CHAPTER 1

Taxation Theory

1. lntroduction
Taxation in one form or another has been levied on citizens from ancient times'
Taxation is usually the major source of government revenue which is, in theory,
required to run the machinery of Sovernment and provide services to its
citizens. Up until the 19th century these services were chiefly the maintenance
of law and. ord.er and defence. In other words the revenue was used to pay the
members of the police force, the judiciary and the defence forces.
over time countries have been very creative in devising ways of levying
taxes. In many countries both the central government and the local authorities
impose different taxes on the populace. Taxes are raised on wages, profits,
property, gifts, bequests, production, consumption, imports - to name a few of
ih" -u.,y taxable items. One of the more outrageous taxes first raised in the late
eighteenth century in England was a tax based on the number of windows in a
,"rid".,.". some householders responded by bricking in some of their windows
and in the end the tax was abolished because of its unpopularity.l
one should not be misled by the different names ascribed to taxes - lariffs,
duties, cesses, statutory deductions or contributions, rates and imposts' They
all amount to additional charges on the pockets of unwilling citizens'
There is natural resistance to paying taxes, but when taxes arl perceived to
be inequitable the resistance may escalate into outright rebellion. The
imposition of taxes, the right to impose taxes and the collection of taxes have
been the stimulus for important political changes in many countries.

One hundred years earlier Charles the 1't sold the monopoly to print cards to the
Worshipful
1
return the comPany collected a tax of six Pence on each pack produced
tax stamP was-printed on the ace of spades One illegal printer forged
anged. Some say that perhaps this is the origin of the superstition that
the ace of spades is unluckY.
 CHAPTER 1

t.t Taxation and Politica! Change

There is the view that taxation issues historically have been treated differently
by the governments in the developed (OECD) region compared to those in the
South (less developed countries such as Latin American, Caribbean, African).
One researcher, Moore, writing in2004 pointed out that "In the late 1990s the
tax take averaged 38 percent of GDP in OECD countries and 18 percent in
developing countries".2
In European countries and USA, taxation issues were publicly discussed and
followed-up by the taxpayers to the extent that governments had to take notice.
In some cases there were revolts and in others revolts were threatened, and
governments had to quell them or attempt to prevent them by adjusting the
"domestic political agenda" to accommodate the protests.
In developing countries a cluster of reasons led to taxpayers not being so
active in debate and protesting taxation issues. Among the reasons given by
Moore are:
(1) Historically many of these countries were former colonies that did not
control their own political economic agenda, and had ground to make
up and systems to put in place.
(2) In developing countries, discussion and debate tend to focus on IMF
and World Bank issues and these impact less on taxpayers' material
welfare. Moore notes that with the introduction of VAT in most
countries this is changing taxpayers' reactions.
(3) In some, privileged elites and special economic sectors lobby and
agitate only for their own narrow interests - not the taxpaying public as
a whole.
(a) In some developing countries rich in a natural resource - oil, diamonds,
for example - the focus is on redistributing wealth and providing social
services and infrastructure.

Some of the political economic events described below date back several
centuries, and show that taxpayers when mobilised helped shape the politlcal
landscape.

England

During the reign of King fohn in the early part of the thirteenth century, one of
the grievances of the nobles was the King's arbitrary imposition of taxes. The

2 Moore, Mick. "Taxation and the Political Agenda, North and South", Eorunt t'or Dettelopntent SttLdies,
No. 1-2004, p5
 Taxation Theory

signing of the Magna Carta in l27sby the king is often seen as the beginning of
the end of feudalism. The Great Charter which King
John signed contained rnuny
clauses concerning the operation of the courts, imprisonment, the Church, and
the ler,ying of taxes.3 Two clauses stated that no scutage or aid (taxes) ,,shall be
imposed unless by the general council of our kingdom" (clause 12), anda general
council would be summoned "conceming the assessment of aids and scutage,,
(clause 14). The general council was the birth of the parliamentary system.

United States

America was a British colony until it unilaterally declared its independence in

7776. Thete were many grievances but the Americans particularly objected to
the Stamp Act (7765) which provided for the first direct tax ever levied by the
British Parliament on Americans. It was designed to raise f30,000 which, with
other import duties, would have paid for one third of the cost of maintaining
British troops in the colony. The Stamp Act was repealed one year later because
of its unpopularity and non-compliance. The British government increased
import duties, so the Americans stopped importing goods from Britain. Import
duties were returned to previous levels except that on tea. The Americans
stopped importing tea. The famous Boston Tea party made it clear that ships
whose cargo was tea would not be able to dock.
Britain felt it was reasonable to ask the colonists to meet the cost of the troops
who were there to defend the colony. The colonists' view was ,,no taxation
without representation". Independence was declare d in 7726.a

Barbados

strangely, the cry of "no taxation without representation" was an echo of that
heard in Barbados more than a century earlier. Barbados had established its
own Parliament (The General Assembly) in 1639. Taxation was among the
policies of the English govemment under oliver cromwell which irked the
Barbadians and they refused to comply. The English sent troops to bring the
Barbadians in line. There were some forays but three days of hearf rain
intervened during which it became apparent to the Barbadian forces that they
could not win, so they negotiated a treaty in which the terms of submission

3 The particular tax which precipitated the confrontation was 'scutage'. This was a money payment
levied in lieu of military service. As King ]ohn was constantly at war with France this had
become
onerous to the nobility.
4 The federal government made two attempts, in lg63 and 1g94, to impose a
ses
the tax was challenged and repealed on the grounds that it *u, ,..o.,,
ess
passed the 16th Amendment to the Constitution which gave it power to
on
income. This was followed in the same yearby a tax aciwhich is the basis of the federal
income tax
system in place today.
 I

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 Taxation Theory

was repaid at face value in almost worthless marks.T For example 1,000 marks
could buy a two bedroom apartment in Berlin in 7974, but by 7g2z l,oo0 marks
could buy only three loaves of bread.

India

In the struggle for independence from the British government, Gandhi used
peaceful protest, including civil disobedience, as his main weapon. Refusal to
pay taxes such as the salt tax and duties on imported cotton goods
manufactured from Indian cotton was a strategy airned at the pocket lr tn"
colonial power. Protests such as the salt march in which Gandhi and a large
group of followers marched to the sea, made salt from evaporated sea water
and openly sold or gave it to the people, arso won international publicity and
support for the independence movement. This particular protest also was
making the statement that the Indian people objected to being taxed by a
government in which they did not participate.

famaica

The grievance of being taxed by a government in which taxpayers have no

voice was a long standing one in the colonies in the Caribbean. The local
Assembly form of government instrtuted in 1849 was empowered to introduce
finance bills which determined and raised taxes. The right to vote was Iinked
to taxpayer status. The local Assembly was representative of only the small
minority of landed interests. Those who had a net income of f300 or who paid
taxes of at least €10 per year had the right to vote.8 Following the Morant Bay
Rebellion in 1855 the local Assembly was abolished (1g66) and Crown colony
government was introduced. Under this system the Governor had full control
over tax legislation. Until universal adult suffrage was introduced in 1944,
taxation in Jamaica (and other Caribbean colonies) was effectively taxation
without representation.
In7902 the colonial government was under pressure to increase the revenue
to deal with the effects of an economic depression. To this end it propcised to
revalue land as a first step in increasing the revenue from the land tax. As news
of this spread, concern and resentment gained momentum by the addition of

7 V'R Berghahn states "One way of horrouring the wartime debts . .and of finding money for
the
reparations now being demanded by the victorious allies, would have been to
raisc taxation. yet the
arge that, ap and increasing unemployment,
would have ting the mark iherefoie had the
ing the gove demobilisation crisis and to rid
itself of its debts vis-a-vis both the holders of war bonds and the Allies." Modertr
Gerntany (second
edition), V.R. Berghahn: Cambridge University press: UK, 79g9, p.70.
,
8 Bamett, Lloyd. The Constitutionnl Lau, of
Isntaiio. oxford Universiiy press. London.7977.3
 CHAPTER 1

rumour that the real intent was a very large increase in all taxes. As anger and
opposition to the proposed tax increased, "tax meetings" were held in several
communities. This protest climaxed on the 6th April, 1902 when crowds of
protestors from some parishes and from Falmouth and Montego Bay gathered
in Montego Bay. The protest became violent and stones were thrown at the
police injuring several police officers. Following a Commission of Inquiry the
Government announced that the tax proposals would be put on hold for a
year.e A similar decision was taken by Government in 7999 in the face of violent
opposition to an increase in the tax on gasoline.
Presumably under pressure from the International Monetary Fund (IMF)the
Government in 2009 announced the proposed imposition of General
Consumption Tax on items previously exempt from this tax. The items
included certain food and personal hygiene goods which wele deemed to be
basic to the needs of the poor. The wave of (peaceful) protests was enough to
warn the Government not to tread that path.

Often taxation is the focal point of other more deep rooted problems and
grievances. There are many more examples in history where taxation can be
linked to upheaval and important change in the political system.

1.2 The State's Sovereign Right to Tax

As stated earlier a tax may be called by other names - an impost, a levy, a

contribution. However called, a tax is a compulsory contributiory imposed by
the sovereign authority on, and required from, the general body of subjects or
citizens.l0 In7962 Frank Chodorov, writing in the United States, held that the
word 'compulsory' "looms large simply because of its ethical content. The
quick reaction is to question the 'right' of the state to this use of power. What
sanction, in morals, does the State adduce for the taking of property? Is its
exercise of sovereignty sufficient unto itself?" He went on to claim that taxation
is robbery by the state, for the individual's indisputable right to life must be
matched by a similar indisputable right to the products of his labour, that is, to
property. The compulsory nature of direct taxation suggests that the state'has
a prior right to one's property, but since no such right can be established, it
follows that the state is using its power without any regard to morals. He
described indirect taxes as a "permission to live price" since every good bears
this tax which is charged in a "surreptitious" manner, "taking, so to speak,

9 For a fuller description of this protest from Thc GIe tuur reports of the time see "The Tax Riots of 1902"
by C. Roy Reynolds in Tlrc Gleaner, November 27, 1999, A8. In this article lleynolds draws a
comparison between the 1902 tax protest and the 1999 protests.
10 Justice Dyer in Leake vs Commissioner of Taxation (State), Australia,7933 Western Australian Law
Reports, Vol. 66.
 Taxation TheorY

while the victim is not lookin 8" .He concluded the article with the words "there
cannot be a good tax nor a just one; every tax rests its case on compulsion".ll
The distinguishing features of a tax are:
o It is compulsory
o It is imposed on all subjects
o It is imposed by the exercise of the state's sovereign Power
o It is levied by the ordinary legislative Process
o It is imposed for a public PurPose.
Taxpayers worldwide and in the Caribbean have challenged the legality of
,o*" iu*", in the courts. In the Bahamas a taxpayer challenged the National
Insurance Act (NIA) contributions he had to Pay as an employer claiming that
if they were a tax he was exemptl2 and if they were not a tax they amounted to
depriving him of his property without compensation, contrary to the Bahamian
Constitution. The Privy Council's decision was that NIA contributions were a
form of taxation. on employers they were a tax on employment (not income)
and therefore he was not exemPt.13
One of the earliest challenges to the state's taxing Powers in the Caribbean
was in Guyana following the Government's imposition of a National
Development Savings Levy in 1962. The tax was deducted from employees'
earnings at source and the resulting revenue was to be used by Government for
development projects. Taxpayers received interest bearing bonds for their
contributions which were redeemable on the death of the taxpayer or when he
emigrated. A group of taxpayers challenged the legality of the levy and claimed
that it contravened the Constitution in that they were being deprived of their
property without compensation. The court held that the levy was not a tax but
a forcea loan and the Development Levy law was repealed'14
In 7970 Trinidad and Tobago introduced the Unemployment Levy for the
purpose of funding schemes to relieve unemployment and train the
unemployed. A taxpayer challenged the legality of the tax and as in the Guyana
.ur" h" ctaimed that it breached his rights to the enjoyment of his property
under the Constitution. The court held that the levy satisfied all the
requirements of a tax.15
ir, *ur,y other circumstances compulsory contributions levied by the State
have been regarded by the courts as taxes, such as, a levy to lay sewers in a city

11 Chodorov, Frank. "Taxation is Robbery" ftom Out of Step: The Autobiography of an Indiaidualist'Devin'
Adair Company, New Yotk,7962.
12 He operatei under the Hawksbill Creek Grand Bahama tax incentive legislation
which provided
operators tax exemptions for a number of years'
Appendix
13 Minister of Housingind National lnsurance and Another as Smith,Bahamas, 1990,4o WIR. See
A for a fuller report of this case.
7962, 7 WIR
14 lnland Reaenue iomrnissioner €t Attorney General os Lilleymn and Others, Guyana,
WIR.
15 Ramesh Diproj Kumar Mootoo us Attorney General of Trinidtd and Tobago, T &T, 7979,30
 CHAPTER 1

to a fund to provide benefits

was held to be a tax on buildings,l6 contributions
contributions to a state health
for the unemployed'l7 compulsory employers'
French seamenls and levies imposed
insurance and family benefit scheme for
ondairyfarmersinBritishColombiatoremedyaglutofmilkonthemarket.lg

f .3 Taxation and Economic and Social Policy

Sincethenineteenthcenturytaxationhasovertimetakenonanewrolein
state. The state in addition to the
tandem with the larger roleiaken on by the
earlierresponsibiliti"esford.efence,lawandorder,hasinvolveditselfinthe
educatioryhealthandrecreationofitscitizens.Thestateisresponsibleforthe
physicalinfrastructureofthecountryincludingroads'harbours'bridges'the
is that of safeguarding
airports, railroads. An over-arching responsibility
quality of the natural environment' In order
to finance the increased
taken on, the state increases taxes. In
addition to this the state
responsibilities
wishestoinfluencethedirectioninwhichtheeconomyshouldmoveandto
achieve certain social objectives'
Taxationpolicyisnowusedbygovemmentstoachievethefollowingobjectives:
o to raise revenue
. to exercise an overall control of the economy
o to promote economic growth
e to modify the influence of the price mechanism
and income'
' to reduce the gap in the distribution of wealth

1.3.1 Control over the Economy & Promotion of

Economic Growth
fiscal policy the state
In order to exercise control over the economy through
see developed' (for
modifies the taxation system to encourage what it wants to
consumer spending. In some cases
example, export indusiries) and to influence
Governmentwillwanttoreducespendinginordertoencouragesavingsand
investmentwhichinturnwillaffectthelevelofemploymentandthecreation
might want to encourage consumer
of new jobs. At other times government
in the economy and to stimulate
spending to mop,f
"*isti"g"o'o"'ptod'ction
a flagging economy.
taxes on consumer goods to
In the first case Government may rncrease the
might reduce
discourage spending. tn ihe second case Government
.or,rr-",

16 Works Ltd'' Canada' 7974' AC992'

I
labann as Southetn Coal Coke Co'' USA
1936' 307 US 495'

owners of the S T 'Hatle' t962' SLT 714

i', products iales Atliistment Connnrittee tts Crystal Dairy Ltd''
Canada' 1933 uK
19 Lower Mainlatd Dairy
Privy Council.
 Taxation Theory

Personal taxes to leave more disposable income in the hands of the consumers
who will then spend it or save it. A change in income will result in a change in
consumption. This is the Marginal Propensity to Consume (MPC). Economists
use the concept of MPC to calculate the 'multiplier effect'. In practical terms
this means that if the income of a taxpayer is increased by $1,000 and
economists know the multiplier is 4/5, they estimate that the taxpayer will
increase his consumption by $800 and will probably save 9200. In the next
round those suppliers who received the $800 will spend $640 on consumption
and save $160. In the next round those who received $640 will spend $512 and
save $128 and so on until there is zero consumption and saving. The effect on
the economy is that the $1,000 increase in income of a taxpayer results in an
increase in consumption of $4,000 and an increase of $1,000 in saving.
In import dependent economies such as ]amaic4 poliry makers also have to take
into consideration the nature of the consumption. Will the additional consumption
be for imported goods or will it be for locally produced goods? The former will put
pressure on the foreign exchange requirements while the latter will have the effect
of increasing income to local suppliers and increasing employment.

1.3.2 Modifying the lnfluence of the Price Mechanism

Taxation policy is also used to modify the price mechanism. All things being
equal price will be determined by supply and demand. A tax on a particular
good will increase the price to the consumer and discourage demand. For
example, a tax on gasoline at a time when the price of petroleum has been
increasing worldwide would help to reduce the amount of gasoline being
purchased by motorists, causing the gasoline retailers to ask the Government
to put a cap on the tax. Government uses taxation policy to distort the efficient
operation of the price mechanism for sound economic reasons. A reduction in
the import bill for oil will have the effect of reducing the demand for foreign
exchange of which the country does not eam enough.
If government wants to protect the domestic price of a product and prevent
the producer from losing ground to cheaper foreign goods, it will discourage
imports by the imposition of high taxes (tariffs) and at the same time give tax
concessions to the local producer. In the mid-1960s the Caribbean Cement
Company was an example of this.20 Tax incentives and concessions are also
used to develop what are deemed to be vital industries, for example, tourism
and agriculture in Jamaica.

20 When the Caribbean Cement Company was started in the mid-1960's it was given the 10 year
concession (subsequently renewed) to sell cement at the duty paid landed cost o[ imported cement at
that time. The Government was effectively foregoing the duty it had formerly received from
imported cement. In today's world market this incentive would be a breach of the regulations of the
World Trade Organisation and the Caribbean Single Market and Economy
 CHAPTER 1

1.3.3 Equality in the Distribution of Wealth and Income

By placing a greater tax burden on the rich - those who can afford it -
government can, to a limited extent, redistribute wealth. This is an unpopular
objective however, as those who have more income claim that it is theirs by dint
of hard work and sacrifice. Governments, however, are also concerned with
social stability and a very large difference between the rich and the poor tends
to social instability.

1.4 Structure of Taxation

Certain objectives of taxation conflict with one another. For example the
government may have a pressing need to raise revenue to cover expenditure
but an increase in the rate of tax of persons or companies may be a disincentive
to production and therefore to economic growth. No single tax is perfect,
therefore there must be a structure of taxation which combines a number of
taxes and which government can vary from time to time according to changes
in emphases or objectives.
The two broad categories of taxes are direct taxes and indirect taxes.
The direct taxes are usually those charged directly on the incomes of
individuals and companies and other legal persons, as the tax laws permit in
each jurisdiction. Other direct taxes could include stamp duties, transfer tax on
conveyance of property, motor vehicle licences and fees and property taxes.
There does not seem to be a clear-cut division between direct and indirect taxes
which applies internationally. In the United Kingdom, for example, direct taxes
include taxes on personal and corporate income, National Insurance
contributions, taxes on petroleum revenue from North Sea oil and gas,
inheritance taxes and capital gains tax.
In the United States, under the Constitution direct tax includes property.tax
and poll tax, based on ownership and existence. The legal definition of direct
taxes prevented the imposition of personal income taxes. By an amendment to
the Constitution in 1913, personal income taxes were brought into being.
Central to distinguishing indirect taxes is the understanding that the person
who pays it in the first instance passes it on until it is finally recovered from the
consumer. This characteristic is easily seen in excise and customs duties on
goods, for example, customs duty on a car which is paid by the importer at the
port and passed on to the car mart and finally collected from the motorist at the
point of sale. The characteristic is not so easily detected in stamp duties which
are usually paid on the registration of documents. They are described as
indirect taxes in the UK, but in famaica are a direct charge on the income of the
payer of the tax. The most effective indirect tax seems to be a general sales tax,

to
 Taxation Theory

from the point of view of collection. The sales tax introduced in Jamaica is the
General Consumption Tax (GCT) which is similar to the Value Added Tax
(VAT) in the UK. A tax on consumption - at the point where people spend
money, rather than on income - is seen to be broader based and fairer. Another
view, however, is that a general tax on spending is regressive as it hits those at
the bottom of the earnings scale who can least afford it.
Most taxes in |amaica are paid by the taxpayer to the collectors of taxes in
each parish. Stamp duties which are represented by actual postage stamps are
clearly not included.

1.5 Attributes of a Good Tax System

The famous Scottish economist Adam Smith writing in the latter half of the
eighteenth century stated that in a good tax system:
. persons should pay according to their ability
o the tax should be certain and clear to everybody concerned
o the convenience of the contributor should be studied as regards payment
r the cost of collection should be small relative to yield.

Since Adam Smith published his Wealth of Nations other attributes have been
seen as important in determining govemment poliry.Ideally a good tax should
be:
o productive of revenue
o certain to the taxpayer (not subject to negotiation by taxpayers)
e convenient to the taxpayer
. impartial between one person and another
' adjustable
o automatic in stabilising the economy
. unharmful to effort and initiative
o consistent with government policy
. equitable in its distribution of the tax burden.

1.5.1 Equitable in its Distribution of the Tax Burden

Taxes can be classified according to the proportion of a person's income which

is deducted. The three concepts here are (a) a regressive tax, (b) a progressive
tax, and (c) a proportional tax.

1l
 CHAPTER 1

Regressive Tax
I

|
I
% of income
taken in tax

Figure 1.: Regressive Tax

A Regressive tax takes a higher proportion of the poorer person's income than
of the richer person's income. (See Figure 1) Indirect taxes which are a fixed
sum such as motor vehicle licences are regressive. Generally speaking indirect
taxes tend to be regressive. In order to ameliorate the worst effects of a
regressive tax such as GCT it is not made general but selective. For example if
all goods and services attracted GCT this would be a general indirect tax,
however it is a selective indirect tax as certain items are exempt or zero rated.
To illustrate the effect of a regressive tax, assume that two taxpayers A (income
$950,000) and B (income $350,000) are trying to set up house. They purchase the
same household items at the same price - a refrigerator, a stove, an electric irory
sheets and towels at a cost of $100,000, attracting GCT of $16,500. Taxpayer A
has paid 1.7% (76,500/950,000) of his income in tax and taxpayer B has paid
4.7% of his income (16,500/350,000), therefore the poorer person has paid a
greater proportion of his income in tax

Progressive Tax

A Progressive tax takes a higher proportion of income as income increases. (See

Figure 2). lamaica's income tax used to be progressive, that is, there were tax
bands such that after the tax threshold the next $5,000 was taxed at70% and the
next $10,000 was taxed at 20% and so on. Although this seemed a fairer tax
structure there were many problems. One was that the highest tax rate of 575%
was reached when a taxpayer's income was $15,000 per year which even in
1986 was not a high income.
It led to a great deal of tax evasion through salary packages being negotiated
in allowances, and taxpayers trying every way to gain a higher code number.

12
 Taxation TheorY

the lower
(The higher the code number assi8ned by the Income Tax Department'
There was also a
the tax"paid.) Therefore the costs of administration were high.
overtime because
disincentive to work harder - many employees refused to work
at the top rate they benefited by only 42 cents out of every
dollar eamed' This
remained
progressive tax structure was replaced by a proportional system which
system was
undisturbed until ]anuary 7, 2070 when a new progressive
2077. This was an
introduced to be in force for a short period ending March 37,
and non-resident
emergency tax collection provision which applied to resident
a new band
individuals whose incomes were being taxed at 25 percent. It created
taxed at27 '5 percent
starting at over $5m and going up to $10m which would be
Non-residents
and another of over $10m which would be taxed at 35 percent.
1/3 percent'
with incomes not falling within the new bands would pay tax at 33
release advising that
The Ministry of Finance o.r Junuary 16,z)L2issued a press
the rates had reverted to 25 percent onJanuary 1,2017'
was the high rate
The main reason that the triginal progressive system failed
of inflation ]amaica was experiencing. As inflation reduced the purchasing
to maintain
power of the taxpayers' *ug"r, they sought and received increases
pushed them into higher tax brackets'
oUt"* which it is possible to deal with
exempt from taxation, to the rate of
e threshold is $100 and over the period
then the threshold
of one year the inflation rate has increased by two percent,
as a
would be moved up to $102. For some time indexation has been suggested
feature that should be built into |amaica's tax system'22

% of income
taken in tax

prepared at regular intervals

21 The rate of inflation is determined by the Consumer Price Index
throughout the year by the Government's Stati
indexatio (2005) and "The Jamaican
22 The latest two studies to recommend
e Sally Wallace and James
Comprehensive Tax Study" done by Georgia St
Alm, Working PaPer Five, 7.

l3
 CHAPTER 1

Many countries have a progressive system or a combination of proportional

and progressive systems as famaica has.23

Proportional Tax

A proportional tax takes a given proportion of income. (See Figure 3) To relieve

those individuals at the bottom of the income scale usually a nil rate is built in.
As of January 2073 in Jamaica the nil rate is applied to personal incomes up to
$507,372. Income over this for individuals is taxed at 25 percent. There are
advantages to the proportional structure. It satisfies many of the attributes of a
good tax - certain to the taxpayer (it is easy to calculate); impartial between
taxpayers; is adjustable (for instance, when inflation causes an increase in
wages the threshold can be raised).

Figure 2: Proportional Tax

1.6 Conclusion

It can be deduced that taxation policies are subject to change quite often, either
to provide more revenue or to encourage some industry or to influence certiin
trends in spending. This means that the tax laws have to be amended or new
regulations issued to reflect these changes. In the UK the Finance Act is
amended every year by the budget speech of the Chancellor of the Exchequer.

23 In the 1970s Denmark had such a seriously progressive system that the taxpayers in the top bracket
paid705'/o of their income in tax. That is, more was paid in tax than was earned. This led some top
earners to evade the iop bracket by receiving payment in goods. Now there is a tax ceiling of 59'Io.
However, Denmark is still among the highest tax systems in the world.

14
 Taxation Theory

In Jamaica, the Minister of Finance introduces changes at budget time but

occasionally also during the financial year. This does not create an aura of
stability.

7.7 Review Questions

1. Outline the attributes of a good taxation system.

2. (a) Define and give examples of a progressive tax, a regressive tax and a
proportionate tax.
(b) How can the socially negative effects of a regressive tax be ameliorated?

a
J Assume that the Minister of Finance was considering lowering the rate of
income tax of individuals from 25% to 22%. what effects on the economy
would have to be considered before such a decision courd be made?

a. Why are tax incentives given to certain industries?

5 Cooperative societies and credit unions in ]amaica are exempt from tax on
their surplus (profit). why do you think this policy was instituted?

6. In pre-Columbian Peru when the ruler of the Incas conquered a tribe the
palace administrators (civil servants) followed the army and assessed the
tax each village had to pay. The tax assessed was in feathers, corn, silver,
livestock - whatever the villagers produced. It is recorded that one village
was so poor that the inhabitants had nothing that could be taxed so the
administrators assessed the vitlage on a stated number of quiverfuls of
lice2a. write a short paragraph on the taxation principle that those Inca
administrators were implementing by the extermination of lice in this way.

7. In the year following the gas riot protests of 7999 the Jamaican Government
reinstated the tax on gasoline by incrementally increasing the price perlitre.
There were no protests. suggest an explanation for the acceptance of the tax
in this second attempt.

8. Explain the marginal propensity to consume and relate this to fiscal policy
in a developing country.

24 A quiver was the pouch in which men carried their arrows and was a uniform size.

15
 CHAPTER 1

9. |amaica's Minister of Finance stated that the major restructuring of the tax
administration project (7997 to 2001) achieved the objective of (a)increasing
tax revenues from 22% of GDP to 24% (b) increasing the number of
registered taxpayers by 60 % since 1995-96 (c) increasing average tax audit
productivity by 60/".2s
Discuss these remarks in the context of the attributes of a good tax system
and comment on any disadvantage or negative effects in achieving these
objectives.

