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Debate on a Bill to amend the Income Tax Act began in the House of Representatives yesterday (Oct. 10). Finance and Planning, Minister Dr. Omar Davies, who piloted the Bill, said the proposed amendments to the Act sought to accomplish six objectives.
These amendments, he announced, included the removal of the tax credit granted to a corporate body on the issue of bonus shares; a requirement that tax-free long-term instruments be kept in Jamaican currency; prescribed persons and institutions need to obtain the approval of the Minister of Finance in respect of the tax-free instruments prior to them being offered to the market; and increases in the rate of premium tax on premium income from 1.5 to three per cent for insurance companies and a move from two to four per cent for non-regionalised insurance companies.
Meanwhile, the rate of tax on investment income for life insurance companies will be increased from 7.5 to 15 per cent; and the taxes presently being collected under the Provisional Collection of Tax Act will be made permanent.
Addressing the matter of the withdrawal of tax credit on bonus shares, the Finance Minister recalled that in 1994, there was an income tax incentive, which allowed for a 25 per cent tax credit to companies on bonus shares.
Dr. Davies said the tax credit was “introduced to strengthen the financial base of companies given the relatively high cost of loan financing which then obtained.our objective was to assist companies which had difficulties in obtaining working capital and they could therefore use this to finance themselves from profits rather than from loans.”
Continuing, he said “With the reduction in the tax, the government was making a contribution to providing them with working capital.”
Against the background of the numerous local and foreign-owned companies which have since listed on the Jamaica Stock Exchange and with the elimination of tax dividend income, the Minister said there was then no reason to give two benefits.
“The Bill seeks to remove the income tax credits towards the company’s tax liability on the issue of bonus shares and the incentive is for companies to go public whereby the tax on dividends has been eliminated,” he noted.
Of the proposed amendment that tax-free, long-term instruments be held in Jamaican currency, it was noted that such deposits or investments must be held for a minimum of five years without withdrawal from the principal sum.
Highlighting the other stipulations which were initially made applicable to long-term instruments, Dr. Davies explained that “the aggregate amount deposited or invested in any one year of assessment would not exceed a million dollars; a maximum of 75 per cent of the interest accrued in any year of assessment could be withdrawn; the amount deposited or invested is not transferable except on death or bankruptcy of the depositor or investor, and neither is it assignable or available as collateral”.
The Minister further pointed out that information on such accounts was also previously required to be supplied to the Minister by the prescribed persons.
Deficiencies, nonetheless arose, and Dr. Davies explained that after the initial requirements were implemented, “it was discovered that the investment houses were not explicitly obliged to seek the Minister’s approval of the product before it was offered to sale, and there was no requirement for the prescribed person to inform the Minister of any changes in the status of the deposit or investment which would allow the interest income to lose the exemption.”
Accordingly, he told the House that the amendment being put before the House “is to ensure that prior approval is gained before the product is offered for sale and for the Minister to be advised of any changes in the investment.”
He stressed that current legislation did not specify the currency of the long-term saving to which the exemption would apply, and therefore the Bill sought to make it clear that the exemption would apply only to long-term investments which are held in Jamaican dollars as it was never the intention to offer the incentive for incentive kept in foreign currency given the potential to generate instability in the foreign exchange market.
“The amendments here will streamline and refine the system bearing in mind our experience,” he noted.
Turning to the taxation of life insurance companies, Dr. Davies stated that as part of the tax measures to finance the 2003/2004 Budget, it was proposed to widen the base of the General Consumption Tax (GCT) and as a result, GCT was imposed on insurance companies.
Following strong opposition by insurance companies that argued the imposition was related to taxing savings, the Ministry of Finance considered the representation by the insurance industry and it was agreed that the GCT on life insurance premiums would be withdrawn.
Instead, it was decided that an increase in the rate of tax applicable to investment and premium income would be assigned.
“The Bill now seeks to provide for, in the case of life insurance companies, the tax on investment income will be increased from 7.5 to 15 per cent, and the tax on premium income will be increased from 1.5 to three per cent, and in the respect of non-regionalised life insurance companies, the tax on premium income will be increased from two to four per cent,” the Minister said.
He further pointed out that provision has also been made in the amendments to exempt life insurance premium from GCT.
The Finance Minister reiterated that “these amendments have been put in place in order to rectify certain deficiencies.and to make the way clear for giving permanent status to the changes outlined.” Debate on the Bill was postponed until a future sitting to allow Opposition Spokesman on Finance, Audley Shaw to make his contribution.