Keith Collister, Gleaner Writer
DENNING
JAMAICA'S FAILURE to encourage entrepreneurship and growth is the central focus of a new report by the Inter-American Development Bank (IDB) on the island.
The report, 'Jamaica - A Private Sector Assessment', analyses the issues that affect entrepreneurship, innovation and investment in the local private sector. It concludes that a perverse incentive structure currently exists for businesses in Jamaica, particularly small businesses.
This structure is due to the lack of access to capital and loans, particularly for small and medium-sized enterprises, the lack of enforcement of contracts, the high transaction costs involved in business registration and, of course, taxation, where local investors face taxes of between one third and 50 per cent on their profits, assuming they pay their taxes.
OPERATING IN INFORMAL SECTOR
In their preliminary review of the IDB report, Indianna Minto of the University of the West Indies-based Jamaica Economy Project identified the current tax structure as forcing a large number of businesses to operate in the informal sector in order to avoid contact with the state and its apparatus, given the costs involved in such contact. Whenever it appears that there is more to be gained from operating outside the formal sector than from operating legally, the Government faces an uphill task in creating the incentives to bring these businesses into the formal economy.
This issue of incentives would appear to be one of the main reasons why small businesses do not grow and why many Jamaicans of an entrepreneurial bent go to the United States to seek opportunities there rather than using their talents in Jamaica. Clearly the country pays dearly for this in terms of foregone growth and employment. Moreover, it is part of the explanation why the country has such a large informal sector which, the IDB estimates, has grown substantially over the past decade to around 40 per cent of the economy.
TAX POLICY
This makes tax policy one of the critical issues Jamaica must get right if it is to raise growth rates. There is growing concern that Jamaica's system of very high corporate tax rates, particularly for small companies, which exists side by side with an extensive set of tax exemptions and other privileges, is harming the long-term prosperity of the country. We clearly need to take note of the success of a number of countries that have reduced or abolished incentives, while lowering and simplifying their corporate tax structure.
At the Gleaner's Tax Forum in March this year, Brian Denning, tax partner at PricewaterhouseCoopers, pointed out that the system of taxation in Jamaica had evolved on a piecemeal basis, which had resulted in many distortions in the economy. Different companies operating in the same sectors of the economy face vastly different tax structures. The extent of the problem is highlighted in a recent study of Jamaica's tax system by Georgia State University. This study, which was ultimately included in the Matalon Report, uncovered over 200,000 different tax incentives.
TAX GIVEAWAYS TO FOREIGNERS
Mr. Denning indicated
that some overseas investors were benefiting from complete freedom from taxes
not only in Jamaica, but elsewhere. In other cases, foreign investors come from countries where investors only have to pay taxes to their own governments on their overseas profits to the extent that they do not pay taxes on such profits in the countries in which they invest. By giving tax holidays to these investors, Jamaica is therefore giving away tax revenues to foreign governments.
TAX BREAKS COMPENSATE FOR DIFFICULTY OF DOING BUSINESS
While it is true that many other countries in the Caribbean and elsewhere offer tax breaks to investors and Jamaica is in competition with these countries, Hunt Howell, an economist at the Inter-American Development Bank, points out that most of these countries, like Jamaica, are very high cost places in which to do business. "It is as if these countries are saying 'yes, it is difficult to do business here, but we will give you a tax break to offset this". Mr. Howell said, "Jamaica could compete far more effectively with other countries that are trying to attract foreign investment if it became a much lower cost place in which to do business." Mr. Howell's views are in line with my own contention that "The existence of tax incentives is a tacit admission that taxes are too high".
The alternative to tax holidays combined with high taxes on older and small businesses is a radical change in the tax system that would sharply reduce the overall tax rate but make all businesses, domestic and foreign, pay it without allowances or deductions. At the tax seminar, Mr. Denning pointed out that Jamaica will soon be required to change its tax system anyway to bring it into line with WTO obligations. For example, incentives for the goods-producing export sector must be withdrawn by the end of 2007.
IRISH TAX MODEL
Mr. Denning suggested that the tax model adopted by Ireland was a good example of how tax policy evolved to meet both national requirements and international obligations. Ireland's company tax rate is 12.5 per cent across the board. Ireland introduced this low rate whilst, at the same time, greatly simplifying business regulation and procedures. If similar steps were adopted by Jamaica, it would be of great benefit to Jamaican businesses of all sizes and ownership structures.
"Brian's comments are I believe entirely consistent with the findings and recommendations of the 2004 Tax Policy Review Committee and there is very little in them with which I would disagree," said Mr. Joseph Matalon, chairman of the Tax Policy Review Committee. "For a small open economy such as ours, operating as we do within an increasingly global economy, fiscal policy is one of the few remaining levers through which any government can effectively influence economic activity. It would stand to reason therefore, in the particular circumstance of Jamaica's crushing debt burden, that effective fiscal policy design and implementation ought to be of paramount concern."
Mr. Matalon added that "I concur also with Brian that an early review of existing tax incentive legislation is critically important. This was a specific recommendation of the committee's report which also included a draft Terms of Reference for such a review."
