Target tax holidays to woo bold investors

Patrick Galbraith, Contributor

There is a growing sentiment among tax technocrats and government officials against tax incentives, despite the enormous economic benefits these schemes generate. The Government has made its position clear with the issuing of the press release via the Ministry of Finance and the Public Service dated November 15, 2010, which stated, "Effective November 15, 2010, no new tax holidays will be granted."

A tax holiday is a government incentive scheme that offers a deduction, exclusion, or exemption from a tax liability as an enticement to engage in a specified activity (such as investment in capital goods) for a certain period.

These tax regimes are not unique to Jamaica; in fact, many developing countries have adopted tax holidays, as a development strategy, to attract investors to targeted industries. The well-known tax holidays here are granted to 'approved enterprises' in the hotel industry, agriculture sector and the free zones and, most recent and generous, the relief granted to companies listed on the Jamaica Junior Stock Exchange.

Over decades, the Government has used tax holidays effectively to attract foreign direct investment and to stimulate growth in select industries and areas. And as a result, today Jamaica has a well-established tourism industry that can rival any in the Caribbean. The benefit of this industry to the country is enormous, as it has contributed significantly to the national development by providing direct and indirect employment and taxation revenue.

Mixed views on benefits

Agriculture, the country's largest employer of unskilled labour in the country, has also benefited from this incentive and has been able to survive despite the challenges of theft and hurricanes. Tax holidays have also encouraged investments in the free zone, an area which is now a significant employer of young Jamaicans. And as the city planners know, the renewal of downtown Kingston hinges on the continued granting of this type of incentive to would-be investors.

Despite the economic benefits, there are strong views against tax holidays. First, it is argued that tax incentives undermine the integrity and fairness of the tax structure and discourage compliance by all taxpayers. However, it is not as simple as that.

Taxpayers are discouraged to comply for many reasons, including how they perceive the Government is spending their tax dollars, the non-enforcement of the law on those who are not tax-compliant, and the burden of compliance. If this incentive is granted to investors in an open and transparent way, with public knowledge of the accepted criteria, there should not be any significant effect on the level of compliance by other taxpayers.

Second, there is the view that tax holidays cause an undesired shift of the tax burden to less-mobile tax bases such as labour, property and consumption. While this view is valid when the Government gives tax holidays to existing profitable companies, it does not hold when this incentive is provided to would-be investors who are bold enough to invest in areas where others fear to invest.

Third, it is argued that there is loss of revenue and increase in the tax authorities' administrative costs under tax-holiday schemes. While there will be added administrative costs, there is no proof that it causes loss of revenue to the Government. If one should examine the overall taxes paid by these entities, the payroll taxes generated and the multiplying effect of employment-income expenditure on goods and services that are subject to indirect taxes because of their operations, there should be an overall net revenue gain to the government coffers.

Compensate boldness

Appropriately, the sponsors of the Green Paper on Tax Reform in Jamaica propose an overhaul of the tax-incentive scheme to create an Omnibus Tax Incentive Law instead of recommending a cessation of incentives. By having this one tax-incentive law, information will be in one place and more accessible, instead of splintered around in the various legislation and ministerial orders.

With the abnormal challenges, fear and risks that permeate the society, tax holidays serve to compensate investors for their boldness. The greater these challenges are the more incentives that are required to entice investors.

At a time when the Government's aim is to stimulate economic growth to provide more jobs, it seems counter-intuitive to take a position that would adversely affect this national goal. So, rather than broadly ceasing to grant tax holidays, the Government should diligently evaluate each application, using specific criteria, to determine the possible cost vis à vis the benefit to the country, and make its decisions on that basis.

Patrick Galbraith is a chartered accountant and the director of tax and regulatory compliance at DGS Chartered Accountants and Business Advisors. Email feedback to columns@gleanerjm.com and pgalbraith@dgsja.com.