Dr. Omar Davies, Minister of Finance and Planning, was jovial as he opened the 2007/08 Budget Debate in Parliament. Beside him is Prime Minister Portia Simpson Miller, and in the background State minister of Finance, Fitz Jackson, both of whom are tickled by Davies' antics. - Rudolph Brown/Chief Photographer

Minister of Finance Dr. Omar Davies stated on Thursday during the opening of the 2007/08 Budget Debate that to achieve a 14 per cent improvement in revenue collections "will require a sustained, aggressive compliance programme."

The tax revenue projection is $215.9 billion.

"I have instructed the financial secretary to work closely with the director general of tax administration in order to meet our target," said Davies.

To achieve the projected increase in tax revenue for the current fiscal year, it is the Government's intention to enforce compliance by conducting forensic and large case audits, with an emphasis on arrears and improvement in the operational efficiency of customs.

The revenue department's definition of a large case is a taxpayer with a turnover of at least $0.5 billion and a business structure which includes a group of companies, among other things.

The minister promised that non-compliant persons will find it increasingly difficult to do business with the Government.

REVENUE MEASURES

The minister tabled a ministry paper detailing three new taxation measures for financial year 2007/08 and announced, among other things, that the tax-free threshold would not be increased as indicated in the 2005/06 Budget presentation.

The new tax measures are:

Special consumption tax (SCT) on cigarettes:

It is proposed to increase the specific SCT on cigarettes by approximately 20 per cent effective April 13, while retaining the current structure of the tax. The specific tax is to be increased from $1,920 to $2,300 per thousand cigarettes.

The ad valorem tax regime remains the same.

However, since the price of cigarettes currently being imported is below the floor price of $4,338.13 per thousand cigarettes, the ad valorem portion of the tax is not being applied.

Davies stated that the measure is not expected to result ina further rise in the price of cigarettes which was recently increased. The measure is expected to yield $500 million.

Environmental levy:

The environmental levy that was announced in April 2003 was not implemented, but the Government is now proposing a levy of 0.5 per cent of the CIF value of all imported goods, effective June 1.

The minister announced that in arriving at this proposal, several meetings were held with various interest groups.

The levy will not apply to goods that are imported by government, diplomats, international organisations, and passengers (up to the duty free allowance of US$500).

The ministry paper states that only firms will be able to claim the levy as a deductible expense, and only where their income tax returns are filed by the due date of March 15.

This measure is expected to yield $1.2 billion.

Although the reference above is only to firms, we believe that the intention must be that the levy will be a deductible expense in relation to any goods utilised in a taxable activity.

There has been no indication as to whether the levy will only be an additional tax on the CIF value of imported goods or whether it will impact the base for the calculation of customs duty and/or GCT.

Customs user fee:

The minister announced that it is the Government's intention to alleviate the negative effect of the customs user fee on domestic producers, particularly small and medium-size operations.

However, the ministry paper merely states that, effective June 1, 2007, tax-compliant firms will be allowed to claim the customs user fee as a deductible expense up to a maximum of $1.5 million for the income tax year of assessment in which it is paid; where the income tax return is not filed by the due date of March 15, no deduction would be allowed in respect of the customs user fee paid.

The customs user fee now forms a part of the cost of goods sold and therefore would be claimed as a deductible expense in the normal course of business.

We suggest that in order to achieve the minister's stated objective, the new provision would need to be a tax credit and not a deductible expense as announced.

ENERGY-EFFICIENT GOODS

Effective July 1, 2007, there will be a specific tax regime for hybrid motor vehicles. The tax on such vehicles will be the lowest current aggregate level of approximately 63 per cent of the taxable value.

Import duties would otherwise have been determined by the cc-rating and type of vehicle which could have resulted in duties of 180 per cent of the taxable value.

Davies further announced the Government's intention to expand the list of energy-efficient goods which qualify for import duty exemption. However, he mentioned that a practical problem relates to the difficulty faced by customs officials in identifying items which qualify for the exemption.

He stated that further work needs to be done, after which the changes will be effected.

PAYROLL TAXES

The Government proposes to consolidate the payroll tax deductions and rationalise the structure for the deductions to allow for the allocation of additional resources to areas such as health and education.

The consolidation would result in payments being made to one entity and would alleviate the cumbersome practice of employers having to file and pay taxes at different agencies.

It was suggested that the cap on NIS contributions be lifted.

The NIS contribution by employers and employees are both presently capped at 2.5 per cent of $500,000 per annum.

The Minister in his speech mentioned in relation to the consolidation of payroll taxes that "16 per cent of payroll [would be] paid over to one entity."

As the present structure of the payroll taxes totals approximately 13 per cent in employee and employer contributions, one wonders whether with the lifting of the cap on NIS contributions there will be an attendant change in the NIS contribution rate for employer and employee to 1.5 per cent each - assuming that 'lifting' means a removal and not an increase in the cap.

PENSIONS & ALLOWANCES

The Ministeremphasised the need for individuals to be able to receive sustainable pension payments. He expressed concern that individuals in the tourism sector and private security industry were not contributing sufficiently towards this, and that the Government itself would be unable to continue to fund the present Defined Pension Scheme for civil servants.

He announced that it was the intention of Government to introduce a Defined Contribution Scheme for new entrants in the civil service.

Davies said his Minister of State would take personal charge of deliberations on the modalities of changes which need to be made in the taxable compensations of special interest groups, including the tourism sector, and the impact this would have on their take-home pay, social security contributions and benefits, and future pension packages.

Any future increase in the tax-free threshold will depend, inter alia, on the outcome of these deliberations.

The Minister also reaffirmed the Government's commitment to refund tax deducted at source from interest paid to pension funds within 45 days of such claims being made. However, this would only apply to duly registered pension schemes qualifying for tax-free treatment.

This is a reprint of KPMG Jamaica's newsletter Tax Newsflash issued April 12, 2007. Email feedback to: jmallen@kpmg.com.jm