Pension funds, Jamaican Government negotiating bond swap

The Golding administration is considering a scheme to pay, with medium- to long-term bonds, billions of dollars in unreimbursed withholding tax it owes to pension funds.

But the finance ministry, now hiding behind the supposed constraints of the Revenue Administration Act, has declined to either confirm the proposal or the extent of the current arrears.

"We will send the previous response," Courtney Williams, of the finance ministry's economic unit that monitors such reimbursements, told the Financial Gleaner last week.

Williams' remark was a reference to separate responses in October to different Financial Gleaner reporters by a political aide to Finance Minister Audley Shaw and the ministry's information office that disclosing information about size of the arrears, the broad groups to which it was owed and for how long, "is not permitted" under the law.

Williams insisted that any information to be disclosed would have to be done at the level of Financial Secretary Dr Wesley Hughes. But he, too, had previously punted on the queries.

However, International Monetary Fund documents, covering its latest review of the island's economy as part of the quarterly tests required for the continuance of the fund's US$1.3-billion loan to the island, suggested that in March the overall tax refund arrears was J$20.3 billion, followed by a small downtick of half a billion dollars in June quarter.

Pension industry sources say fund managers have proposed, and the Government is actively considering, swapping the arrears for interest-bearing bonds. The tenor of the bonds and their coupon rates are the subject of talks among pension funds, of which there are about 10, and with the Government.

It was not clear from the available figures what proportion of the withholding arrears was owed to superannuation schemes, managers of individual retirement accounts (IRAs), ordinary exempt individuals or firms due refunds for any of a wide number of reasons.

"The vast proportion of the arrears would be owed to pension funds," said a senior pension-sector official, who requested anonymity because of the sensitivity of current negotiations with the Government.

Back in September 2008, Shaw said the Treasury owed pension funds J$7 billion, and that he would have reduced the debt substantially by the close of that fiscal year.

Jamaicans pay income tax at 25 per cent on interest earnings, which banks are required to withhold and turn over to the Government. But pension funds, which are exempt from the tax, are, broadly, supposed to be reimbursed within 45 days.

That time frame has, for several years, been kept only sporadically, causing angst between the Government and pension-fund managers, who complain about the negative effect on their cash flow and returns to contributors.

Under Jamaica's standby facility with the IMF, these refunds are deemed to be in arrears if they remain unpaid 90 days after the due date. The agreement also calls for elimination of all government payment arrears by the end of the 27-month life of the facility - an undertaking that is apparently proving strenuous for the administration.

It is in that context, Financial Gleaner sources say, pension-fund officials apparently floated the concept of the bond, with some cash payouts, to Viralee Latibeaudiere, the director general for tax administration, during recent meetings.

These bonds, the industry appears to have proposed, would be for between five and 30 years, with interest on them "backloaded" so there would no payment during the life of the IMF agreement.

It was not immediately clear, however, whether the industry would demand an interest premium for the delay in interest payments, or how the issuance of the bonds would affect the government's targets under the IMF programme.

In mid-October, Hughes had told the Financial Gleaner that the government was on a specific programme to pay down the tax-refund arrears and keep current on new obligations.

"We are not building up any arrears," he said, but conceded that the "funds are not readily available" to clean up the books. The finance ministry was also being thorough in ensuring that all reimbursements were legitimate, he said.

At the time, however, Hughes said he did not have the specific figures on the arrears and referred the Financial Gleaner to Latibeaudiere who, in turn, referred the newspaper back the finance ministry for the information.

But, she said: "The arrears must go down and we are looking at ways to discharge all the arrears."

Back at the finance ministry, however, getting the broad data requested - which Hughes appeared to have no problem delivering - proved difficult.

"The Revenue Administration Act bars the MOF (Ministry of Finance) from disclosing the info — even to Parliament," Shaw's aide said in an email to one reporter.

A similar response came a fortnight later from Florene Wilks, one of the ministry's information specialists.

However, the Revenue Adminis-tration Act, at section 17H, appears to concern itself primarily with the leaking of information or documents about an individual's or company's income or tax status, rather than broad policy issues.

A request to the ministry's Information department for the specific section of the act prohibiting the release of the information went unanswered.

business@gleanerjm.com