After months of postponement, the 3% withholding tax on specified services took effect yesterday. Since the tax was first announced, many have bemoaned the negative effects that it may have on the private sector. Additionally, there have been several questions raised as to how the tax would be computed and the mechanics of its enforcement, especially for entities that currently do not issue withholding tax certificates.
The tax is in keeping with the government’s continued efforts to broaden the tax base and increase compliance, as part of its perhaps IMF-induced tax reform measures. Regardless of any lingering uncertainties, its introduction should be embraced, as the tax aims to bring within the tax net those non-compliant taxpayers who have proved elusive. The hope is that, if it is successful in attaining its aim of broadening the tax base, then the increased revenue generated will ultimately allow the government to ease the tax burden, which will enure to the benefit of those who are tax-compliant.
Effect of the tax
The implementation of the tax means that certain bodies have now been designated “tax withholding agents”, and are liable to collect from specified service providers, on behalf of the government, a 3% withholding tax on any invoice exceeding $50,000, or batch of invoices issued within a 30-day period which in aggregate exceeds $100,000. It is understood from discussions between the Tax Administration of Jamaica (“TAJ”) and certain interest groups that in relation to the latter, the batch of invoices must relate to the same transaction. The specified service providers will initially include those providing the following services: accounting; auditing; catering; consultancy; decorating; engineering (whether architectural, electrical, mechanical or structural); entertainment; information technology; janitorial; laundry; landscaping; legal; management; building or motor-vehicle repairs and maintenance; rental or leasing of motor vehicles or equipment; transportation or tours; and haulage of goods. However, service providers who were previously subjected to certain other forms of withholding taxes are exempted.
The tax is expected to be implemented on a phased basis, and therefore, there might very well be other service providers that will be added in the future to this already expansive list. Indeed, the Minister of Finance may, by Order published in the Gazette, designate any other service provider as being a “specified service provider” for the purposes of this withholding tax.
Specified service providers will have to brace for this new tax as they may encounter issues with cash-flow from the reduction in revenue which will result from their clients having to deduct this tax from any applicable payments to them. On the upside, the taxpayer will be able to claim any tax withheld as a tax credit, and any excess credit may either be claimed as a refund or used to offset future assessments. They will also have the choice of whether to claim the credit against their quarterly obligations or against their annual income tax return. However, they will be not be able to claim the credit if they have failed to meet their quarterly or annual income tax filing obligations. Tax payment obligations for specified service providers have therefore now been front-loaded, with the tax being paid at the source and then later claimed as a tax credit. Through this, the government will be able to secure greater levels of compliance, as it will not need to rely on the goodly and dutiful service providers to pay their income tax to the government directly.