THE CONTINUAL reduction in interest rates is a welcome move in the right direction. Those responsible for this achievement are to be commended and we hope that the trend will continue. The lower cost of borrowing will assist companies, which borrow money as a source of financing, to improve their profit performance and, for the Government, it will reduce the cost of servicing our national debt. Interest rates are at a 10 year low and the Jamaica dollar continues to remain relatively stable.
TAX DISADVANTAGE
The inflow from the recently issued 2015 U.S. dollar bond should have a positive impact on the interest paid on Government's debt and our foreign exchange rate. The U.S. dollar 2005 bond, which matures on June 10, 2005 has a fixed coupon rate of 10.875 per cent tax free. The 2015 U.S. dollar bond was issued at a coupon rate of 9 per cent per annum. The interest is tax free in the hands of non-Jamaican residents. The implication of this is that Jamaican taxpayers will suffer tax on the interest received; withholding tax of 25 per cent and if the income is received by a company, additional taxes may be payable because of the higher company tax rate of 33 1/3 per cent.
Overseas investors may not benefit from the tax free status of such instruments unless the investments are made from tax- free countries or countries without a double taxation treaty with Jamaica. Where investors are resident in countries which tax investment income, the tax free status of such instruments passes taxes from Jamaica to another country, where a double taxation treaty exists. There is also the risk that Jamaican companies may repatriate profits to overseas shareholders, who then invest in such instruments and receive their interest gross overseas.
Consideration should be given to either making the interest paid on future bond issues tax free or taxable for all investors. Treaty rates could be applied to interest paid to overseas investors.
Raphael E. Gordon is the managing partner of KPMG Peat Marwick, chairman of KPMG CARICOM, and a member of the Public Accountancy Board.
