New Tax Measures and Sovereign Downgrade

In keeping with the Government’s objective to improve the fiscal account and to achieve its primary surplus balance target 7.5%, a series of tax measures were tabled on February 12. The package is expected to raise an additional $15.9Bn during fiscal year 2013/14 and also follows from last year’s $19.38Bn package.

 

The new tax measures include:

  •  Dividend tax payable by residents will be increased from 5% to 15%, effective April 1st.
  •   Imposition of a 5% surtax on the taxable income of large “unregulated companies”. Companies with gross income equal to or greater than J$500Mn are considered to be large. This additional tax will now push the tax rate paid by unregulated companies to 30%. Unregulated companies refer to those companies not regulated by: the Financial Services Commission, Bank of Jamaica, Ministry of Finance and Planning and the Office of Utilities Regulation (OUR).
  • Increase in the Education Tax rate. The tax will be imposed as follows: a) employers contribution will increase from 3% to 3.50% b) employees contribution will increase from 2% to 2.25% c)self-employed contribution from 2% to 2.25%
  • The tax rate on local stamp duty will be increased from 3% to 4%, while the transfer tax on properties will move up 100basis points to 5%
  • The sale of lottery tickets will now be permitted on Sundays and public holidays. However, the gaming industry was not spared from tax hikes. The taxes within the industry will now range from 20% to 25% from prior band of 17% to 23%
  • Telephone call tax will be included as a part of the GCT tax base. GCT on pre-paid vouchers to be calculated on the face value than the sales price to retailers

Given the proposed tax increases, it is likely that the economy will see further declines this year due to the contractionary effect of these fiscal policy measures. Within the context of an already weak economy, consumers are expected to limit consumption expenditure, while businesses will
restrict investments decisions given weakened market prospects. Businesses that are largely dependent on the local market will likely under-perform this year, and as such companies will have to become more ardent is exploring market opportunities outside Jamaica in order to support earnings. In light of the tax package, greater inflationary impulses will be felt, but may be tempered by weak consumer demand.


Against the background of the recently launched National Debt Exchange (NDX), Standard & Poor's Ratings Services lowered its foreign and local currency sovereign credit ratings on Jamaica to selective default (SD) from 'B-/B'. The agency also lowered the ratings on the bonds that are included in the sovereign's proposed domestic debt exchange to 'D'. The ratings on the government securities not included in the debt exchange to 'CCC'. Standard & Poor's expects to assign a new sovereign credit rating in the 'CCC' category to the new bonds upon the completion of the debt exchange and the issuance of the new bonds, which is scheduled for later this month.