10.A tax is "a compulsory contribution levied by the state". Discuss.

lL.Discuss the significance for tax purposes of one of the following cases:
(a) Minister of Housing and National lnsurance and Another z;s Smith, (Bahamas
79e0)
(b) lnland Reaenue Commissioner €t Attorney General us Lilleyman and Others,
(Guyana,7962)

12. Explain and give examples of "bracket creep".

13. Briefly explain "indexation".

25 Address by Hon. Omar Davies, opening ceremony of Seventeenth General Assembly of the
Caribbean Organisation of Tax Administrators, Kingston, Iamaica, 22-26 Jttly 2002.

t6
 CHAPTER 2

Taxation in lamaica

2. lntroduction

|amaica is often described as being one of the most highly taxed countries.
There are taxes on goods brought into the country (import duties); taxes on
certain goods manufactured here (excise duties); taxes on company profits;
taxes on personal income (including dividends out of already taxed company
profif and interest on savings out of already taxed personal income); taxes on
payroll, paid by the employer (statutory contributions); taxes on land; taxes
related to motor vehicles (road licences, motor vehicle registration, drivers'
licences); taxes on the operation of businesses (for example, spirit licences for
operating a bar); various Parish Council rates, and the all pervasive General
Consumption Tax (GCT) which follows the goods, with few exceptions, from
the wharf through all stages of transformation and through every sale until
they reach the final consumer. This list is by no means exhaustive.
In colonial times the taxes raised by the British Sovernment were mainly
import duties and house and land tax. In 1869 there was enacted in |amaica a
law which provided for the appointment by the Sovernment of a Collector
General to collect customs and excise duties. Although there was direct
taxation in the UK from 7842, in the colonies revenue was raised from excise
and customs duties, stamp duties and house and land tax. It was not rr.,tlt tgtq
that a law was passed by which "a tax was imposed on the income of all
persons including companies". The first f100 of income was free of tax and the
tax rate increased progressively from a minimum of about one Percent to a
maximum of 10 percent. This was just after the First World War and the
revenues were intended to purchase surplus war material and equipment to
establish sources of employment for the demobilised soldiers.
Tax administration and tax collection have been of ongoing concern to
jamaican governments - both colonial and independent. In order to rationalise
the collection of tax and the overall revenue administration system the Reaenue

77
 CHAPTER 2

Administration Act was passed in 1985. This Act recognised various

departments responsible for assessing the taxpayer and for collecting from him.
The Inland Revenue Department (formerly Collector General's Department),
and the Income Tax, Stamp Duty and Transfer Tax, Customs and Excise, and
Land Valuation Departments were established. The Commissioner and
Department of GCT and Excise were added later.
A restructuring programme funded by the World Bank was implemented
over the period August 7997 Lo March 2001. The objective was to improve the
tax administration system to:
(1) Broaden the tax base
(2) Improve the efficiency and effectiveness of the tax administration
system by:
. Strengthening its organisation and management
. Improving the control of tax evasiory and
' Improving tax collection
(3) Encourage voluntary compliance.l

One of the results of the restructuring programme was the introduction of a

system designed to register as many taxable persons as possible. This meant
that anyone doing business with any tax collector (except in the case of land
taxes) was required to have a tax registration number (TRN). This immediately
brought into the tax net, for example, anyone who owned a motor vehicle.
Another result of the programme was the reform of the tax administration
structure.
A review of the project by the World Bank itself identified some areas not
covered in the project:
o Institutional weaknesses in controlling corruption, and
. Support for economic evaluation of the tax structure.
Despite these omissions and other weaknesses perceived in the project the
World Bank's overall evaluation was that they had designed in ]amaica a "high
value added reform" project.2
During 1998 new legislation entitled An Act to Amend the Rette'nue
Administration Act was passed in the House of Representatives. It effected the
following changes as of 1tt December, 1999:
(1) abolished the positions of Commissioner of Income Tax, Commissioner
of GCT and Excise, Commissioner of Stamp Duty and Transfer Tax
(2) abolished the Departments headed by the above and the Revenue

1 Davies, Omar, Minister of Finance of lamaica. Speech at 17th General Assembly of the Caribbean
Organisation of Tax Administrators, July 2002.
2 Taken from http:/ /siteresources.worldbank.org/INTTPA/Resources/964.pdf on October 9,2006.

ta
 Taxation in Jamaica

Board, repealing the Reuenue Board Act

(3) created departments for Revenue protection, Tax Administration
services, Taxpayer Appeals, Taxpayer Audit and Assessment
(4) provided for Commissioners corresponding to the new departments
(5) established a new position - Director General of Tax Administration
who was responsible for the running of all revenue departments. The
Director General was suPported by the Director General's Secretariat.

The revenue departments which remained from the original structure were
the
Inland Revenue, Customs, and Land Valuation Departments.
AII departments were headed by Commissioners and were organised along
functional lines. In the case of the Inland Revenue Department its tax collection
functions were expanded to include income tax, general consumption tax and
education tax, among others.
The Minister of Finance said that as a result of the programme, increased
tax
revenues were collected, the number of registered taxpayers increased by 60/.
over the 7995196 number, and average tax audit productivity increased by
60%. He intimated that the Government would be working with the
International Monetary Fund (IMF) to establish an even better tax system, and
one of the areas being considered was the "further,, reduction of the
discretionary powers of the Minister.3
It is not clear what was the outcome of the proposed arrangement with the
IMF but after a twenty-year run of the adjustments of the 19g0s, the
Government decided to have another review of the taxation system. It set up a
tax policy review committee (TPRC), led by Mr.
Joseph H. Matalon, to carry out
this review, but the TPRC realised that it needed assistance in the basic analysis
that needed to be done. Georgia state University's Andrew young school of
Policy Studies was selected to do this work under the guidance of prof. Roy
Bahl who had participated in the 1980s study.
Georgia state University (GSU) produced "The
Jamaica Comprehensive Tax
study" which was completed in August 2004. The study comprises ten
working papers, each covering separate areas of the subject.
The Finql Report of the Tnx policy Reuiew Committee based on the GSU study
was completed in November, 2004. "The Committee's approach has been to
analyse options for changes in the tax system that are consistent with our
understanding of the GOJ's economic objectives, and from this analysis to
present a package of reform proposals that is estimated to generate
approximately the same level of revenues as the current system.,,4 The TpRC

3 Davis, Omar, Minister of Speech delivered to 17th General Assembly of the

_Finance, Jamaica.
Caribbean Organisation of Tax Administrators,
Juiry 2002.
4 Final Report of the Tax Policy Review Committee to the
Government of Jamaica, Nov. 2004, 10

l9
 CHAPTE

concluded that the best way to achieve this was to "shift the present balance
arvay from the current heavy reliance on direct taxes and toward indirect
taxes,"s thus broadening the tax base.
The Minister of Finance announced in his budget presentation in April 2005
that the proposals in the TPRC's report would be implemented over a period
of four years beginning in 2005.6
In fact, the Government did not have four years in which to implement the
proposals as it was removed from office in the September 2007 elections. The
new Government continued to review the proposals to see which could
conveniently be implemented.
Another re-organisation of the Revenue Department took place when on
April 1, 207L,Tax Administration Jamaica (TA|) was established by the Reuenue
Administration (Amendment) Act,201.1. and began operating on May 7,201.7.TAJ
is a consolidation of the Inland Revenue Department, Taxpayer Audit and
Assessment Department and the Tax Administration Services Department. It is
under the management of a Commissioner General who is assisted by three
Deputy Commissioners General in charge of Management Services, Operations
and Legal Support.
o Management Services include finance and accounts; records
management; human resource management and training; information
technology; administration; property and Procurement management.
. Operations include customer service and registration; taxpayer
accounting, audit, investigations and assessments; tax collection;
enforcement of tax laws.
. Legal Support includes co-ordinating the provision of legal services in
relation to domestic legislation; tax treaty negotiation; litigation
matters; legal research and advice; international trade and tax matters;
legal advice and dealing with rulings.

All three deputies are required to provide status reports to the Commissioner
General on the matters under their purvtew.
The overall duty of TAJ is to
. administer the law relating to the audit, assessment, administration
and collection of domestic tax revenue
. collect all domestic tax revenue
o direct, organise and control all domestic tax collection activities
. administer related non-tax laws.

5 Final Report of the Tax Policy Review Committee to the Government of |amaica, Nov. 2004, 25
6 "S9.3-b in new taxes", The Doily Obseraer, Friday April 75, 2005, 2.

20
 Taxation in Jamaica

The Act states that domestic tax revenue in this context excludes post office
revenues and other revenue which under the Act or any other Act is required
to be collected by some public officer other than the Commissioner General.
The other departments of the Revenue Department left intact by the
amendment are the Customs Department, the Land Valuation Department, the
Revenue Protection Department and the Taxpayer Appeals Department. These
are all led by Commissioners who, except for the Commissioner of Land
Valuation, are under the "operational superintendence" of, and report directly
to, the Financial Secretary.
TAJ has indicated that new compliance strategies have been developed to
improve national registration, taxpayer education, debt management and
collection, inter alia, and there are new concepts about operations.
When we were preparing the third edition of this book in early 2007, we
raised the question of new tax legislation governing electronic commerce. The
response at the time did not demonstrate any urgency in the matter. Out of the
Ministry of Science, Technology, Energy and Mining has come legislation, the
Electronic Trmsoctions Act, 2007, which was passed in 2006 and promulgated in
2007. It was supposed to be the first of a number of regulations that would
provide a structured platform for the future development of electronic
business. It contains regulations dealing with on-line transactions. This was
followed by the Cyber Crimes Act and a data protection law is in the preparatory
stage prior to drafting.T lt would appear that the rules regarding taxation will
come some time in the future. The Commission of the European Communities
in June 2000, when contemplating the drafting of tax laws regarding e-
commerce, said they realised that existing "compliance, control and
enforcement models" then available to the various tax administrations would
be inadequate, and that international consensus was needed to preven! for
example, double taxation or unintentional non-taxation. One of the issues
which they addressed was the "on-line supply of digital deliveries, in
particular those destined to final consumers"S, fot example, downloads from
the internet. We believe the situation has been made more complex by the
introduction of mobile computers and telephones with which e-transactions
may be carried out. The question of the location of a transaction could present
some problems. We are not satisfied that our existing taxation laws can
adequately deal with these potentially sticky points.
In this chapter we deal with the background and history of the taxation of
incomes of individuals and companies as well as payroll taxes and the general

T Information supplied by a senior officer of the Ministry of Science, Technology, Energy and Mining
SCommission of the European Communities , "Proposal for a Regulation of the European Parliament
and of the Council amending Regulation (EEC) No 218 192 on Administrabive Co-operation in the
Field of Indirect Taxation"
 CHAPTER 2

consumption tax. Some of the other taxes will be touched on very briefly in the
later chapters, and the administration of income tax will be dealt with in more
detail in chapter 11, and that of the general consumption tax in chapter 12.

2.1 lncome Tax

The complexity of UK taxation as it had evolved was unsuitable for the colonies
and a simplified form of tax legislation was implemented which facilitated the
administration of the tax system by inexperienced aciministrators.
The |amaican administration of the tax was the responsibility of a three
member Assessment Committee appointed by the Governor. All persons liable
to pay tax were to submit a statement (return) of total income for the preceding
vear, so that the Assessment Committee could assess the tax payable. The
taxpayer was advised of the amount assessed and the Collector General, who
1\'as now charged with the added responsibility to collect income tax, was also
advised of the assessment. Collectors of Taxes were assigned across the Island
and they received the taxpayers' returns and collected the taxes. Under the law
the taxpayer was allowed to object to the assessment by the Assessment
Committee and to appeal to a judge-in-chambers, and if necessary to the Court
of Appeal. In 7928 in order to ease the burden on the courts, it was provided
that the taxpayer should first raise his objection with the Assessment
Committee which should review the assessment. If the taxpayer and the
Assessment Committee could not agree then either could appeal to a judge-in-
chambers. The Assessment Committee was replaced by an Income Tax Appeal
Board in 1955 to which both the Commissioner of Income Tax (CIT) and the
taxpayer could appeal prior to approaching a judge-in-chambers. In 1971 the
Appeal Board was abolished in favour of the Revenue Court.
There were continual amendments to the law over the years up to 1938. In
1939 there was a consolidation of these amendments and in that year the first
Commissioner of Income Tax was appointed.
Again in 1953 there was a consolidation of the amendments since 7939.In
1953 also the Pay As You Earn (PAYE) system was introduced.
By the next year the law of 1953 was repealed by Law 59 of 7954. This law
included substantial redrafting and new legislation and came into effect on 1st
January 1955. It forms the basis of the current lncome Tax Act.
After 1955 there were several amendments - sometimes more than one in a
vear. In 7976 the laws were consolidated into the lncome Tsx Act and formed
part of the Revised Laws of famaica.
The law provides for the taxing of individual as well as corporate income. As
far as the individual is concerned some of the areas that were given attention
over the years/ were:
o the tax-free threshold starting at f,100, and after several changes, set at
 Taxation in Jamaica

$80,496 in 7997, fi100,464 in 7999 and 9120,43 2 in 2007, $769,704 at

July
7, 2005 and 9793,440 at January 7, 2006, $ZOO,3O4 at 1,
July 200g; $220,27 2
at January 7, 2009; 9320,296 at July 7, 2009 and g441,76g at
January 1,
2010 and $502,372 at |anuary 2013.
. the applicable rates of tax for various bands of income
. family allowances and dependent relative allowances
' linking of husbands' and wives' incomes: at first it was provided that
husbands and wives should be separately assessed. In 1939 the new law
provided for the wife's income to be deemed to be her husband,s and
to be assessed in his name. rn79z2 the incomes were again separated,
but the couple could elect to have the wife's earned income considered
her husband's
o additional charge (surtax) on incomes above a certain amount
o tax avoidance
. relief for pensioners
o relief for elderly taxpayers.

one of the more interesting innovations was the system of tax credits
introduced in 7972. The tax was calculated on the statutory income,
and from
this the tax credits were subtracted, the balance being the tax payable.
The
credit was an amount allowed the taxpayer in respect of a certain
responsibility, expense or saving. By 19g3 the list of crediis had
grown to 16
and included the personal allowance, wife allowance, children allowance,
dependent relative allowance, life insurance premiums relief,
pensioners
allowance, capital growth investment credi! mortgage interest
relief and
household helper relief.
In the case of companies the income to be taxed (described as the chargeable
income) is arrived at by totaling companies, incomes from all
sources and
deducting all permitted expenses. From the beginning expenses incurred
"wholly and exclusively" in acquiring the income were allowed as
deductions
in calculating the taxable profit.
Provision was also made for some form of depreciation to be allowed
as a
deduction. Some of the amendments over the years have related to
the l'evel of
depreciation to be allowed. The tax law did not accept the accounting
method
of calculating depreciation, but rather established rates for accelerated
depreciation described as capital allowances. Capital allowances
on property,
plant and machinery were introduced in rg3g followed by- various
amendments over the next 25 years relating to initial allowances,
investment
allowances, balancing charges and balancing allowances. In 1944
theprovision
of special relief for farming operations was introduced. This was done by
allowing half the capital cost of certain improvements as a capital allowance.
There was a period when companies had to pay companies profits
tax at

2t
 CHAPTER 2

between 25 and 35 percent as well as additional company profits tax (ACPT)at

a rate of 15 percent - later reduced to 10 percent. Companies were categorised
as follows:

Type of Company Tax Rate

1. Agricultural company 2s%
2. Open Company other than agricultural 30%
3. Intermediate company other than agriculturai 32.5%
+. Close company not agricultural nor investment
company with annual chargeable income not
exceeding $25,000 30%
5. Close company not agricultural and not in
4 above 3s%
Many of these provisions for both individuals and companies have had "ups
and. downs"; some like the surtax did not survive until the time of the tax
reform.
Some public entities were exemPt from paying income tax. Parish Councils,
the Kingston and St. Andrew Corporation, the National Water Commission
and other Government Institutions or Departments were specified. An
amendment effective on Decemb er 23, 2003 but for practical Purposes effective
on january 7,2004, has listed a number of public entities which no longer enjoy
a tax-free status. These are:
. The Airports Authority
o The Betting Gaming and Lotteries Commission
. The H.E.A.R.T. Trust
. The Jamaica Development Bank
o The |amaica Mortgage Bank
. The |amaica Racing Commission
. National Insurance Fund
. The National Housing Trust
. The National Water Commission
. The Petroleum Corporation of |amaica
. The Urban Development Corporation
The system seems to have been rather complicated and the actual tax rate was
well over 40 percent for many companies. The reform set one rate of tax for
individuals and companies and did away with all the several categories of
companies. This rate was 33 % percent which in the case of companies is lower
than the aggregate of the CPT and ACPT previously charged. The tax credit
system for individuals was also removed. Later the rate for individuals was
reduced to 25 percent.
on |anuary 1., 1986 there came into effect the above mentioned reform

24
 Taxation in Jamaica

described by the then Prime Minister as an equitable system of taxation ,,which

met the economic objectives and which the Revenue Department could
administer". His government's assessment of the tax system up to the time of
taking office in 1980, was that it had "developed over the years in a piece-meal
manner and that changes were dictated primarily by the need to raise
additional revenue".9 The |amaica Information service expressed it thus:

Jamaica has long laboured under an income tax system that was complicated,
cumbersome and grossly unfair. A high marginal tax rate made it a disincentive to a
productive work ethic. AIso, too many people were not paying their fair share. There had
to be a change, and tax reform is it.10

As regards the income tax "the key elements of the 1986 reform program were:
1. The credit system was replaced by a standard deduction of J$g,5g0
2. A flat rate tax of 33 % percent replaced the progressive rate structure
3. Fringe-benefit type allowances were made taxable as ordinary income,
with some exceptions
4. The preferential treatment of overtime income was eliminated
5. Interest income, above a certain level, was made taxable,,.r1

The findings of the GSU study completed in 2oo4 suggested that about z5
percent of self-employed and 25 percent of employed (non-self-employed)
persons were evading the tax net, yet about 22 percent of the Government,s
revenue in2003l04was generated by the PAYE system. There was a question
as to whether Government relies too heavily on the individual income tax.
Some strong recommendations were made for the increase of the individual
income tax threshold and for indexing it to inflation, and for the elimination of
tax free allowances.l2 The Tax Policy Review Committee agreed with these
recommendations.
The increase and indexation of the threshold have been accepted by the
covernment but the recommended increase was felt to be too sharp, so it
would be dealt with in stages. The proposal that the threshold be increased to
$275,784 as of January 2007 and indexed thereafter was deferred, and it was not
until July 2008 that any adjustment was made. To date, the indexation has not
been implemented.
There have been attempts to deal with some of the outstanding matters as far

9 Thc Jantaican Tnx Reform, edited by Roy Bahl, published by the Lincoln Institute of Land policy,
Massachusetts, USA, 1990, page xi.
10 JIS release, Tax Reform, c.7986.
TTThelamaicanTaxRet'orm,editedbyRoyBahl,publishedbyLincotnlnsriruteof Landpolicy, 1990,page
1s5.
12 The Jamaican Individual Income Tax, Andrew Young School of Policy Studies, Georgia State
University, lanuicn Comprehensiue Tax Stutly, Working paper Five, August 2004.

25
 CHAPTER 2

as the individual income tax is concerned. These are:

o The elimination of preferential treatment of a number of allowances
including housing in favour of allowing only legitimate reimbursable
expenses: some action was taken effective August 1,2009 with regard
to living accommodatiory laundry and clothing allowances and at some
future date with regard to tourism gratuities.
. The review and adjustment of the basis on which the taxable portion of
the motor vehicle allowance is computed: still to come.
. The exemption from taxes of dividends from unlisted companies in the
hands of the taxpayer: in December 2008 the then Prime Minister
announced that all dividends paid by Jamaican owned companies were
to be zero-rated but in the Budget presentation of 2072, the Minister of
Finance announced that dividends would be taxable once more.13 The
situation has been rather fluid and the changes will be detailed in
chapter 5.

\\'ith regard to corporation taxes, matters still outstanding are:

r The reduction of the rate of corporate taxes to 25 percent. In 2012 the
Minister of Finance in his budget speech announced that the rate for
regulated companies would remain at33% percent and for unregulated
companies the rate would be reduced to 25 percent. Regulated
companies are those regulated by the Financial Services Commission
(FSC), Office of Utilities Regulation (OUR), Bank of ]amaica (BOJ) and
Ministry of Finance. The effective date would be January 7,2073.
. Consideration is being given to implementing a system of charging a
minimum tax based on accounting profits irrespective of tax adjusted
profits. This has been accepted and is to be implemented in |anuary,
2073.14

The following recommendations on tax incentives are still to be implemented:

o Tax incentives are to be limited and redesigned to ensure their
effectiveness. The Government should commission an independent
study of existing incentives to determine the costs and benefits and to
make recommendations for their redesign as necessary. In the
meantime a moratorium should be instituted on extensions to
previously granted incentives.
o No more tax holidays should be granted and existing ones should be
allowed to expire.

i3 No adjustment was contemplated for the rates applicable to Building Societies and Life Insurance
Companies.
14 As of 1 November 2012 the GCTAJ has not published details of the implementation
 Taxation in Jamaica

. Any new orders offering tax relief should be for duty and/or GCT
during set-up of the businesses.
o Government should review the Common External Tariff in concert
with its CARICOM partners.

There does not seem to be any immediate follow-up on the last of these
recommendations.
As Mick Moore pointed out in his article referred to in chapter 1, in contrast
to the OECD countries where taxation issues are in the open and often
determine the domestic political agenda, in the less developed countries of the
South generally the tax issues are dealt with in private, such as some small
groups trying to get waivers of import duties. It is only when the government
has tried some tax reform that many of the taxation issues have been brought
into public political agenda.ls
]udging from the many statements which have been made about the high
level of waivers granted over the past few years, it would aPPear that the tax
relief which is most popular among the local entrePreneurs is waivers' The
situation was so out of control that the Government is bringing all sorts of
measures, including legislation, to govern waivers and incentives. In the 201'2
Budget debate, the Minister of Finance announced the cancellation of "blanket
discretionary waivers" and the abolition of waivers in some specific areas such
as the importation of horses.16
Because so many of the previous proposals had been left hanging, and the
Government is in the unfortunate situation where it must make drastic changes
in the way it manages its fiscal affairs, the Private Sector formed the Private
Sector Working Group (PSWG) which updated the document previously
presented by the Tax Policy Review Committee in 2004. With reference to
individuals, the new proposals include:
. Reduce the tax rate to 15 percent for incomes up to $1.1m.
. Establish a common tax base for all payroll taxes.
. Remove the salary cap and reduce the rate for NIS.
. Establish a PAYE employment tax credit (as an incentive to the
employer to hire more staff).

In the case of the corporate taxpayer the new proposals are:

o Cease granting incentives involving tax holidays except in limited
circumstances (for example, charitable organisations).
. Highly regulated entities are to agree to pay the current companies

15 Moore, Mick. "Taxation and the Political Agenda, North and South", Forum for Deuelopment Stuclies,
No. 1-2004.
16 Ministry of Finance. Ministry Paper No' 32 - Revenue Measures Fy 207212013.

27
 CHAPTER 2

income tax rate of 33% percent during a transition period. (See above
where regulated companies are still being taxed at 33% percent, but
there is no reference to a transition period.)
All other companies are to pay 15 percent Companies Income Tax and
10 percent withholding tax. (Compare provision above for unregulated
companies to be taxed at 25 percent as from |anuary 2073.)
Introduce a Minimum Income Tax payable by all companies registered
in |amaica at the higher of 0.5 percent of accounting profit or $100,000.17
(See above where minimum tax of $60,000 is established.)

This document was under review by the Government as it prepared to finalise

a budget which satisfied its own requirements and those of the IMF. No doubt
more of the proposals will be adopted during the next budget exercise.

2.2 Payroll Taxes

Persons in employment are subject to having their salaries or wages taxed at

source, not only under tlne lncome Tax Act but also under the National lnsurance
Act, the Nstionsl Housing Trust Act, and the EducntionTax Act.
The employer on the other hand, in respect of the salaries and wages he pays
out is subject to charges under the National lnsursnce Act, National Housing Trust
Act, the Education Tsx Act and under the Humnn Employment and Resource
Training (HEART) Act.
Some of these taxes have not found favour with the reformers as they are
seen as a burden on both the taxpayer and the tax administration. As regards
the latter, it was recommended that the administration of the NIS and the NHT
be merged. More recently, harking back to an earlier recommendation, it was
decided that the reporting and payment of payroll taxes should be consolidated
to facilitate their administration. This became operative on December 37,2077.

2.2.1 National lnsurance Scheme (NlS)

The NIS was established in 1965by the National lnsurance Act.It is a funded
social security system administered by the Ministry of Labour and Social
Security. Contributors are employed persons, self-employed Persons/
voluntary contributors and employers. The age requirements are 18 years to
retirement. Retirement age is given as 65 for mery 60 for women if actually
retired. If not, contributions continue until age 70 for men and 65 for women.

lTTaken from http://wwwpsoj.org/fq=news/private-sector-working-group-presents-proposal-to-

parliament on May 9,2072.

2E
 Taxation in Jamarca

Benefits to contributors are:

. old age benefit - pension
o invalidity benefit
. widow's and widower's benefit
. orphan's benefit
. special child's benefit
. benefits attributable to injury or disease
. funeral grant
o maternity benefit (domestic workers)
o maternity grant to certified exporter
. NI Gold health scheme

The penultimate bullet needs some explanation. If an employer who has

approved status under the Certified Exporter's Scheme makes maternity leave
payments for eight weeks to an insured employee and if at least 75 percent of
his labour force consists of females, then the employer is entitled to a maternity
grant equivalent to the last two weeks' pay to that employee less any statutory
deductions taken therefrom.
Beginning in fanuary, 2011, the age at which one may start to receive the NIS
pension is 65 for both men and women. Previously women became eligible at age
60 and men at 65. The plan is for the retirement age for women to be raised one
year at a time over five years, so that women who reached age 60 in 2011 would
have at most one year to wait for their benefits, while those who become 60 in
2072 will have at most two years to start receiving their benefits, and so on.
The following contribution rates were set to be applicable as of Sth February
7996:
Domestic workers $10 per week
Self-employed persons 920 per week
Other workers 2.5% of earnings up to a maximum of $4,810
per week

The provision regarding "other workers" was changed as of October t, ZOOa to

2.5 percent of earnings up to a maximum of 99,675 per week or 9500,000 per
year. As of August 2 ,2070, the maximum earnings to be charged rose to 91.0m
per year .
The employers match the employees' contributions.
As of August 2, 2070 contributions from domestic workers and self-
employed persons using NIS stamps were increased from 920 to $50 per week.
I

i
A voluntary contributor is someone who is not required to, but elects to, pay
NIS contributions. This category included members of the Defence Force and
Members of Parliament, and they have since August 2, 2070 been required to
 CHAPTER 2

pay as other employed persons.ls

There is available to us a case from the Bahamas which tested that country's
National Insurance Act. This is the Minister of Housing and National lnsurance
nnd Another a Smith, which sought an answer as to whether or not the NIS was
a tax.
In 1955 the Government of the Bahamas passed the Hawksbill Creek Grand
Bnharnn (Deep Water Hnrbour nnd lndustriql Areo) Act and entered into an
agreement with the Grand Bahamas Port Authority Ltd (Port Authority)under
rvhich the Port Authority leased substantial areas of Grand Bahama for 30 years
(later extended to 35 years) to construct a deep water harbour and develop the
area. The agreement gave to the Port Authority and to persons working in the
port area exemptions, for a period of 30 years (later extended to 35), from a wide
range of taxes. These covered property tax, capital tax, income taxes, excise taxes,
export taxes, stamp duties and banking taxes. The agreement also provided that
any new tax, not falling within the taxes mentioned then, would not be imposed
at any greater rate than it was imposed in any other part of the Bahamas.
ln 1972 the Government of the Bahamas passed the National lnsurance Act
(\fIA) under which the employer and the employee each pay a contribution
based on the level of pay received and the employer is required to deduct the
employee's contribution from his pay. After the introduction of the NIA both
employers and insured persons in the Hawkesbill Creek development area
complied with it.
In September 7978 Mr. Smith, an attorney-at-law, was employed by a law
firm whose offices were in the Port Authority area and later he became a
partner in the firm and as such an employer and licensee of the Port Authority.
Both as an employee and an employer Mr. Smith paid contributions up to
October 7984 at which time he brought a case against the Minister of Housing
and National Insurance to the effect that
(a) he was not liable to pay contributions as these were a tax from which he
was exempt under the Hawkesbill Creek agreement and alternatively
(b) if they were not a tax, they amount to a deprivation of his property
without compensation in breach of article 27 of the constitution.

The case ended up at the Privy Council where it was decided that national
insurance contributions from both employers and employed persons were a
form of taxation; but the contributions from employers which were due
regardless of earnings or profits were a tax on employment rather than on
income and could not fall within the exception from taxation of income allowed
under the Hawkesbill Creek agreement. Moreover, any interpretation of the

lS For more details see Chapter 4, section 4.1.1

to
 Taxation in Jamaica

agreement which would treat the contributions

of employers differently from
those of employees or self-emproyed persons wourd have such bizarre
consequences that it could not be accepted.

2.2.2 Education Tax

The Education Tax was estabrished in
Jury 19g3 by the Educntion Tax Act. rts
I goals, such as increasing teachers,
taxes collected however go directly
fund) and are not earmarked or
mes.

to it is that education does ,,o, ,""o,1'il"i1T;8,"".?i":hT.HT:tTn:

recommendation of the Task Force on
Jamaican Tax Reform was ,,to eriminate
this tax and to raise the same revenue (if necessary)
through the individuar and
corporate income tax. . . . The burden of this
reform on Individuars wilr have
the same pattern as the individual income tax,
which is more progressive than
the Education Tax because the latter has no standard
deduction,,. The Task
Force was doubtful that this suggested reform
would be accepted. The TpRC,s
Report also recommended the erimination of the
tax and its .eplacemen tby a
commensurate increase in the individuil income
tax.1e
The applicable Education Tax rates are, for employ
ees, 2% of total taxable
income, that is, gross pay less NIS and pension,
and 3% oftaxable income for
employers.
Certain employers are exempt from the employer,s
- portion of education tax.
These are:
. A Ministry or Department of Government
. Any Parish Council
. The Kingston and St. Andrew Corporation
. The University of the West Indies.

The Minister by notice in the Gazette may

add to or remove entities from thid
list.
According to the GSU studp "the rationare for
these exceptions is not
readily evident".2o

19 Ashford w Meikle "Tax Reforms Can Benefit small Businesses"

, The sunrlay Glentrer,March 13, 2005,
20 Alm' James and sally wallace, "Payroll Taxes and
Contributions" , latnaicn ComTrrertensiae Tax study,
Working Paper Six, August ZOOE,LZ.

