Most persons know by now that Parliament passed a suite of legislation commonly dubbed as “the Omnibus legislation”. This suite of legislation, consisting of four (4) Acts of Parliament, took effect on January 1, 2014. The Omnibus legislation is intended to overhaul and remedy some of the widely-known deficiencies in the tax incentives regime that has been operating in the island since the 1940s.
The Fiscal Incentives (Miscellaneous Provisions) Act, 2013 repeals most of the legacy incentive legislation and so new tax incentives may only be granted with respect to bauxite, export free zone, approved head office and Junior Stock Exchange listing. The Fiscal Incentives (Miscellaneous Provisions) Act, 2013 sets out the transitional arrangements for moving from the old regime to the new. The transitional arrangements provide for “continuing beneficiaries” of the old regime. Continuing beneficiaries are companies who, on January 1, 2014, were entitled to fiscal incentives granted under incentive laws that have now been repealed. These include companies operating in the following industries, among others: hotel, tourist attraction, resort cottage, motion picture, petroleum refinery, agriculture and export.
Continuing beneficiaries may elect to keep old incentives, which generally included: relief from income tax, relief from customs duty, and zero rated GCT status in relation to imports. Under the old regime, continuing beneficiaries are/were not entitled to initial and annual capital allowances under the Income Tax Act. Capital allowances would have the effect of reducing the amount of income tax liability.
Continuing beneficiaries may elect to abandon the old regime and operate under the new “equitable” system of taxation. The election is made by notice in writing to the Commissioner General and must be made in respect of ALL the fiscal incentives to which the company was entitled under the repealed enactment. The effective date of the election is determined as follows: (a) for the purpose of the Income Tax Act, the first day of the year of assessment in which the election is made; (b) for the purpose of the General Consumption Tax Act, the first day of the taxable period next following the date when the election is made; and (c) for the purpose of other revenue laws, from the date when the election is made.
Under the new fiscal incentive regime, all companies have the same entitlements, excepting for those who are continuing beneficiaries, those operating under the few legacy incentive laws that have not been repealed, and those who may be granted incentives under the new law passed to incentivize large-scale projects and pioneer industries. Thus, generally speaking, under the new fiscal incentive regime, all companies pay income tax (25% for unregulated and 33 1/3% for regulated); all companies are entitled to capital allowances on certain assets; all unregulated companies and self-employed individuals are entitled to Employment Tax Credit (which generally has the effect of reducing the effective income tax rate on the trading income for most unregulated companies to 17.5%); zero rated GCT status based on incentive legislation is generally not applicable and so continuing beneficiaries would start to pay 16.5% GCT on imports; relief from customs duty is applicable to manufacturing, primary production, tourism, creative industries and healthcare; and relief from additional stamp duty on import of goods is applicable to manufacturing and primary production.
Companies may make their election to terminate their entitlement to incentives under the old regime by June 30, 2014. Continuing beneficiaries in the hotel and resort cottages industries will have to be most contemplative about this decision. A hotel or resort cottage company that makes the election to abandon its existing incentives by June 30, 2014 will be allowed to continue to collect 10% GCT from customers. At the same time, this company will become liable to pay 25% income tax on profits (that is, income after disbursements and expenses, which would include capital allowances and Employment Tax Credit provided for in the 2013 Income Tax Act amendments). This company will also lose its zero rated GCT status and will start to pay 16.5% GCT on imports. On the other hand, a hotel or resort cottage that does not make this election will be required to collect an increased rate of GCT, that is, the usual rate of 16.5%, but will continue to enjoy zero rated GCT status in relation to imports. If after July 1, 2014, a hotel or resort cottage elects to abandon its legacy incentives it will be required to continue collecting 16.5% GCT on sales until its incentive period comes to an end.
Other continuing beneficiaries may also elect to give up their incentives by June 30, 2014. However, for continuing beneficiaries, other than hotels and resort cottages, the primary consideration will relate to income tax liability because there are no GCT or other tax consequences of making the election at a later date.
If a continuing beneficiary makes the election to abandon legacy incentives it would be treated as all other taxpayers. Since the company will now become liable to account for and pay income tax, it will be important to know that it would become entitled to take into account capital allowances. But, companies that make the election by July 1, 2014 may be entitled to claim initial and annual allowances on all existing and future capital expenditure in accordance with the amended Income Tax Act provisions. When a continuing beneficiary abandons its legacy incentives, it will be entitled to claim Employment Tax Credit.
It would be prudent for all continuing beneficiaries, prior to June 30, 2014, to make a determination based on its projections and all relevant considerations up to the end of its incentive period, whether there will be any advantages to it of electing to terminate its current incentives. For hotels and resort cottages, this analysis is likely to focus on the impact that collecting 10% or 16.5% GCT from customers will have on sales while at the same time taking into account the effect of the Income Tax Act on the tax on profits and distributions to shareholders.