, the tax-free threshold for income tax purposes will be significantly increased from $220,272 to $320,736, with a further increase to $441,168 on January 1, 2010.
Income earned in excess of this revised threshold remains subject to income tax at 25 per cent.
It is estimated that this measure will cost $5.202 billion for the current fiscal year.
It is a critical part of the overall tax package presented by the minister. In particular, the increase in the threshold will provide much-needed relief from income tax for heavily burdened PAYE taxpayers.
It is estimated that the increases in the threshold will take 85,000 PAYE workers out of the income-tax net by January 1, 2010.
Notwithstanding the doubling of the income tax threshold to $441,168 by January 1, 2010, the threshold will remain significantly below the amount recommended by the Matalon Report, of $275,184, which was to have taken effect January 1, 2004, and indexed thereafter to inflation.
In today's terms, at February 2009, this threshold would be approximately $505,000, based on the movement of the Consumer Price Index.
This disparity will continue to grow over time in light of inflation.
Pensioners and the elderly
Under current income-tax rules, the first $45,000 of pension income derived annually from an approved pension or retirement scheme is exempt from income tax with a further $45,000 exemption, in respect of any income, if the recipient is 55 years or over.
Minister Shaw announced that with effect from July 1, each of the above allowances shall be increased to $80,000.
On this basis, pensioners and the elderly may earn tax-free income - inclusive of the general tax-free threshold - of the following amounts:
(J$B) Jul 1, 2009 Jan 1, 2010
It is estimated that this measure will cost $128 million in 2009-10 and will remove an additional 4,500 pensioners from the income-tax net.
Consolidation of payroll taxes
The minister indicated that payroll taxes would be consolidated with effect from July 1 but neither his presentation nor the ministry paper outlined any further details as to how this would be achieved.
Issues which need to be clarified include:
1. What consolidated rates shall apply?
2. Will the J$500,000 NIS income cap be increased or abolished?
3. How will the separate rules and bases for each payroll tax be harmonised to facilitate consolidation?
4. How will employed persons be treated versus the self-employed?
Transfer tax, stamp duty rates
In pursuit of a general programme to reduce rates and with the express aim of stimulating the real-estate market, Shaw said the rate of transfer tax shall be reduced from 5.0 per cent to 4.0 per cent, and stamp duty on conveyances from 4.5 per cent to 3.0 per cent, with effect from January 1.
For real-estate transactions, this will normally mean that vendors shall be liable to an aggregate of 5.5 per cent of the consideration payable - transfer tax and stamp duty combined - while the purchaser shall be liable for stamp duty of 1.5 per cent.
It is estimated that this measure will cost J$644 million for the current fiscal year.
Administrative enhancements
The minister spoke of several administrative measures which are expected to enhance the revenue collection process and assist in the management of the various ministries.
These include the establishment of a Large Taxpayer Office ( LTO) and the forensic data-mining intelligence unit (FDIU)
The LTO, which commenced operation in January, deals with the 3.0 per cent of taxpayers who contribute over 80 per cent of taxes paid.
The FDIU will focus on identifying self-employed persons that are not compliant.
In addition, efforts are being made to improve the customer service at the collectorates. The Revenue Protection Division is to be re-established and work will continue in ensuring that customs collections are more effective.
The ministries are also to benefit from a central treasury management system to manage public funds which, it is expected, should reap financial benefits from the reduction in wasteful spending; and a public accountability inspectorate (PAI) responsible for reviewing reports tabled in Parliament and ensuring that the recommendations are followed and implemented. The PAI will also assist ministers in the investigation of issues as necessary, in order to promote accountability and transparency.
Tax amnesty
The recently concluded amnesty programme is to be extended to taxpayers who previously avoided declaring taxes - estimated to number more than 200,000 persons. Such persons are being invited to come forward and declare for 2008-09 forward.
Submissions will be accepted on a 'no questions asked' basis up to October 2009. Thereafter, persons will be assessed when audited and this could cover several years.
The 'PricewaterhouseCoopers' referred to as writer of this article is the PricewaterhouseCoopers partner-ship registered in Jamaica.
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