3l
 CHAPTER 2

2.2.3 National Housing Trust

The National Housing Trust (NHT) was established in 7975 although the
current features of the NHT are governed by the Nstional Housing Trust Act,
passed in7979. The Trust was established to augment and improve the existing
stock of housing.
Contributors may be employed persons, self-employed, voluntary
contributors and employers. As in the case of the NIS, voluntary contributors
are persons who are not liable to pay this tax but who choose to do so. On
application to the Minister they may receive a certificate from the Minister
authorising them to make contributions. Contributors may begin to make
contributions from age 18 to retirement.
Benefits to contributors are:
o a variety of housing benefits for qualified contributors
. refund of individual contributions after 7 years (i.e. in the 8th year)
. cash grant on death, retirement or permanent incapacity.2l
The retirement age is 65 for the purpose of benefits in respect of contributions.
The employee's contributions are vested with the employee. The employer's
share is not. NHT is payable on emoluments at 2 percent for employees and 3
percent for employers. Although there is the possibility of a cash grant at some
critical points in one's life, and a refund of each year's contributions in the
eighth year, there is an element of tax in this payroll deduction. Many of the
contributors do not get housing benefits or seek benefits, and as the
contributions are held for seven years there is a possibility that one may not
manage to reclaim them.
statistical Data put out by the Bank of famaica show that in 2002 the NHT
financed 6,367 mortgages amounting to 93,966.0rn, while in 2010 there were
6,806 mortgages amounting to $75,774.6rn The numbers have not increased
greatly, but the values indicate the vast increase in housing costs over the
period.
In 2005 the NHT was made to contribute to the financing of projects for the
development of education, when the Government of the day passed an Act to
that effect. The limit of the expenditure was set at $5 billion and the provision
became inoperative at August 25,2006.

l1 Such grants are not taxable under lhe lncome Tqx Act.
 Taxation in Jamaica

2.2.4 Human Employment and Resource Training

(HEART)

The HEART Trust Fund was established by the Humnn Employment

and

ResourceTraining Act of 1982. The objectives are:

o to d.evelop, encourage/ monitor and provide finance for training
schemes for employment of trainees
. to Provide employment oPportunities for trainees
o in
to direct or assist in the placement of persons seeking employment
]amaica and
o to promote emploYment Projects
. to that thlre is an adequate number of persons trained for
".,rrre
employment in the technical and vocational fields
. to maintain high standards in the training in technical and vocational
subiects
o to co-operate with other organisations in matters relating to technical
and vocational education and training
o to certify instructors in technical and vocational subjects
. to approve and accredit institutions which offer training in technical
and vocational subjects
. to approve and certify courses in the technical and vocational
areas'

are to
The rates, terms and conditions relating to the payment of contributions
subject to
be prescribed by the Minister of Finance, by way of regulations
affirmative resolution in the House of Representatives. The contributions
3 percent of the
prescribed under the Act are paid by employers at the rate of
total emoluments of employees. Contributions are not paid by employers
whose annual pay bill does not exceed fi773,328. An employer
who pays
emoluments to a HEART trainee under the scheme will be
allowed a credit
Under the lncorue Tax
from the HEART Trust up to a limit of $600 per trainee.
Acf the employer may dedrct the contributions in arriving at his chargeable
income. This deduction is governed by the following rule: in
the first year
years deduct
deduct 100 percent of the contributions, in the second and third
and 80 percent in
75 percent tf tn" contributions related to a male trainee
relation to a female trainee.

2,3 MonthlY and Annual Returns

The TAJ has introduced new forms for the reporting of the
payroll taxes' All
(TRN) and an NIS
employees must have their Taxpayer Registration Number
,1r*b", by which they are identified for the Purpose of recording in-house

33
 CHAPTER 2

:neir individual emoluments and various deductions therefrom each payment

:enod. Each month, all the employees' deductions for, and the employer's
natching contributions to, the NIS must be totalled and reported on form SO1
:Lrgether with similarly combined figures for NHT and Education Tax. In the
ra- of PAYE only the employees contribute, while only the employer
contributes to HEART . The total of all these various contributions should be
lemitted with this form, so it follows that the combined amounts are now to be
paid in one place, that is, at any tax office, whence the amounts due to the NIS,
\HT and HEART will be transferred to them. The employer must make the
remittance by the 14th of the following month.
An annual return on Form SO2 is prepared at the end of the calendar year.
Form SO2 is accompanied by Schedules A, B and C. Each schedule lists each
employee, properly identified by his TRN and NIS reference number. Schedule
B gives values for all perquisites like housing and motor vehicles while
Schedule C lists the deductions for Pensions (except NIS), Employee Share
rJrvnership Plan, and any other agreed deduction. The information on these
nvo forms are brought together on Schedule A and the grand total of each
column is taken to Form SO2. These are usually accepted up to the 14th
February of the following year. From an accounting point of view, it is
advisable for the employer to complete the annual return and then pay the
December amount. This allows for the correction of any mistakes in
overpayment or underpayment. The December remittance can therefore be the
balancing amount.
At the end of the year the employer also prePares for each employee a
Certificate of Pay and Tax Deducted - Form P24. This is usually done after the
annual return has been submitted.

2.4 General Consumption Tax

The General Consumption Tax was introduced in October 1997 by the Genernl
Conxtmption Tax Act.It is a general sales tax which is chargeable on goods and
services imported into famaica and on all business transactions carried on by a
taxpayer registered under Section 27 of the General Consttmption Tnx Act.
Some goods and services are exempt from this tax, while the tax rate on some
is set at zero. The standard rate was 10 percent when the tax was introduced,
but it was raised to 721/z percent then to 15 percent and as of May 7,2005, to
16.5 percent. The Minister went beyond the recommendation of the TPRC in
this instance, as their recommendation was for an increase to 16 percent. On
Ianuary 7, 2O\0, the standard rate was increased to 17.5 percent. In the 2012
Budget presentation the standard rate was reduced to 16.5 percent. There are a
number of other rates applicable to items in the telecommunications and the
tourism sectors.

34
 Taxation in Jamaica

The GCT replaced the following indirect taxes:

. Excise duty
. CARICOM duty
o Consumption duty
o Entertainment duty
o Retail sales tax
. Telephone services tax
o The hotel accommodation tax
. Additional stamp duty on imported goods (except in the case of In
Bond Shops, 'protected goods', alcoholic beverages, tobacco and
petroleum products).

Section 64 of the General Consumption Tax Act du/ry amended the affected
sections of relevant acts, and section 65 repealed the Consumption Duty, the
Entertainment Duty, Retail Sales Tax, Telephone Service Tax and the Hotels
(Accommodation) Tax Acts.
The registered taxpayer is required to collect from his customers the taxes on
the sales price of the goods or services he sells (output taxes) and to set this off
against the taxes he pays on his purchases (input taxes). Any excess of output
over input taxes must be paid over to the TA], while any shortfall may be
carried forward to the next period as a credit. Remittances and reports on the
prescribed forms are to be submitted to the TA| on a monthly basis and should
cover the activities of the previous month.
This tax is in effect a tax on the value added on an item between one
transaction and the next. If no value is added then the input tax would be equal
to the output tax and no additional revenue would flow to the government
beyond those duties and taxes collected at the port if the item is imported, or
any excise duties if the item is produced locally.

2.5 Commentary
In the final report of the Tax Policy Review Committee in2004, it was reported
that the technical analysis showed that |amaica is not a particularly high taxing
country. Ratios of taxes to GDP were comPared with those of some countries
with populations of two million to four million and all other Caiibbean
countries, and it was found that the taxes in |amaica were "about average for
this group of countries". Further analysis using a sample of 1,17 countries
indicated that |amaica's taxation is equal to, or below, the average of the
sample. The reason the |amaican taxpayer probably feels burdened is that there
is such a high level of non-compliance, those who do Pay are likely being taxed
at an extremely high level.22

22Final Report of the Tax Policy Reuiezo Committee to Gooernment of lnmaica, November, 2004,72

35
 CHAPTER 2

In in the firm PricewaterhouseCooPers was reported to

2009, a tax expert
have said that Jamaica's taxation level was not out of line with other countries
in the region which were at Jamaica's stage of development. when compared
with developed countries, famaica's tax rate was not particularly high. He
added that the perception that we are very heavily taxed came about because
we have to pay for services the costs of which should be covered by the taxes
we already pay. He referred to countries like Canada and the UK which are
heavily taxed but provide first rate health and other social services.23

Productive of Revenue

As indicated above, the reform was to provide the same level of revenue as
would have flowed without reform. This was described by the TPRC as being
"revenue neutral". From a revenue raising point of view one of the most
successful reforms has been the introduction of the GCT. From the table below
it can be seen that from the first year in which GCT and special consumption
tax (SCT) were introduced the collection was significant and has continued to
increase every year and is now one of the main supports of the budget. The
reform proposed to use this as the main plank of Government revenue. This
might well be feasible, as the results of 2011 / 12 show the total of GCT and SCT
outstripping returns of income tax.

Jamaica: Selected Fiscal Years: Income Tax, GCT and SCT Revenue

Fiscal Year Income Tax GCT + SCT

]$ millions J$ millions
7985 I 87Y 1.,455.6 not applicable
7997 192. 4,746.7 1,553.8
7996 I 97. 25,493.0 27,983.7
2001 /02s 35,495.4 34,624.9
2oo2lo3tl 39,045.9 40,070.5
2oo3 / o4s 55,379.6 49,387.6
2004/05t1 63,137.6 54,442.1.
2oos/o6s 66,723.8 59,538.1
1006 / 07q 76,055.3 70,304.2
lo07l 0891 92083.8 78,564.9
1008/Oes 1.07,625.5 97,323.7
1009/ 10fl 1.L8,459.7 97,228.4
lo10/ 11tl 703,999.7 779,279.8
'1.23,992.7
r011 /12S 1.06,430.3

l-: iaken from website http:/ /iamaica-gleaner.com/gleaner/20091216/news/news4.html on June 13,

lr-112
 Taxation in Jamaica

Sources:
Y Figures taken from Estimates of Expenditure prepared by Ministry of Finance
* Figures taken from Statistical Abstract prepared by Statistical Institute of Jamaica
il Figures taken from Financial Statements & Revenue Estimates prepared by Ministry of
Finance

Certain to the taxpayer

The system was seen by the analysts as being rather uncertain because of
"discretionary waivers, formal tax relief and uneven administrative practices
that lead to differential treatment of individuals and companies" - a situation
seen as being "overly friendly to some taxpayers".24 This means that some
taxpayers have been able to negotiate for themselves a more satisfactory
package. If the proposed reform of the waiver policy is promptly and properly
implemented, that would be one solid move towards making the system more
"certain" to the taxpayer.

Convenient to the taxpayer

Payment of tax due by payroll deduction is convenient to the

employee/taxpayer, but the present system of computing four separate payroll
taxes is still burdensome to the employer although now all are reported on the
same form and paid together. Since the NIS, NHT and HEART still operate
under their own laws, no doubt each tax or contribution still has its own
independent audit programme. The Jamaican Tax Structure Examination
ITSE) project recommended simplification of payroll taxes by (a) combining
NIS and NHT (b) eliminating education tax and raising the revenue this
produced by increasing the tax rate (c) streamlining administration (". . . the
present system of separate collection forms and audit departments for each
payroll programme makes little sense. One collecting agency should collect all
five payroll taxes." )25
These taxes again came in for criticism in the 2004 report on the system and
it was recommended that the administration of the NIS and the NHT shodld be
combined. Education Tax and HEART were seen as two further taxes on
income which should be eliminated.26 As can be seen the action to date is only
the combination of the reporting and the payments.

24 Final Report of the Tax Policy Reuicttt Conunitte e to Gotterwnent of lantnicn,November , 2004, 20
25The JTSE Project dealt with five payroll taxes/deductions. The fifth not dealt with here is the Civil
Service Family Benefits Scheme.
26Final Report of the Tax Policy Rettiettt Conutittee to Coaernntent of Jntnnicn, November, 2004, 30-31

,7
 CHAP'I ER 2

The self-employed, unless they employ an accountant, may find the

:,i ment of taxes rather inconvenient, involving the preparation of tax returns
':.i the joining of long lines at the collectorates. Some persons may eventually
-= able to pay all their taxes on-line, thus reducing the inconvenience to them.

Impartial between one person and another

-:.e analysis of the system for the proposed reform found that among the
-: jivrdual taxpayers, allowances and gratuities had created some inequities.
,r:.erther source of inequity was the preferential treatment given to some
::\ravers through exemptions under the GCT. The self-employed, by evading
--:.e tax net, were also seen as enjoying an unfair advantage.2T

-\s regards companies, the "favourable tax preferences" (such as tax

-:.;entives) granted to some created discrimination. Relief from import duties
-:. some goods due to negotiated special treatments was also seen as
:rscriminat ory.28
The proposed reform was the correction of most of the above inequities and
::.e use of the sales tax (GCT), being fairer to all taxpayers.
The current proposals from the Private Sector Working Group have much
::.e same tenor.

\djustable

- he proposed reform brought the income tax exempt amount (threshold) into
iieater focus by recommending significant increases to it and indexation of it
:o the inflation rate. The threshold has been increased although not to the level
:roposed, but there has been no further discussion about the indexation. The
;lat rate also may be increased or decreased as the circumstances warrant.
These are indications that the system is adjustable both for the individual and
:he corporate taxpayer.

Unharmful to effort and initiative

The TPRC saw the reduction in the tax rate for companies as o.," *ry of
=hifting the burden of taxation from owners of capital, while raising the
threshold and eliminating education tax and HEART as shifting the burden
irom labour.2e The latter should lead to the reduction in the price of labour,
thus contributing to a reduction in production costs and consequently an
lmprovement in Jamaica's competitiveness.30 Since both the owners of capital

)l Fttnl ReTtort of thc Tox Policy Reztieitt Cotnmittce to Goxertuncttt ol lonnico, November ,2004,39
i: iiral l{eport oJ the Tox Poli;rl Reuieio Conrruittac to Goucrturrttt ol lnnnicn, Novcmber ,2004,22-3
lg Finnl Rcytort of the Tnr Policy Rcttiettt Connrtittec to Cottertmrcnt of Jntnnicn, November ,2004,36
l,r Frnni Reptort of the Tnx I'olicy Rtt inp Conunittec to Gotternntetrt o.f lntrnica, Novcmber ,2004,39

38
 Taxation in Jamaica

and the owners of labour wourd have

some rerief, this would tend to encourage
effort and initiative. The recent lowering of the
tax rate of unregulated
companies only partially answers
this proposal.

Consistent with government policy

as two important objectives of

One of the ways of achieving
x net should eventually work

Equitable in its distribution of the tax

burden

one of the questions which exercised the

minds of the persons on the TPRC
was the equity in the proposed system.
They saw that if the emphasis is to
be
vould suffer more than the rich; therefore
s recommended. Those businesses
that
e reduction of taxes on the payroll but
in capital stock leading to
increased employment and produ",i"i,l,.;Ipunsion

2.6 Conclusion

Although the TpRC report was the resurt

of a request from the Government
Jamaic4 we can safery say at this stage that all of
th" .".o--"rautio.,, were not
accepted.
The proposals of the pswG are under
review but arready we know that
some of the recommendations are
not fully acceptable.
The criticism in the report of successive
-T'RC governments
introducing
piece-meal reforms to the system without sufficient emphasis
consistency of the system as a whore, on the internal
wourd no doubt stilr hord true.
there is
can ther
er set of
ent of the system.

37 Final Report of the Tax policy

Reuiew Committee to Gouernment
32 Final Report of the Tax Policy of lamoica,November, 2004,
neuiew coiLmi't',rr'ioZ"orrrr*rnt 9
of lamnico,November 2004, 40_1
,

l9
 CHAPTER 2

2.7 Review Questions

Summarise the main changes to the |amaican taxation system resulting from
the tax reform Programmes from 7986 to 2006.

\\Ihat are the advantages and disadvantages of the GCT?

Outline the education tax system and discuss this tax in the light of taxation
theory.

,,Payment of tax due by payroll deduction is convenient to the

employee/t axpayer," Discuss this statement in relation to ]amaica's current
(2012) payroll deduction system.

\Vhat are the advantages of the Taxpayers Registration Number? Are there
any disadvantages?

Represent diagrammatically the new tax administration structure

intioduced by the restructuring Programme 2O1O 177 and comment on the
management efficiencies this produced'

-{re contributions to }amaica's National Insurance Scheme (NIS) a tax? Give

reasons for your answer.

-{ccount for the perception that }amaican taxpayers are very highly taxed
compared to taxpayers in other countries.

Summarise and comment on the main recommendations of the Tax Policy

Review Committee (Matalon Report/Georgia State University Study).

40
 CHAPTER 3

Taxation of Emoluments - I

3. lntroduction
-emoluments, refers to the salary and other profits one earns from
The word
the word emoluments as the
being employed. lt will be necessary to dlfine
Irtconte Tax Actenvisions it, as lt,ell as
the concept of being employed'

3.f Emoluments

The lncome Tnx Act (section 2(1)) states that emoluments include
. all salaries, fees, wages
. all provisions or Pavments rn respect of
living or other accommodation
entertainment
utilities
domestic or other services
whatsoever
' all other benefits, perquisites and facilities
respect of expenses
. all sums paid to uny-p"rson bv an employer in
whether reimbursable or not
allowances payable in
. all annuities, pensions, Superannltation or other
respect or puri services whether legally
due or voluntary and including
a pension or other
lump sums paid in commutatio'-t oi l" lieu of
periodical suPerannuation pa1'ment'
to the
. any puy*"r,, of money or'oih". valuable consideration'made
related to the
holder or past holder of any office or ernployment
terminationofthatofficeoremploymentotherwisethanbydeath'or
to his future conduct'
any und.ertaking given by that Person as

Notethatthelasttwosetsofitemsrelatetoanrndividual,sformer
emploYment.
EmolumentsaresubjecttotaxunderthelncomcTmAct.Fromtimetotime
which allows a portion or all
the Minister of Finance may introduce legislation
free of tax'
of any one of the above emoluments to be
ThelttconleTaxActstatestl.ratincometaxshallbepayableforeachyearof

41
 CHAPTER 3

assessment in respect of all income. It is therefore an annual tax on income. An

employed person receives payment for his/her employment at regular
periodic intervals - every week, every fortnight or every month and the tax
pavable, deducted by the employer each month, is one twelfth of the
employee's annual tax liability from his employmentl. An important point to
note here is that the income which is being taxed must be earned by the
taxpayer in the year of assessment. If for some reason the taxpayer receives
income relating to a particular year, some years after it was due to him then he
is assessed to tax on his income in the year in which it was earned. In lnland
Reuenue Board as. Suite * (Trinidad, 7986), a schoolteacher received arrears of
pav for six years in the year when suspension on half-pay was lifted. He was
taxed on the entire amount in the year in which he received the arrears. By a
decision of the Privy Council it was held that the taxpayer's arrears of income
ior each year from 7970 to 7975 were assessable to tax as part of his income for
each of those years.

3.2 Who is an Employed lndividual?

ln many the answer to the above question is straightforward. For

cases
example, a building contractor hires a carpenter at a rate of $1,250 per day, or
a hotel hires a waitress at $5,000 per week, or the Ministry of Education hires a
teacher at $65,000 per month: the carpenter, waitress and teacher are all
employed individuals. In other cases it is not so straightforward. If a business
employs an accountant to come into head office and prePare only the payroll,
or if a building contractor hires a carpenter at a weekly rate to do only the doors
and windows of an apartment, are the accountant and the carpenter in these
cases employed persons or self-employed persons? There are other cases where
employed persons have 're-classified' themselves as self-employed, for
example, where a senior manager, with responsibility for head office
administrative duties together with production supervision in a subsidiary,
bills the company every month for the same amount in connection with work
done in the subsidiary.
In order not to discharge their tax liability as PAYE taxpayers some
individuals negotiated for themselves a contract by which they were deemed
to be independent contractors and for their services they received their
remuneration gross. In some cases a service company was formed and the
pavment was made to this company. As of January 79962 guidelines were
published by the Tax Administration which set out the criteria for determining

1 These deductions should be paid over by the 14th of the month following that in which the deductions
rvere made.
I Incorporated into the principal Act as Section 5(1)(c)(ix) by an amendatory Act in 2002.
 Taxation of Emoluments -I
in the case of personal services, whether they were provided by an independent
contractor under a "contract for services" orby an employee under a ,,contract
of service". The terms of any contract must therefore be carefully examined in
order to determine whether it is a "contract of service,, or a ,,contract for
services".
In either case employers (even when they are the purchasers of services from
service companies) must now withhold all payroll related statutory deductions
and pay these over to the Commissioner General of TAJ ,,on account of the
ultimate beneficiaries of that income - the employees and/or shareholders of
the [service] company".
'Personal services' include services of
a professional, clerical, technical,
administrative or management nature.

3.2.1 contract of service vs. contract for services:

Guidelines

Legally, an 'employee' is employed under a 'contract of service, and is subject

to the supervision, control and direction of the employer in respect of the way
in which the work is to be done. The matter of control by the employ", o,nu.
the employee has been emphasised by the Courts as being the important factor
in deciding whether the relationship of employer and employee exists. It is
therefore important to understand the meanings of 'supervision, direction and
control' for the purposes of these guidelines, as the existence of these key
criteria will most likely establish a contract of service and the provider as an
employee.
A summary of the tests that can be used to distinguish between a 'contract
for services' and a 'contract of service, is set out in Table 3.2.
There are no strict rules that can be applied in respect of the determination
of a 'contract for services' versus a 'contract of service,. The matter of -control,
will always be a very important although not the sole deciding factor in
determining a contract of service where personal services are bein[ supplied.
In the Ashenheim as. Commissioner of Income Tax (1.g70f case one of the matters
the taxpayer (sir Neville Ashenheim) sought to establish was that he had a
contract for services (that is, he was serf-employed). This was rejected. one of
the opinions delivered in this protracted case, which went as far as the privy
Council, was that "although the duties of the ambassador were not stated in the
letter of appointment it was well known that the performance of the duties as
an ambassador was subject to the 'direction and control, of the government,,.

4t
 CHAPTER 3

Table 3.2 Contract of Service & Contract for Services: Some Criteria

Criteria Contract of Service Contract for Services

Supervision, Purchaser has, or exercises Provider of service can

direction and the right to direct where, work in his own time
control how, when work is to be
done and to supervise it; and
to determine the times when
the provider of the service is
to be available

Termination of Specified notice period No specified notice

SETVlCC required period established

Independence Operates own

business, makes
management decisions,
provides own
equipment,3 provides
own staff to assist with
work

Financial risks Does not risk own capital in Risks his own or
and rewards the work to be undertakena borrowed capital, takes
financial decisions,
bears any loss and
takes any profit

-{nother area in which there is a difference is the fact that the self-employed
:erson is responsible to file his own tax returns and pay his taxes, while the
:mployee has this done by the employer.
In lnn Louie as. The Queen (Canada, 2002) employees worked in a store
,:,perated by a company, Tudor, of which Mr. Louie was the sole shareholder.
Ther. also assisted in a franchised cafeteria run by Mr. Louie for which they
'.., ere paid the minimum wage. They were however allowed to bring their own

raked goods and other foods and sell them in the cafeteria. Tudor failed to

I -n some cases the nature of the r,r.ork to be done is such that the purchaser of the service provides the
-quipment as this is customary in that profession, trade or vocation e.B. a comPuter programmer must
::'r the programme on the client's computer.
(ESOI's) will not be considered as
= :nployees who participate in Employee Share Owncrship Plans
::king financial risks within this context.

44
 Taxation of Emolumcnts I

remit income tax on the wages paid in the cafeteria operation and Revenue
Canada assessed him as liable for tax, interest and penalties for the sum of
Cg72,665. Mr. Louie claimed that when working in the cafeteria the workers
were employed. under contracts for services (that is they were self-employed)
and therefore responsible for their own income tax returns. The Tax Court of
Canada applied the criteria listed above and found that control was exercised
by Tudor, substantially all the equipment and tools were supplied by Tudor,
and there was no risk of loss to the cafeteria workers. Consequently it was
decided that the workels were employed under contracts of service and Tudor
was liable for the tax payable on their wages.
One particular borderline area where it is difficult to decide whether a
contract of service or a contract for services is operating is the situation of home
workers. In a 1984 UK case, Nethennere (St. Ncots) us. Gardiner nnd Anotlrcr, the
individuals were provided with sewing machines at home on which to sew up
garment components. Although it r,r'as not an income tax case it is relevant' The
decision of the Privy Council was that home w'orkers using sewing machines
provided by their 'employer' and working almost exclusively for that
employer were employees fulfilling a contract of service, not a contract for
,"..ri.".. Each such case would have to be decided on its own merits and the
criteria outlined in 3.2 above would be applicable.
|amaica had to deal with this problem in the 1990s. Some, usually senior,
employees had an arrangement whereby their salary, rent and other
emoluments were paid into a service companv and the fiction was maintained
that this service company hired the employee to his real employer who did not
deduct any PAYE as the service company made a corporate annual return' All
emoluments paid to an employee whether through a'service company' or to a
subsidiary are taxable under the PAYE regulations'

3.3 Connected Persons

S5(1)(c) of the Incorne Tnx Act, states that "all emoluments arising or accruing
to any person (or any member of his family or household) by reasor-I of his
office or employment of profit" are liable to income tax. Section 2(2) defines
connected person.5
A person's family or household includes his/her spouse, children and their
spouses, his/her parents, servants, dependents and guests'
In short, an individual may not avoid paying taxes on any emolument due
to him, by arranging for it to be paid to another member of his household.

5 This section defines corporate connccted pcrsons as thosc u'ho are controlled bv the same legal person
 CHAPTER 3

1.4 Residents and Non-Residents

All emoluments from an employment are liable to income tax.

. Where an employee is resident' in )amaica and the employment is
exercised or carried on outside the island the emoluments are liable to tax.

An example of this would be where a famaican goes abroad and is employed;

his emolumbnts are taxable in |amaica.

. Where an employee is not resident in |amaica and the employment is

exercised or carried on outside the island but the gain or profits in
respect of the employment are derived from the island whether
received in the island or not, they are liable to tax.

An example of this situation is where a Jamaican company has a branch office

in Trinidad which is managed by a |amaican resident there. If the salary of the
manager comes from Head Office in ]amaica, then it is taxable in |amaica.

3.5 Allowances and Partial Tax Relief - Provisos

There are enactments which allow some measure of relief for certain benefits
received by the employed person or any member of his family. These provisos
are set out in sections 5(1)(c)(i) - (viii)of the lncome Tax Act.In summary these
are:
(i) (a)a meal allowance in relation to work done outside of normal
working hours
(b) a uniform allowance and laundry allowance for employees who
are required to wear a uniform
(ii) emoluments of an office or employment of profit held by a person in
the course of a trade, profession or business either where the
emoluments were taken into account in computing the profits of.the
trade, business or profession, or where the office or employment is
such that the emoluments would ordinarily be taken into account in
computing the profits
(iii) housing accommodation
(iv) lump sum payments out of the Consolidated Fund (that is, made to
Government servants), or out of other approved funds
(") motor vehicle
(vi) telephone service
(vii) credit cards
(viii) sums used by employees to acquire shares in Employee Share
Ownership Plans (ESOPs).
 Taxation of Emoluments - I.

3.6 Meal, Uniform and Laundry Allowances

The first proviso states that emoluments shall not include:

. Any payment made to an employee in respect of meal allowance in
relation to work done outside of normal working hours (s5(1)(c)(i)(A));
. Any allowance in respect of the provision of a uniform or the
laundering thereof to an employee who falls within any of the
categories specified in Appendix B of Part I of the second schedule, and
who the Commissioner is satisfied is required to wear a uniform in the
interests of safety, security or public health or in accordance with the
law or any international agreemen! provided the allowance does not
exceed $5,739 per annum in respect of uniform, or $3,395 per annum in
respect of laundry, or such other amount as the Minister may,by Order,
prescribe (s5(1 )(c)(iXB)).

The rationale for the tax free allowance for uniforms is that where a person is
in an employment that requires a uniform, the purchase and maintenance
(keeping it clean) are expenses which have to be incurred in order to carry out
that employment. As of January 7995 these amounts may be claimed only by
certain specified categories of workers. These are.:

Employees Entitled to Uniform & Laundry Allowance

A.

(1) Members of the Jamaica constabulary Force, Island special

Constabulary Force and the Jamaica Defence Force
(2) Members of the Jamaica Fire Brigade
(3) Persons registered under the Dental, Medical, opticians, veterinary
Acts, Professions supplementary to Medicine Act and Nurses and
Midwives Act
(4) Porters employed to hospitals
(5) Correctional Officers
(6) Attorneys-at-Law
(7) Resident Magistrates
(8) Judges
(9) Legal officers in the service of the Government of Jamaica, whose job
requires them to be robed in court
(10) Customs Officers
(11) Air traffic controllers
(12) Postal workers employed in the delivery of mail

47
 CHAPTER 3

r13) Teachers required to wear protective clothing

i 1{) Drivers and conductors of public passenger vehicles
(15) The crew of any aircraft or ship
{15) Port workers
t17) Attendants at petroleum filling stations
(18) Messengers
(19) Drivers
(10) Watchmen
ii.)1) Private security guards
(22) Cleaners
ri23) Gardeners
(I) Workers employed in the hospitality or manufacturing industry,
restaurants, agriculture, mining, or in refrigerated facilities

B. Other employees approved by the Commissioner.

{-p to }uly 31, 2009 the following provisions obtained:

If the employer provided the uniforms and the value exceeded the
allorvance, one-third of the excess was taxable at the rate of 25 percent. Where
other employees, for example bank staff, were provided with a uniform by the
employer, 33 713 percent of the amount paid by the employer was to be
brought into the charge to tax.6

.{s of August7,2009, the following obtains:

i. The employees in the specified occupations are entitled to the same tax
exempt amounts of $5,739 and $3,395 for uniform and laundry,
respectively.
ll Where the employer in a year of assessment provides uniform costing
more than 95,739 to an employee in one of the exempt categories, the
excess is taxable at the rate of 25 percent. The employee is still entitled to
the laundry allowance of $3,395.
lll Where the employee is not in any of the exempt categories, and the
employer provides uniforms, the full cost is liable to tax. The employee
is not entitled to the laundry allowance.

6 -{lthough this was not in the Act, it was stated in the Revenue's website www.irs.gov.jm under the
frequently asked questions section.

48
 Taxation of Emoluments
- I

Examples

1' Elaine is emproyed in hoter A as front

office staff and is required to wear a
uniform. Her emproyer provided the uniform
costing $s,zgg. Elaine does
not derive a taxabre benefit as she is on the
list of Jpprorr"a workers to
receive uniform and the uniform alrowance
is not more than the prescribed
amount. Elaine may claim $3,395 laundry
allowance for the year of
assessment 2012.

