Going for growth

Norman Rainford & K. Don Yu, Guest Columnists

Minister of Finance and Planning Dr Peter Phillips presented what will become the first Budget of Jamaica's next 50 years, and it seems to be a step in the right direction. He presented a budget that seeks to balance austerity measures with a growth agenda that, if executed well, offers hope.

The minister emphatically announced that there are no new taxes in the Budget. This was primarily because many of them were introduced in February in connection with the IMF conditionalities.

The minister reiterated several initiatives that could change the tax landscape in Jamaica as we know it. He previously mentioned them in the Fiscal Policy Paper, dated February 12, 2013.

Based on these repeated references, it is expected that:

(a) Discretionary waivers, other than for charitable organisations and for charitable purposes, will no longer be granted beyond a certain minimal threshold, except where it is required to satisfy the Government's contractual or legal obligations;

(b) Rules affecting charities and charitable donations will be revamped (the Government will seek to harmonise the tax laws to address the treatment of charities as well as enact a Charities Act); and

(c) An Omnibus Tax Incentive legislation will be tabled in Parliament, by September 2013, that will eliminate ministerial discretionary powers in the granting or validating of tax relief, and will put in place a transparent regime for tax incentives.

The minister also presented several measures that comprise the 'Growth Agenda'.

He talked about strategic investments that can change the country's economic landscape such as the logistics hub; a US$20-million investment by the Development Bank of Jamaica in new ICT centres - not including investments in the ICT sector by private businesses; nine agro parks; investments in general infrastructure such as roads and housing; energy cost reduction; public-sector transformation; and tax reform.

He also went into some detail about integrated resort developments and implementing rules that were gazetted on Wednesday, April 17.

He said that the law allows for three integrated resort developments, each with at least 2,000 new hotel rooms and casinos. He expects that the new resorts will create at least 30,000 new jobs as well as many construction jobs.

The Government will start receiving proposals between June 1, 2013, and September 30, 2013, and a decision is expected to be made by early 2014.

Finally, he described micro and small enterprises as the backbone of the Jamaican economy and announced that the Development Bank of Jamaica will commit J$2b to the sector.

AUSTERITY AND DEBT

On the austerity side, total expenditures have been reduced to approximately J$520.89b, compared to J$602.53b in 2012-13. The bulk of the reduction comes from savings in debt repayment as a result of the National Debt Exchange (approximately J$91b).

Allocations to most government agencies also have been cut.

The largest component of the Budget spend continues to be interest and amortisation. Although reduced significantly from last year - from J$335.3b to J$225.24b - debt servicing still comprises 43.2 per cent of total expenditures.

The reduction in debt servicing is offset in part by the forecast increase in wages and salaries of public-sector workers from J$142.9b to J$160b which includes approximately J$17b for back wage agreements), which now comprise 30.7 per cent of the Budget.

This means, in total, debt servicing and public-sector wages continue to make up an inordinate percentage of total expenditures (73.9 per cent this year versus 77.9 per cent last year), leaving J$135.6b or 26.1 per cent (versus J$136b/22.1 per cent last year) to cover all other expenditures.

The silver lining in the significant reduction in debt amortisation is that expenditures on capital projects will see a slight increase from approximately J$38b last year to J$44b in 2013-14.

The growth agenda coupled with the reduction in spending is good policy in these hard times, but there is little comfort that the way forward will be smooth.

Even as we stand on the cusp of a new IMF agreement with renewed hope, the numbers are not encouraging. At a macro level:

For the first nine months of the 2012 calendar year, real GDP declined by 0.3 per cent when compared with the corresponding period of 2011;

The October 2012 Labour Force Survey revealed an unemployment rate of 13.7 per cent, 0.9 percentage points higher than the 12.8 per cent reported for October 2011, but 0.4 percentage point lower than the 14.1 per cent reported for January 2012;

The unemployment rate among youths was 35.3 per cent in October 2012, 4.2 percentage points higher than the 31.1 per cent reported for October 2011;

Inflation rates reported for the first three quarters of the 2012-13 fiscal year trended higher in comparison to the same periods in the previous fiscal year.

The Jamaica dollar has been depreciating continually against the US$.

REVENUE MEASURES

The macroeconomic outlook for the next four fiscal years is brighter with forecast growth of 0.8 per cent, 1.4 per cent, 1.8 per cent and 2.2 per cent. These are not "hockey stick" forecasts by any means but, based on prior performance, they might as well be.

