OPTIONS AND INNOVATIONS FOR OPTIMIZING REVENUE FROM TAX ON CONSUMPTION

1. OPTIONS AND INNOVATIONS FOR OPTIMIZING REVENUE FROM TAX ON CONSUMPTION THE JAMAICAN EXPERIENCE Presentation to the COTA Conference St. Lucia Tuesday, July 25, 2006 Desmond Batchelor Tax Administration of Jamaica

2. Introduction Jamaica with a revenue target of J$195B, as well as other Caribbean Islands must find innovative ways in achieving their respective revenue targets. Revenue inflows from consumption will play a major role in achieving the revenue targets as in Jamaica VAT accounts for approximately 39% of the total revenue collections.

3. Introduction (cont’d) France is credited as the first country to implement Value Added Tax. This was in 1955; and today over one hundred & fifty (150) countries have implemented a type of VAT. Value added tax was introduced in Jamaica on October 22, 1991, as General Consumption Tax (GCT). GCT simplified and modernized the Jamaican indirect tax system.

4. Introduction (cont’d) The GCT replaced eight (8) taxes: • Excise Duty • CARICOM Duty • Retail Sales Tax • Telephone Service Tax • Entertainment Duty • Hotel Accommodation Tax • Consumption Duty -other than for products covered under a Special Consumption Tax (SCT) • Additional Stamp Duty levied on importation of goods – except for specific “protected” goods

5. How does the tax work? • Tax is charged on certain transactions such as the supply of goods and services. • It is charged at each stage of the production and distribution chain by businesses and other persons conducting continuous or “taxable” activity.

6. How does the tax work? • Most businesses do not incur the cost of the tax; they simply ensure that it is charged when they make a taxable supply and claim credit from the revenue for tax paid on their business inputs. • Specified supplies are charged at the rate of 0% or are exempt from the tax. Zero-rated businesses can claim a credit for the tax paid on inputs, but exempt businesses cannot.

7. How does the Tax Work? • The cost of the tax is borne by businesses which make exempt supplies and by unregistered end consumers, as both parties pay the tax when acquiring commodities, but are unable to claim a compensating VAT credit.

8. Income Tax vs VAT Income Tax, taxes profits accruing to the business; while VAT taxes spending or amounts going out of the business. Income tax is classified as a direct tax while VAT is an indirect tax or consumption tax.

9. STRATEGIC OVERVIEW As Tax Administrators we should be conscious of the benefits of good customer service, the education of both staff and customers and also the effects of enforcement activities. All these must be efficiently and effectively managed and where possible information technology utilized to optimize revenue inflows.

10. Jamaica’s Primary Objective Collect the revenues due The strategies employed to accomplish the primary objective are: • Improve Compliance through better service delivery, education and enforcement. • Improve information and communication technology processes. • Improve the organization and management of Tax Administration.

12. STRATEGIC OVERVIEW The following options and innovations emerging from our strategic direction outlined have been implemented or are being considered for implementation to optimize revenue inflows in general but specifically from consumption.

13. OPTIONS & INNOVATIONS SERVICE

14. OPTIONS AND INNOVATIONS • Increase the VAT standard rate and reduce the Income Tax (IT) rate to attract international businesses and discourage under-reporting of profits or tax avoidance schemes. Reduction in the IT rate and the stimulation of investment will generate more employment, resulting in more disposable income available for consumption. There is greater equity in VAT as it affects a greater majority of persons than Income Tax. Jamaican GCT rate is now 16.5% up from 15%, Income Tax threshold increased to $193,440 Jan 2, 2006 and will again increase to $275,000 Jan 1, 2007. These tax free allowances will boost consumption and consequently revenue inflows

15. OPTIONS AND INNOVATIONS • To make it easier and less costly for the administration and for taxpayers to comply, a single tax rate is desirable. This also reduces discrimination in the market place. The standard rate in Jamaica is 16.5% (effective May 1, 2005). The exceptions are 20% charged on phone calls, 8.25% for tourism revenue and varying rates on motor vehicles depending on engine capacity.

16. OPTIONS AND INNOVATIONS • Reduce the number of zero-rated goods and services as input tax on zero-rated goods is refundable while the revenue receives no output tax. Jamaica has significantly reduced the list of zero rated goods as this proved counterproductive and costly to administer.

17. OPTIONS AND INNOVATIONS • Consider an amnesty programme for a specified time to encourage potential taxpayers to register without the imposition of punitive actions. While compliance and revenue inflows usually increase, an amnesty has to be carefully managed to minimize ill-will by compliant taxpayers, who may feel benefits accrue to delinquent persons.

18. OPTIONS AND INNOVATIONS • Encourage Voluntary Disclosure Programme without the imposition of penalty to allow businesses operating outside the net to legitimize and formalize their operations. We have accommodated registered taxpayers who inadvertently understated their tax liability to make amendments without imposing penalties. Persons who should be registered are given the opportunity to do so.