2' Elaine decided that she needed two more

uniforms in addition to that
provided by the hoter. she provided these
at her own expense in 2072 at a
cost of $8,000. seeing that she has already
exhausted her uniform and
Iaundry allowance for the year of assessment
2072, the provision of the
uniforms wilr be at her own expense and therefore
she cannot craim it as an
allowable expense.

3' rn2072 Joanne who works at hotel B was

provided with three uniforms by
the hotel at a cost of $1g,000.
Joanne his received a taxabre benefit of
$72,267, that is the amount by which the cost
of 91g,000 exceeds the uniform
allowance of $s,z3g. This is added to
Joanna,s sarary and taxed at 25
percent.

4' Marie works in an insurance office and in 20T2wasprovided

with uniforms
by her employer which cost 915,000. This
amount must be added to Marie,s
salary and taxed at 25 percent. Marie cannot
claim uniform laundry
allowance' If the company provided her with
laundry arowance, then this
allowance wourd be regarded as a taxable
benefit ani subject to tax at 25
percent.

3.7 Travelling Allowances

Employers often include a car in the remuneration
package. The car rs expected
to be used by the employee in the performance
of his job. prior to reform one
of the problems was estimating the emproyee,s
private use of the car as this was
taxable.
There are two situations: (a) where the
employee uses his own motor vehicle
and (b) where the employer provides a
motor vehicle.

49
 CHAPTER 3

?.7.1 Employee's Own Vehicle

\\'here the employee uses his own motor vehicle in the performance of his
duties, the employer may pay him a travelling allowance sufficient to
reimburse him for expenses incurred on business travel. Application should be
made to the TA| for approval to make such payments without the deduction of
income tax. A travelling allowance may be paid to directors without deduction
of tax, but the amount paid depends on "where and how often the directors
have to travel in the performance of their duties".7 Again, approval must be
obtained for the payment of this non-taxable amount.
From time to time the Commissioner sets the amount of travelling
allowances for designated travelling officers in the Government service. These
are published on line as Technical Advisories. Table 3.7.1 below issued in
March 2010 shows the rates set for genuine travelling officers, supervisors and
other government officers who from time to time incur mileage in doing their
iob.8

Table 3.7.1Travel Allowance & Mileage: Covernment

Covernment Post Annual Travel Allowance Mileage

C,enuine Travelling Officers $457,920 $36 per km

Genuine Travelling Officers $$569,635 not applicable

(no mileage)

Supervisors $335,767 $36 per km

Casual miles (mileage not applicable $43 per km

rvithout travelling allowances)

Commuted $311,040 not applicable'

In the private sector, employers take note of what is acceptable for Government
employees and use these rates as a guideline. The range in the travel allowance
is the lump sum compensation to the employee for using his private vehicle

i IROC Paper (Vo1.2, issue 1, 23 April 2002) issued by the then Tax Audit and Assessment Department
(TAAD).
S AIso included in the 2010 Technical Advisory were the rates for Managing Directors/ CEOs ($725,160
to *70,792), Senior Managers ($582,912 ro $699,494) and Middle Managers ($487,920 to $585,504).
These travelling allowances are inclusive of mileage.

50
 Taxation of Emoluments _ I

(whose value will vary from emproyee to employee)

for carrying out the
employer's work. Employees in the hlgher categories such as chief
executive
officers receive a travel allowance but no mileage. In the Government
service
and in the private sector an employee whose job involves regular
travelling
may choose to commute the mileage to the travel allowance and receive
fi27,600
(to $25,920) per month. In such a case the employee is responsible
for all
expenses of his vehicle.

Examples -

1. strong Build Ltd is a construction firm with contracts in st. Ann and
Portland. strongbuild's Kingston staff travel to the sites to work
- some
every day. The project managers visit all the sites regularly. Strongbuild
has
made the assumption that the supervisor category in the Government
service is approximately equivalent to its project Managers and
has based
the travelling allowance on the rates in the 2010 Technical Advisory.

James Lawrence, a Project Manager, drives his own small pick-up to the sites in
St. Ann and in November 2012 submits a claim for 1,720km.

Mr. Lawrence's travelling allowance for November will be:

Travelling $279,264 I 72
Mileage 7,720 @ g3O

2' Another Strongbuild employee travels from the Kingston office to

the sites
when he is required. He uses his own vehicle. He has chosen to take
a
monthly travelling allowance of 921,600 ($2s9,zoo 172). If he had chosen
to
be reimbursed on the casual travelling rate he would submit a
monthly
claim for the kilometres travelled. For example 300 km at
$36 would have
resulted in a tax free travelling allowance of $10,g00 which is less
than the
commuted amount. However another month it may be g00 km in which
case it would have resulted in g2g,g00.

The amounts claimed as travelling allowance must be based on

genuine travel
expenses incurred in carrying out the employer,s work.
 CHAPTER 3

Sales Agents

tn the case of sales agents whose commissions form at least 50 percent of their
EJms emoluments, a special formula was worked out by the CTAAD for the
e
apense allowances. With effect from |anuary 1., 2005, the amount of
aUorvances agreed was based on the gross emoluments as follows:
30 percent of first $1 million of gross emoluments
15 percent of second $1 million of gross emoluments
10 percent of third $1 million of gross emoluments
zero percent of the balance of gross emoluments.

This rvas to be reviewed every year, therefore sales agents were required to
make the necessary applications by the deadline of September 30s each year.

Erample

Rov Blake is a salesman for a distributor of canned products. He is paid a basic

-larv and a commission on sales. For the year of assessment 2011 his basic
--[an'was $600,000, commission on sales $840,000. The special sales agents'
trpense calculation would be as follows:

$
5a1ary 600,000
Commissions 840,000
Sub-total - Taxable 7,440,000

-{llowable Sales Agents Expenses

3O% x 1,000,000 : 300,000
7c% x 440,000 66,000 366,000
Balance subject to tax L,074,000

The amoun t of $1.,074,000 would be Roy Blake's taxable gross againrt *tli.n n"
rsould be allowed the threshold amount but could claim travelling allowance
as rvell.
Some sales persons do not use the formula in their tax computation and
mr-stead throughout the year seek reimbursement from their employers for
direct expenses - motor vehicle, promotional items, fees and other expenses
incurred in carrying out their employment.lo The formula is useful for those

i' \orv CGTAJ

I I From informal inquiries made by one of the authors of sales persons in the insurance industry

52
 Taxation of Emoluments I

as rn
sales agents who although attached to a firm are almost free-lance agents/
the real estate industrY.

t.7.2 Motor Vehicle Provided by Employer

of the employee the
where the employer provides a motor vehicle for the use
taxable benefit is basei on the age and original cost
of the vehicle and the level
(see table3'7'2
of private usage, that is, over 50 percent or uP to 50 percent
below).
Regulation 11 (as amended May 1996) states:
Wherebyreasonofhisemploymentamotorvehicleisprovided(without
transfer of property in it) for the use of an employee
in relation to his
and the motor vehicle is available in any year for
the
office or
"*ptoy**t
private use of ihe employee or members of his family
or household' the
for the purpose of
value of the benefit u..*i1g to the employee shall,
ascertainingthetaxpayableinrelationthereto,bedeterminedbythe
Commissioner in accordance with the Appendix'

The Appendix to which reference is made above is

reproduced and designated
Table 3.7.2 below.
and members
where the vehicle is given for the private use of the employee
must be determined by the
of his family and household, the value of the benefit
by the Minister'
Commissioner in accordance with any regulations prescribed

Table 3.7.2 Motor Vehicles: Annual Taxable Benefit

Original Cost of Ageof MV- UPto5 Age of MV - Over 5

Years Old Years Old
Motor Vehicle
($48,000) $30,000 ($36,ooo)
Up to $300,000 $40,000
($0o,ooo; $40,000 ($48,000)
Up to $700,000 $50,000
($8o,ooo) $60,000 ($65,000)
Up to $1,000,000 $75,000
($1oo,ooo) $72,000 ($'80,000)
Up to $1,500,000 $90,000
($140,000) $98,000 ($100,000)
Over $1,500,000 $120,000

where taxpayer has

Figure in brackets ( ) is value of motor vehicle emolument
ouer 50% Private use. Other figure represents
value when taxpayer has up to
50lo private use.

53
 CHAPTER 3

Erample

foanna Thompson is a sales representative for a Kingston pharmaceutical

cornpany, Wellbeing Limited, which provides her with a 2007 motor vehicle
rsfuch cost $950,000. The accountant estimates that she uses the vehicle for her
private pursuits 40 percent of the time. The company owns and maintains the
r ehicle. During 2010 Miss Thompson received a basic monthly salary of $70,000
and in fune 2010 earned commissions of S80,000. Calculate her gross income
for the month of fune.

\fiss Thompson had less than 50 percent private use of a vehicle costing over
S;m,000 but less than $1,000,000, and which was less than five years old. From
the table the value of the motor vehicle benefit was $75,000 for the year.
Following is the computation of her gross emoluments.
$
Salary 70,000
Commissions 80,000
Value of motor vehicle emolument 6,250 (75,000+12)
Cross amount 1,56,250

1.7.3 Travel To And From The fob

It has been established by case law that

. travel from home to work is not deductible as it is precedent to work
r travel from work to home is not deductible as it is subsequent to work
o travel on the job from one place of employment to another in the same
job, or from one place of business to another for the purpose of one's
business is deductible
o travel from the end of one job to another separate job is not deductible
regardless of whether the taxpayer has two separate jobs, two unrelated
businesses, or one business and one place of employment as an
employee.

The first two points above were challenged in the case Commissioner of Inland
Rmenue as. Payne in Australia in 2001. Mr. Payne's residence was a farm in
\erv South Wales and he worked as an airline pilot out of Mascot airport in
Sr-dney. He travelled to the airport by car, bus and train, and he did the trip
t'etrveen 40 and 50 times per year. Mr. Payne claimed travelling expenses
totalling 4$15,510 as deductions for the years June 1991 to June 1994. The
Cr:mmissioner of Inland Revenue disallowed the deductions and the taxpayer
appealed to the Tax Tribunal which agreed with the CIR. Mr. Payne appealed

54
 CHAPTER 3

Example

Joanna Thompson is a for a Kingston pharmaceutical

sales representative
company, Wellbeing Limited, which provides her with a 2007 motor vehicle
tshich cost g950,000. The accountant estimates that she uses the vehicle for her
private pursuits 40 percent of the time. The comPany owns and maintains the
r-ehicle. During 2010 Miss Thompson received a basic monthly salary of $70,000
and in )une 2010 earned commissions of $80,000. Calculate her gross income
for the month of June.

\tiss Thompson had less than 50 percent private use of a vehicle costing over
5;m,000 but less than $1,000,000, and which was less than five years old. From
*re table the value of the motor vehicle benefit was $75,000 for the year.
Following is the computation of her gross emoluments.
$
Salary 70,000
Commissions 80,000
Value of motor vehicle emolument 6.250 (75,000+72)
Cross amount 156.250

1.7.3 Travel To And From The lob

trt has been established by case law that

o travel from home to work is not deductible as it is precedent to work
o travel from work to home is not deductible as it is subsequent to work
o travel on the job from one place of employment to another in the same
job, or from one place of business to another for the purPose of one's
business is deductible
. travel from the end of one job to another separate job is not deductible
regardless of whether the taxpayer has two separate jobs, two unrelated
businesses, or one business and one place of employment as an
employee.

Tlre fust two points above were challenged in the case Commissioner of lnland
Rr-nue xs. Payne in Australia in 2001. Mr. Payne's residence was a farm in
\ert South Wales and he worked as an airline pilot out of Mascot airport in
!sdr*l'. He travelled to the airport by car, bus and train, and he did the trip
befi*-een 40 and 50 times per yeaf. Mr. Payne claimed travelling exPenses
ry-elling 4$15,510 as deductions for the years June 1991 to June 1994. The
C-turrdssioner of Inland Revenue disallowed the deductions and the taxpayer
rypeaied to the Tax Tribunal which agreed with the CIR. Mr. Payne appealed

54
 Taxation of Emoluments - I

to the Federal Court of Australia which ruled in his favour. The CIR appealed
to the High Court of Australia which held that for the expense to be allowed as
a deduction the occupation which earns the income must by its very nafure
require travel.

3.8 Housing Accommodation

An employer may, as part of the terms of employment of some employees,

include the provision of housing accommodation. For income tax purposes the
cost of providing this benefit is an allowable deduction to the employer, and
the employee is liable to tax on this benefit.
In determining the annual value of the accommodation the CGTAJ is guided
by the lncome Tax (valuation of Housing Accommortation) Regulations, 1964. This
emPowers the CGTAJ to take into consideration the proportion that rent bears
to total emoluments and other factors. 11
one consideration is that the employee by the terms of his contract may
receive a "fully serviced accommodation". In Jamaica this would normally
mean the services of a maid and a gardener. In such a case the value of the
accommodation is taken as inclusive of the services. In the Mnhfood os CIR
(7976) case the Commissioner could not assess and include as a
separate
emolument the cost of the domestic help.
Another factor which the CGTA] will take into consideration in valuing the
accommodation is whether or not the employee/occupier can make some
money out of the accommodation provided, for example, by subJetting it. The
point here is whether the accommodation can be converted into money,s
worth. In the UK case of Tennant as smith (lgsg) where a bank manager was
required to Iive in a free residence on the bank's premises, which could not be
converted into money's worth as far as the bank manager was concerned, the
decision was that the value of the house could not be considered as an
emolument to be taxed.
In Jamaica's Regulations it is specifically stated that the Commissioner is not
precluded from placing a value on accommodation in such circumstances. It
might seem unfair for an employee/occupier to be assessed on a lavish
accommodation which is in keeping with the status of the employer rather than
for the benefit of the employee. Again the Commissioner shall not be
precluded from placing a value on this type of accommodation.
The accommodation may be:
o rented from an independent landlord, that is, not from a ,connected
person'

11 Other factorsinclude the rent obtainable in an arm's length transaction and any contribution towards
the rent paid by the employee.

55

q rG-
 CHAPTER 3

rented either from the employee himsell a person connected to him, for
example, his uncle
owned by the employer.

In the 1980s the practice evolved for employees to receive 'remuneration

packages' which divided the total salary into categories that attracted certain
tax advantages. In addition to travelling and vehicle component a popular one
ri-as housing and accommodation. Designating part of salary as
accommodation raised the difficulty that some employees rented their
accommodation and some owned theirs.
The employee-owner who received all or part of his mortgage paid as his
'rent allowance' received a greater advantage than the employee-renter. The
or\Trer was adding to his capital and would benefit from the appreciation of the
property. If he had paid for his house the accommodation part of his salary (if
unadjusted) would be a tax free cash sum not available to his counterpart
rt-hose accommodation allowance went to his landlord to pay rent. The
errployee-owner taxpayer therefore had to treat this as though he rented his
property to himself and calculate the gain from the rental and bring this in as
taxable income. Where the 'rent allowance' part of salary was paid to an
unconnected person - the landlord - the IT Act had to put in place provisions
rshich dealt with abuses and tax evasion schemes. Some of these were:
. Where the'rent allowance' was greater than the salary;
. Where 'rent allowance' was greater than the total of all the other
emoluments.l2

Technical Advisory from the Tax Department stated that from August 1,
--L
2009 any amount paid in cash either directly to an employee or to an
unconnected person is liable to tax. This effectively removed the advantage of
separate payments for accommodation and of rent paid to an unconnected
person as a largely untaxed salary benefit.

12fu Essentials of Jamnican Taxation third edition vo1.1, page 47-8 lor worked examples

56
 Taxation of Emolumcnts I

3.8.1 Rent Paid to Unconnected persons

Examples

1. Allan Brown rn 2072 earned an annual salary of g1,000,000 and his

employer paid rent of $360,000 directly to his landlord. Ignore statutory
deductions

Salary
Rent
Statutory income

As of August2009, Allan is chargeable to tax on the entire amount of the

accommodation benefit.

2. Susan Wallace earned an annual salary of $g00,000 in 2072 and her

employer paid 930,000 per month to an independent landlord for the rental
of Miss wallace's apartment. She also had a company car which cost
$750,000 six years before. It is estimated that Miss wallace,s private use of
the car was about 60 percent. Ignore statutory deductions.
$
Salary 800,000
Rent paid 360,000
Motor vehicle benefit 65.000
Statutory Income 7,225,000

annum. Ignore statutory deductions.

Subsequent to August. 2O0g

Salary (1) $200,000 from head office

Add rental benefit 600,000
Salary (2) 700,000 from subsidiary
Statutory income 1.500.000

Prior to August 2009 and apprying the formula for housing emolument
paid to an independent landlord, the taxable housing benefii would have

57
 CHAPTER 3

bercn 75% of the average of:

(a) the annual value of the accommodation ($600,000) plus
(b)the other emoluments including emoluments paid by "connected
persons" ($900,000)
Tarable housing benefit :15% of l%x ($600,000 + $900,000))
:15% of $750,000
: $112,500

$
Hary' (t) 200,000 from head office
-{dd rental benefit L12,500
>alan, (2) 700.000 from subsidiary
Statutory income L,012,500

The change implemented from August 2009 has resulted in an increase in

statutory income of almost half a million dollars.

3.A.2 Rent Paid to Connected Person

l\trere the rent is paid to the employee himsell or a person connected to the
employee, tax will be based on the full rent paid since it is in effect more money
tn the employee's pocket. The post August 2009 position is the same, in that a
=.rrn
paid to the employee or a connected person is a cash emolument which
rrust be included in his statutory income and taxed.

Eramples

1. Elizabeth Chen, a bank employee, in2072 received a salary of $90,000 per

month, a uniform allowance of $7,500, and her employer paid $30,000
monthly rent directly to her.

SaIary
Lniform allowance
Accommodation
Statutory income

Preuously the employee's statutory income would have been:

S.1"ry
Uniform allowance
Accommodation
Statutory income

58
 Taxation of Emoluments -I
Post 2009, all of the uniform allowance is taxable as Miss Chen is not in the
exempt category. The full rent is a cash benefit and is taxable like all other
emoluments.

3.8.3 Employer Owns the Accommodation

where the employer owns the accommodatiory the employee may occupy it
(a) as part of his remuneratiory or
(b)because he has to be in the particular location to carry out
his duties.

In such cases the Regulations provide guidelines on how the annual valuation
of the accommodation should be determined.

(a) where the employer has a house which could be rented on the open market
and it is assigned to an employee as part of his remuneration, the valuation
of the accommodation is "the rent which might reasonably be expected to
be obtained on a letting from year to year, at arm's length, of the quarters
or residence if the landlord undertook to bear the costs of the iepairs,
insurance, taxes and any expenses necessary for maintaining the quarters or
residence in a state to command the rent". since August 2009 the value of
the accommodation is its rental on the open market.

Joanna is a teacher at a rural school and she is given the option of living in one
of the teachers' cottages on the compound or living in the iown. she chooses
to
live in one of the cottages which the school maintains and insures. It could be
rented on the open market for $25,000 per month. This amount is added to
Joanna's salary and she pays tax on the total.

(b) The employee may be required to live in the accommodation

provided by
the employer for the purposes of performing his duties. In such cases the
accommodation is usually "within the compound of the institution". In
these situations the employee may be inconvenienced by the arrangement.
Examples of employees in this category are officers in the
Jamaica Defence
Force who live at Camp, ministers of religion who must live in the
accommodation provided by the church, nurses who live in the nurses,
home and certain hotel employees. If it is proved that the employee has to
live on the same premises where he works in order to carry out his duties,
then his liability to tax for the accommodation is limited to 30 percent of his
emoluments excepting the value of the accommodation.
59

.r;,. 8i-
 CHAPTER 3

.i'nr'.,i
Eramplei:,',.:

-\ minister of religion receives a monthly stipend of $60,000. His church

provides the accommodation close by and he is required to live there. The
:nonthly value of the accommodation is 30 percent of the stipend.

$
Stipend 60,000
Value of accommodation gO% of $60,000 18,000
Statutory income 78,000

Erempt Body Owns the Accommodation

Section 12h states that an exempt body is "any colporation or association

organised and operated exclusively for religious, charitable, scientific or
educational purposes". Where the employee's accommodation is owned by an
erempt body as specified in s.12h of the lncomeTax Act, the employee must pay
ta\ on 30 percent of his gross emoluments excepting the value of the
xcommodation.
The University of the West Indies and UTECH are exempt bodies as
specified under the criteria in s.12h of the lncome Tqx Act. They own houses and
apartments which they let to staff for a nominal rental. For a member of staff
receiving a monthly salary of $100,000 and occupying (for a nominal rent) an
apartment valued at $90,000 the calculation would be similar to (b) above:
$
\{onthly salary 100,000
\ralue of accommodation gO% of $100,000 30,000
Statutory income 130,000

3.9 Telephone Service

Pavments made by the employer for the maintenance of a telephone at the
employee's residence to be used for purposes related to the employment hre
not taxable on the employee.

3,lO Use of Credit Cards

Pror-iso (vii) states that where an employer provides a credit card for the use of
*re employee the actual goods, money or service obtained shall be disregarded
and the amount of the emolument is the "expense incurred". This means that
r-here a credit card is provided as part of the package of remuneration of an
employee, the amount brought into the charge to tax is the cost to discharge the
,redit card liability which will include interest and service charges (if any).
 Taxation of Emoluments I

3'11 other Expenses in carrying out The Emproyment

There may be instances where employees rncur expenses
in carrying out their
job and these are not covered in the provisions. If
the employee needs to incur
the expense to do the job it will be allowable although each
case would be
decided on its merits. For example a headmaster requir-ed
to teach history was
not allowed the expenses of attending a series of weekend lectures
on history.l3
In many cases it is clear that expense was necessarily incurred
in carrying out
the job; for example when a traveling salesman moves
from town to town
getting orders for his company and when far from his home
he spends the
night in a hotel.
other employee expenses are not so clear cut. In a UK case smith (rnspector
of Tnxes) as' Abbott (1994) a group of Scottish and English journalists
for national
newspapers claimed the expenses of newspapers and magazines
which they
purchased to keep themselves informed about issues and
stories in other
newspapers and magazines. The journalists' union had
negotiated an amount
for this expense in their salary. The scottish journalistl lost their appeal
through the scottish courts and took their case to the privy
Council. The
English journalists won their appeal through the English
courts and the
Revenue took its case to the privy Councir. Both appearJwere
taken together.
The Privy Council's decision was that expenditure by a journarist
on
newsPapers and periodicals is not necessarily incurred
in the performance of
his duties and is therefore not allowed. The issue clarified was that
the
expenditure by the employee must be incurred in the performance
of his
duties not in maintaining his competence to do hisJob.it
is a very narrow
interpretation and perhaps it might not stand in a Caribbean
case. There seems
to be no comparable Caribbean case, however.
Jamaican employees who wish to claim for expenses other than those dealt
with in the Act and discussed in this chapte*horta complete
form IT01/IT05
"schedule 3, Employees Expenses Claim". The
CGTA] will decide each claim
on its merits in compliance with the Ac

3.12 ConcessionaryLoans

A number of employees of financial institutions had been benefiting

for years
from loans advanced to them by their employers at interest
rates far below the
prevailing rates. The Commissioner realised that this was,
in many cases, a
device to give the employee a tax free emolument. This
was seen as tax
evasion. In fac! the best construction that could be put on
it was that it

13 Humbles (Inspector of Taxes) vs. Brooks (UK, 1962);40 TC

500.

61
 CHAPTER 3

dei'eated the equity principle which is that all taxpayers should be treated
equally and be subject to income tax legislation.
Section 5A of the Act (included in 2002), states that if any director or
errployee of a specified financial institution, by reason of his employment, gets
a loan or loans from his employer at an interest rate which is less than the
prescribed rate, then the cash equivalent of the benefit in respect of any year in
will be treated as an emolument. A
rn-hich the loan(s) remain(s) outstanding,
Ioan to the employee from his employer, or from any company over which the
eurployer has control or from any company by which the employer is
controlled is regarded as having been made "by reason of his employment".

3.12.1 Explanation of Terms

Specified Financial Institutions
These include the Bank of Jamaica, merchant banks, development banks,
insurance companies, building societies licensed under the Building Societies
-{cl, trust companies and any other institutions licensed under the Banking Act
or the Finnncial lnstitutions Act.

Prescribed Rate
This was originally set at 18 percent, but may now be set from time to time by
the Minister of Finance by an Order under the Act. On February 10, 2003, the
rate was set at 14 percent.

Cash Equivalent
The cash equivalent of the benefit of a loan is the amount representing the
difference between the amount of interest which would have been payable at
the prescribed rate and the amount of interest actually paid at the
concessionary rate.

Loans
The section does not apply to loans made for the following purposes: .
. purchasing a house for owner occupation
. purchasing a motor vehicle for private use
. purchasing land
. education
o training
. emergency needs (compassionate loan)
. furnishing of a residence for owner occupation.

The section also does not apply to outstanding balances on the principal of such
loans which in aggregate do not exceed $1.5 million.
 Taxation of Emoluments -I
Emolument
This means that the amount is liable to tax (and possibly payroll deductions
as
well).
The provisions concerning concessionary loans are:
1. They apPly to loans given by specified financial institutions such as banks
and building societies.
2' The provisions do not apply to principal balances totalling no more than
$1.5 million, or to loans used for certain purposes, such as purchasing a
motor vehicle for private use. The difference between interest actually
paid at the concessionary rate and the rate prescribedla by the Minister of
Finance is deemed to be a cash benefit.
3. The cash benefit is treated as emoluments. The provisions have retroactive
effect to January 7,7999.

Note that the cash benefit to be treated as an emolument is the difference

between the amount of interest actually paid at the concessionary rate and
the
amount of interest that would have been paid at the prescribed rate. The
computations are to be done on a monthly basis, thus charging the tax on the
employee's salary in the same manner as p.A.y.E., and bringing to account
any
reduction in the principal amount so that note may be taken of the month in
which the loan balance falls below $1,500,000.
When the loan principal falls below $1.5 million no further taxable benefit
will arise. Note in example 3 below that one step is the comparison of the loan
principal - amount borrowed and still owed - against $1,500,000.
Another point to note is that if the loan is not for one of the purposes in the
exempt category, it does not matter how small it is; it will still attract tax
on the
cash equivalent. If all the loans fall outside the exempt categories, the entire
cash benefit is taxable.
If loans are given at differing concessionary rates of interest then the amount
of $1,500,000 must first be applied against the loan with the lowest rate of
interesf then the next lowest and so on, before determining against which the
prescribed rate will be applied.

Examples

1. In January 2077, John, a bank manager, received a loan of $3 million from

his bank to invest in the business of his brother-in-law. The rate of interest

14 Section5A of the Income Tax Act provides for the Minister of Finance to prescribe a new
rate from
time to time. Any new rate will probably approximate the prevailing rate
at *hich the banks would
normally lend to their "best customers,,.

63
 CHAPTER 3

\{as 4.5% and the repayment period was fixed at four years. The prescribed
rate for loans was L4%. At 31st December 2077, John had not repaid any of
the principal but had paid all of the interest. (a) What is John's tax position
concerning this loan in year of assessment 201.7? (b) If John's employer had
been an insurance company which was a subsidiary of the bank which
granted the loan, what would fohn's tax position be in this circumstance?

(a) The loan has been given by a financial institution listed in section 5,4.(6).
The loan is not for one of the exempt purposes as listed in 5A(7).
Therefore the cash equivalent of the benefit of the loan must be treated
as an emolument as follows:
$
Interest on $3 million at 74% for one yearls 420,000
Interest on $3 million at 4.5% for one year 135.000
Cash equivalent of benefit 285,000
Tax for year of assessment 2077 @ 25% 7L,250
Additional monthly tax 5,937

(b) |ohn's tax position would be the same, as his employer, the insurance
company, is also a prescribed financial institution and is controlled by
the bank. (See section 5A(4Xb)).

Susan works for the Bank of |amaica and in ]une 2011 she received a car
loan of $1.200,000 at the concessionary rate of 5%. The prescribed rate was
74%. lNhat is Susan's tax position concerning this loan for year of
assessment 2011?
The loan is for one of the exempt purposes, and it does not exceed $1.5
million therefore no cash equivalent benefit applies.

3- L:rApril 2007,Joanna, an employee of a building society, received a loan of

$3.0 million to purchase an apartment. The interest rate on the mortgage
loan is 7.5% andthe applicable prescribed rate is74%. Joanna has paid nine
mortgage instalments of $40,000 per month from 1st April to 31't December
2007 of which $24,000 is interest and $16,000 is principal. What is Joanna's
charge to tax (if any) on this loan for the years to 31st December 2011?

foanna has received a concessionary loan from a financial institution (listed

in s.5A(6)) for a purpose that is listed as exemPt, that is, if the apartment is

i-; ln practice the computations would be done on a monthly basis, but since no repayment has been
made, the principal remains the same at the end of the accounting period and the computation is
made for the whole year.
 Taxation of Emoluments I

to be occupied by her. However the amount

exceeds the exemption limit of
$1.5 million. The loan date was Aprlr 2007. The cash
equivalent benefit on
which she will be charged for yla. of assessm ent 2007 is calcurated as
follows:16

$
Total loan at concessionary rate
3,000,000
Principal repayment April to December 2O0Z (9
mths x 16,000) 744,000
Loan balance at 31st December 2007
2,856,000
Therefore taxable benefit applies; calculated as
follows:
Taxable benefit for 9 months ($3 million less
91.5 million)
at (74% minus 7.5%) that is, $1,50000 O @ 6.5%,
divided
by 12 multiplied by 9
: $73,725
Tax on $73,725 @ 25%
: $18,281
Balance of loan at concessionary rate, 31sr
December 2007 2,956,000
Principal repayment in 200g ($16,000 for T2months)
792,000
Principal balance at 31st December 200g
2,664,000

As principal still exceeds $1.s million the taxabre

cash benefit has to be
calculated.
Taxable benefit is (g2,g56,000 _
$1,500,00 0) x (1a% 7.s%) :
$1,356,000 x 6.5%
$88,140
Tax on $88,140 @ 25%
922,035

The above process wourd be repeated until

the loan balance fails below 91.5
million at which point there would be no further taxable
cash benefit.

