Jamaicans typically say that “nothing is certain in life, except death and taxes.” While corporate income tax is a significant contributor to the Government’s revenue, it often places a heavy burden on domestic and overseas companies alike. This burden leads multi-national companies (MNCs) to set up operations in jurisdictions that have low-income tax rates which in turn spur governments quite like our own, to offer incentives aimed at attracting foreign investment to increase economic growth.
A prime example of a regime used to attract investment is Jamaica’s Special Economic Zones Act which offers a 0% income tax rate on profits derived from rental income, and a 12.5% income tax rate on chargeable income from the conduct of a trade, business, profession or vocation within a special economic zone. The latter rate can be further lowered to 7.75% through tax credits.
The competition between countries seeking to attract investments through low-income tax rates as incentives , has become fierce over the decades to the extent that it is now referred to it as the “race to the bottom”. The race to the bottom in parallel with globalization and advancements in the digital economy has effectively allowed a number of companies to offer services that are not captured by existing tax law. To address those loopholes in the international tax system and to improve tax transparency, there have been a number of reforms to the international tax system.
The Organisation for Economic Co-operation and Development’s (OECD) Two-Pillar Solution
One of the crucial reforms has been led by the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS) and to this end, the Inclusive Framework which includes Jamaica, agreed to a two-pillar solution in 2021 to ensure that MNCs pay a minimum level of income tax in each country that they operate.
Through Pillar I, a new method to allocate profits to countries where large MNCs may have significant business but limited (or no) local operations was established. Through Pillar 2, a global minimum corporate income tax of 15% for qualified MNCs was agreed. The primary focus of this article will be on Pillar II which is expected to impact the income tax rate applied to certain companies operating in Jamaica.
Pillar II in a Nutshell
Qualified MNCs are entities whose annual consolidated revenue equals or exceeds of Euro $750 million (globally), excluding NGOs. Small entities and solely domestic companies will therefore not be affected directly by the Pillar II solution. Companies that however operate in more than one jurisdiction or have intentions of expanding their businesses may fall within Pillar 2 as their revenues increase, they merge with other companies, and they expand to countries which have different income tax rates.
In practical terms, when the solution is implemented, qualified MNCs will need to calculate their effective tax rate for each jurisdiction where they operate and pay a top up tax for the difference between those effective tax rates and the 15% minimum tax rate. The top up tax will be charged in the country, which is the ultimate parent of the MNC, unless Jamaica makes adjustments to its low-income tax rate incentives.
The Impact of Pillar II
In 2021, the Institute of Chartered Accountants of Jamaica reported that approximately 12 MNCs which operate in Jamaica will be affected by the proposed global minimum tax rate of 15%. Those companies, and any others who qualified since the performance of that 2021 survey, should carefully consider that the implementation of Pillar II will directly reduce their income and profit. For some MNC’s this may impair liquidity enough, that it affects the viability of their operations in Jamaica.
Additionally, financial institutions which provided loans to qualified MNC’s that fall within Pillar II will need to reassess their existing facilities and financial products to ensure their future viability. With the implementation of this global change, the business-market for financing will be affected by the necessary adjustments made by MNC’s who are forced to pay higher income tax rates or elect to close foreign operations instead.
This global change will likely reduce Jamaica’s appeal to some MNCs and foreign investors, since they may no longer be able to benefit from preferential corporate income tax rates, at 12.5% or otherwise. This will impact employment rates, the gross domestic product, and the growth of the economy if it is not managed properly. The Government of Jamaica will therefore need to revisit tax incentives and consider the introduction of more non-fiscal incentives to attract foreign investment.
On the other hand, the global minimum tax rate may lead to an increase in revenue for the Government once adjustments are made to the existing income tax legislation, and to tax-incentive policies, to align with the minimum 15% requirement. The Government may be incentivised to make those adjustments, even though they may discourage foreign investment, to avoid having the MNC’s parent country benefit from implementing the top-up tax mechanism to cover the minimum threshold that was not met locally. If those changes are to be made, the Special Economic Zones Act and other tax-incentive legislation will also face adjustments.
While the OECD’s rules are aimed at increasing the tax burden on various high-value MNCs, it also has the potential to shift the allocation of profits in specific economic arenas, and bring about measurable impact on national revenue, and tax policies and law in Jamaica. When these changes are implemented, they are expected to affect many MNCs directly and some local/regional companies indirectly by reshaping the business and investment landscape in Jamaica and the Caribbean.
MNCs, financial institutions, investment firms, hedge funds, and SEZ companies, would be wise to consult their tax advisors and Attorneys to determine whether these changes in the international tax regime will affect their business. To delve deeper into this topic, DunnCox Attorneys-at-Law is hosting a seminar entitled “Beyond Borders: Implications of International Tax Reform on Business in Jamaica” on July 27, 2023, at the Jamaica Pegasus. Speakers include Dr. The Honourable Nigel Clarke, Minister of Finance and the Public Service, along with representatives from TAJ, JAMPRO, Ernst & Young, and the Jamaica Special Economic Zone Authority. Visit www.dunncox.com to register or obtain further details.
This article is intended to provide general information only and is not to be relied on in place of legal advice.
Jonathan Morgan and Chantal Bennett are Attorneys-at-Law at the law firm DunnCox. You may contact them at jonathan.morgan@dunncox.com or chantal.bennett@dunncox.com.