19. OPTIONS AND INNOVATIONS • Make voluntary compliance an easy and low cost experience for taxpayers. • provide information channels, e.g. 1-888-Tax-Help andwebsite www.jamaicatax.gov.jm(May 2001) • provide alternative payment options, e.g. e-payment of tax www.jamaicatax-online.gov.jm(Dec 2004) • install drop boxes at Collectorates to facilitate quick cheque payments and returns filing (Mar 2006) • have customer service staff in banking hall to attend to taxpayers who need help (peak period) • decentralize operations allowing filing at any office • introduce: e-filing of Tax Returns (awaiting legislation)

20. OPTIONS AND INNOVATIONS • Consider outsourcing certain collection functions to increase the options available to make payments. A Survey conducted showed that this would be an acceptable payment method which would improve collections. (Draft Bill currently under discussion with the Ministry of Finance.)

21. OPTIONS & INNOVATIONS EDUCATION

22. OPTIONS AND INNOVATIONS • Implement an aggressive taxpayer education programme to encourage higher levels of voluntary compliance. A major thrust of Jamaica’s Tax Administration is Taxpayer Education: • Publications • Update accountants on legislative changes, interpretations & rulings • Website/Toll-free help line • Workshops/Seminars/School’s Tax Education Programme (STEP) • Marketing (advertising, promotions, interviews, etc) • Expos

23. OPTIONS AND INNOVATIONS • Isolate and conduct seminars to educate delinquent taxpayers where the tax potential is greatest. Targeted workshops/seminars held with various interest groups through strategic partnership arrangements.

24. OPTIONS AND INNOVATIONS • Conduct regular meetings with stakeholders to obtain feedback on any programme implemented to allow for continuous improvements and the strengthening of legislations. The inputof interest groups is encouraged through strategic partnership in the implementation of programmes. E.g. Focus group sessions and recommendations for legislative changes from staff, etc.

25. OPTIONS & INNOVATIONS ENFORCEMENT

26. OPTIONS AND INNOVATIONS • Develop and maintain a strong audit and investigations team to conduct enforcement activities to support voluntary compliance. Visible field work is carried out by trained technical staff with an audit coverage not exceeding 5% of taxpayer population, supported by investigations and court action where necessary.

27. OPTIONS AND INNOVATIONS • Strengthen your intelligence gathering capabilities to identify persons who are liable to be registered for VAT. • Conduct street surveys. • Use linkages across tax departments (e.g. cross matching Income Tax & GCT data bases, customs data, & taxpayer registration). • Collaboration with Govt Agencies. • Use third (3rd)party information. • “Force” register taxpayers. • Use computerisation.

28. OPTIONS AND INNOVATIONS • Strengthen the offence provisions of the relevant tax laws and impose penalties on those delinquents who refuse to comply with the statutory requirements. Legislative changes are currently being considered to make penalties more punitive to encourage greater compliance. Court actions have been taken against delinquents, which are publicised through the media, resulting in greater inflows.

29. OPTIONS & INNOVATIONS INFORMATION TECHNOLOGY

30. OPTIONS AND INNOVATIONS • Implement an effective and reliable computerized system to aid in risk management and the classification and selection of taxpayers for auditing purposes. A classification module is being developed in Jamaica’s Integrated Computerized Tax Administration System (ICTAS) to be used to select cases for audit based on certain variables, such as sales turnover, net profit margin, industry average, business complexity, aging of case, auditor’s compliance rating report.

31. OPTIONS & INNOVATIONS MANAGEMENT & ORGANISATION

32. OPTIONS AND INNOVATIONS • Ensure continuous education and specialized training for staff to develop their auditing, investigations and intelligence gathering capabilities and also to provide updates on the implications of certain legislative amendments. Training is a key component of Jamaica’s Tax Administration. A 13 months Tax Audit & Revenue Administration (TARA) Post Graduate Training Programme, accredited by the University Council of Jamaica.

33. OPTIONS AND INNOVATIONS • Ensure potential revenue is greater than the administrative cost. The GCT threshold was increased to J$1M. Entities with sales less than J$1M are no longer required to be registered or to file returns. This has improved the cost effectiveness of administering the system and reduced cost of compliance for many taxpayers.

34. OPTIONS AND INNOVATIONS • Closely manage accounts receivables to minimize arrears and to ensure a better cash flow. Jamaica implemented a Call Centre on June 6, 2006, which manages accounts not paid up for 1 – 30 days (J$ 200M from 471 accounts collected in 6 weeks). Accounts in arrears over 30 days are selected for compliance action using the Accounts Receivables Conversion (ARC) approach.

35. CONCLUDING STATEMENT The optimization of revenue extends beyond compliance activities. It also is a function of the quality of the management in place and the use of information technology. Management must be accessible to taxpayers as this can contribute to improving public image which can encourage voluntary compliance. The recruitment, selection and placement of staff to audit, assess and collect the revenue will also contribute to the success in revenue optimization.