4. In January 2007 Horace received the same loan

amount of 93 million on the
same interest and mortgage payment terms
as Joanna in example 3 above.
However the loan was for a second apartment
which he intended to rent.

This is not one of the exempt purposes. Therefore

each month Horace pays
tax on the full cash benefit as follows: .

Interest on $3 million at prescribed. rate 14%

Interest on $3 million at concessionary rate 7.5%
Taxable benefit
Tax on $195,000 @ 25%

16 Again, the computations would be done on a monthlv

basis.

65
 CHAPTER 3

Arthur received two loans in January 2010 from his employer, a commercial
bank. The first loan of $1,400,000 is at 7% p.a. and the second was for
$1,800,000 at 9/o p.a. The prescribed rate was 74%. The loans were for
specified purposes.
Calculate the cash equivalent.

First apply the amount of $1,500,000 against the loan with the lower interest
rate.
$
Loan with lower interest rate 1,400,000
Less $1,500,000 L.500.000
(100,000)
Add second loan 1.800.000
Balance 1,700,000

lnterest on $1,700,000 at 1,4% 238,000

lnterest on $1,700,000 at9% 153.000
Cash equivalent 85,000

6- Sonia received two loans in fanuary 2017 for prescribed PurPoses. One loan
was for $2,000,000 at a rate of 7/" p.a. and the other was for $1,000,000 at a
rate of 9% p.a. The prescribed rate was1.4%. Calculate the cash equivalent.

Loan at lower rate of interest 2,000,000

Less dmount exempted 1.500.000
Balance 500,000

Add second loan 1,000000

1,500,000

Interest on $1,500,000 at 74% 210,000

Interest on $500,000 at 7% 35,000

Interest on $1,000,000 at9% 90.000
Total concessionary interest 125,000

Cash equivalent 85,000

A development bank loaned an employee two loans for commercial

purposes in |anuary 2011. One loan was for $2.5 million at a rate of 9/o p.a.,
and the other was for $7,750,000 at a rate of 72/o p.a. The prescribed rate at
the time was 78%. Calculate the amount to be included in taxable
 Taxation of Emoluments - I

emoluments in 2011.

Interest on $4,250,000 at 78% 765,000

Interest on $2,500,000 at97o 225,000
Interest on 91,750,000 at 72% 210.000
Total concessionary interest 435,000

Taxable emoluments 330,000

3.13 Loans to Employees on Study Leave

In some organisations when employees are given permission to go on study

leave, arrangements are made for them to be paid their salaries for all
or some
portion of the study leave. These amounts are taxable in the normal way.
If the
employer and the employee agree that emoruments paid to the employee
during the study leave will be a loan, the amounts wiil not be taxable. The
conditions under which the payments will be consid.ered a loan are;
1. The employee may not take leave (presumably vacation or
maternity)
during the period of the study leave, nor can he/she earn reave.
2. The employee must be bonded to work with the employer for a specified
period after the end of the study leave.
3. The loan or part thereof must be repaid if the employee leaves
the
employment before the end of the specified period.
4. Any salary increase during the period must be included in the agreement
for the loan or be included in an annex to the loan agreement; otherwise
amounts paid in excess of the agreed loan amount will be treated
as
emoluments and taxed.

The emoluments which normally would be deductible in the employer,s

profit
and loss account, can not be allowed as a deductible expense whln
paid out as
a loan.
The loan agreement must be acceptable to the CGTAI, and the
characteristics
which must be identifiable are the lender, the borrower, the amount of the
loan,
the obligation to repay and a guarantor

3.14 Lump Sum payments

Lump sum payments tend to be associated with the termination or cessation

of
employment by reason of retirement, completion of a contract term, laying-off,
redundancy, premature termination of a contract, wrongful dismissal,
illness,
disability arising from an accident on the job, inter nlin. The following case
illustrates that care should be taken in describing the lump sum so
that it can

67
 CHAPTER 3

be given the appropriate treatment under the Act.

The case Guppy o lnlnnd Reoenue Board was heard in the Court of Appeal of
Trinidad and Tobago in 1985. Horace Guppy's contract of employment was
xrbject to a memorandum of agreement between the company and the Staff
-tssociation which described as severance pay the lump sum to be paid to an
errployee who had served not less than 25 years with the company and who
n-as 45 or more years of age, when declared medically unfit by a medical
practitioner.
When in 1978 Mr. Guppy was retired on medical grounds, he insisted that
he should be compensated according to the service agreement. Later he was
adr"ised that he would receive a retirement benefit of $78,864 and that 50
percent of this sum would be deducted under the PAYE system. Mr. Guppy
di.sagreed with the deduction of tax and requested a ruling.17 The decision of
the Board of Inland Revenue was that Mr. Guppy's lump sum was
erroluments. Mr Guppy appealed the decision on the grounds that his lump
*rm payment was "severance pay". The Court of Appeal decided that Mr.
Guppy's lump sum was not severance pay or compensation for loss of office.
It rvas a payment in respect of the past services of the taxpayer to which he was
entitled by law under the agreement which formed part of his contract of
-n'ice and as such it was taxable.
The following will expand on some of the situations listed above under
rr-hich termination of employment can take place.

Retirement

ln general on retirement the individual expects to receive a pension. If he was

a government servant during his employmen! his pension will be payable out
ot the Consolidated Fund or some other fund designated by the Minister of
Finance as a public fund. The individual has an option to receive the pension
rn equal monthly instalments, or to receive a lump sum first and subsequent
proportionately reduced monthly instalments. The lncome Tax Act
s5(1Xc)(iv)(A) provides that such lump sum payments from the Consolidated
Fund or other public fund are not deemed to be emoluments, that is, they are
not taxable.

Completion of a Contract

Contracts of a short term nature would not attract a pension but a once and for

l-7 Section 53B of Trinidad and Tobago's Income Tax Ordinance and the Income Tax (Emoluments)
R.egulations, gives the taxpayer the right to request a ruling from the Inland Revenue Board if he
disagrees with the tax on his emoluments.
 Taxation of Emoluments _
I

There are provisions

;1,tJ,1r",'rtonbcompletion' for determining whether
a
It is not taxable when:

"'i.1T:lffi:i:?:*xi:H?ffion other
and it is in the rorm
or a rump sum
rund and it; il;;":::::::1or rnd designated as a
iubric
(b) the ;; #:,lffJ,i*pavm€nt
o";* a d there is a termination
employment. In this of
case a part or iiJ;rXT
tax free portion is
the avera;";;; for
21/E and by the the
years of service and
exceeding the tax free divid
figure i, a"r"tU"a
such. u,
"
u,:::,:#J:IL1l paid out of the Consoridated
the
Fund at the end of
(d),h-;;il*::ailff :f il,;l;H:,#:.1:*,n:lm*:,:y,,
or more years' in which
applicable. .u,u',hJ'rl.muta in (b) is

A gratuity is taxable when:

t"'iT;il:;:;fl:'j, i'
'o'"ia"'ed bv the Commissioner Generar to be a
(B) payment is made
through the annual budget
bodies, ,, ,.,.h puy-ur.,irJo of government entities
or
ffi"', not come out of the
Consoridated
(C) the gratuity is
paid at the end o{ the
termination of emproym".,t contract period, but
there is no
(D) the gratuity is urrd ,h" .;;;1,
r ess than
paid U". f"j ,j.J "l*To"o.
ti,,u" y"u,, or,".,.i." I
1.li tlTlijf
portion cannot be used, if ,.hlfl T iT Jlj
;:Tia:: rffi:T"'"'.T as the emproyment is ror

Laying-off

From time to time

re d u ce d
;:;I
r,,_ ; i i i:,lTI: ji: ;',-. l't:"T:il: r,ff
",
rn connection with the termination of
i
therr services. H*I
Redundancy

Redundancy is a particular
form of sever;
(Terminstioti ,na
iriuraorry eoy*rnt;;;:;,";;::;r;.Tl"fil:::
established the terms
ana conaitio.,, ."ru,rrg :i7.{::{#:{r:
to the ,;;;;", of emproyees
 CHAPTER 3

ry=f,i comes into operation in the following circumstances (s.5):

. \Vhere the employer has ceased, or intends to cease, to carry on the
business for the purposes for which the employee was employed
. \\'here the business no longer requires the particular kind of work for
rvhich the employee was engaged
. \Vhere the employee has suffered personal injury or a work related
disease.

*r,:t:
the Act an employee is entitled to redundancy payment if he has been
=r:nuously employed for a period of 704 weeks or more prior to the date of
&:edundancy.

Gfuer

h ;a--es of premature termination of a contract (loss of office), wrongful

(to work)because of some illness or accident sustained on
=snisal, disability
tr ob, compensation usually has to be paid to the former worker.
-{-. a general rule, lump sum payments occurring in the above situations are
aul'[e but under s.5(lXcXiv)(B) of the Act a provision states that the Minister
r F:nance may make an order subject to affirmative resolution by the House of
ier*entatives excluding from taxable emoluments the whole or part of any
:e',-:1ent in respect of the termination of employment by way of:
. commutation of pension
. terminal gratuity
. severance Pay
. compensation for accident
o illness
. redundancy
. loss of office
. wrongful dismissal or
o other situations resulting in termination of employment.

ae -\ct further states that such an order made by the Minister may include
=:-rrisions whereby the portion of the payment not excluded from taxable
-rurluments may be treated as income to be allocated over the period specified
= '-Ire Order. The Order made by the Minister under s(5)(1)(c)(iv)B of the lncome
l= -{cf is known as the Income Tax (Termination of Employment Payment)
&Jer, 7977.In the Order lump sum is defined as "any payment other than a
-nodical payment".
The Termination of Employment Payments Order seeks to relieve from tax
ie following lump sum payments in respect of the termination of employment
-rr a PeISon:

70
 Taxation of Emoluments I

1. A lump sum paid out of an approved superannuation fund if:

. payment is in accordance with the rules of the fund
o payment is on retirement of the person at the retirement age specified in
the rules of the fund or before retirement age if the person becomes
physically or mentally incapacitated
. the amount does not exceed the limit specified in section aa(2)(iv)(b) of
the Act unless the person had acquired rights in the fund prior to October
77,7977.

2. A lump sum not falling under (1) above if;

o it is paid pursuant to an approved retirement benefit scheme (s. 61.(1))
. payment is on retirement of the person at the retirement age specified in
the rules of the fund or before retirement age if the person becomes
physically or mentally incapacitated
. the amount does not exceed the limit specified in section aa(2)(ivXb) of
the Act unless the person had acquired rights in the fund prior to October
71,1977.

3. A lump sum not falling under (1) or (2) above if:

. it is paid out of an approved superannuation fund in accordance with the
rules of the fund or,
. it is paid pursuant to an approved retirement benefit scheme
o payment does not exceed the aggregate of contributions made to the fund
or scheme by the person less amounts previously returned to him plus
interest allowed thereory unless the person had acquired rights before
October 77, 1977, in which case an additional amount not exceeding the
aggregate of contributions made to the fund or scheme by the employer
in respect of that person and not previously paid to him, may also be
included in the lump sum payment.

4. A lump sum paid by the employer to, or in respect of, a person as

if the
compensation on his becoming physically or mentally incapacitated
Commissioner General is satisfied by the medical evidence that the
incapacity is permanent.

5. A lump sum paid by the employer to, or in respect of, a person as a terminal
gratuity, or severance or redundancy payment or as compensation for
wrongful dismissal or for some other loss of employment where
. employment was continuous for three years or more and the annual
average emoluments over the last three years of employment exceeded
$2000 and the lump sum does not exceed 21/t times the average annual
emolument of that person over the last three years if the employment

7l

. -df,
 CHAPTER 3

period was not less than 33Ya years, or a proPortionately smaller amount
if the employment period is less.
. The employee's period of service is more than one year but less than three
years and his average annual emoluments are less than $7,000, and the
lump sum does not exceed the average weekly salary for the last 12
months times the number of completed three months.18

5- A lump sum paid as compensation for wrongful dismissal where the period
of employment is continuous for not less than one year, and the average
annual emoluments over the last three years or since the commencement of
employment are $2000 or less, and the lump sum does not exceed the
average weekly salary for the last 12 months times the number of
completed three months, where employer and employee are connected
persons. Where they are not connected, the lump sum should not exceed
the average weekly salary for the last L2 months times the number of
completed two months.

It is important to note that in computing the lump sum the following rules
rPPIY:
. Redundancy payments are calculated on two weeks' pay fot each year
of employment for the first ten years and three weeks' pay for each year
thereafter.
r An employee's period of employment shall be computed in weeks and
any week in which an employee works 18 hours or more "shall count
as one week in the computation of that employee's period of
employment".
. The emoluments used should be "the average basic weekly
emoluments" and therefore should not include overtime or other
payments made to enable the employee to carry out his duties.
. Any payment in lieu of notice is taxable and therefore should not be
included in the computation of the tax free component of the lump
sum.

--: Ihis provision and the one at 6 have been overtaken by events. The basic annual salary of $7,000 or
b,s is so far below the tax threshold and the minimum wage that the provisions are hardly relevant
and are therefore not illustrated.

72
 Taxation of Emoluments I

3.14.1 Computation of Tax on Termination /Redundancy

Payments

(a) Example

Where the employee's period of service is less than one year, all the termination
payment is taxed.
jonas williams joined Fancy Footwear Ltd. in February 2077 at a salary of
$65,000 per month. His employment was terminated in November 2011. His
employer paid |onas a gratuitous lump sum of $25,000.
In this case the entire amount is taxed in the normal way.

(b) Example
Where the employee's period of service is more than one year but less than
three years and his average annual emoluments are more than $7,000, then all
the redundancy payment is taxed.

If jonas was employed to Fancy Footwear from Febru aty 2009 to November
2011, the lump sum would be subject to tax in the normal way.

(c) Example

Where -
. The period of employment was continuous for three years or more but
less than 33 713 years and
. The annual average emoluments over the last three years of
employment exceeded $7,000, then the tax free portion of the
redundancy payment is 21/t times the average annual emolument of
that person over the last three years times the period of service divided
by 33%.

1. Arthur Watson who was employed as a welder for 15 years to Strongbuild

Ltd., was made redundant. His salary in his final year was $624,000
($12,000 per week), and in the two prior years was $585,000 ($11,250 Pet
week) and $526,500 ($10,125 per week). His redundancy Payment and tax
free entitlement are calculated as follows:
 CHAPTER 3

Iedundancy Payment
$
First 10 years of employment, 10 x 2 weeks x $12,000 240,000
\ext 5 years, 5 x 3 weeks x $12,000 L80,000
Redundancy Payment Entitlement 420,000

Tax free Portion of Redundancy Payment

Average annual salary for final 3 years is $578,500 I% ($SZe ,SO0+ $585,000 +
5624,000)I

Tax free entitlement is (21/+ x $578,500 x 15) dividedby 33% : $585,731

\{r. Watson's total redundancy payment is therefore tax free.

IJ Mr. Watson's employer chose to pay him $648,000, that is, $228,000 more
than the legal entitlemen! then $585,731 would be tax free and $62,269
rt'ould be taxed.

rld) Example

lffirere the employee's period of service is 33% years or more, the non-taxable
arrtion of the redundancy payment is21/e,tirnes the average emoluments for the
st three years of employment.
Ir ^{rthur Watson had worked with the same employer for 34 years, and was
=rade redundant, his redundancy entitlement and tax free calculation
would
Le:

Redundancy Payment

$
First 10 years of employment, 10 x 2 weeks x $12,000 240,000
\ext 24 years, 24 x 3 weeks x $12,000 864,000

Redundancy payment entitlement 1.104,000

Tar-free Portion of Redundancy Payment

-{r-erage annual salary for final 3 years is $578,500
Tar free entitlement is 2r/e, x $578,500 : $1,,301,625
-ls his redundancy payment entitlement is $1,104,000, all of this is tax free.

74
 Taxation of Emoluments -I

3.15 Review Questions

1. Distinguish between a'contract of service, and

a,contract for services,.
Include in your answer examples of each and
comment on the riability to
income tax of each.

2. Jennifer Jones is sports/fitness director at sun sand Hotel on

the north
coast. she has set up a company cailed Fun
Fun Ltd. and she has asked sun
sand to pay her contract sum directry to Fun Fun
Ltd. Miss Jones has no
other clients, she does not use her own equipment.
she has an assistant
whom Sun Sand pay. She often decide, her o*n
hours.
would you classify Miss Jones' employment as a contract
of service or a
contract for services? Give reasons for your answer.

3. walter simpson is a werder speciarising in making

and instailing grilrs. For
the past six months he has had only one crient
- st.o.,gbrild Limited who
build houses. simpson does ail the griilwork. He
o*i, hi, own welding
plant. strongbuird set the schedure of work to be
done and simpson is
expected to folrow the schedule. He sends a
bilr every month for the
amount of square feet of grilrs compreted. He
gets paid gross. Discuss.

4' John wilson, an insurance executive, receives salary of

$50,000 per month
and earned commissions in
June of $75,000. He has for his use a 3 year old
car which cost the company $690,0t 0. private
usage of the car is estimated
at 30%. His telephone bill was g650 for the mo,-,tt,
of June. He was in
Mandeville for two days during the month and
spent an average of 92,000
per day, which he paid by using the company's
credit card. His employer
pays $30,000 per month directly to his landlord.
what is his taxable amount
for June? State your assumptions.

5' Jeffrey Bennett is a senior manager with strongbox Ltd. His

compensation
package is as follows: $g00,000 per year, housiig
$360,000 (paid iirectry to
landlord), motor vehicle (new), $1,400,000, enlertainment
$120,000. Mr.
Bennett has a service company which for the
past few years has received
only his remuneration from strongbox tti. who
has paid him his
compensation package less 2%, contractor,s levy.
(a) Does Mr. Bennett have a contract of service
or a
(b) What is Mr. Bennett,s taxable income in 2017? contract for services?

6' section 5I of the rncome Tnx Act refers to emoluments

arising or accruing to
any person "or any member of his f Lmily or household,,.
 CHAPTER 3

(a) Who are the members of his household?

(b) Joanna Bent is employed by Sparkling Ltd. at a salary of $50,000 per
month. She receives her rent cheque of $30,000 from Juices Ltd., a wholly
owned subsidiary of Sparkling. This cheque is made payable to her
husband. Explain the tax implications of this arrangement.

Discuss the significance for tax purposes of the following cases:

Ashenheim as. CIT (Iamaica,7970)
Commissioner of Inland Reaenue as. Pnyne (Australia, 2001)

\{ark Brown is financial analyst at International Trades Ltd. For the year of
assessment 2011, he receives emoluments of $1,800,000.00. Additionally, he
receives meal tickets of $6,000.00 per month, and clothing and laundry
allowances of $25,000.00 per annum.
Mark enjoys playing the stock exchange, and in 2011 makes a gain of
5180,100.00 from stock exchange activity. Mark receives ordinary dividends
from shares held in a UK Company of €140 in September 2011.
Calculate Mark's statutory income for 201,1,. Make and state any necessary
assumptions.

Peter Small is an Accountant at ]umbo Products Ltd. (Jumbo). He receives

an annual salary of $1,080,000. Although Peter does not require a cellular
phone to effectively perform his duties, his employer provides him with one,
and agrees to pay a maximum bill of $30,000 Per year. For the year, Peter's
cellular phone bill totals $38,100. He receives $4,500 per month for
entertainment. He drives a car owned by Jumbo which was purchased three
years ago at a cost of $1,600,000. Peter's private usage of the car outweighs
his business usage. Jumbo pays Peter's landlord, an unconnected persory
$33,000 per month for rental. In order to prepare Financial Statements for the
previous month, Peter works overtime during the 2"d week of each month.
He uses one meal ticket valuing $200 to purchase suPPer each evening' He
also uses one meal ticket valuing $300 to purchase lunch on each working
day of the month.
Calculate Peter Small's taxable income tor 2077. Make and state any
necessary assumptions.

Celia Wilson is employed by a building society. She receives a salary of

590,000 per month. She receives three uniforms each year paid for by her
employer, valued at $15,000. She receives an annual sum of $8,400 for the
laundry upkeep of the uniforms. To facilitate her work-related visits to the
Titles Office and various law firms in the corporate area her employer has
provided her with a vehicle, original cost $950,000, now four years old.

76
 Taxation of Emoluments I

Cecilia's usage is approxim ately 75%t Private and 25(/o work related. What
is this taxpayer's annual taxable income?

11. |anet Anderson is employed as a marketing director to Good Foods Ltd'

Her salary is $145,000 per month; she has the use of a new comPany car
which cost $1,350,000. Her estimated private usaSe is S;'.lL. Good Foods
pays $35,000 per month rental to |anet Anderson for her own house. An
examination of the company's credit card statement shows that Mrs.
Anderson has received cash of $15,000, groceries of $8,000 and credit card
charges totalling $450 were paid by Good Foods (Mrs. Anderson did not
reimburse the company for these private expenses)'
During the month in question the company also has written off a loan of
$60,000 Mrs. Anderson received for her child's school
fees. Compute Mrs.
Anderson's taxable emoluments for the month'

12. Kelly-Ann Bonner is emplol'ed to Big Builders Limited as a top executive

and received. a remuneration package for the year 2011 as follows:
$
Basic salary 800,000
Entertainment allowance 120,000
Travelling allowance 80,000
Credit card facilities 80,000
Living accommodation 180.000
1,260,000

Your investigations reveal that:

(i) only $60,000 of the entertainment allowance can be regarded as
incurred for business PurPoses.
(ii) In addition to receiving the travelling allowance in cash, Kelly-Ann is
provided with a fully maintained company car. The value of the benefit
accruing to her from the provision of the car is $30,000"
(iii)Credit of $80,000 was received on the credit card but she repaid $40,000
to Big Builders.
(iv)The following personal exPenses for Kelly-Ann were also paid by the
company during the Year.
$
Household helPer 1,500 per week
ElectricitY 3,000 per month
Cooking gas 15,000
Children's school fees 120,000
Compute Kelly-Ann's income from emoluments for the Year 2077.

77
 CHAPTER 3

\[athew an employee of a building society requested and was granted a

($150,000), clear off his
=:-atf loan of $900,000 to repair and insure his car
($550,000) and pay his fees and expenses in a part-time
=edit card debts
J.egree programme at UWI ($200,000). Mathew received the loan at the rate
.-f 5'7 when the prescribed rate was 75%. Discuss Mathew's tax position
;.-'ncerning the loan.

i:. February 2010, Delroy who is employed to a development bank, received

, loan of $250,000 to settle medical bills for his mother. By December he had
=paid $30,000 of the principal. On 1st |anuary 2011, Delroy received
another loan of $1.4 million to purchase a lot of land. The concessionary
-:rLterest rate for both loans was 5% and the prescribed interest rate was '1,4%.

a r \\rhat was the tax on Delroy's loan for year of assessment ended 31tt
December 2010?
t') at 1't February 2011 and (c) year of assessment 31st December 2011?
--uke
is an assistant manager of a bank and he owns a studio apartment for
r.-hich he has a mortgage with a building society. InJune 2011 he saw a two-
hadroom house for sale by an owner who was leaving the Island. Luke
:rade an offer of $4.75 million which was accepted and the bank gave him
: staff loan for $2.0 million at an interest rate of 6% when the prescribed
::rterest rate was 1.4%.Whatis Luke's taxation position concerning the bank
.oan at 31st December 2017?

\fichael, who is an employee of a commercial bank, was granted two loans

n Tanuary 2077 for specified Purposes. The first loan was for $1,250,000
rr-ith interest at a rate of 6%, while the second loan was for $2,000,000 with
rnterest at a rate of 70%. The prescribed rate at the time was 74%.
'a,tCompute the cash equivalent (if any) to be taxed as an emolument for
Y 1A2071,.
b ) Assume the same facts as in the question except that the interest rates on
the loans were reversed and the prescribed rate remained the sape.
Compute the taxable cash equivalent (if any) for Y I A 2077 assuming
that no principal was repaid.

Horv are lump sum payments to a retiring employee treated? Would your
ans\ver be different if the retiring employee was a teacher in the
govemment service?

l: -\ston Boyd has been made redundant after 15 years of continuous

employment with Rainbow Ltd. His annual salary in his final year was
Str,248,000 and in the prior two years was $1,029,600 and $1,200,000, the

7A
 Taxation of Emoluments - I

latter including $108,000 for overtime pay.

(a) Calculate Mr. Boyd's redundancy amount and the tax free component (if
any) of his redundancy pay.
(b)Assume that Rainbow Ltd. agreed to pay Mr. Boyd 91,500,000. What
tax, if any, would Mr. Boyd pay on this lump sum?

19. James Carter was employed to a financial institution which failed. He had
been in continuous employment from 1 March 2010 to 20 June 201,2 at a
salary of $786,000 per year. What is James Carter's redundancy pay and
what is the amount of tax, if any, on the lump sum?

20 Joan Chang has worked as a legal secretary with a firm in Kingston for
almost 35 years. Her annual salary for the past three years has been
$950,000. In order to induce staff to take voluntary redundancy the firm is
offering its employees a "tax-free package of three times their present
annual salary" as a lump sum payment. Advise Miss Chang.

21. Discuss the significance for tax purposes of one of the following cases

(a) Ian Louie vs. the Queen (Canada, 2002)

(b) IRB vs. Suite (Trinidad, 1986)

22. lanine is employed to a commercial bank. she owns and occupies a house
for which she has an NHT mortgage. She has the opportunity to buy a
studio apartment for $2.5 million and her employer will give her a loan for
this amount at 6% interest. The prescribed interest rate is 14%.
Advise Janine on the tax implications (if any) of her acceptance of this loan,

23. Andrew Brown was employed for 14 years 10 months as a foreman mason
to High-Rise Ltd and was made redundant in December 2077. His annual
salary in his last three years with High-Rise was as follows:
2011 (final year) - $72L,000
2010 - $648,000
2009 - $576,000.
Advise Sam on his redundancy entitlement, the tax free portion of the
redundancy and the redundancy payment he can expect if High-Rise
decides to pay him $550000 as a redundancy payment.

79
 CHAPTER 4

Taxation of Emoluments - l!

1. lntroduction
lto-e are continuing our examination of the incomes of employed persons whose
rrr-rmss arise solely from their employment. Employed persons are paid by (u)
r- agreed hourly rate (b) a weekly rate or (c) an annual sum divided into 12
cl:-ual monthly instalments. 1
[n chapter 2 we had indicated that there are other charges besides income tax
r;ich are levied against the payroll. Both the payee/employee and the
Faler/employer are charged under the National lnsurance Act, the Nntional
ii-*-.in8 Trust Act and the Educ{ttiott Tax Act. The employer alone is charged
qrder the Human Employment And Resotrrce Training Act (HEART). All
eroluments should be taken into account when these charges are being
aiculated. A review of section 3.1 in chapter 3 will serve as a reminder of the
cornponents of emoluments.

4.1 Statutory Deductions

Starutory deductions are those that are mandated by law such as NIS,
Education Tax and NHT. By law the employer must make the deductions and
:erLit them to the relevant authority. Although NHT and NIS were designed as
contributions towards specific benefits which may be received at a future date
+- the employee, they are seen as payroll taxes. Education Taxes collected go
Jirectly to the Consolidated Fund and are not earmarked or specifically used
ior education programmes. Therefore from Government's and the employees'
:oint of view this tax is no different from a tax on income.

