EDITORIAL - Carefully craft, explain bank transaction tax

In the face of the outcry against his proposed tax on banking transactions, Peter Phillips, the finance minister, now proposes to raise most of the foregone $2.5 billion by applying the general consumption tax (GCT) to premiums paid by Jamaican residents to foreign insurance companies, as well as the payment for services for which foreign persons/companies are contracted. Rightly, premiums for re-insurance arrangements are exempt from the tax.

We wish Dr Phillips success in collecting the money. For if he fails, it means that the finance minister will have to fashion other means of raising the money, or slash the Government's proposed spending, which is already tight, by the amount of the shortfall.

His space is constrained by an over-large national debt, whose containment requires bringing order to the country's fiscal affairs, the strategy for which includes running a primary surplus of 7.5 per cent of gross domestic product, in accordance with Jamaica's economic support agreement with the International Monetary Fund.

strategic retreat

What is now proposed will prove far less efficacious than the one-tenth of one per cent, or a tenth of a penny on the dollar, that most Jamaicans would have to pay on their bank withdrawals, against which they rebelled. Dr Phillips, therefore, should see it as not a permanent defeat, but a strategic retreat from which will be launched a new, properly articulated campaign.

The replacement takes are likely to prove problematic. It is not clear from the minister's statement to Parliament last week whether, as with premiums to foreign insurers, the GCT on payments to foreign services providers, is meant to be withheld at source. The unlikely alternative would be to ask foreign individuals/entities to remit the GCT to Jamaica, which raises the extrajurisdictional application of Jamaican law.

GCT on premium income

Further, Dr Phillips did not indicate what portion of the overall $2.3 billion he expects to get from the GCT tweak will come from its application to payments for services. Neither did he indicate the formula for calculating the potential yield. But it can be assumed that the greater portion will result from the GCT on premium income.

If the minister expects to raise, say, J$1.5 billion, from the 15 per cent GCT on foreign insurance payments, that would assume that, apart from re-insurance, Jamaicans send abroad about J$10 billion annually to pay for coverage on insurance policies, some of which, Dr Phillips argued, was structured as tax avoidance schemes in captive insurance companies.

Whatever the true figures, these measures, like with most other taxes, will require an army of bureaucrats to enforce, without ever fully closing all the loopholes.

The bank transaction tax, on the other hand, is almost avoidance-proof, efficient and cheap to enforce, with the capacity to bring into the tax net those most able to evade taxes. This efficiency means that low rates can be applied to raise a lot of money. In that respect, a marginal uptick in a withdrawal tax could provide the Government to, for instance, lower the rate of GCT.

Dr Phillips has a credible case to make if it is carefully crafted and explained without emotion and not in a last-minute rush. He may also find it useful to get advice from Marcos Cintra, the Brazilian proponent of bank transaction levies, even though in the context of a single tax regime.

The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.