WHY JAMAICA URGENTLY NEEDS TO REFORM ITS TAX CODE

by Trevor H. Francis

Jamaica’s Tax Regime does not encourage compliance.  It has failed, and continues to fail, to identify massive amounts of businesses operating outside of the country’s tax net.  To compensate for that failure, it appears to me and many of my colleagues that compliant taxpayers are unnecessarily targeted for audits by the Tax Administration Jamaica (“TAJ”). This inefficient tax system is now exacerbated by an important  agreement with the U.S. which operates unfairly in favour of the US government although through no fault of their own. Urgent reform is needed to make the system more equitable and to level the playing field.

Within the last five years, the government of Jamaica entered into a cross-border tax compliance agreement with the U.S.  That agreement is assisting the U.S to operationalize its biggest global tax compliance initiative in its history.  That initiative is called the “Foreign Account Tax Compliance Act” (“FATCA”).  FATCA was signed into the U.S Tax Code in 2010 by President Obama.  It is designed to combat tax evasion by “U.S Persons” (i.e: US Citizens, Residents Aliens (Green Card Holders), and others) through their use of offshore accounts and investments.  FATCA is an income tax information reporting regime that imposes a “withholding tax” on financial institutions for non-compliance.

The government of Jamaica agreed to make FATCA effective in Jamaica on July 1, 2014.  Starting in 2014, FATCA requires Jamaica’s financial institutions (such as: our local banks, credit unions, building societies, stock brokers, investment institutions, pension funds, and insurance companies, etc.) to provide certain information about all their clients who are “U.S Persons” to the TAJ, which then reports that information to the Internal Revenue Service (“the IRS”).  The penalties for the financial institutions which do not cooperate with the FATCA requirement are extremely punitive, and financially costly. 

US Indicia of Individual Accounts at Our Local Financial Institutions

Jamaica’s financial institutions are required to use the following identification criteria of their customers (account holders) to determine if they qualify as “U.S Person” for reporting on them to the IRS:

• A US place of birth;
• A current US resident or mailing address;
• A current US telephone number;
• Standing instructions to pay amounts from a foreign account to an account maintained in the United States;
• Power of attorney, or signatory authority, granted to persons with US address; or
• A U.S. “in-care-of” or “hold mail” address that is the sole address with respect to the account holder.

Will Jamaica and Jamaicans benefit in any significant way from that U.S cross-border tax compliance agreement? 

Absolutely not.  In fact, many Jamaicans who are classified as “U.S. Persons” are now under the jurisdiction of the U.S for tax purposes, due primarily to the FATCA agreement.  Many of them are not even aware that their business banking and investment transactions (locally and abroad) make them “U.S. Persons.”  But they should be aware, because “U.S. Persons” caught evading U.S taxes could be extradited to the U.S on felony charges of tax evasion.

To be fair, Jamaica is not the only country which entered into the FATCA agreement with the U.S.  However, I will hazard a guess that the governments of many of those countries, including the government of Jamaica, had no idea that the enforcement of FATCA compliance automatically helps the U.S to enforce another of its tax law (the Report of Foreign Bank and Financial Accounts (“FBAR”).  No mention is made of FBAR in that cross-border agreement because there was no need to mention a law which has been in effect for over 40 years.  FBAR has been part of the U.S Tax Code since the early seventies.  However, the cross-border mechanisms to enforce its compliance was very weak.  Those mechanisms have been strengthened by  FATCA.  Compliance with FATCA automatically forces compliance with FBAR.  In fact, it will expose those who have failed to comply with FBAR for decades.  The civil and criminal penalties for not complying with FBAR are significantly more punitive than those for FATCA.  Since that is a fact in law, which compliance do you suppose is of more interest to the U.S?  You guessed it, FBAR.  Many countries, including several third-world countries, refused to enter into the FATCA agreement with the U.S. 

How Much do you know about FACTA and FBAR; Why should Jamaicans at home and those in the Diaspora arm themselves with information about these two important regulations? Here is a link to basic information about them.     

A Quick Definition of a “U.S Person”

 A “U.S. Person” means:

• A Citizen of the U.S (residing anywhere in the world);
• A U.S Resident Alien (Green Card Holder, residing anywhere in the world);
• A Domestic Partnership;
• A Domestic Corporation;
• A Domestic Estate; or
• A Domestic Trust.

A fulsome definition of what qualifies an individual or entity as a “U.S Person” cannot be fully defined in  this article.

The FATCA agreement benefits the U.S 100 percent, due primarily to the premise and structure of its Tax Code.  The U.S Income Tax Code is premised on citizenship and U.S residency (Resident Aliens status).  As such, “U.S Persons” are taxed on their worldwide income. 

It benefits Jamaica zero percent.  That is due primarily to Jamaica’s Income Tax Code being premised and structured on residency in Jamaica.  That structure is fundamentally weak, as it allows those who can afford to establish residence outside of Jamaica to have their cake and eat it (legally escape Jamaica’s income tax net).  The administration of Jamaica’s Income Tax Code is also weak.  As alluded to earlier, that weakness results primarily from an antiquated Income Tax Regime, with ineffective enforcement mechanisms.

Our Income Tax Regime Must Encourage (Not Discourage) Compliance

Taxpayers who are compliant should never feel they are being targeted by the TAJ for audits, because they are the low hanging fruits.  Many of them (perhaps all of them) feel that way, and that does not make for effective income tax administration.  Those taxpayers will simply engage the services of competent tax professionals to devise legal ways around being unfairly targeted.  Furthermore, taxpayers deserve good customer service from TAJ employees.  The existing culture of poor customer service also does not encourage tax compliance.

Income Tax Reform Badly Needed to Broaden the Tax Net and Ease Our Debt Burden

The government should engage competent tax professionals who will not only help reform the Income Tax Regime, but also devise effective mechanisms to enforce the tax laws and regulations.  Reforming does not mean throwing out everything.  It means retaining good tax law and repealing the bad.  The country and taxpayers will benefit as follows:

• A broadened tax net;
• Lower tax rates;
• Increased tax revenue (without unnecessarily targeting and penalizing existing compliant taxpayers);
• Facilitating a balanced annual budget;
• Significantly reducing the country’s debt burden;
• Tax policies and incentives which will encourage the expansion of existing businesses, and the formation of new businesses, thereby creating new employment opportunities; and
• Grow Jamaica’s economy.

 

Trevor H. Francis, B.Sc. (Hons), M.Sc. (Tax), CLU, CPA, FCA  is a Chartered Accountant and a Certified Public Accountant. He is the Senior Founding Partner in the firm FIACG-FRANCIS. LEE.HO-LUNG Email: trevor@fiacg.com. Website: www.fiacg.com