- --i..tulv and weekly paid persons may earn additional income by working overtime or on public
--siidays. Employees get paid for public holidays (e.g. Independence Day, National Heroes Day).
----ctice has established that in order to be paid for the public holiday an employee should be at work
:re day before the holiday and the day after the holiday unless on sick leave.
 Taxation of Emoluments -I

4.1,1 NlsContributions
self-employed persons'
Contributors to the NIS are employed persons'
an employed person's
voluntary contributors and. employers. In calculatinS
be made' The basis of
liability to income tax, the NI9 deductions must first
assessable to income tax ' ' '
calculating the contribution is "any emoluments
otherthanannuities,pensions,suPerannuation'beingemolumentsfromwhich
incometaxisdeauctiblewhettrerornottaxinfactfallstobededucted
per week, and-
workers paid $10
therefrom,,. As of 6th october, 2003,domestic
on wages uP to a maximum of
other employees paid a flat rate of 2'5 percent
study it
gg,675p"i *e"k (that is $500,000 per year). As a result of an actuarial
wasfoundthatthecontribution,toth"NationallnsuranceFundmustbe
was decided that as of
increased for it to remain
August 2, 2070, domestic
0 per week while other
should to a maximum of $1m -
employed persons
increased from $500,000' Fr uaty 2013 the cap is now set at $1'5 m
and NIS contribution therefore is restricted'
to a maximum of $75'000'
In each case the employer pays an equal amount'
by purchasing stamps
self employed individuals used to Pay $20 weekly
the value of the stamp was
issued for this PurPose' Since Augu st 2' 2010'
the stamps are affixed to a special
increased to $50. ln order to create a record'
pays tax has b11
card. When the income on which the self-employed Person
determined,theNlsannualcontributioniscomputedat5percentoftaxable
from 1Oth ]anuary 2013 the cap
income. As with domestic and other employees
therefore restricted to a maximum
is now set at $1.5 m and the NIS contribution
the amount computed (or the restricted amount) will be
of $75,000. From
deducted the annual amount prevrously paid
by weekly stamps and the
balance Paid in cash.
week (using the stamp
Voluntary contributors who used to pay $20 per
method)aremainlyMembersofParliamentandmembersoftheDefenceForce.
now made by salary deductions
Their adjustment is that their contributions are
as done for other emPloYees'
of service and a contract for
There are individuals who have both a contract
services, and in light of the cap placed on
the charges for NIS there might be
some probl"*, irr'the compuiation of NIS
deductions, and consequently, oi
such an individual will need to
Education and PAYE taxes. It is certain that
makeareturntotheTA}incorporatingbothsourcesofincomeandaggregating
such income in order to compute the various
payroll taxes'

8l
 CHAPTER 4

Eramples

\Iarvin Smith is a self-employed tailor. In 2011 his earnings less expenses

have produced a statutory income of $450,000. Mr. Smith's NIS
contribution for the year is calculated as follows:
$
Gross income less expenses 450,000
\lS for year (5% x $450,000) 22,500
Less paid by weekly stamps (52 x $50) <2,600>
\IS due 79,900

I Peter Boyce is a self-employed quantity surveyor. His statutory income for

1011 is $1,250,000. Mr. Boyce's NIS contribution for the year is calculated as
follows:
$
Gross Income less expenses 1,250,000
\IS for year (5/" x $1,250,000 : $62,500) restricted to 50,000
Less paid by weekly stamps (52 x $50) <2,600>
\IS due 47,400

1.1.2 NHT Contributions

\Hf is payable on gross at two percent for employees and three percent for
Self-employed individuals pay three percent of their statutory
-.plovers.
--.r-r-)rrr€, that is, the same figure on
which income tax is computed. The floor is
=- prevailing minimum wage, and there is no ceiling. The funds collected go
= ie National Housing Trust.
Contributors are employed persons, self-employed persons, voluntary
::nributors and employers. The age range for employed contributors is 18
;=ei's to 65 for a man, 60 for a woman. For the self-employed, no age range is
----- J

--tsu.
a.I.3 Education Tax
,*-.r.lributors are employed persons, self-employed persons, and employers.
-{:e requirements for employed persons are 18 years to retirement age which
r. s:ated as 65. No age limit is stated for the self-employed.
For self employed individuals the basis for calculating the tax is "earnings"
^ r-irh are defined as statutory income. Self-employed persons pay two percent
-r'Jreir statutory income.
The form for the employers' annual return states clearly that "gross Pay

E2
 Taxation of Emoluments II

includes NIS & NHT contributions,

housing allowances, salaries, fees,
commissions, bonuses, overtime, holiday or other emoluments paid ... in the
year being reported". The tendency, however, is to deduct NIS and
contributions to an approved pension scheme from the gross pay before
Education Tax is calculated.2 Employees pay two percent of this base and
employers pay three percent. No payments are required from those earning the
minimum wage. There is no ceiling.

4.2 lncome Tax

For employed persons income tax is paid on the pay-as-you-earn system. As

previously stated Jamaica has a reformed income tax system since 1986.
The reform established a uniform standard deduction or tax threshold. This
is the amount of income on which the tax rate is nil. Following is a list of the
thresholds established since |anuary 2000:

Date Threshold
71112000 $700,464 per year or $8,372 per month3
T lT lZOOL $720,432 per year or $10,036 per month.
7 l7 12005 $169,704 per year or $74,092 per month
1 1712006 $793,440 per year or $16,120 per month
1 I 7 I 2008 $200,304 per year or $76,692 per month
11712009 $220,272 per year or $18,356 per month
7 I7I 2009 $320,736 per year or $26,728 per month
7l7 12070 9447,768 per year or $36,764 per month
11712073 $507,372 per year or $42,276 per month

It should be noted that when the threshold is reset during the tax year the
effective threshold for the year is the weighted average of the amounts
prevailing during the year. In 2008, therefore, the effective threshold was
$796,872 and in 2009 itwas$270,504.
As mentioned in chapter 1, one way taxation authorities adjust the tax
burden is to arrange it so that those who earn more pay more. Another method
is to have a non-taxable portion of income. This is particularly important in the
case of ]amaican taxpayers as post-reform a flat rate was introduced for
individuals. The non-taxable threshold or the amount at a nil rate lightens the
tax burden on those at the lower end of the income scale.
Income tax reform was brought into effect by Act 4 of 1986 which repealed

2 The Act excludes contributions to the Civil Sen,ice Family Benefits Scheme.
3 For those who have wondcred why the annual thresholds are not nicely rounded figures, the reason
is that they must be easily divisiblc by twelve and fifty t*'o

83
 CHAPTER 4

Eanv of the personal reliefs and allowances in the old system such as child
-ief and an amount for employing a household helper. The remaining
l&ortances such as uniform, meal and housing as discussed in chapter 3 have
teen detailed and in some cases further explained by directives from TA|.
For PAYE taxpayers who have no other sources of income, the amount on
rilch the income tax is calculated is gross pay less NIS less pension
urtributions up to a certain limit. The resultant figure is statutory income.
F^rrn this statutory income the threshold is deducted and the balance which is
:anable income is taxed at 25 percent.

1-2.1 Annual Return and Terminology

Section 66(7)of the lncome Tsx Act states that "every person shall be under a
Cutr- to submit a declaration of his estimated income tax for the year of
esssment", that is, to make an annual return. Section 66(1)(b) exempts
trL\pavers whose emoluments are taxed at source. Therefore if a taxpayer's
rr--ome is derived solely from emoluments, from which tax at source has been
Srrlucted by PAYE instalments, then, generally speaking, he need not submit a
Eturn of his estimated income.4
\\'trere a PAYE taxpayer has income from other sources in addition to his
tmoluments, he is required to make a return each year of his actual income for
fu vear of assessment and estimated income for the following year of
xressment. In his annual return he will include income from all sources,
,:eCuct all appropriate allowances and exemptions. The resultant figure is his
fratutory income. From his statutory income he will deduct the threshold
mrount and compute the tax. By definition statutory income is:

rhe aggregate amount of income of any person from all sources remaining
after allowing the appropriate deductions and exemptions under the lncome
Trt Act.
'scatutory income' is by custom used for individuals. The term 'chargeable
r,come' is used in relation to legal persons, for example, companies.
For the purposes of this text we set out below the situations in which we will
se the terms "taxable income", "statutory income" and "chargeable income".

For PAYE taxpayers, salary and emoluments are added together and
from this are subtracted any applicable enumerated deductions. For many
taxpayers emoluments from their employment represent their only

+ -:e CGTAJ of course has the power to request an annual return of actual and estimated income from
ir.'; taxpayer. See chapter l1 sections 11.1 and 11.2.
 Taxation of Emoluments - ll

source of income. Therefore after subtracting the enumerated

deductions the balance is their statutory income.
For individual taxpayers, income (less allowable expenses) and
emoluments from all sources are added together and from this are
subtracted any applicable enumernted deductions. The balance is
statutory income.
o For PAYE taxpayers and other individuals, taxable income is the
amount chargeable to tax after the threshold has been deducted from
the statutory income.
o For companies, chargeable income is all income less expenses "wholh'
and exclusively" incurred in acquiring the income.

The other sources of income making up an individual's statutory income will

be discussed in chapter 5. In the examples which follow it is assumed that the
only income of the employees is that from their employment.

Examples

1. In the year of assessment 2011, |onas Brown was employed as an assistan:

manager in a hardware store. His emoluments were $16,000 per week
($832,000 per year).s His annual payroll deductions and his employer's
contributions are as follows:
$
Income 832,000
NIS,2.5'/o x $832,000 20.800
Statutory income is $832,000 less $20,800 811,200
Less threshold 477,768
Taxable income 400,032
Tax@ 25% 100,008
Other Deductions
NHT 2% x Bross income, 2% x$832,000 76,640
Education Tax,2/. of statutory income (2% x $811,200) 76,224

Employer's Contributions $
NIS(2.5% x gross income) 20,800
NHT (3% x gross income) 24,960
Ed. Tax (3% x $877,200) 24,336
HEART (3/. x gross income) 24,9606

5 For simplicity in working the examples the annual salary is used.

6 Computation of HEART contributions is explained in 4 3 below.
 CHAPTER 4

: l iz3f,s1l1 Walker was employed as a secretary at monthly salary of $85,000

:uring 2011. She had the use of a two-year old company car which cost
5..130,000. Private use of the car was estimated at less than 50%.
:{er payroll deductions and take-home pay for the year are as follows.

$
faraf\ 1,020,000
\[c-rtor Vehicle benefit 90.000
UTOSS 1,110,000
Les NIS, 2.5% x $1,000,000 (restricted) 25.000
S-.atutory income ($1,1 10,000 less $25,000) 1,085,000
lss Threshold 447.768
Tar.able Income 643,832
Ia', @ 25% 760,958
ulther Deductions
\L{T 2%, x gross income, 2% x $7,770,000 22,200
Eiucation Tax,2% of statutory income
I : x $1,085,000) 27,700

i-{er take-home pay was $1,110,000 - $25,000 - $22,200 - fi27,700 - $160,958 :

5s:c0,142.

Lmette Brown works as a waitress in a Kingston restaurant. In 2011 her

iseeklv wage was $5,500. Her payroll deductions are as follows.
$
Cross income 286,000
\15,2.5% x $286,000 7,750
Statutory income 278,850
Tfueshold 447,768
Tarable income nil
Other Deductions
\HI 2% x gross income, 2% x$286,000 5,720
Education Tax,2% of statutory income 5,577

I.rhn Wilson is an insurance executive whose salary and commissions in

Tanuary 2012 totalled $90,000. Rent of $25,000 per month was paid directly
:ur his landlord. His payroll deductions for the month of |anuary were:

86
 Taxation of Emoluments II

$
Salary & commissions 90,000
Accommodation benef it (100% of rent) 25.000
Cross income 115.000
NIS, 2.5% x 1,000,000/12 (restricted) 2,083
Statutory income ($115,000 less $2,803) 712,917
Less threshold 36,764
Taxable income 76,753

Tax@ 25% 19,038

Other Deductions
NHT 2% x gross income, 2% x $775,000 2,300
Educatior-r Tax,2/n of statutory income 2,258

T ake home p ay : $ (90, 000- 2, 0 83 -79,038-2,300 -2,258) : $64,327

Remember that he does not receive the rent in cash.

5. Marva Shields is a nurse in full time employment at a public hospital (X)

and does sessions at another health facility (Y). In 2011 she received total
emoluments of $700,000 from X and from Y she received $400,000. She
received her pay from Y after statutory deductions.T Below we show the
NIS and PAYE as deducted and what they should be when the emoluments
are aggregated.

X Hospital Y Medical Centre Total

$ $$
Emoluments 700,000 400,000 1,100,000
NIS 77,500 10,000 25,000
Statutorylncome 682,500 390,000 1,075,000
Less threshold 447,1.68 447,768 447,768
Taxable income 247,332 -51,169 633,832
Tax payable 60,333 0 158,458
Education Tax 13,650 7,800 21,500
NHT 14,000 8,000 22,000

Note that the NIS on the total emoluments is restricted to $25,000 which is
92,500 less than charged by the two health facilities. Marva will have a credit ir
her NIS account of $2,500 which will be carried forward to 2072.In the case ol

7 The most likely treatment is that Nurse Shields' earnings at Y Clinic would bc c'leemed as her sclt
employed earnings u,hich she will bring into hcr annual statutory deduchon returns.

87
 CHAPTER 4

fu rr-u-rme tax, Marva will submit an annual return and if she has no other
dEE€ for 2011 her tax position is as in column 4 above. Her tax liability for
![L- *. S158,458 of which she has paid $60,333 and therefore owes $98,125.

{.3 HEART Contributions

=:e -ctor employers whose monthly payroll exceeds $74,444 (annual

gnr,--.- of $173,328) are required to pay 3 percent tax on total gross emoluments
d eir'lovees. By law compensation in the form of allowances should be
'"ilr;EJed in the tax base; in practice allowances are excluded.s Unlike the
Earcajon Tax, HEART payments are deposited in an account earmarked for
rME :ir the Trust (a corporate body) and do not go into the Consolidated Fund.

-d: employer who pays an emolument to a trainee under the scheme will
!il*-r=r,-e a credit from HEART up to a limit of $600 per trainee. As per section

f3 i ' s t of the lncome Tsx Act, HEART contributions are allowable deductions
!r'r : person in computing tax on business income, and where the person
m.:'ovs a HEART trainee the amount paid to the trainee (subject to the limit
s bl HEART) may also be deducted. As stated in section 148 of the lncome Tax
-{': Jre amounts allowed are the total emoluments in the first year, but in the
sr-nd and third yearc 75 percent of a male trainee's emoluments and 80
gent of a female trainee's emoluments are allowed.
[ertain employers are exempt from the provisions of the HEART Act. These
.si:lovers are the same as for the education tax.

Eramples

The average monthly paybill of Right Repairs is $12,000. The actual paybill
rncluding statutory contributions for |une 2011 was $13,011. Right Repairs
does not pay HEART contributions.
The average monthly paybill of Great Life is $850,000. Assuming that Great
Life has no HEART trainees, the HEART contribution for June 2077 is 3% x
5850,000 : $25,500. If Great Life had 4 HEART trainees (each of whom
received $200), the credit allowed by HEART for the month would be $200
ithat is, 4 x $600 +12). The amount paid in contributions would be allowed
as an expense in the employer's accounts. If all four trainees were in their
tirst year the amount of their emoluments ($800) would be included in
salaries and wages and also expensed in the employer's accounts.

i r-lorvances here means allowances approved by the CGTAG..

88
 Taxation of Emoluments _ ll
3. Blue Moon Hotel whose paybill
for June 2017 was $645,000 did not
any Heart trainees. BIue Moon's har.e
Heart contribution was $645,000 x
$19,350. 3% =

4.4 Enumerated Deductions

For individuals whose emoruments
derive from an office or employment
profit (coniract of service) s.13(1) of the o:
Act sets out a number of expense.
which might be ailowed as deductions
in the calcuration or ririrtory income.
summary these are: Ir

(i) Contributions to an approved superannuation

(j) fund
sums paid to an approved fund
Ly un approved association or by
member of an approved association an,,
(k) Contributions to widows' and
orphans' Funds out of stipends o:
Ministers of Religion
(t) Contributions to Civil Service pension
fund
(m) Contributions to Jamaica Constabulary
pension scheme
(p) Contributions to NIS
(o) Annuities or other annual payments
secured by a deed of covenan:
(must be for at least five
consecutive years) in favour of uwl
(q) or UTECF.
f statutory income to charitable o;
d list
(')
proved by the CGTAJ.
(u)
approved retirement scheme
(") ESOP qualifying payments.

4.4.1 Treatment of Enumerated Deductions

For the individual pAyE taxpayer
the enumerated deductions as set
section 13 of the Act are allowed out i:-
from the total emolu_"r.,,r, the resultin:
figure is statutory income:
salary xxx
Add Housing benefit
xxx
Add Motor vehicle benefit
xxx
Total
Less pension contributions XXX
LessNIS xxx
Statutory income
;
following paragraphs some of these
'" :h."
explained.
enumerated deductions are

89
 CHAPTER 4

1.4.2 Contributions to an Approved Superannuation

Fund

T'hL: is a fund designed for employed persons, other than Government

errployees who are provided for under the Pensions Act. It must be a fund
epproved under the lncome Tax Act or under the lncome Tax LaTD (Cap. 207, 1938
by
=:ixd edition) now repealed. If it was approved under the Act, contributions
an employer or employee should not have exceeded 10 percent of the
ertplovee's remuneration, and if the fund was aPPloved under the Law but
had not been approved under the Act, the contribution was limited to 5 percent
ot the remuneration. The lncome Tax Act was amended in 2008 so that the
arrounts to be allowed as deductions were increased to twenty percent of the
errployee's remuneration. Generally, the employee would be expected to
ccvntribute an amount which would be matched by the employer. Either
ccrntribution is supposed to be limited to ten percent, but in the event the
anployer pays in less than ten percent the amendment now allows the
errployee to make up the difference. To qualify for the relief, the payments
nrrst be ordinary annual contributions to the fund.
The tax free lump sum payment which is allowed is limited to the commuted
ralue of one-quarter of the accrued pension up to a maximum of 12.5 times
,re.quarter of the annual pension before the commutation. The commuted
ralue is defined as the value calculated by an actuary in the prescribed manner
and as of a fixed date.

1.4,3 Business Entertainment

[n other countries this benefit or perquisite is very carefully controlled because
ot the obvious abuses that can occur. In the UK entertainment of overseas
'i.ients only is allowable.
ln |amaica the general guideline is that expenses incurred for reasonable
business entertainment will be allowed as an expense to the employer.
The main situations are:
(a) where the employer pays directly, for example, by bill sent for settlerrient
(b)where the employee pays by his (or the company's) credit card at the
time of incurring the expense.

tn the case of (a), assuming that the entertainment was for business Purposes/
dris will be an allowable expense which will be brought to account in the
company's books and will be debited to the profit and loss account. In the case
ot (b) where payment is made by a credit card owned by the employee, the
amounts for entertainment are reimbursed by the employer to the employee
 Taxation of Emoluments _ II

and would attract no tax. where the company,s

credit card is used the situation
is similar to (a).

4'4'4 ordinary Annuat Gontributions to an Approved

Retirement Scheme
Contributors to an approved retirement scheme
are serf-employed persons or
those who are emproyed in non-pensionable
posts. This deduction had been
restricted to
chargeabre
the
or
superann
3, ;'.,H:"IT:,tll i:l"fi:..":::l
e Tax Act was amended to allow the
deductible amount to be increased up to 20
percent of chargeable income. The
self-employed are ailowed to take rit ua,uu.,tage
of the retfr on 20 percent of
their income' For those in non-pensionabre
posts, relief is avairabre to both
employers and employees' If the employer
makes contributions on behalf of
the employee, those contributions form part
of the employee,s contributions in
the computation to determine whethei the
prescrib"a pu.."r.,tage has been
reached.
There had been a rimit of $120,000 on lump
sum payments from such
pension schemes. The limit was removed.
The tax free r-ri ,r* is carcurated
as for superannuation schemes. (See
section 4.4.2 above.)
The senate passed these amendments to the
rncome Tax Acton February 15,
2008 and they became effective on March
4,2OOg.

Example

Byron King is a self employed chartered accountant.

His fee income in 2011 was
$1,050,000. During the year he entertained prospective
clients to Iunch at one of
the Kingston hotels, paying by credit card.
At year-end he had spent g34,000 on
this entertainment expense. In 2009 he had
executed a deed of covenant in
favour of UTECH for g12,000 a year payable
quarterly by t rr.,i;d;;;:
He also pays $72,000 per year into an approved
retirement scheme. what is
Byron King's statutory income for year-end
Decembe r 2077? Ignore statuto^,
deductions except NIS.

Fee Income
$$
1,050,000
NIS
50,000
Business Entertainment
34,000
Donations to UTECH
72,000
Approved Retirement Scheme 72,000 168.000
882.000

9t
 CHAPTER 4

\.u: NIS is restricted to $50,000 as of 2010. The business entertainment has to

be approved by the Commissioner; the donations to UTECH do not exceed
: :---'of statutory income and contributions to an approved retirement scheme
a-" Le up to 20 percent of the employee's chargeable income.

1-1.5 ESOP Qualifying Payments

Ihe Eighth Proviso (s.5) of the lncome Tnx Act says that emoluments "shall not
,'---ude any sums used by employees to acquire shares or share options
=;suant to a plan approved under the Employees
Share Ownership Plan Act,
Act) to the extent that the sums so used are relieved of income tax"
=:{P
rr,cer the ESOP Act.
The ESOP Act became effective in April, 1995 and was amended in 2003. The
ir*- is designed to encourage employee participation in the ownership of
icr.rnesses. In order to get the tax benefits a scheme must be approved by the
,raCJAl. For plans to be approved at least 50 percent of the work force has to be
.remritted to participating in the ESOP on an ongoing basis. Under the ESOP
-L-- First Schedule, Part I, all plans (except share options) must establish a trust
r rold the assets and shares relating to the plan. The participants must agree
i*r: the trustees may hold their shares for two years after they have been
alxated to the participants.
Ine law allows different funding arrangements for the purchase of shares in
anpanies setting up employee ownership programmes. The purchase of
Fiies may be by way of the participants' own funds, by credit, by grants, and
;*,0: The loans and grants may come from the employer company or
lurdflS.
,re-r*.er participating company - such as a member of the Sroup to which the
e=t:lover company belongs. The company distributing its shares under the
i.:n is described as the "grantot" for ease of reference.
Ernployees using their own funds to purchase shares may use salary, back-
a€,r; or bonuses; those using credit, grants or loans may have received from the
g:ltor company an outright grant to purchase shares, or a loan directly from
fu qrantor, or a loan from a third party channelled through a participating
.Empany. The third party loan may even have been passed on to the employees
c concessionary rates. The employees may use any combination of these funds
e *re case requires.
Each of these options has tax relief implications for the employer and the
his or her bonus, back pay or
-rpiovee. An employee who uses any part of
*arrr deductions to acquire shares to be held in the plan on his behali is
rr,irrr-ed a tax deduction of the amount so used. The plan may provide for a
.Ea-ain percentage of the bonus to be used in the plan. This amount should be
and to pay
=;-j over promptly to the trustees to buy the shares in the grantor
m".- trust expenses specified in the plan. Back-pay payable in lump sums may
 Taxation of Emoluments Il
be treated as bonus payments. with regard to salary deductions the amounts
must be previously agreed and the grantor must forward the
deductions
forthwith to the trustees who must use at least g5 percent (or
such other
prescribed percentage) to purchase ESop shares on tire
participants, behalf
credit purchases are paid for by salary deductions or", th" time
specified in
the credit agreement. If more is deducted than required
to pay for the share:
the excess may be held in the plan to purchase more shares
or be returned to
the participant. If the money is paid ort to the participant
the amount is taxabre
and the trustees must withhold the tax. The same condition
applies whether the
purchase of shares is by deductions, bonus or lump
sum back_pay.
If the purchase money comes out of a loan tire participant is allowed a
deduction of the amounts spent to buy the shares. The participant
may be
allowed a tax deduction equivalent to the principal and interest
payments or
the loan, but then he cannot be allowed a deduction also
of the amounts speni
to buy the shares. There_is no tax on any difference between
the interest paic
by the participant and the interest which would have been charged
hai th.
loan been made at the market rates prevailing whire the
shares remainec
unallocated. Part III of the second schedule provides that
if the shares sc
financed are transferred at the request of the participant
' in the first 3 years after the date of allocation, 100 percent of the interes:
differential enjoyed by the participant must be brought into
statutorr
income
o in the fourth year,75 percent of the interest differential
. in the fifth year, 50 percent of the interest differential
. in the sixth year,25 percent of the interest differential
' after the sixth year there is no tax on the interest differential.
If a participating company makes a loan or a grant for the purchase
of shares i:
the grantor, the money must be paid directly to the trustees
who must use n.
less than 85 percent to purchase shares. To the extent
that the grant is used r;
buy shares in the plan it is exempt from rncome tax.
The tax relief may be suspended in any year in which,
_ inter arii, the numbe:
of participants is reduced below 50 percent of the eligible members
of th=
workforce. The Fifth schedule to the ESop Act provides
that tax relief on..,
applies to an employee to the extent that the initiat market
value of share.
allocated in any year does not exceed 10 percent of
the employee .
emoluments. Any excess allocation is taxable. If the shares
are acquired at les.
than their value, the price difference is not treated as taxable.
Dividends paid by the Grantor on shares herd in the plan
are exempt fro:
tncome tax.
It should be noted that the shares purchased under an ESop
must be held b..
the employee/shareholder for six years in order to retain
tn" r.,u*i-r^ t.,

93
 CHAPTER 4

hmit. II ESOP shares are sold or transferred

. in the first 3 years after the date of allocation, 100 percent of the value
must be brought into statutory income
. in the fourth year,75 percent of the value
. in the fifth year, 50 percent of the value
. in the sixth year, 25 percent of the value.
. after the sixth year there is no tax on the value of the transfer or sale.

E s-res must be transferred because the participant has so requested on

he ier retirement or if the participant has died, the value to be brought into
illlrn-,ale is the lesserof the initial value and the value on transfer.
Ii€ ESOP Act gives relief on transfer tax and stamp duties.e
Tie CGTA) will consider a plan to be a qualifying plan under the Act if:
a tthere is nothing in the plan to discourage participation by any eligible
employees
t tthe assets of the plan will be allocated in a broad and equitable way
l tulI time employees will participate in the plan on similar terms, and if
pricing and any financial arrangements for the acquisition of shares do
not discriminate against the lowest paid employees
"d)more than one company in a group of companies is involved in the
plan, and the choice of companies which are involved in the plan will
not result in the exclusion of the lowest paid employees of the group as
a whole
e)the application for approval is accompanied by the appropriate
documentation and certificates.

rfu the companies in famaica which made plans for the establishment of an
'rf
ECF trom as early as7993, did not get a positive resPonse from the employees
ryd 1000 whery in view of the strong growth experienced by the company
m-e: the previous two years, they felt it was "a good time for them to invest in
fu company".lo
ii.e government of the United Kingdom in 2000, introduced an "all-
s'=ioyee share ownership plan" (AESOP) which is aimed at encouraging
rrlrkers in smaller unquoted companies to purchase shares in their businesses.
h. ar01, the programme was renamed the Share Incentive Plan (SIP). In a
E^-jpaper article Jane Renton said "too many companies are still being
by the complexities and costs of running such schemes". Some of the
--,.rred
:ci'lems that a small company can face include getting professional assistance

I I--c- is more in the Act than is dealt with in these paragraphs. For example there are detailed
:r:'.i:ions for the acquisition of share options. The interested reader can review the Act for further
-=i-s
I I ':--:t Life Opts for ESOP", The Finarrcial Gleaner, July 7 , 2000

94
 Taxation of Emoluments _ II

in setting up the scheme, creating a market for

the company,s shares and
having the shares regularry varued'under
a formura approved by the Revenue.
It is perhaps not surprising that of the number
of cornpanies participating in
the scheme unquoted companies represented
only a third at the time of the
report.11
It would appear that companies have found
that the schemes are very usefu-
in retaining staff, because of the tax benefits
available to the farticipants in the
schemes, so the schemes have become
increasingly popular. According to a
worldwide survey reportedly carried out
by Buck Consultants and Globa,
shares, 52 percent of 31g r"spondents
said they were outsourcing the
management of all or part of their employee
share schemes. More of them
would have outsourced if they had not been
afraid of losing contror of their
data or afraid that it would have beer
too expensive.l2 we deduce that the
administration of the schemes is still proving
to be difficurt; and some firms
have resorted to using specialry desrgned
software to assist them.

strongbuild Ltd has an approved ESop. In 2010 the emproyees

purchase s% of the share capital of 10 agreed tc
million shares of $t each, that is, 500,00_
shares' There are 50 emproyees in the
plan. Each emproyee therefore had to finc
$10,000 to purchase his/her 10,000 rhr.ur.
In that year Richard walrace received a
salary of
9750,000. His contributio:
to an approved pension scheme was
$30,000. uis ESop purchase by salan
deduction was treated as an enumerated
deduction. His taxable salary for 2o1t
will be computed as follows.
Note that ESop purchase of g10,000 does
not exceed 10% ofsarary.
$
Salary
750,000
Less pension contribution
30,000
Less NIS
79,750
Less ESOP
10.000
Statutory income
697,250

(a) If Richard wallace received

a loan from strongbuild to buy the
shares, the
principal and interest would be an allowable
deduction.
(b) If the shares were purchased
with an outright grant from the companr

"Complexity Takes Away Incenrive to Turn

" l;}iru; ffi; sraff into shareholders,,, The sundoy Tin:.-
,,
I::Tfromwebsite:http://www.emptoyeebenefits.co.uk/item 14341 lpg_411_drr_news/ 35gl p.

