2013 Business Law Year-In-Review

This article provides a recap of the major laws passed last year affecting businesses in Jamaica.

Possibly the most topical legislative change has been the new Omnibus Tax Regime. For years both local and foreign investors have argued that taxation and the general business climate in Jamaica did not encourage investment which would generate growth. In response the GOJ passed laws that gave certain tax incentives (relief from and reductions in income tax, GCT, customs duty etc.) to industries that they felt would lead to growth in employment and the economy in general. This, of course, led to a hodge-potch of sector-specific tax incentive legislation. There were laws giving incentives to players in the tourism, manufacturing/export, film and cement industries among others. Different industries received different tax benefits.

In addition to these sector-specific enticements almost all the tax statutes, including those governing income tax, GCT, and customs duties, allowed the Minister of Finance, in circumstances he thought ‘just and equitable’, to waive any tax due in almost any instance. This meant that the Minister had a wide discretion, to grant a ministerial waiver to any company in relation to any transaction.

As one can imagine, this state of affairs left those businesses that did not qualify for the sector-specific tax benefits and that did not benefit from any discretionary waivers to argue that they were disadvantaged and not particularly incentivized to invest or continue to invest their capital in Jamaica. More importantly, there appeared to be no assessment done as to whether the employment and economic growth that should have been generated by these tax-breaks and waivers were actually being realized. In fact many observers felt that the opposite was true, in that these tax concessions contracted the tax base because so many businesses benefitted from some form of tax relief and only a dedicated compliant number actually carried the full tax burden. This discriminatory treatment was felt to negatively affect voluntary tax compliance as noted in the 2012 USAID report on tax reform in Jamaica.

The GOJ eventually agreed with this position and in its January 15, 2010 Letter of Intent to the IMF the government stated that it was committed to scaling back the system of tax incentives and exemptions in order to significantly broaden the tax base and reduce distortions in the system which included the cessation of the grant of discretionary tax waivers.

Fast forward to 2013 and the government has passed several laws pursuant to its Omnibus Tax Regime. They are discussed below.

The Fiscal Incentives (Miscellaneous) Provisions Act

This Act repealed several industry specific tax relief pieces of legislation which gave tax incentives to businesses in the cement, tourism, shipping, motion picture, petroleum refining, general manufacturing sectors and to approved farmers. Notable exceptions are the bauxite and free zone sectors. As is expected, the Act contains ‘savings’ provisions which allows existing beneficiaries to continue to enjoy their entitlements under those laws. However, no renewals or new applications will be entertained. These existing beneficiaries however, cannot take advantage of the new Employment Tax Credit (ETC) unless they renounce all their entitlements under the repealed laws or their entitlement period ends.

In addition to being able to take advantage of the ETC, if existing beneficiaries under the Hotel (Incentives) Act and the Resort Cottages (Incentives) Act choose to come under the new regime before July 1, 2014 then they can continue to charge their customers GCT at the reduced rate of 10%. Those that keep their entitlement under the old laws will have to charge GCT at the normal rate of 16.5%.

-Employment Tax Credit

In keeping with the theme of using tax policy to encourage compliance from all business and not just those in specific sectors, the Act creates the ETC. This amendment allows most employers to claim a tax credit in respect of the Education tax, NHT, HEART and NIS payments made in their capacity as an employer during the relevant period against income tax due on trade income and from the rental of licensed tourist accommodation. The credit that may be claimed is limited to 30% of the income tax due.

It is clear that the ETC is being used both to reward the prompt payment of statutory deductions by employers and to encourage compliance in tardy businesses. The credit can only be claimed in relation to statutory deductions that were paid on time. Furthermore, where the employer is an individual, he/she cannot claim the ETC unless their personal statutory deductions (i.e. in relation to them being self-employed) are paid up.

The GOJ to its credit appears to have been minded to impose conditions that would prevent the system being abused. No roll-over of ‘excess’ tax credit to successive years is permitted and there are provisions for a claw-back against companies that claim the ETC and pay dividends to their shareholders in the same year if the tax rate paid on the dividends was less than 10%. Also, the bauxite, free zone and group head office companies that continue to enjoy their business specific tax incentives cannot claim the ETC. Regulated companies such as the banks, investment houses and utility companies are also excluded.

