Editorial: Taxation lessons not learned

If Dr Peter Phillips recalls, at the time of his 2014-2015 Budget Debate presentation, he felt compelled to withdraw his proposed tax on bank withdrawals. And this wasn't because it would have been an unreasonable imposition, or a bad tax. In our view, it wasn't, which others, in retrospect, might appreciate.

First, that tax would have been hard to evade. The majority of Jamaicans have bank accounts, or engage in transactions with financial intermediaries of some kind.

Furthermore, in a modern economy, almost all the cash in business transactions finds its way into banks. The tax would have been efficient, with a low transaction cost to the Government.

Critically, too, the proposed tax rate was low, being at the highest point one-tenth of one per cent on withdrawals of less than J$1 million, and 0.09 per cent for withdrawals above J$1 million and up to J$5 million. It fell to 0.05 per cent for transactions of J$20 million and above.

Yet, Dr Phillips was forced to retreat and find another way to raise an estimated $2.25 billion, which morphed into a political battle whose narrative the government didn't clearly and convincingly articulate and therefore couldn't win. Put another way, Dr Phillips didn't properly prepare his constituency - the people it would affect - for the tax.

It appears that the finance minister and his aides and technocrats learned nothing, or little, from that fiasco, judging from this month's clumsy, if not chaotic implementation of a three per cent withholding tax on so-called "specified services", from which some individuals and firms - as in the case with the general consumption tax - will be collected. The tax applies to a gross payment of $50,000 to the service provider.

While Dr Phillips announced the tax in March, there has been no serious public education or engagement about it by the tax authorities, and as auditing and consulting firm PwC Jamaica has been telling its clients up to the proposed date of implementation, there was an absence of clarity on some of its elements.

Right reasons, wrong move

Indeed, we appreciate the motive behind the measure: a way of forcing people who might otherwise evade taxes to pay something, while allowing tax-compliant people to credit these upfront payments against their final income tax bills.

But as PwC pointed out, with an income tax rate of 25 per cent, the imposition of a three per cent withholding on gross revenue presumes a 12 per cent net profit margin, which is high for most firms, thus exacerbating cash-flow difficulties that could potentially arise from this arrangement. There is no regime for offsetting the tax a company withholds from payments to other people against what is withheld from it, thereby easing cash-flow problems.

PwC has also underlined an absence of comprehensiveness in the services that are either covered or excluded under the regime, or specificity in the definition of "gross payment", on which the withholding tax will apply. That could raise issues of interpretation and knotty fights.