**
 CHAPTER 4

or with a bonus or part of a bonus or back-pay funds (or a stated

percentage of any of these), then the amount used for the purchase would
not come into the employee's tax calculation.
lc)If Richard Wallace instructed the trustee of the plan to sell his shares in
2072 - two years after they were allocated to him - then the purchase price
of $10,000 on which he was originally given tax relief would be brought
to account in that year and form part of his statutory income.13

ftustration

An illustration of an ESOP which seems to have achieved the main objective of

aeating employee shareholders is that of lamaica Producers Group Ltd
tProducers). In March 1995 over nine million shares were issued to the Trustees
d the Producer's ESOP. The company facilitated the purchase through a loan
b the ESOP Trustees which the employees in time will repay. In the 1996
-{nnual Report, the disclosure note listing the ten largest shareholders gives the
hrgest shareholder as "Trustees - Employees Share Ownership Plan - 13.6
urillion shares".14 The next largest shareholder has 4.8 million shares.
-{ssuming that the value of shares granted to each employee in any one year
n-as not greater than 10 percent of the employee's emoluments, then, the
mrount to be repaid through the Trustees to the company will be treated as a
deduction in the tax computation of each employee. For employees this seems
a painless way to acquire shares in the company for which they work.
Based on figures disclosed in extracts from the audited accounts for 2070, at
rear end the ESOP shares were just above 18 million ordinary shares, with total
in issue being 187 million.15

1.5 Gifts from Employers

\7te lncome Tax Act states that "all other benefits, perquisites and facilities
rshatsoever" are emoluments and are taxable. Where an employee receives
from an employer money (or something having money's worth)whether these
are described as gifts or bonuses, generally they are subject to tax. The test is -
did the payment arise "from the office or employment"? In various UK cases
this has been interpreted as "in his capacity of employee", "by way of
remuneration for his services", "as a reward for service". If the gift flows from

li The shares may have appreciated in value by that time and he might wish to take the gain and pay
the tax liability. However the objective of ESOPs is to encourage employees to hold shares and have
a stake in the company.
1{ Disclosure of the 10 largest shareholders is a requirement of the Jamaica Stock Exchange for quoted
comPanres.
15 Taken from website: www.jamstockex.com/read.php?ContentID:14151

96
 Taxation of Emoluments II

the employment or office, that is, the

emproyee wourd not have received it if :.
was not in the employment or office,
then it is an emorument. It is immater.
that the payment is voluntary or gratuitous.
wh;re an employer 'forgives' u a"ut owed
.
though
by an emproyee, this is treated ..
a cash sum - a gift - was given to the emproyee and
'forgiven' is subject the amou,-
to tax.
In the Guyanese case McDnuid as. Commissioner
of lulnnd ReLter.tue* (7967), tl .
employee/taxpayer was given an interest-free
loan by his emproyer to bur .
house. The varue of this benefit, computed
on the basis of the market rate :
rnterest on such loans, was a taxable emolument.
In the UK the fo'owing have been deemed
emoluments: a Christmas
voucher of f10 to all employees (Laidler perry,7965);a F-
us. rump sum from a
employer on the withdrawal of the use
of u .o^pur-ry or-, a change of por;r
(Bird os' Mnrtlnnd, 79g2); a rump "u.
sum payment of f 1,000 to certain civil servar.:-
in recognition of their giving up the ,rg'ht
to berong to a trade union (Hanili.
os. Godfrey,1987).
A payment which is a "testimoniar" is not taxable. ,,From
distinction has been drawn between a early da's .
payment which is a reward for ser'ice_
and is therefore taxable . . . and a payment
which is a testimoniar, and is n-
taxable."16It is sometimes difficuri to
a"t".-ine on which side of the line .
particular gift fals. From UK decided cases,
a testimoniar is a gift or pres.. ,
made to an employee on personar grounds
not by way ofpayment for 1- -
services; also when it is intended to
commemorate ,,some special occasion
as a wedding, a century at cricket, sui -
a birthday,, or it is girri^-,,ot the
the year when it is custor ary to make season ,.
presents,.. In the following cases:i.
payments were deemed to be testimonials
and therefore not taxabre: a paym€
of f130 as a prize to a bank emproyee for
passing the Institute of Banke --
examinations (Bau us.
rohnson, 7977); tir" pry.r,".,t of f 1,000 bonus to the
of the England team who won the worri capta.
Cup in 7966 (Moore us. Griffitrts, 197_
the proceeds of a benefit match given
for a professionar cricketer who rr..-
about to retire (Reed zts. Serlmour, tgZZl.

4.6 Gratuities: Hotet Emptoyees

A long standing tradition in the hoter industry
is the receipt by workers -.
gratuities (tips) from hotel guests. The
guests and users of the restaura
facilitiessometimes give the tip in cash or add
it to their credit card paymen:.
A disadvantage of this from the point of view
of the other workers is that the -
efforts contributed to the ser'rice and
they receive nothing. For exampre,::.

16 David salter ancl Julia Kerr, Easson: Cnses

ntul Matcrittr ott Rct,cttLtc Lnw ,second edition, srvc.et :
Maxwell, London, p 149
 CHAPTER 9

trEgzlate in the tip given by the guest to the waiter who served the meal.
fuimg the tips is one way of dealing with this so that all workers benefit. A
tlT ;L-)Elmon form of pooling is to add a service charge to the bill and to pool
ft rraj for a period and allocate it to the hotel workers on some agreed basis.17
jb are always liable to income tax. However as an incentive to hotel
mi€rs the famaican tax authorities initiated an Approved Gratuity Scheme
fu ;censed tourist accommodation effective from 1't July 2000.18 The main
fter--=s of the scheme are:
. The total amount distributed in any one year of assessment must not
exceed 10 percent of billed sales. The maximum non-taxable benefit to
anv individual should not exceed $250,000. Employees earning taxable
emoluments of $500,000 or more will not benefit from the relief on
gratuity payments.
h r. f. intended to cap the exempt amount at five percent of gross income as of
i* \lar' 2005, but protests from the hotel sector led the Minister of Finance to
rirr:r implementation of the measure.
it-hat has been happening is that the hotel workers receive tax-free the
Fil tltlO from an approved gratuity scheme as well as the general tax-free
&f,r-rrance for individuals. It was not until the 2009 170 budget that it was
a=aded that the programme should continue until the general tax threshold
:ea*res $470,272or above, when the tax exemption on the gratuity will cease.le
3E€d on the proposed threshold for January 1,, 2013, this tax position for hotel
satuities should come to an end on that date.

Eramples

-\ waitress at a licensed tourist hotel which operates an approved gratuity

scheme has an annual salary of $365,000 and received a total of $104,000 in
tips for year of assessment 2011. The full amount of the tips is tax free. The
salary also would not be taxable, being less than the threshold.

The waitress' supervisor received a salary of $475,000 for 2011 and

gratuities totalling $270,000. Calculate her taxable income. Assume the total

--,\n allocation system based on points is popular in Caribbean hotels. Those workers who have guest
:ontact have higher points than those who are in the background. This method ensures that workers
rr ho contribute to the smooth running of the hotel, such as in the accounts department, but who have
no guest contact also benefit from the tips
-:ihis provision/incentive has not been incorporated into the published Income Tax Act. It can be
tbund on the Jamaica Tax Administration's website, www.irs.gov.jm.
-i PricewaterhouseCoopers, "Budget 2009-10: Difficult decisions in challenging times". The Sunday
Gl e n rre r, Aprll 26, 2009, p.C7

98
 Taxation of Emoluments - II
gratuities received by the hotel did not exceed ten percent of billed sales.

$
Salary 475,000
NIS (11.875)
463,725
Threshold @47.t68\
Taxable salary 27,957
Taxable gratuities 20,000 ($270,000 less 9250,000)
Total taxable 47,957

3. Another member of staff whose salary is 9400,000 and who has an

accommodation benefit of 990,000, a vehicle benefit of $60,000 would no:
benefit from the relief on his gratuities allocation because his total taxable
emoluments exceed $500,000.

4.7 Review Questions

1' (a) Present arguments for and against abolishing the Education Tax.
(b) suggest some improvements in the administration of the payroll ta-r
system.

2. (a) ]onathan Peters is a welder employed to a construction compan'

Strongbuild Ltd. His annuar sarary is 96g6,000 which includes laundn-
and uniform allowance ($s,ggs and 95,239 respectively) for which he
qualifies. The company does not have a pension scheme. Calcurate
Jonathan Peters' taxable income for 2077.

(b) wayne Harvey is also employed to Strongbuild Ltd. as site enginee;

His annual salary is $1,650,000. He made a covenanted donation to the
UWI of $2,000 per month by salary deduction. He does not qualify fr-:
laundry or uniform allowance. He contribu tes 2% of his saiary to a,:
approved superannuation scheme. calculate wayne I.Iarvey,s annu.
net pay in 2011.

(c) what is the cost to strongbuild Ltd. for the services of peters ar.:
Harvey in addition to salary for year ended December 2011? set ou:
your answer in columnar form. Strongbuild Ltd, whose annual paybi_
for 2077 was 97.5 million, does not have any HEART trainees.

3. In addition to her monthly salary of $60,000 Anne wallace receives

monthly transport 'allowance' from her employer of $6,000 and
 CHAPTER 4

subsistence 'allowance' of $4,000 for working late. She also contribtttes 5%

"-lf
salary to a pension scheme operated by the comPany (who match this
rsith their 5%).What is her statutory income?

>oundbank Ltd has finalised the arrangements for an Employee share

rlivnership Plan. The employees will purchase 70% of the shares for $3
nLillion. What are the tax implications for the employees if Soundbank
Iends them the money at 72.5% interest?

Distinguish between a testimonial payment by an employer to an employee

and a gift from an employer to an employee.

ra) What conditions must be satisfied for a proposed Employee Share

Ownership Plan (ESOP) to be approved?
gained by employees from participating in
ib) Outline the tax advantages
an ESOP?
rc) How does an employee/participant secure maximum tax benefits
und.er an ESOP and under what circumstances would these benefits be
lost?

- (a)What are Statutory Deductions?

lb)Discuss H.E.A.R.T. and NIS from the perspective of both the employer
and the employee.
{,c)Discuss NIS and one other Statutory Deduction from the perspective of
the self- employed.

i Discuss the taxation issues in the McDaaid as. Commissioner of lnland Reuenue
(Guyana, 7967) case.

i "A gift to an employee is not taxable." Comment briefly on this statement.

- -'. Rohan is employed to a newspaper company at an annual salary. of

s650,000. He has an entertainment allowance of $30,000 which was
approved by the CGTAJ. He has joined the company/s approved pension
scheme to which he contributes 5% of his gross salary. During the year 2011
Rohan completed his degree in journalism and the company awarded him
a gift of $20,000. what is Rohan's liability to tax in year of assessment 2011
and what is his net pay?

-i. Explain with examples the income tax treatment of gratuities for hotel
rgorkers.
 Taxation of Emoluments - 11

12. Bettina works in the Carnival hotel in ocho Rios and has a salary of $40,000
per month. The gratuity system in place is approved by the CGTAJ and
consists of an allocation of grafuities a month in arrears on a points basis
For year of assessment 2010 Bettina's share of the tips was g150,000. Bettina
contributes 5% of her basic salary to the hotel's approved pension scheme
What is Bettina's statutory income for 2070?
In 2011 Bettina received a promotion and an increase in pay of $8,000 pe:
month. Assume that all other amounts remain the same. what is Bettina'=
statutory income for 2077?

13. Donald Chambers is a manager of a branch bank in the year 2077. He earn.
income of $1,800,000 per annum and is paid accommodation of $600,000 pe:
annum. He is assigned a 2009 motor car costing 91,200,000 which is usec
60/o privately. Mr. Chambers' rent is paid to an independent landlord.
Prepare a schedule with notes showing Mr. chambers' emoluments an;
deductions for year of assessment 2011.
How much does Mr. Chambers receive in his monthly salary cheque?

14. )udith is an engineering supervisor with strongbuild Ltd. He:

remuneration for year of assessment 2077 was: salary $960,00a
entertainment of $60,000, housing allowance of 920,000 per month paid t,
Judith's building society for the apartment which she owns. strongbui.;
provided Judith with a 2009 car which cost g900,000 and her private use r.
estimated at fifty percent. To carry out her site duties Judith is required :;
wear a hard-hat and protective clothing which strongbuild provided at ,
cost of $7,500. Judith has joined Strongbuild's staff pension scheme t:
which she contributes 5'/o of her basic salary.
What is fudith's tax liability for year of assessment Z07l?

15.Jason is an assistant chef at a licensed tourist hotel which operates a:

approved gratuity scheme. He has an annual salary of $560000, ar,;
received a total of $160,000 in tips for year of assessment 2011. He has bee.
given a two year old vehicle (cost 9950,000) which he uses most of the tirr,.
on the hotel's business. fason also contributes 5'/n of his gross salary to a
approved pension scheme.
(a) Prepare a schedule with notes showing |ason's statutory income.
(b) What is Jason's tax liability for year of assessment 2011?
(c) What is Jason's monthly take home pay?

rol
 CHAPTER 5

lndividuals - Others Sources

5. lntroduction
rve have examined the source of income of an employed individual who
-;ar
a-eives emoluments. We have looked at the treatment of these emoluments
r,l the payment of income tax by the PAYE system. If the employed
r-n]iridual has no other source of income he need not file a return unless
rcuested to do so by the CGTAI. His employer prepares a form P24 for him
fra:ng the total emoluments for the year and the tax deducted and his
e:,ployer files a form SO2 which is in effect the employee's return.
lncome from an employment, however, rr.ay be only one source for an
rriiridual. Other sources that an individual might have include rental income,
inrdends, interest (bank, building society), pensions and annuities and profits
=:n business.l Further, many Jamaicans are self-employed either in the
=r:actice
of their profession (doctors, accountants) or they own and run their
--,c^r businesses.

-ction5 of the lncome Tax Act states that income tax "shall be payable by
r.en- person at the rate or rates specified hereafter for each year of assessment
r respect of all income, profits or gains" which are outlined in subsections
i - iaXi) and 5(1)(a)(ii) as the annual profits or gains arising or accruing -
. to any person residing in the Island from any kind of property
whatever, whether situated in the Island or elsewhere;2 and

. to any person residing in the Island from any trade, business,

profession, employment or vocation whether carried on in the Island or
elsewhere.
:uL,''ections3 of section five outline the specific income sources chargeable to
=r rvhether received in the Island or not in respect of -

- --:.-frLs from business will be dealt with in chapter 6 .

I -luon 5(1)(a)(iii) deals with persons who are non-residents - not covered in this volume
I i::ections 5(1)(bxi), s(1)(bXii), s(1)(b)(iv)- (vi)

1o2
 Individuals - Others Sourccs

a rnterest
a dividends (other than those being paid out
of capital assets)
a pensrons/ annuities and other annual
sums
a rents, royalties, premiums and any other
profits arising from propert_,
a the accretion realised on the
"n"uri-"r'rt, disposal or r"ie-ption
an.. of
units or other form of rnvestment in a fttoney mnrket ftrnd which ha:
been acquired under a poricy of insurance
issued on or after 1st June
7999
the accretion realised on the encashment;
disposar or redemption, on c:
after 1st June, 1999, of any units in a money
market fund operated br- ,
qttalified unit trust scheme.

In this chapter we shalr examine the position

of individual taxpayers who har.=
income from sources other than employment,
such as income from:
o interest
. dividends
o discounts
o rents, and other profits arising from
property
. pensions
. scholarships.

The self-employed and those running

their own businesses or practising ther--
professions will be treated in chapter
6.

5.1 lnterest lncome: Chargeable to Tax

Interest may be described as the reward
for ailowing someone to have the us.
of your money' It has been defined as the
creditor,s share of the profit, whic
the borrower is presumed to make from
the use of tn" ,,.,or-,"y. section 31A c,
the IT Act states that interest includes
any profit or gain accruing to an investo:
' by way of any premium; income from participating instruments; or ar,.
sum paid or credited to the investor in
rlspect of a ieposit, loan or use r:
the investor,s funds for a period of time,
whether or
discount allowed to the investor ";;;il;;;'.
' on the sale or redemption of bonds, cerfificates
of deposit, debenture_.
notes, repurchase agreements or reverse
repurchase agreemer-rts
' on the disposal of a right to receive the
amount.r;J;h"reof stated in ,
bond, certificate of deposit, debenfure,
note or other instrument issued ::
him or to any other persory or the exercise
of a right to receive interes:
prior to the maturity of the instrument

r03
 CHAPTEIT 5

. in respect of an investment in financial derivativesa

. in respect of an investment in a money market fund or commercial paper.

km=rest income is, in most cases, subject to tax deduction at source at the rate
,m 5 percent for individuals and 33 % percent for companies.
to an
-"-tron 31A provides for the withholding of tax on interest being paid
m:.stor by a "prescribed person" on deposits, investments or loans. The
rs;ribed person must withhold tax at the rate of 25 percent, unless the
trGn.U authorises a different rate which he is satisfied applies to the investor.
I a *cond prescribed person, for example a money management company, is
Fixrg the interest on behalf of the prescribed person, such as a merchant bank,
u*t rvhom the deposit or investment was made, or to whom the loan was
er:ended, the second prescribed person must withhold the tax as indicated
.;E(\-1\-e.

The payer of the interest, most often a financial institution, must provide the
Fi ee (taxpayer) with a certificate showing gross interest earned, tax deducted,
cd any other particulars as may be prescribed, and remit the tax deducted to
=e CGTA|. The Act provides for the prescribed person to set off tax deducted
=.,rn payments to investors against tax deducted from interest earned on
made by the prescribed person, prior to remitting the taxes to the
='.'estments
:{
5.1.1 Prescribed Persons
:...tion 31.A, lists prescribed persons as
ia) the Accountant General
rb) any bank operating under the Banking Act or the Bank of Jnmaicn Act
ic) any institution operating under the Financinl lnstitutions Act
rd) any building society
l.e) any society operating under the Co-operatiue Societies Act
(f) any person licensed as a dealer under lhe Securities Act
(g) a society registered under tine lndustriril and Proaident Societies Act, other
than a society which either satisfies these conditions: (i) it has at le.ast
fifty members, (ii) its share capital is of one class and (iii) its members,
in accordance with the rules, are substantially identical to its
shareholders; or the society's members are, or have been, employed by
the same employer and all its transactions are carried on only with its
members
ih) Ministry of Finance
(i) any life insurance company

I Subsection 31A defines a financial derivative as including a contract whose value is based on the
:,erformance of an underlying financial asset, index or other investment.

1o,4
 Individuals - Others Sources

(j) a company, other than the Financial Sector Adjustment Compan

Limited, registered under the ComTtanies Act being a company in whrc:
the Government or an agency of the Government holds not less than :-
percent of the ordinary shares and which issues securities
(k) any issuer of commercial paper
(l) any unit trust management company, or
(m) any person not falling within paragraphs (b) to (t) and who is connecte;
to the persons listed in those paragraphs.

5.1.2 Money Markets and Unit Trusts

In addition to the traditional commercial and merchant banks and unit trust.
other investment-handling businesses have become established and gror.:
popular in |amaica. A distinguishing feature of these money markets manage::
is that a large part of their business is in managing low risk financr-
instruments such as fixed deposits, government bonds and commercial pape:
for their clients.6To do this efficiently and effectively clients'cash is combine:
into a pool or fund which is invested and the pool is enlarged by the intere.:
earned. From time to time some of the instruments mature while new ones a:.
added. The process is repeated over and over and the clients receive or, .
monthly or quarterly basis a fixed interest payment. This interest is subject :-
tax at source, that is, the money market manager is responsible for deductir:
and remitting the tax.

5.1.3 Specified Unit Trusts

An accretion in value realised on an encashment of units in a specified ur-:

trust is deemed to be interest. The manager of the unit trust making t::
payment or crediting the unit holder should deduct tax at the rate of 25 perce::
and furnish the unit holder with a certificate showing the total amount of t:=
payment or credit and the deduction. By the fourteenth day of the next mon:-
he should make a return to the CGTAJ and pay over the tax deducted, to ti=
person indicated by the Commissioner.
Since June 7,7999, the accretion in value is regarded as the differer:=
between the proceeds of the encashed units and the purchase price of the un::.

5 The Act defines a moncy market as a pool of financial assets administered or managed collectir e-
which as regards interest arising before lst January, 2000, 31 percent of the value is comprise: ,
interest bearing instruments, while in respect of intcre.st arising after 31st December, 1999,51 per:.-r
of the value is comprised of interest bcaring instruments.
6 Subsection 31,4(6) defines commercial paper as securities comprising or evidencing a debt obliga: -
including promissory notes, whether or not secured or guaranteed, but docs not include pa]::,-
obligations arising out of the sale of goods or servlces.

105
 CHAPTER 5

Companv
:r in which fu ---,..eeds of the encashed units and the price at the date of encashment.
-os than 51 -t ==ecified unit trust is one which comprises or includes a money market
tiimrr 1: described in paragraph 5.1.2.

:onnected plmple
\(".nsi holds 30,000 units in a specified unit trust which he purchased in
\;,,,'ember 2009 at $7.40 per unit. He sold 6,000 units on 10th June 2012
.:en the units were trading at $9.20. Monsi's charge to tax on the interest
:nit trusts, '. computed as follows:
a'.d grown :-tX units at $9.20 : $55,200
franagers
-cs purchase price
financial :"-t]l units at$7.40 : $44,400
ial paper
-afn : $10,800
:ombined l-r on gainat25/o : $2,700
interest
ones are : ,:--.tead of taking the cash Monsi gave instructions to purchase units with
:-is net proceeds, (i.e. the sales proceeds less the charge to tax - $52, 500). The
.r.rbject to
=ansaction was done on 25th June 2072 when the units were trading at
:educting 5v.10. After the deduction of management charges 5,600 shares were
:urchased. Monsi now owns two blocks of units - 24,000 purchased in
\ovember 2009 at $7.40 per unit and 5,600 at $9.10.
; September 2072 Monsi had a family emergency for which he needed
Si+,000 and decided to sell as many units as necessary to realise the
ied unit a:nount. The units were selling at $8.50.
idng the -{ comparative analysis of the sale options is as follows:

Sale of part of second block: 5,400 @ $8.50 less purchase price of 5,400 @
)9.10: Ioss of $3,240. There is no gain, therefore there's no tax liability.
Sale of part of first block: 5,400 @ $8.50 less purchase price of 5,400 @ 97.40
= gain of $5,940. Tax on gain : $7,484.

rj_l.Jnary:
$
R.ealisation of 5,400 shares of second block - 45,900
$rvely in
-ess tax - nil
ii percent \et - 45,900
:iligation, Realisation of 5400 shares of first block - 45,900
Less tax - 7,484
\et - 944,406

106
 ! - :a eI: :LrUrCeS

\nc;al interest to sell 5,400 shares out of hr.

,y the 2002 Amendment Act. It makc:

:st arising on investments with insuranc.

'other than in relation to a specified policy,,, t:.

5' ,olding tax at the rate of 25 percent.
ls an lnsurance contract entered into between 161
- -.i 31.t May, 7999, whereby interest would be paid by tr=
:_:-:.',' on deposits or other investments made by the investor ::
'-::. rhe policy on the understanding that the interest would b=
::-::. i:-.ome tax provided the investment was not withdrawn bv t:=
:': r . -:.-:n rhree 1'ears from the date of the contract; and a deposit was maj-
- ---= --'.'estor during the above-mentioned
period and no withdrawal rr:.
: =:= ""'-:hi;,. three years. see under exempt interest in paragraph 5.2.3 belolr-

5.1.5 lncome from Building societies and lndustrial and

Provident Societies

--r cepositor in a building society such as Jamaica National Building Societr- ::

\-ictoria Mutual Building society may be either a shareholder who is savj;:
torvards a purchase of a home or simply a saver using the building society a. .
bank. As building societies are "prescribed persons" under the Act they mu--
deduct at source tax on the interest earned on deposits or savings, whether _-

not the depositor is a shareholder.T The saver includes the tax deducted in h .
overall tax computation as a tax credit
Certain depositors with building societies also under section 12 (ad whe-=
under prescribed conditions they may receive tax exempt interest. (See 5 _ -
below.)
As inferred in item (g) of paragraph 5.1.1 above, a provident society r^,,hr:-
fulfils the conditions described, may pay share interest to its members withc _:
deduction of tax. This relief does not extend to members who are non-reside- _

Withholding tax should be deducted at the rate of 25 percent for individua..

Share interest includes any interest, dividend, bonus or other sum payable t. .
member by reference to his shares.

7 Previously if a depositor was also a shareholder (even of only one share) he could receive the inr.
gross. Hc was liable to tax but he had to include the gross interest income in his annual return
pay the tax

107
 CHAPTER 5

5.1.6 Eurobond lssues

Srnce the year 2001 the Government has made a few issues of U.S. dollar
jenominated bonds (called Eurobonds and global bonds). These have been
:ought by overseas and local investors alike, but while the earlier bonds were
;iearly understood to be free of taxes on interest earned, the issue in June of
',]-12 was accompanied by some amount of uncertainty as to the tax status of
-..cal purchasers. The new bonds were not tax free to Jamaican investors and
-;,ere were fears that this would extend to the bonds previously issued. The
\finister of Finance however explained that as far as the earlier bonds were
:-incerned, any interest on derivatives thereof held by famaicans would be
--.red. Derivatives were described as the smaller units into which some of the
r-,nds were divided and sold.8
Interest on all new issues of US dollar bonds during and after 2003 is subject
:,- rvithholding tax when payable to |amaicans.e

5.2 Exempt !nterest

lie 2002 Amendment to section 31A of the lncome Tsx Act lists specific
:.r-estments on which interest is exempt from tax. These are certain
. Deposits or investments with prescribed persons
. Life insurance contracts
' Equity-linkedpolicies
e Interest-sensitive Insurance Contracts
o Money market funds of unit trust schemes.
5.2,1 Deposits or lnvestments with Prescribed Persons

-\ccording to section 72(ag) of the Act, a bank, money market manager or other
:rescribed person may take deposits and disburse up to 75 percent of the
r"terest exempt of tax annually under the following conditions:
. Each relevant deposit or investment account must be held in Jamaican
dollars for a period of five years without any withdrawal from the
principal sum.
. The aggregate amount deposited or invested in any year of assessment
(other than interest accrued or credited) must not exceed one million
dollars.
. Not more than 75 percent of the interest accrued in any year of

a =Jrtorial, "Taxation and Uncertainty", The Cleaner, June 17,2002.

: Will Have to Pay Tax on All New US Clobal Bonds", Sunday Herahl,
-i::siness News article, "Jamaicans
:-r 9-15, 2003, 38.

108
 Individuals - Others Sources

assessment may be withdrawn.

At least 80 percent of the assets in which the account's funds art
invested are debt securities, or securities issued or guaranteed by tht
Government or the Bank of |amaica, or are other instruments having ar
initial maturity of not less than five years and approved for th.
purposes of this paragraph by the Minister.
The investor must understand and agree that the amount deposited c:
invested is not transferable, except on the death or bankruptcy of th..
depositor or investor, is not assignable to another person and is nc':
available as collateral.
The prescribed person must supply to the Minister responsible fc:
finance or his nominee the following information on the account
. the taxpayer registration number of each account holder
. the amount invested
. the date on which the account is opened and
. the taxpayer registration number of the prescribed person.

Prior to accepting the deposits the prescribed person must apply in writing :-
the Minister stating his name, address, TRN; giving the Minister sufficie:-:
information to determine whether the conditions set out above are satisfie;
and undertaking to advise the Minister of any change which would result in =
loss of exemption from tax. Further, the Minister must have issued a certifica:=
of approval setting out the conditions under which the deposit is to be made

Example

Melisa invested $1m with Kingston Investment Brokers Associates (KIBA) c

1st October 2008, at an interest rate of 76/r, p.a.10 She agreed to the terms ol .
five year deposit and 75% of the interest paid quarterly. After receiving eig::
quarterly interest payments without deduction of withholding tax, in Octob.-
2010 Melisa decided to withdraw her principal and pay down on an aPartmer:
During the two years in which the tax-free deposit account was in operatic:
KIBA would have added the 25'/o interest not disbursed to the principal ar:
this combined amount would have earned interest. In October 2010 ltl".e-
Melisa decided to close her account, she became liable for the tax on the eig-
quarterly interest instalments she received. KIBA must withhold and remit tl--.-
tax. However the 25% interest not disbursed and added to the principal will :.
adequate to cover the tax due and Melisa will receive her $1m plus the balan..

10 ln practice the rate of 167i, would be unlikely throughout the full five ycar period; in more r.':.
times, financial institutions tend not to lock themselves into long term interest ratL's.

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 CHAPTER 5

The calculation below illustrates the principle. The figures are approximate
;LS compound interest would be used.

Quarterly interest @ 4% on $1,000,000 40,000

Disbursed / Received tax fuee 75% 30,000

Over two years undisbursed interest of $10,000 is added to the principal in 8

quarterly instalments. Use tables to compute amount to which $10,000 will
accumulate if paid at the end of 8 quarters at a rate of 4%.
$
Amount accumulate d is 9.2742 x $10,000 92,1.42
Interest already disbursed ($30,000 x 8) 240.000
Total :332,1.42

On withdrawal of principal tax due on interest

$332,742x25% = 83,035
Investor receives principal of $1,000,000 plus
accumulated interest of $92,742less tax of
$83,036 :1.,009,706

5.2.2 Money Market Fund of Unit Trust Scheme

l\rhere a unit trust business also operates a money market fund and sells units
in the fund to investors, the conditions for interest on the units to be exempt
trom tax are similar to the above as regards maximum investment of one
million in any one year, the paying out of not more than 75 percent of the
increase in value of the units each year, the holding of the units for five years
and the non-transferability of the units except on the death or bankruptcy of the
hvestor. Two additional requirements must be met:
. the units in money market funds must have been acquired on or after
the 1st lune 7999;
. the valuation of a money market fund shall be determined on the basis
of its average monthly value during the prior three-month period.
(s.12(ak))

Erample

Rhona purchased 100,000 units in a unit trust money market fund in February
2008 at $10.00 per unit. She understood and agreed to the condition that the
units could not be encashed for five years. The units did moderately well and
each quarter Rhona received a cheque for 75% of the gains on the units. In
October 2011 Rhona's house suffered serious damage in flood rains caused by
a tropical storm. She urgently needed cash and on 1't fanuary 2072 she decided

llo
 Individuals - Others Sources

to encash her money market units. The average monthly value for the three-
month period 1't October to December 31st was $10.50.
As Rhona has cashed her units before the five year period she has lost the tar
exempt status of her holding of units. The accretion in valuell which now falls
to be taxed is the difference between the purchase price and the value of the
units calculated at the average of the three-month period up to encashment
Interest which she received previously tax exempt, now falls to be charged tt-
tax as follows:
Purchased 100,000 @ 910 $1,000,000
Sold 100,000 @ 910.50 $1,050,000
Cain $50,000
Tax on gain@25/o : $12,s00

As she has 'broken' her holding she must pay tax on the accretion of her units
As in the narrative of the example in 5.2.1 the 25% of the interest withheld $'il
be used to pay the charge to tax.

5.2.3 lnsurance Contracts

The insurance industry promotes policies in which the insured persor

participates in the investment of insurance premiums in addition to receivin=
the insurance coverage. In order to implement the new uniform taxatio:
provisions concerning interest it was necessary to deal with certain insurancr
policies with an interest component which were already in existence. Sectior
4BA added by the 2002 Amendmentl2 clears the way for the existing insuranc.
contracts by providing that interest arising between 16th December 1993 an;
31st May 7999 is exempt.13 After the latter date the tax on interest follows the
general rule and the exempt provisions applicable to all financial institutior..
(with modifications to suit the particular financial instruments which the
promote).
The main insurance policy types with an interest feature now brought (wit:
special provisions) within the taxation of interest framework are:
. Life insurance (section 12 (ah))
o EquityJinked (section 12 (ai)) and
o Interest-sensitive (section 72 (aj)).

