Distortionary taxes not the only impediment to private sector credit

Reducing the tax obligations of regulated finance companies would increase responsiveness to monetary signalling but there would be fiscal consequences, says the International Monetary Fund’s (IMF) Jamaica office.

The Jamaican government, the office indicates, is caught between encouraging cheaper funding for productivity and growth on the one hand, and increasing tax collections on the other.

But distortionary taxes are also not the only impediment to private sector credit, the IMF Jamaica representative asserts.

The Bank of Jamaica (BOJ), which has been trying to stimulate lending by freeing up reserves, itself indicates there are hiccups in its programme to drive higher levels of private sector credit at cheaper rates. The central bank itself did not seek to make any link between the outcomes of its policies and taxes on the financial sector.

During the March 2019 quarter, the central bank said in its latest Quarterly Monetary Policy Report, the QMPR, that two cuts in the policy interest rate executed in the quarter did not get the response expected.

BOJ shaved a combined 50 basis points off the rates to 1.25 per cent in the period. That was followed up in mid-May with a single 50 bps cut to 0.75 per cent in mid-May.

MARCH QUARTER

Referring to actions taken within the March quarter, the central bank said its policy actions, were aimed at stimulating a pick-up in the rate of expansion in private sector credit, which should lead to higher economic activity and support inflation returning to the target range of 4.0 per cent to 6.0 per cent.

The reduction in the signal rate, complemented by the liquidity injection from a three percentage point reduction in the cash reserve requirement for deposit-taking institutions facilitated a reduction in money market interest rates for the March 2019 quarter.

The adjustments to the cash ratio, the CRR, freed up an estimated $17.8 billion for lending. A second two-point reduction in the CRR was implemented post-quarter on June 3. That reduction, which takes the ratio down to 7 per cent, is projected to free up $12.3 billion.

Regulated companies are taxed on income at 33.33 per cent, and pay an asset tax of 0.25 per cent. They are also not allowed to credit statutory payments made on behalf of employees towards these tax obligations, unlike unregulated companies.

Regular companies are taxed at 25 per cent and the Jamaican government lifted the asset tax for them in April.

Asked for comment on whether it viewed the taxes on the financial sector as negatively impacting its monetary policy goals, the central bank declined to weigh in, saying the issue is best addressed by the Ministry of Finance and Planning, as it relates to tax policy.

The finance ministry promised a response, which was not forthcoming up to press time.

Fincos have been lobbying for more equity in how they are taxed, relative to other businesses. President of the Jamaica Securities Dealers Association JSDA and CEO of NCB Capital Markets Limited, Steven Gooden, reaffirmed the position he took in January at the annual capital markets conference in Kingston that with improvements in the economy and fiscal reform bearing fruit, it was time to consider equalising the taxes paid by regulated and non-regulated firms.

The 33.33 per cent corporate tax rate is applicable to fincos and other regulated companies, with the exception of life insurers. The asset tax paid by regulated entities is charged against balance sheet assets, which is not deductible in the computation of income taxes.

A member of the financial sector, who requested anonymity to speak freely, said his own company had paid out $500 million in asset taxes in its last financial year – money which could have been applied to capital, or distributed to shareholders as dividends, he said.

He also pointed to the last IMF report on Jamaica, which said there were distorting taxes that the authorities needed to address.

In the IMF Executive Board Fifth Review under the Stand-By Arrangement for Jamaica, published in April 2019, the fund said “cuts to distortionary financial taxes will help support economic activity and job creation”.

Last week, IMF Jamaica country representative Constant Lonkeng Ngouana added some nuance in discussion with the Financial Gleaner, saying the issue was a complicated one from the perspective of the Jamaican Government.

“Lowering the financial asset tax is likely to lessen rigidity in credit and improve monetary policy transmission. Such a tax cut, however, would inevitably take into consideration the associated fiscal cost, given the still high debt burden of Jamaica,” Lonkeng said.

He added that in general, progress was being made in removing distortionary taxes, citing the total lifting of the asset tax on non-financial companies that was approved by Parliament earlier this year. That move is expected to eliminate $1.8 billion of taxes of assets.

“As you may recall, this was in addition to reducing the transfer tax, eliminating the ad valorem stamp duty and the minimum business tax, and increasing the GCT threshold,” said the IMF rep.

So even though on financial institutions remain in place, those that do mortgage lending “would benefit from higher turnover in the real estate market that the stamp duty and transfer tax reductions are likely to generate,” he added.

Lonkeng argued further that outside of the asset tax and the higher corporate income tax on financial institutions, there are other structural impediments to private sector credit in Jamaica. These, he added, are being tackled by the government through policy measures to deepen financial markets, including improved credit reporting; while the central bank has made adjustments to the CRR.

“On the latter, you may recall that the BOJ lowered the J$ CRR by 3 ppts in March and further by 2 ppts. The bank also narrowed the interest rate corridor from 300 to 200 bps, thereby bringing the interest rate on its overnight Standard Liquidity Facility down to 2.75 per cent,” said Lonkeng.

“We believe that these policy measures should help banks adjust their business model from lending to the government to financing business activities, as the public sector continues to deleverage,” the IMF rep said.

avia.collinder@gleanerjm.com