Roy Collister, Conributor
COLLISTER
A MINISTRY Paper which accompanied the Minister of Finance's 2005 Budget Presentation indicated that, with effect from 1 January 2006, businesses would only be able to carry forward tax losses for five years, rather than indefinitely as is the case at present.
In effect, the Minister was turning the clock back almost two decades as, prior to 1 January 1987, the Income Tax Act placed a similar five year limitation on the carry forward of tax losses.
This legislation had been in force since the colonial era and had in fact been copied from the then British tax legislation. Thus, it could be argued that the Minister was turning the clock as far back as colonial times.
The original Tax Reform Committee, which was established in the mid-eighties and of which I was chairman, gave considerable thought to the issue of the limitation on the carry forward of tax losses. The Committee (which I shall refer to as the Collister Committee to distinguish it from the Matalon Committee) concluded that there was no basis for such a limitation and recommended to the then Minister of Finance that it be removed.
Accordingly, with effect from 1 January 1987, the Income Tax Act was amended to enable losses to be carried forward indefinitely. Thus, at the same time as he was announcing the recommendations of the Matalon Committee, the Minister of Finance was reversing the recommendations of the earlier Collister Committee. This is particularly ironic in the light of the fact that Professor Roy Bahl, the leader of the Matalon Committee's advisory team, along with a number of the members of his team, had also been advisers to the Collister Committee, of which Mr. Matalon himself had been a member.
Moreover, it should be noted that Trinidad and Tobago permits the indefinite carry forward of losses. Thus, just as we are entering into the CSME with its implications for the harmonisation of economic (including tax) policy, we are re-introducing this restriction which will put Jamaica out of step with Trinidad.
JUSTIFICATION
In the light of the above one might well ask what is the justification for this retrograde step. The obvious response would be that it is intended as a revenue generating measure. If this be the case then circumstances have changed significantly since 1986 when the proposal to permit losses to be carried forward indefinitely was under consideration by the Collister Committee. At that time, when the Roy Bahl-led advisers were asked what would be the adverse effect on tax revenue of implementing the proposal, their response was that it would be 'minimal'.
It could be argued that, even without the re-imposition of the limitation on the carry forward of tax losses, Jamaica's tax legislation is unduly harsh in its treatment of businesses making losses. The reasons for this are as follows:
In Jamaica there is no provision for group relief in many modern tax administrations, where a member of a group of companies incurs a loss, the group is entitled to net off this loss against the profits earned by the other group companies in arriving at the group's taxable profit.
Clearly, this is only fair as otherwise the profit figure on which the group would be paying tax would exceed the profit actually made by the group to the extent of such loss. To my knowledge, over the past 35 years, numerous representations have been made by the private sector calling for the introduction of group relief. However, although in the past undertakings have been given by several Ministers of Finance to pass legislation to grant group relief, no such legislation has been enacted.
GROUP RELIEF
This is despite the fact that no lesser person than Michael Manley, in a Budget speech in the late seventies, announced that group relief was to be introduced. Moreover, group relief was one of the recommendations of both the Collister and Matalon Committees. Finally, both Barbados and Trinidad and Tobago grant group relief. Thus, failure to implement this recommendation means that another opportunity to move towards greater harmony in tax policy in the CSME has been missed.
In Jamaica there is no provision for terminal or carry back losses. In some countries, such as Canada and the UK, when a business ceases, tax losses may be carried back for three years. Again, the Collister Committee ( and also the Matalon Committee) recommended that the Income Tax Act be amended to allow a three year loss carry back upon termination of a business. This, together with unlimited loss carry forward, was seen as providing a longer averaging period for tax and, therefore, as a way of moderating the tax disincentive inherent in riskier lines of business.
Anti - avoidance provisions concerning the use of trading losses - Sections 13(5) (a) and (b) of the Income Tax Act state that, if within any period of 3 years of a trading loss being claimed by a corporate body, there appears to the Commissioner of Income tax to be both a change in the control of the company and a major change in the nature or conduct of the business carried on by it, then the deduction of the loss incurred before the change may be disallowed.
The provision also applies where the business has become small or negligible and there appears to the Commissioner to be a change in control prior to a major upsurge in business. The purpose of these provisions is to make it difficult for the owners of a business which has sustained losses from recovering some of their losses by selling their company to another entity, which is in a position to use up those losses.
This is why the re-introduction of the limitation of the carry forward of the tax losses is so harsh - a business which has experienced several years of losses, faced with the alternatives of "Use the losses or lose them" may not have time to get back on its feet before losing the losses. Moreover, it may not even have the opportunity to recover some of the losses by means of a sale of these losses, because of the anti-avoidance provisions referred to above.
The anti- loss environment inherent in the tax system discourages companies undertaking new and risky ventures. Moreover, when they do undertake such ventures, the system encourages companies not to create separate companies but rather to make any new venture a division of an existing profitable business. This is undesirable because
Businesses should be organised within the structure best suited to their operations rather than using whatever vehicle may be the optimum for tax purposes, but which may not be the most efficient from an operational standpoint.
An entrepreneur setting up a new business is unlikely to be able to operate the new business as a division of another business. Thus, the re-introduction of the limitation on the carry forward of tax losses discriminates in favour of the large established business rather than the small man, especially in the case of a start up venture. In the USA, new employment is not being generated by big business which, in the main, is laying off workers but rather in small business. Given that the problems of Jamaica are to a large extent attributed to unemployment, should we therefore really be turning further the screws of a tax system, which already discriminates against small business, by re-introducing the 5 year limitation on the carry forward of tax losses? Certainly this is not the stated intention of the Minister of Finance who, in a recent radio interview, when asked what would be the distinguishing feature of a Davies-led Government replied "The development of small and medium sized businesses."
In the light of the above, it might well be asked what is the justification for this harsh treatment of businesses sustaining losses, which by definition are the businesses in greatest need of relief? It might have been expected that the justification for the decision to reduce the number of years losses can be carried forward from perpetuity to 5 years would have been spelled out in Ministry Paper 25, which accompanied the Minister's Budget Presentation. Surprisingly, this did not prove to be the case - the measure was simply referred to as part of the rationalisation of the Corporate Income Tax structure. In short, the "rationale" for the "rationalisation" was not explained.
However, at a recent meeting held at the Ministry of Finance and attended by representatives of both the PSOJ and the Montego Bay Chamber of Commerce some light was shed on the issue. This meeting was convened to discuss a letter written to the Minister of Finance by the President of the Montego Bay Chamber of Commerce protesting at the decision to cap carry-forward losses. It is understood that at that meeting a senior Ministry official justified the measure on the grounds that it was a recommendation of the Matalon Committee.
As I had no recollection of seeing any such recommendation in the Matalon Committee Report, I spoke to Joe Matalon himself on the issue. Joe confirmed that there was no such recommendation in either the Report itself or even the Appendix thereto. It would therefore appear that the decision to reintroduce the five year cap on carry forward losses was based on the incorrect assumption that this was a Matalon Committee proposal. Clearly, given that the measure was based on this false premise, it should be withdrawn forthwith
Roy Collister is the Chairman of the Economic and Taxation Committee of the Jamaica Chamber of Commerce.