11 This example assumcs that I{hona did not receive payouts based on accretion rates higher th:-
obtained at October 1, 2011.
l2The 2002 Amendment brought together Income Tax Amendments issued and implemented sin,.
1996. Therefore the insurance companies had been implementing these provisions beforc the 2t,-
Amendment.
13 Provisions had to be satisfied such as no withdrawal from the principal sum rvithin three years

111
 CHAPTER 5

Life Insurance Contracts

Interest or appreciation earned by an individual in relation to a life insurance
contract is exempt where:
1. The contract is expressed to be in effect for a period of not less than five
yearsi
2. The annual premium does not exceed one eighth of the amount of the
rnsurance coverage/
3. A distinct charge is made against the policy for insurance coveragei
4. The policy contract has been approved by the Superintendent of
Insurance or the Financial Services Commission.

Equity Linked Policy Contracts

1. The contractual premium does not exceed $5,000 per month or $60,000
per annum or such other amount as the Minister may determine.
2. From 1't |anuary 2000, a minimum of 51 percent of the assets to which the
policy is linked is invested in stocks, shares or real estate.14

Interest Sensitive Insurance Contract

1. The contractual premium does not exceed $5,000 per month or $60,000
per annum or such other amount as the Minister may determine.
2. The amount other than the regular contractual premium invested in any
such contract or contracts in any year of assessment does not exceed in
the aggregate one million dollars, and in any case does not exceed five
million dollars in any five year period.
3. The investment is held for a period of five years without any withdrawal
from the principal sum.
4. Not more than 75 percent of the interest accrued in any year of
assessment has been withdrawn.
5. The contract has been approved by the Superintendent of Insurance or
the Financial Services Commission.
6. At least 80 percent of the funds (other than regular contractual
premiums) must be invested in debt securities, securities issued or
guaranteed by the Government or the Bank of famaica, or are other
instruments having an initial maturity of not less than five years and
approved by the Minister.
7. Information on the account must be supplied to the Minister of Finance
or his nominee (see last bulleted point in paragraph 5.2.L above).

14 For the period up to the 31st December 1999 a minimum of 70 percent had to be invested in stocks,
shares and real estate.

112
 CHAPTER 5

[-ife Insurance Contracts

b.:erest or appreciation earned by an individual in relation to a life insurance
ontract is exempt where:
1. The contract is expressed to be in effect for a period of not less than five
years;
2. The annual premium does not exceed one eighth of the amount of the
insurance coverage/
3. A distinct charge is made against the policy for insurance coverage;
4. The policy contract has been approved by the Superintendent of
Insurance or the Financial Services Commission.

Equity Linked Policy Contracts

1. The contractual premium does not exceed $5,000 per month or $60,000
per annum or such other amount as the Minister may determine.
2. From 1st |anuary 2000, a minimum of 51 percent of the assets to which the
policy is linked is invested in stocks, shares or real estate.14

lnterest Sensitive Insurance Contract

1. The contractual premium does not exceed $5,000 per month or $60,000
per annum or such other amount as the Minister may determine.
2. The amount other than the regular contractual premium invested in any
such contract or contracts in any year of assessment does not exceed in
the aggregate one million dollars, and in any case does not exceed five
million dollars in any five year period.
3. The investment is held for a period of five years without any withdrawal
from the principal sum.
4. Not more than 75 percent of the interest accrued in any year of
assessment has been withdrawn.
5. The contract has been approved by the Superintendent of Insurance or
the Financial Services Commission.
5. At least 80 percent of the funds (other than regular contractual
premiums) must be invested in debt securities, securities issued or
guaranteed by the Government or the Bank of Jamaica, or are other
instruments having an initial maturity of not less than five years and
approved by the Minister.
7. Information on the account must be supplied to the Minister of Finance
or his nominee (see last bulleted point in paragraph 5'2.1 above)'

--l For the period up to the 31st December 1999 a minimum of 70 percent had to be invested in stocks,
.hares and real estate.

112
 Individuals - Others Sources

As can be seen from the above the conditions for each type of insuranc.
policy contract are very similar to the conditions applying to exempt intere.-
deposits in money market funds and unit trust money market funds. Tr.
taxpayer would need to be aware of the conditions under which he is makir:
the investment or taking out the insurance policy. Some of the conditions fal1 :-
the insurance company, or money management company to be implemente:
for example, that 80 percent of the funds be invested in government securitie.
This provision accomplishes two fiscal objectives - that of mobilising lor=
savings to develop the economy and (importantly for Jamaicans considerir -
virtual collapse of the insurance industry in the 1990's) that of protecting tl-.
investment of insured persons by directing their investment into low rt.:
instruments.

5.2.4 Non-Residents

For non-residents, interest on shares in, and deposits with, a building socie,'
on or after ]anuary 1,7963, is exempt income under section 12(s).
The section also exempts interest on investments made on or after Januan -
1963
o in schemes approved under the Hoirsing Act or
. in an approved public utility or
. in an approved hotel enterprise or approved extension of a hotel, unc.-
the Hotels (lncentioes) Act or
o in a resort cottage or a recognised extension under the Resorf Cott',:-'
(lncentioes) Act.

Persons who qualify for the above exemption are those not resident in l-.
Island or persons who are not resident in a country with which Jamaica ha. :
double taxation agreement.ls A further proviso is that they may not be reside
in a country which unilaterally grants relief from double taxation for inco:.
earned in |amaica. The non-resident may however live in a country in u'h,-:-
this category of income is exempt from income tax.
For |amaicans living in the UK, Canada, the USA and other countries r,'-:-
which |amaica has double taxation treaties, deposit and share interest shou :
be paid net of tax at the rate stated in the treaty.

5.3 Discounts
'Discounts' in the context of section 5(1)(b) means discounts arising

15Dealt with in s.82 and s.83 o[ the in the Lrconrr, Tor Act The rate of tax on interest in CARIf -
countries is 15 percent. For other countries it varies between 10, 12 5 and 15 percellt

113
 CHAPTER 5

discounting transactions in the ordinary financial sense, for example, in

uansactions in treasury bills. Normally treasury bills are issued by the Bank of
Iamaica at a discount and redeemed at par value. The purchaser of a treasury
bill is chargeable in respect of the difference between what he pays for the bill
and what he receives for it, whether the bill is held for the whole time between
its issue and its maturity, or whether it is purchased or sold during that
period. As regards these transactions the whole of the profit is within the
charge to tax.

5.4 Dividends

-{n individual taxpayer may hold shares in public quoted companies or private
companies (that is companies registered under the Companies Act 1-965 andlor
rhe Companies Act,2004) and the dividends received will be a source of income.
-\ taxpayer may also have shares in businesses registered under the Cooperatiae
Societies Act or the lndustrial nnd Proaident Societies Act. In many companies
registered under the Companies Acts the shares include both ordinary and
preference shares, and dividends are payable on both.
Section 31 makes all dividends paid to non-residents by a resident company
assessable to income tax. Section a0(1) of the Act (as amended) makes it
rnandatory for |amaican companies to withhold tax from dividends paid to
non-residents at the individual or corporate rate subject to the conditions of any
existing double taxation treaty.

5.4.1 Dividends Paid to Residents

Dividends are derived from profits which have borne tax at the corporate tax
rate. The directors then decide to distribute some of these profits to
shareholders. The problem arose in the past when withholding tax was
deducted from these already taxed profits now classed as dividends. The
shareholders received their dividends net of tax which they then had to claim
as a tax credit against their overall tax liability. From 2002 to 2009 there was a
step by step winding down of the deduction of withholding tax from dividends
first from companies on the stock exchange and then all companies. In |anuary
2009 by an amendment dividends to ]amaican residents were zero-rated in the
hands of the taxpayer.
There was now an anomaly in the system as non-resident shareholders were
being taxed on dividend income and residents were not. To address this
anomaly the law was changed so that the dividends of residents are now to be
taxed at five percent and the tax is to be withheld at source and remitted to the
Tax Office.
The tax is to be treated "as a final tax" and implementation date was 1st )une,

114
 Individuals - Others Sources

2072.16 The taxpayer in receipt of such a dividend should disclose it in his

annual return. As this dividend has suffered corporate tax plus the 5 percent
final tax withheld - it is not subject to further tax. The five percent final tax is
not recoverable or available for set-off.

Example

Peter has an annual salary of $1,700,000. He has shares in Desnoes and Gedde'
Ltd. and bank deposit interest net of $15,000 (gross of $20,000). In December
2072Peter received a dividend from D & G of $2,000 on which D & G withhelc
5% final tax. That is he received $1,900. Peter will pull all his income together
including the $1,900 on his annual return and attach the dividend warrant. He
will deduct the $1,900 dividend from his total as tax has been paid on this anr
work out his tax liability. The 5% withheld from his dividend cannot be usec
to settle any of his liability. '

Emoluments 1.,700,000
Bank deposit interest (gross) 20,000
Dividends, D &G 7,900
Total income 7,727,900
Less NIS <25,000>
Statutory income 7,696,900
Less dividends already taxed <1,900>
1,695,000
Less threshold <447,768>
Taxable income 1,253,832
Tax due at25% 313,458
Less paid by PAYE <288,000>
Less tax withheld on interest <5,000>
Tax due 20,458

5.5 lncome from Sale of lnvestments

The sale of an investment may result in a capital gain. The investment could t'=
in land, shares or any other asset. Section 5(7) of the Act provides that ar.'.
person who acquires the right to receive the amount stated in a bond, certifica:=
of deposit debenture, note or similar instrument, and subsequently disposes c:

l6Ministry Paper No.32 Revenue Measures: FY 201212013, par. T "lmposition of tax on divider.:
payable to residents".

It5
 CHAPTER 5

that right, is liable to tax under section 5(1)(b) on any profits or gains accruing
to him on the disposal. Similarly, if there exists a right to receive interest on any
of these instruments and the right is exercised, any profits or gains arising from
the exercise of that right are liable to tax.
As regards transactions on the |amaica Stock Exchange, where the taxpayer
does not satisfy certain conditions (see below), capital gains made on the
lamaica Stock Exchange are subject to income tax.
Transactions in land are caught under the Trnnsfer Tnx Act (7977) with its
unique way of collecting the tax.

5.5.1 Gains on lamaica Stock Exchange

Section 72(a) ofthe Act specifies the conditions under which some of the profit
or gains made by a taxpayer on the Jamaica Stock Exchange are tax exempt.
These conditions are:
o The individual must not be in the business of trading on the Stock
Exchange, that is, he should not be a dealer'
. The profits or gains must not exceed one-half of the individual's
stafutory income from all other sources for the year of assessment,
or
. Where he elects, the gains or losses for the current year may be
aggregated with the gains or losses of the two immediately preceding
years of assessment and must not exceed one-half of the aggregate of
his statutory income from all other sources for the year of assessment
and those two preceding years.

Example

Wallen's gains from transactions in shares which he bought and sold on the
famaica stock Exchange (JSE) for year of assessment 2011 were $700,000. He
had income from employment of $1,300,000 and from dividends of $240,000:
Wallen's statutory income from all sources other than JSE gains is
51,540,00017. The stock exchange gains are less than half of Wallen's statutory
income, therefore the $700,000 is exempt.
However if Wallen's gains were $1,100,000 and his statutory income
(excluding gains on JSE) was still $1,540,000, then his gains would exceed 50%
of his statutory income. Wallen would lose the exemption and the $1,100,000
n'ould have to be included in his taxable income. He has an altemative

17 For this example in the interests of simplicity, enumerated deductions such as NIS and pension have
been omitted.

rt6
 Individuals - Others Sources

rt'i-':
however. He may elect in writinS to the CGTAI to aggregate 2011 gains
his gains or losses for 2010 and 2009.
ln 2009, 2010 and 2011 Wallen',s gains were $500,000, $640,000 ar,:
$1,100,000, respectively. Assume that his other income
remained the same. H=
wrote to the CGTAI advising that he wished to take advantage of the provisic '
permitting him to aggregate his gains and losses over the three years. In Ve'--
of assessment 2011 his position would therefore be:

Y/A )SE Income Stat.Inc. (Other)

$ $
2009 500,000 1,540,000
201,0 640,000 1,540,000
2017 1,1oo,0oo 1,540,000
Total 2,240,000 4,620,000

As the aggregate of the gains over the three year period does not exceed 50'-'
:

the aggregate of his statutory income over the same period, the JSE gains --
year of assessment 207L ate exempt.
The benefits to the taxpayer are seen particularly where he has sufferec =

loss on his transactions on the JSE. If in 2010 instead of a gain of $640,0i-'-

wallen had made a loss of $640,000 and made gains of $1,600,000 in 2011 whi;-
exceeded his income from all other sources, his position would be as
follou''

Y/A JSE Income Stat. Inc. (Other)

$ $
2009 s00,000 1,540,000
2010 (64o,ooo) 1,540,000
2077 1,6oo,ooo 1,540,000
Total 1,460,000 4,620,000

Without the provision allowing the taxpayer to aggregate the year -:

taxab :
assessment with the two preceding years of assessment, in 2011 his
amount would increase by $1,600,000 - the gains for that year'

5.6 Scholarships, Bursaries Etc.

Income received from scholarships or any other educational endowmenl '-

exempt from income tax if the person receiving it is in a full time stu;
programme at a university, college, school or other educational establishme::

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 CHAPTER 5

s.7 Rents, Royalties, Premiums and any other Profits

arising from Property
hoperty is a technical legal word, the meaning of which is defined in the
--:tryretation Act. "It includes money, goods, things in action, land and every
:escription of property, whether real or personal; also obligations, easements
arising out of or incident to
=rd profit, present or future, vested or contingent,
as above defined."
=roperty

5.7.1 lncome from Rents

Rents will include not only any form of payment for the use or occupation of
-and and buildings, but rentals for the use of plant and machinery, for example.
Such income is taxable after the deduction of the expenses incurred in
acquiring the income. Thus the cost of repairs to rented machinery would be
"ieducted before tax is calculated.

5.7.2 Other Profits Arising from Property

Tfus phrase will cover any kind of income which arises from property not
=pecifically mentioned. There are all kinds of dues and other fees or payments
for access to, or rights over, property. For example, a taxpayer may own a
jmestone quarry and lease the rights to the quarry and the access road. The
iease payments are income to the taxpayer and are taxable.

5.8 Pension lncome

in respect of "... annuities,

Section 5(1)(b)(i) states that income tax is payable
oensions or other annual sums". Under paragraph 72(z) a special relief is
ar-ailable to taxpayers who are in receipt of a pension. Pension here means
,avment out of a statutory pension scheme, that is, NIS pension, or out of an
approved superannuation or retirement scheme. The pensioner's exempt
amount is $80,000 (previously $45,000)18 and is deducted from the pension
lncome.
Taxpayers who are over 55 years or permanently incapacitated may deduct
*re $80,000 from the pension receipts and from any other source of income.

li The new relief for pensioners became effective July 1, 2009. In year of assessment 2009 pensioners
rvere entitled to a maximum $62,500 (50% of $45,000 and 50'/r, of $80,000)

118
 Individuals - Others Sources

Example

James is 53 and receives a pension from a past employer of $10,000 per month
He is presently employed and his salary and emoluments are $100,000 pe:
month. As James is under 55, the exempt amount of $80,000 is deducted fron
his pension income as follows. (Ignore payroll deductions)

$
Employment
Pension 120,000
Less exemption 80.000
Statutory Income

If |ames' pension was 95,000 per month his statutory income calculation woul;
be:
$$
Employment 1,200,000
Pension 60,000
Less exemption 80.000 \!!_ exemption restricted to $60,0C"-
Statutory Income 1.200.000

If fames is 55, the pension exemption may be deducted from other income.

Employment
Pension
Cross Income
Less pension exemption
Statutory Income

5.9 Gambling

An individual may make money from gambling on horse racing, football pool=
and games of chance such as lotteries. If this could be classified as "income" fc:
taxation purposes then it would be taxable. The point was tested in the UK car.
of Grahqm os. Green* (1925) where the taxpayer sought to establish that ]--.
gambling winnings were not taxable. The CIR sought to show that b,
systematically and persistently earning money from gambling the taxpar-e:
was following a vocation. The court found that the activity was a habit and nc:
a vocation and therefore was not taxable. In an earlier case Pnrtridge - -.
Mnllandaine (uK 1886) the taxpayer regularly attended race meetings ar:

119
 CHAPTER 5

m-stematically placed bets and took bets on races. The Court decided that the
:a\paver was pursuing a "vocation" - that of a professional bookmaker and as
s.:ch his profits were taxable. The distinction between these two cases seems to
-t between professional betting activity (Partridge) and private betting
Graham).
\fost jurisdictions tax gambling winnings by bringing them within another
satute. In famaica the Betting, Gaming and Lotteries Act of 7966 from 7994 used
rt impose a "bet winnings tax" of 5 percent of the winnings on racing pools.
s33(1)). "Winnings" is defined as the "gross sum returnable" to a bettor. The
5 sercent was deducted at source by the bookmaker and remitted to the CGTAI
rithin two weeks of being deducted. As of fune 7, 2005, the tax was adjusted
E reap 5 percent of the gross profit of racing promoters, 20 percent of the gross
-rrfit of bookmakers and 29 percent of the gross profit of lottery companies.
Gross profit is computed as gross sales less payouts.
The various lotteries also come under ttrre Betting, Gaming and Lotteries Act.In
Detember 2003, the Minister of Finance announced that winnings from the
ottery over $15,000 would be subject to deduction of tax at source at the rate of
-i percent after being relieved of tax from May 7999.1e In the 2012 Budget an
x:rreilS€ of the tax to 20 percent was announced. The effective date was set at
Itrme 1, 2012.
The tax is authorised by the Betting, Gaming and Lotteries AcL Gains (and
"n*s) from gambling are therefore not part of an individual's taxable income
';nder the Income Tax Act.

5.lO Maintenance Payments

-l-imony, palimony, maintenance or separation allowance is taxable in the

:ands of the person receiving the money unless it is paid out of funds which
iar-e already been taxed. The only |amaican case which we found - Y os.
stome Tqx) Assessment Committee, 794320 - related to payments of alimony
''mder an agreement between Mr. and Mrs. Y which provided for Mr. Y to pay
:n annual sum to Mrs. Y out of his income after income tax and other proper
ieductions had been taken out. The court agreed with Mrs. Y that she should
:ot be assessed for income tax on the alimony paid by her ex-husband because
ie source of the funds was already taxed.
\ormally the payments are made out of funds that have already been taxed
:nd the recipient would therefore not be liable to tax on the amounts received.
:"-rrne countries allow the alimony payer (under certain circumstances) to claim

--. Takenfromwebsitehttp://www.lotteryinsider.com/lottery/jamaica.htmonMay29,2007.
1- 'tmnica Law Reports, Vol. 4, 115-6.

120
 Individuals - Others Sourccs

the payment as a deduction and the recipient then brings in the amount a.
income liable to tax.2l

Example

Anthony Black, a |amaican taxpayer, has a gross salary of $2,500,000. In 2011 he

received zero-rated dividends of $20,000 and net interest from a bank depo:r-
account of $75,000. He is a keen gambler and the total of his w'innings fror:
horse racing bets was $90,000. In his divorce settlement, he was required to pa',
a monthly maintenance amount of $50,000 for the support of his child and er-
wife who live in Jamaica. What is Anthor-ry Black's taxable income in 2011-
(Ignore statutory deductions. )
Cross salary 2,500,000
Interest, bank deposit, gross 100.000
2,600,000
Less threshold 447,768
Taxable income 2,758,832
Tax@ 25'/o 539,708
Less tax paid at source 25.000 [bank deposit]
Tax due 574,708

Gambling winnings and dividends (in 2011) were not liable to tax. Mr. Black .
payments to his ex-wife are made out of income on which Mr. Black has pa:-
tax therefore this item does not come into his tax calculation and is not taxaL'..
in the hands of his ex-wife.

5.11 Factors Affecting the Taxpayer

One of the few benefits which might be gained from old age and incapacitr
the abatement of income tax.

5.11.1 Age
By section 12(nb) a taxpayer who is 65 years or older or who reaches the age
65 in the year of assessment qualifies for an exempt amount of $80,000 (usuai

21 InaTrinidadiancase, Boordof InlnttdRt:rettLLe t's Vnllarl (Kantrcth), (T&T, 1998) thealimonvwasi-::

by a resident to his non-resident ex-rvife in Canada" Ht-. claimed thr. pavmerrts as a dt'duction -
pa],ments to a non-rcsidcnt are taxable at source - hc shoulcl have u,ithheld the tax in ordcr [o c , :
the deduction The Court decirled that givcn thc provisions of thc doublc' taxation trcatY r.r'itlr Can::.
thcse pavments were to be rcmitted w,ithout deduclion of tax. Therefore cvcrr thou6;h no tax was ::
in Trinidad on the remittance, thc- cx-husbarrd lvas allolvecl to claim tlre amount as a deduction

121
 CHAPTER 5

.-:lled Age Exemption). This was increased from $45,000 on ]uly 1, 2009. Age
a\emption is deducted from gross income.
There was some difficulty with this section and that relating to pensions (see
: o above) when they were first introduced in 1987. The wording of these
: tions of the lncome Tax Act seemed to be ambiguous. The Commissioner's
::lterpretation was that they were mutually exclusive, that is, a taxpayer could
erther qualify for age exemption or pension exemption, but not both. The
lecision in the Sir Allen Lewis os. CIT case resolved the matter. |ustice Marsh
;:ated,,. . . section 72(z) and72(ab) stand on their own and are not mutually
erclusive. Consequently, persons who qualify under paragraph (z) are entitled
:o the full exemption granted under that paragraph; and upon reaching the age
-.f 65, are also entitled to the further exemption granted by paragtaph (ab)."

5.11.2 lncapacity
The lncome Tax Act, under section 72(y), grants exemption from income tax on
:he emoluments of individuals who are physically or mentally handicapped
and who are employed. The exemption applies to:
. a person suffering from a disabling permanent physical handicap "that
is to say a physical disability, infirmity, malformation or disfigurement
of indefinite duration, resulting from illness, injury or congenital defect
. a person suffering from a disabling permanent mental handicap, but
capable of being gainfully employed'

The individual must be so certified by "the Minister responsible for social

security on the advice of the Chief Medical Officer".

5.12 Exempt lncomes

Under section 12 of the lncome Tax Act, certain categories of individuals and
particular sources are exempt from income tax. These are summarized below.

Governor-General: The emoluments of the Governor-General and an

Acting Governor-General

Ex-Soldiers: Disability pensions and war gratuities of ex-soldiers as

the Minister has declared to be exempt

Part-time Soldiers: Training expenses allowances received by part-time

soldiers who serve in the Jamaica National Reserve
provided these allowances are agreed by the CGTAJ
and are paid out of money provided by Parliament; also

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 Individuals - Others Sources

exempt are bounty payments to such persons if the

money (bounty) is paid in consideration of their having
attained a prescribed standard of efficiency through
prescribed training

Diplomatic Services/
Trade Missions: Cost of living allowances to civil servants who have tc
live abroad in order to carry out their functions, for
example, those working in our embassies, consulate=
and missions to the United Nations.

5.13 AllowableDeductions

Expenses are allowable in arriving at the taxable income if they "were incurre;
wholly and exclusively in earning the income". A further point to note is tha:
the expenses must be related to the source of the income. If there is no incom'
from a particular source then no expense deduction is allowed. This has beer
the focal point of some decided cases in the UK and the West Indies. The UK '
Vnllambrosn-(1910) case indicates that in certain circumstances a deduction I'
allowable when there is no income from the related source. The Grenadian cas.
of Woodroffe as. CIT (7966) adopts the same position. In ]amaica in the Alexmn''
as. lT Assessment Committee (1945) and the Thusites as. CIT (1973) cases, t}-'t
taxpayers sought to claim as an allowable deduction interest they had paid t':
money borrowed to purchase shares. There was no dividend from the shares ':
the years in question. The interest was not allowed as a deduction because th.
source to which it related did not produce income. For a further discussion r
this point see chapter 8 section 8.7.2.22

5.14 Review Questions

1. Discuss the statement "all interest is taxable."

2 Who is a "prescribed person" for the PurPoses of Section 31A, and what a:
the taxation implications of this group?

":-'
J. Walter |ames receives a salary of $1,400,000 per annum. He has a
shelter" deposit of $500,000 with a building society which he opened -

22 The summaries of the cases referred to in this paragraph are given under chapters 5 and
Appendix A

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 CHAPTER 5

january 2009 and which attracts 12% interest. Walter has taken the
maximum interest allowed to maintain the tax shelter status. In 2011 he
received preference dividends of $9000 from shares in a comPany on the
|amaican Stock Exchange.
Prepare Walter |ames' tax computation for 2011 with notes.

Discuss the income tax implications of the following situation:

Barbara has an annual salary of $750,000 and holds 6,000 units in a qualified
unit trust which she purchased at $8.00 per unit in January 2008. In
December 2011 she sold her units when they were trading at $11.20. She
also has a fixed deposit of $60,000 with Victoria Mutual Building Society on
which she receives interest monthly at a rate of 70% p.a. (net of tax).
Prepare Barbara's tax computation for year of assessment 2011.

Daphne, to prepare for her daughter's higher education, took out a six-year
endowment insurance policy in August 2008 which was described by the
insurance company as the tax free "Golden Egg Investment Policy" in
which she made an initial deposit of $10,000 and thereafter monthly
instalments of $1,000. The policy guaranteed a minimum interest of 74% if
no withdrawals were made. In August 2010 her daughter postponed
starting higher education and Daphne continued to make the monthly
deposits. In August 2011 her daughter was about to enter university and
Daphne advised the insurance company that she would like to cash in her
"Golden Egg". What is Daphne's tax liability (if any)on the proceeds of this
policy?

State in bullet point form

a. the conditions under which a deposit with a prescribed person may be
tax exempt;
b. the responsibilities of insurance companies and building societies.in
relation to tax exempt contracts and accounts.

Discuss the taxation treatment of the following:

a. Preference dividends of $8,500 from a private company that is not tax
deductible
b. Preference dividends of $8,500 from a comPany quoted on the famaica
Stock Exchange
c. Dividends of $8,500 from a holding of units in a unit trust.

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 Individuals - Others Sources

8. (a) Research andwrite notes on: money market, repurchase agreements

eurobonds, unit trusts.
(b)How does a person/s age affect his income tax liability?

9. Mr. |ohnson was born in 1945 and receives a pension of $4,000 per month
He is additionally employed as a Consultant at a salary of $g0,000 pe:
month. During 2011 he sold 8,000 shares in a company quoted on the stock
Exchange and realized a profit of $50,000 on this sale. He also receivei
during the year, income of $48,000 from an approved superannuation fund
Advise Mr. Johnson about his income tax liability for year of assessmen:
2077

10. shaun Taylor is the works supervisor at a leading mechanic shop in Ma'.
Pen. His annual remuneration is as follows:
Salary $980,000
Motor Vehicle Upkeep $168,000

Taylor is paid a travelling allowance of $15.40 per mile. His limit for th.
year is 10,000 miles. Sometimes Taylor drives the company pick-up to c:
road service to customers' vehicles. As Taylor is a conscientious worker an:
responds to service calls outside normal working hours, the company pa) .
his cell bills. Taylor is concerned about the amount of deductions from h:.
salary and has asked you to explain them.

11. Compare and contrast the main issue in each of the following cases:
Woodroffe vs. CIT (Grenada, 1966)
Alexander vs. IT Assessment Committee (Jamaica, 1945)
Thwaites vs. CIT (lamaica,7973)

12. Michael Campbell age 66 is an instrument technologist in the bauxr:.

industry. Michael provides you with the following information to compu:=
his income tax liability for year of assessment 2011. The profit and Lc.-
account relating to his business as at December 37,2077 is as follows:

I
Revenue from instrument contracts 10,200,000
Other income 70,000
Less Expenses:
Wages & salaries 700,000
Utilities 290,000
Depreciation 570,000
Legal fees 820,000

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 CHAPTER 5

General exPenses 730,000

Professional fees 680.000
Net Profit

Notes
1. The legal fees relate to the new building purchased during the year.
2. Included in general expenses are utility bills amounting to $75,000
paid by the
business for Michael's house.
3. Other income relates to gross interest on a fixed deposit received as follows: Gross
tax
interest for the period )anuary to June received |uly 31, 2011 amounted to $60,000,
deducted at source was $15,000' Gross interest for the period July to December
received February 28,2ol2amounted to $60,000, tax deducted at source was $15,000'
Prepare a schedule of Michael's tax liability for year of assessment 2011 with notes
where appropriate.

13. Dejenay is employed as a paraleSal law firm. Her salary is $950,000

with a
per annum on which she pays PAYE of $21,500 per month. In year of
assessment 2011 Dejenay received dividends of $6,000 from the Gleaner
Company Ltd a company quoted on the )sE; and a Preference dividend of
(private); interest
$4,80b from Calypso Supergas Ltd, a gas station company
from a deposit at victoria Mutual Building society of $750 net. supergas
did not meet the requirement to have interest on Pleference dividend
deducted from their account. Dejenay will be 65 during 2011.
Using the above data, prepare a schedule with notes showing Dejenay's tax
liability for years of assessment 2011 and2072'

14. sandra is employed as an assistant manager at |amaica super Hotel

Ltd.
Her salary is $1,200,000 on which she pays PAYE. In year of assessment
2072 Sandra received. dividends of $9,500 (net)from Grace Group Ltd, a
quoted company, a dividend of $2,800 (net) from strongbuild Ltd, her
father's company (private); interest from a deposit at Victoria Mutual
Building society of $3,000 net and a dividend of $8,000 on the Preference
shares she holds in the Super Hotel Group Ltd. Calculate Sandra's taxable
income (with explanatory notes) for year of assessment 2072 - ignore
statutory deductions.

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