For there to be any reasonable possibility of meeting the forecasts, Jamaicans will need to keep both eyes on the road and put 'pedal to the metal' and not let up for a long time to come.

There were only two tax measures announced by Minister Phillips. He made it clear that they were part of the drive of the GOJ to collect outstanding taxes; and remove inefficiencies and distortions in the tax system.

During the fiscal year, the Government will concentrate on collecting taxes already imposed.

Collection efforts may bear significant fruit in this financial year as increased efforts by Tax Administration Jamaica (TAJ), coupled with the recent prohibition against the granting of discretionary waivers - with certain exceptions - could see taxpayers being forced to pay up tax arrears.

The Tax Collection (Amendment) Act 2013, passed in March, allows the minister to write off uncollectible tax arrears.

However, the regulations to this legislation, which would, among other things, set out the criteria for determining a debt to be 'uncollectible', is not yet drafted, therefore, the regime is not yet in operation.

Even upon implementation, taxpayers' arrears would need to fit within the prescribed conditions to satisfy the test of being 'uncollectible' before they are written off.

Taxpayers should expect to see increased issuance of notices of assessment, increased tax audits and increased publications by TAJ of the list of tax offenders.

TAJ may continue to use cross-checking facilities to locate and identify delinquent taxpayers.

In this regard, TAJ, in the past, has announced that it would use public records such as the list of companies and businesses registered at the Companies Office of Jamaica, as well as the list of members of professional associations and the telephone directory to identify possible delinquent taxpayers.

Taxpayers have commonly failed to comply with tax requirements in relation to certain transactions. These failures, in our experience, include:

• Not withholding tax on certain payments to non-residents;
• Employees not reporting other income (side jobs or businesses);
• Landlords failing to report rental income; and
• Business owners erroneously claiming personal expenses as business expenses.
• Non-compliance, perhaps, may be due to lack of knowledge of the tax laws or indifference on the part of the taxpayer. These failures may be 'low-hanging fruits' for the TAJ and make easy tax collection targets.

The Tax Administration has traditionally struggled with the issue of taxpayer compliance. The
widespread non-compliance of taxpayers is exacerbated by the
administration's apparent tentativeness in utilising the full arsenal of
tax enforcement measures available to it.

However,
the minister has projected an increase in the collection of tax revenue
for this fiscal year and has also emphasised the legislative reform that
will unfold over the next four years.

It is hoped
that this legislative reform will place the appropriate emphasis on
enhanced statutory powers that will ensure that the projected tax
revenue is collected.

INEFFICIENCIES AND
DISTORTIONS

GCT on residential electricity: With
effect from July 1, 2013, the supply of electricity to all residential
customers will be a zero-rated supply.

Minister
Phillips explained that the decision to move this service from exempt to
zero-rated supply was made to honour the Government's commitment to the
Jamaica Public Service Company Limited (JPS) that it would not increase
the cost of supplying electricity and, by extension, would not increase
the cost of electricity to JPS customers.

Currently,
the GCT regulations expressly exclude JPS from claiming GCT input tax
credits in respect of its supply of electricity to any of its customers,
even though the supply of electricity to commercial and industrial
customers is taxable at standard rate.

With this
change, GCT input tax costs borne by JPS would now be recoverable from
the Government instead of being passed on to residential
consumers.

Based on the minister's announcement, JPS
would not be able to claim all of its GCT input tax costs and would only
recover those related to the supply of electricity to residential
customers. This may result in a reduction in the cost of electricity to
those customers.

Since the announced change relates
only to residential customers, the lingering question is whether the GCT
input tax costs incurred in respect of JPS' supply of electricity to
its commercial and industrial customers are now
recoverable.

Customs Administration Fee (CAF): On June
1, 2013, changes to the fee structure of the recently introduced CAF
will be implemented.

These changes are aimed at
addressing an identified inequity between the fees payable on imported
finished goods and the fees payable on imported raw
materials.

It is believed that the import cost of raw
materials should not be equivalent to the import cost of finished goods,
since manufacturers will incur further costs in producing their
finished goods.

This distortion will be remedied by
the implementation of a new fee structure, which would adequately take
account of the difference in input costs for finished goods and raw
materials.

- KPMG Senior Tax Partner Betty
Ann Jones contributed to this analysis.

Norman Rainford is tax partner and K. Don Yu is tax principal at KPMG
Jamaica. Send feedback to nrainford@kpmg.com.jm and
kdonyu@kpmg.com.jm