Caricom will need to update its tax arrangements to align with the movement towards a minimum global tax on businesses, and Minister of Finance Dr Nigel Clarke is pushing for the bloc to tackle the issue proactively.
It’s a better approach than being lectured to later on the issue, he said at a forum on Thursday.
Inside Jamaica, reforms to the tax laws are ongoing, and the concessionary 12.5 per cent corporate rate available to SEZ operators is under review.
The global initiative, which will set a floor of 15 per cent for corporate income tax rates, is being led by the Organisation for Economic Cooperation and Development, and Jamaica is among the over 130 countries that have already signed on to the initiative in principle.
Several countries in the Caribbean earn significant revenues from their designation as low-tax zones, while others offer incentives to win foreign investments.
“There is also a challenge with the perpetual race to the bottom, with corporate income tax that disproportionately affects developing companies. Multinationals play countries off each other for cheaper arrangements; and they win, with small developing companies losing,” Clarke asserted on Thursday at a forum hosted by law firm DunnCox on the implication of the new global tax regime for Jamaican businesses.
“We have countries which are known as low-tax jurisdictions and companies are able to shift and make themselves better off, at the expense of the country. It is a very complicated situation that the OECD has been grappling with,” the minister said.
The OECD has formulated a Base Erosion and Profiting Shifting initiative, better known as BEPS, to tackle the issue of tax leakage.
Pillar 1 of the initiative is a new method to allocate profits to countries where large multinational companies, or MNCs, may have significant business but limited or no local operations; and Pillar 2, which is a global minimum corporate income tax of 15 per cent on the foreign profits of multinational companies.
“Pillar 2 will establish a minimum effective rate of corporate income tax across the world. Once that is in place, the incentive for small states to offer low-tax destinations will be greatly reduced,” Clarke noted. “Jamaica is an early adopter. It is not yet law, but that is the direction in which things are moving.”
The minister noted, however, that as it now stands, the Caricom tax treaty, which is law, is incompatible with the direction of the international tax architecture.
Marlene Nembhard Parker of Tax Administration Jamaica further explained at the forum that the issue relates to the double-taxation provision under Article 72 of the Treaty of Chaguaramas, which does not align with either the OECD or United Nations model.
“Caricom’s double-taxation agreement is exclusively about “source rights” and does not recognise residents’ rights, she added.
Ja tax reforms in 2024
Jamaica itself is in the process of amending its domestic legislation to fit within the OECD pillars.
“We are now carrying out wide tax reforms and we are trying to include the change,” said Nembhard Parker. “These will take effect in 2024,” she said.
Once the BEPS pillars are operationalised, the Caricom tax treaty, to which 11 of the 15 Caricom members are signatory, will require update. Those discussions are already under way at the level of COFAP.
“The Council of Finance and Planning in Caricom has focused on the incompatibility between the treaty and the directions of global arrangements, and has brought outside experts to provide advice. Tax authorities across Caricom member states have met, and a technical working group established for bringing the Caricom treaty into line with global standards,” Clarke said at the forum.
“For that to be effective, all 11 member states that signed the original treaty would have to sign on,” he added.
The finance minister said that the intensification of globalisation since 1989 has no precedent in human history, and that the past three decades have given rise to companies of a size and a scale that account for an enormous share of the global economy.
“Most have revenues that accrue from countries in which they pay no taxes. Companies like Google and Facebook make a tremendous amount of revenues based on the customers that they have in the developing world, including here in Jamaica. Their customer base is monetised for advertising revenue, on which profits are made, but there’s nothing which accrues to the developing country,” he said.
If every country were to deal with the issue unilaterally, the fragmentation in national tax revenue arrangements would “undermine the productivity advances which we have gained from this phase of digitisation”, he added.
The OECD agreement is to be ratified in September, with an extended phase as nations change legislation to match it.
Under Pillar 1, the profits to be globally reallocated are estimated to be in the region US$200 billion.
“Jamaica’s share of this reallocation could be a few billion Jamaican dollars, which could build a few schools and fix a few hospitals. It would be a very important step, ensuring we do not have winners and losers from this phase of globalisation and digitisation,” Clarke said.
The global minimum tax rate will apply to overseas profits of multinational firms with annal group sales of €750 million (US$868 million) or more.
As a signatory to the OECD initiative, Jamaica will have to redesign its special economic zone regime, under which the minimum tax currently falls below the proposed global rate.
“We will look at how we design our incentives,” said Bevon Sinclair of Tax Administration Jamaica. Those reviews are a work in progress.
“It is very likely that Jamaica will be introducing a version of Pillar 2, known as a qualified domestic top-up tax. It will allow Jamaica to top up to the 15 per cent,” Sinclair said.
