The National Budget- Top Ten Legal Issues For Your Business
As the Minister of Finance closed the Budget Debate 2012/2013 he reminded Parliament that Jamaica can only survive if we get the debt to GDP ratio on a downward trajectory. This essentially means that the government needs to collect more taxes from the people; use a lot of it to pay down the debt; and spend less on recurring and capital expenditure.
Accordingly, individuals and businesses have been called upon to contribute more to the government coffers, of course to the detriment of funding personal and corporate expenditure. But, it is this kind of sacrifice and high regard for national rather than short-term personal interest that is expected to slowly propel us to economic growth and take us out of crisis mode. In this article, I have selected ten (10) changes in law and policy that have been proposed or implemented that will affect how businesses operate in Jamaica.
The most widely noted change is the reduction in the standard rate of General Consumption Tax (“GCT”) effective June 1, 2012. Businesses will now collect, on behalf of the government, GCT of 16.5% on gross sales of goods and services, rather than 17.5%. GCT is due at the time of supply of goods and services. For businesses that offer goods and services on credit, all invoices for goods and services delivered or rendered up to May 31, 2012 are to be taxed at 17.5% even if the invoice is submitted to the customer in the month of June or later. Some businesses may also notice that they are required to pay 17.5% GCT on goods and services that they obtained up to May 31, 2012 while they are required to collect 16.5% GCT from the end user or consumer whom they supply. For example, retailer bought goods from distributor on May 20 and is invoiced for GCT at the rate of 17.5%. The retailer starts selling these goods to consumers on June 4 and collects 16.5% GCT.
Another major change that will affect most companies is the change in the income tax rate on profits that is expected to take effect on January 1, 2013. The new tax rate will be 25%, a reduction of 8 ½% in comparison to the existing rate of 33 1/3%. This 25% tax rate will not apply to regulated companies, including banks, financial institutions, telecommunications, water and light companies. This change will mean that unregulated companies will pay the same rate of tax on income as individuals. In my estimation, the effect is that companies as corporate vehicles will be more attractive to small and medium sized businesses that usually operated as sole proprietorships and partnerships.
So, companies got a benefit with one hand and a small bit taken back with the other hand when the Minister announced the adjustment in Asset Tax. Businesses will feel the effects of this when they file their tax returns on March 15, 2013. Financial institutions and securities dealers (who will not benefit from lower tax on income) will pay more tax on assets at the rate of 0.2% of the value of assets instead of the flat rate that usually applied. Other companies will pay significantly increased flat fees ranging from $5,000 to $100,000 depending on the value of their assets.
Further, with the objective of shoring up compliance and collection rates, a new concept of minimum income tax will be implemented with effect January 1, 2013. More details will be required as to the exact manner in which this system will be implemented. However, the broad framework is that all registered companies, self-employed persons (including farmers, taxi operators, shop keepers, etc who earn more than the personal income threshold), professionals (including lawyers, doctors and consultants) will be required to pay a minimum income tax of $60,000 per annum.
A fifth change that will affect businesses is that the personal income tax threshold of employees will increase from $441,168 to $507,312 effective January 1, 2013. Businesses should, therefore, look forward to making the requisite adjustments in their computerised or other payroll calculation systems.
In 2009, the Income Tax Act was amended so that no income tax was payable on dividends paid to residents by companies resident in Jamaica. This was great news for persons who preferred to finance business by equity investments rather than loans, as well as for persons who preferred to establish local companies rather than try to set up tax efficient structures by use of International Business Companies in St Lucia and Barbados. A relatively small tax of 5% is now to be re-imposed on dividends paid to residents effective June 1, 2012.
The other four policies and changes in law that I will mention are not strictly tax or revenue based measures arising from the Budget but will be important in shaping the landscape for business in Jamaica.
The Minister of Finance announced that in five years, the much talked about Junior Stock Exchange which has been regarded in many quarters as highly successful to date, will be disbanded. In five years all special tax holidays presently available will be eliminated. A lot more details will need to be published as to exactly how the JSE will be disbanded, whether a JSE will operate in some form without the special tax holidays and the implications for companies currently listed on that exchange.
It would indeed be exciting times, if and when the changes are implemented to reduce incorporation, obtaining a TRN and NIS number to a one step procedure at the Companies Office rather than the visits to three government offices now required to complete these rudimentary start-up procedures.
It would be equally exciting to see the passing into law of the Secured Obligations Act and the establishment of the registry for assets other than land which will accommodate the registration of security interests taken in these assets. It is expected that small and medium sized businesses will benefit tremendously by being able to submit collateral for loans.
Finally, the Minister of Finance announced that plans are being put in place to make loans and collateral support available to small and medium sized enterprises. This will be administered through the Development Bank of Jamaica.