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– Reduction in Corporate Income Tax

The Act amended the Income Tax Act to reduce the rate on income tax for large unregulated companies from 30% to 25% resulting in the income tax rate for all unregulated businesses being 25%. Regulated companies will continue to pay tax at 33 1/3%

– Junior Stock Exchange

The Act provided a transition period for the gradual phasing out of the Junior Stock Exchange tax incentives. Prior to the January 1, 2014 companies that listed on the Junior Market paid zero per cent income tax for the first 5 years and 50 per cent of regular income tax for the next 5 years. Those companies will continue to enjoy those benefits. Companies that list between January 1, 2014 and March 31, 2016 will be entitled to 100% exemption of income tax for 5 years only. The exemptions cease thereafter.

The Income Tax Relief (Large-scale Projects and Pioneer Industries) Act

Whereas the sector-specific tax incentives have basically been abolished, the GOJ still requires an avenue to attract major capital investment by giving them incentives commensurate with the level of their investment. Projects such as large casinos and port expansions readily spring to mind.

Therefore, given that the Minister of Finance in the April 2013 Letter of Intent to the IMF  stated that it would cease issuing discretionary tax waivers to all persons, including major investors, the Income Tax Relief (Large-scale Projects and Pioneer Industries) Act, 2013 appears designed to allow the GOJ to continue to grant the tax breaks that major investors demand but in a transparent and non-discretionary manner.

The Act provides for the Minster of Finance to designate certain projects as approved large-scale projects which would entitle these projects to specified income tax incentives.

The Minister of Finance makes the order, subject to affirmative resolution by Parliament, which designates the project as being approved and prescribes the tax incentives that may be granted to companies participating in such projects.

Under section 4 of the Act, before a project can be designated an approved large-scale project, the Minister must be satisfied that the projected amount of capital investment or jobs created under the project is the same or more than the value of the tax incentives being given. In addition, the project must be likely to make a substantial contribution to Jamaica’s economic growth and development.

When the Minister submits the proposed order to Parliament for its consideration, it shall be tabled along with a cost-benefit analysis in relation to the tax incentives that are being proposed.

This statute, therefore, contains checks-and-balances that were absent in the previous discretionary waiver process. The Minister of Finance now has to publicly disclose the cost-benefit analysis on the project and obtain Parliament’s permission before making the order.

The order will specify the tax incentives which will be applicable to participants in the approved large-scale project. This tax relief granted can be in addition to or in place of any other tax incentives that would ordinarily be applicable to the project. The order will also state any conditions relating to the designation or the specified tax relief.

After the order is granted, a prospective participant can apply to the Minister to be declared an approved participant in the large-scale project. If the application is successful, the Minister will grant a certificate of approval to the participant which will specify the tax incentives to which the participant is entitled.  Presumably therefore not all participants in an approved large-scale project will be automatically entitled to the same tax benefits and therefore the Minister appears to have a discretion, based on criteria he deems fit, to give different levels of tax relief to different participants in the same project.

The Act makes provisions for certificates of approval for participants to be amended if the Minister considers it appropriate or cancelled if the participant is found to be non-compliant. While the granting of a certificate does not require parliamentary approval, the Act requires details on all orders and certificates granted to be tabled before Parliament annually.

As is expected for a regime that obtained the approval of the IMF, there are limits on the designation of approved large-scale projects and the certification of approved participants. According to section 7, an order cannot be made for an approved large-scale project neither can a participant be approved in any year if the likely effect of such order or approval is to cause the total tax revenue being waived under the Act in that financial year to exceed 0.25% of GDP.

The Act provides for regulations to be issued to cover: the process for applying to have a large scale project approved; the process for applying to be certified as an approved participant; and application fees.

Interestingly, the Act appears silent on a minimum level of investment or a minimum number of jobs to be created in order for a project to qualify. It is expected that such details would be revealed when the regulations are issued.

The Act also allows the Minister to designate certain economic activity as being pioneer industries to allow them to benefit from specified tax incentives approved by Parliament in a process similar to that for approved large-scale projects.

Along with those two Acts, the Omnibus Tax Regime included two pieces of subsidiary legislation, the Customs Tariff (Revision) (Amendment) Resolution and the Stamp Duty (Amendment of Schedule) Order. When tabling those bills before Parliament late last year, the Minister indicated that they were designed to replace outdated laws which lacked administrative coherence and generated significant tax expenditure. Though the changes have been generally welcomed, one controversial aspect of these laws is the requirement that a local manufacturer must satisfy the Commissioner of Customs that its imported raw materials will be used in its manufacturing process in order for such goods to qualify for the productive inputs relief. Stakeholders in some quarters have called for the legislation to give the Jamaican Manufacturers Association a significant role in this process.

