Application of the Income Tax rates -"a rate by any other name"

Everald Dewar, Guest Columnist

"Then you should say what you mean," the March Hare went on. "I do, Alice hastily replied. "At least I mean what I say - that's the same thing, you know."

"Not the same thing a bit!" said the Hatter. "You might just as well say that 'I see what I eat' is the same thing as 'I eat what I see'. "You might as well say," add the Hapless Taxpayer, that "the applicable tax rate" is the same thing as "the tax rate applicable."

All right, so I made up the last bit, but what on earth has the Mad Hatter's tea party got to do with application of income tax rates? Well quite a lot, it appears, as tax accountants and practitioners seem to have become as confused as Alice with the changes in the tax rates and the rate which is to be applied to the period the account is made up. Let me explain.

In my November 13 article, we examined the amendment to the corporate income tax rates and what income is to be taxed. The rate changed on January 1, 2013 from 33.33 per cent to 25 per cent for unregulated companies, and effective April 1, 2013 from 25 per cent to 30 per cent for large unregulated companies.

The corporate income tax rate is based on a tax year. A tax year (also called a year of assessment), runs from January 1 to December 31. It is important to distinguish the tax year from a financial year or the period in which a company prepares a set of accounts.

Although a year of assessment and a financial year are often the same thing, this is not always the case. While a year of assessment cannot exceed 12 months, companies can prepare a set of financial accounts for up to 18 months.

For a better understanding, let us compare two scenarios. In the first, an unregulated company makes up accounts ending on June 30, 2013. This financial year will therefore straddle two tax years - 2012 and 2013. One would have expected that the profit in this 12-month period is to be split between the two tax years. Thus six months in 2012 to be taxed at 33.33 per cent, and six months in 2013 to be taxed at 25 per cent but this is not so. The rate of tax applicable to the entire profit will be 25 for the year of assessment 2013.

So far so good. In fact, tax practitioners and Tax Administration of Jamaica will both agree that only one rate of tax will apply for a tax year and this is true even where a financial year ends in a period other than the year of assessment, that is December 31.

In the second scenario, the entity is a large unregulated company. As you might guess there is a difference where the tax rate changes twice in the same year of assessment: in January 2013, 25 per cent and again in April 2013, 30 per cent. In effect, there are basically two rates of tax running in the one year of assessment.

Undesirable state of affair

In theory, one cannot escape having to pro-rate the profit between the two rates. For example, if the financial year ends December 31, 2013, three month's profits taxed at 25 per cent, and nine month's profits taxed at 30 per cent.

If the financial year ends June 30, 2013, nine month's profits taxed at 25 per cent, and three month's profits taxed at 30 per cent.

We will agree that this state of affair is undesirable and not only overturns established thinking but may not have been the intent of the legislators. However, it is my view that in administering the law it is possible that the Commissioner General of Tax Administration Jamaica may allow for the intended application as given in our first scenario or it may be that an amendment to the law will become necessary in order to remove all doubt.

I would like to bring to readers' attention that the new Tax Incentive reform package, which was recently tabled, proposed that effective January 1, 2014 the rate of tax will apply strictly to a tax year. This means that where a taxpayer's financial year does not end in December it would have to be pro-rated.

Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston. everald.dewar@bdo.com.jm