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The Securities Act

The mid 2000s saw the rise of the unregulated investment scheme in Jamaica. 2008 saw the spectacular collapse of at least two of those schemes. Media reports in 2013 indicate that investors are still owed approximately J$10 billion in one of the failed schemes. It can be assumed that several investors under the other are in a similar position. Undoubtedly therefore, the FSC, the business community and the general public should welcome the extensive amendments made to the Securities Act last year. A few of the changes are highlighted below.

– Outlawing Ponzi/Pyramid Schemes

A new section has been inserted into the Act that defines ponzi schemes as investment schemes that provide investors with returns derived substantially from investments made by other investors in the scheme, rather than from genuine profits. The section makes it a criminal offence for persons to establish ponzi schemes or to invite persons to join ponzi schemes. There are similar prohibitions against pyramid selling schemes.

– Investment Clubs

Private investment clubs with a maximum of 20 members are permitted provided that the club meets specified criteria, which includes it not being able to borrow from the public and it making regular filings with the FSC.

– Enforcement

The FSC’s powers to enforce compliance and investigate unlawful activities in the securities market have been considerably enhanced. These include being permitted to: apply to an RM for a warrant to search the premises of any licensee; issue public statements about suspected breaches; apply to the court for recovery of profits against a person that generated such profits in breach of the securities laws; and obtain information from holding companies when their subsidiary is a licensee.

Given that tackling financial crimes has become a co-ordinated effort globally, the amendments also provide for the sharing of information between the FSC and foreign securities regulatory authorities for the purposes of investigating securities violations abroad.

– Collective Investment Schemes

A regulatory framework has now been provided for Collective Investment Schemes in the form of the Securities (Collective Investment Schemes) Regulations, 2013. This is in keeping with the structural benchmark under the IMF agreement which required that a framework, where such schemes were regulated by the FSC, be implemented by the end of 2013.

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Revenue Administration Act

This Act was amended to make further provisions in relation to the empowerment of tax officials to apply to the courts for access to information held on taxpayers by third parties such as commercial banks and other regulated financial institutions in order to enhance tax compliance management. The amendment also contains provisions for the publication of the names of delinquent taxpayers upon the initiation of court action by Tax Administration Jamaica (TAJ).

Even before the recent changes, some businesses may already have started receiving requests from the TAJ concerning transactions, payment or accounts relating to third parties. In March 2013 the TAJ published a list of alleged delinquent taxpayers that had been brought before the courts earlier in the year.

The IMF Agreement required that the TAJ be empowered to require mandatory e-filing for groups of taxpayers and/or types of taxes. While the existing laws already empowered the Tax Commissioner General to prescribe forms he considers necessary for the various purposes of the Act, the amendment goes further as it not only allows the Commissioner General to specify the form of the return but also to require any person to periodically file returns. Pursuant to this, the TAJ announced that as of March 1, 2014 large taxpayers, with a turnover of more than five hundred million dollars ($500M), employers with over twenty (20) employees and persons filing a GCT refund return would have to file tax returns electronically as manual returns would not be accepted.

The National Security Interest in Personal Property Registry

For many years Jamaica has had one land registry where all registered land is recorded and all registered charges concerning any registered parcel of land can be found. It was a different story in relation to personal property. Personal property is basically any asset other then land. If the property was owned by a company the charge was likely to be registered at the Companies Office of Jamaica. If it was owned by an individual it may have been registered at the Island Records Office. If the asset was of a particular type such as a motor vehicle or intellectual property, regardless of the corporate status of the owner, there were likely to be other registries involved. Furthermore, in many instances, there was no legal requirement for some charges to be registered anywhere leaving third parties to deal with such property at their risk as they had no central register to search for existing liens.

Therefore the establishment on January 1, 2014 of the National Security Interest in Personal Property Registry was a significant change to the credit landscape in Jamaica in relation to non-land assets. The intention of this registry and its enabling legislation is to provide a simplified registration process for the taking of security interests in personal property and to stipulate rules to govern the priority in which such interests may be enforced. The law is thus intended to create a central electronic registry for charges over motor vehicles, furniture, intellectual property, equipment and other moveable property which may be searched by any member of the public free of cost.

Increase in RM Court’s Jurisdiction

The Judicature (Resident Magistrates) (Increase In Jurisdiction) Order, 2013 increased the civil jurisdiction of the Resident Magistrates’ Court from claims of up to J$250,000 to claims of up to J$1,000,000. It is expected that this will lead to a reduction in minor claims being filed in the Supreme Court thereby improving the likelihood of the timely disposal of substantial commercial disputes by the higher courts. It is also anticipated that additional resources will be allocated to the Resident Magistrates’ Court to allow them to effectively handle the increased number of claims this change will bring.

This article is intended to provide general information only and is not to be relied on in place of legal advice.

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