OPTIONS AND INNOVATIONS OPTIONS AND INNOVATIONS FOR OPTIMIZING REVENUE FOR OPTIMIZING REVENUE FROM TAX ON CONSUMPTION FROM TAX ON CONSUMPTION

THE JAMAICAN EXPERIENCETHE JAMAICAN EXPERIENCEPresentation to the COTA ConferencePresentation to the COTA ConferenceSt. LuciaSt. LuciaTuesday, July 25, 2006Tuesday, July 25, 2006Desmond Batchelor Desmond Batchelor Tax Administration of JamaicaTax Administration of Jamaica

IntroductionIntroductionJamaica with a revenue target of J$195B, Jamaica with a revenue target of J$195B, as well as other Caribbean Islands must as well as other Caribbean Islands must find innovative ways in achieving their find innovative ways in achieving their respective revenue targets.respective revenue targets.

Revenue inflows from consumption will Revenue inflows from consumption will play a major role in achieving the revenue play a major role in achieving the revenue targets as in Jamaica VAT accounts for targets as in Jamaica VAT accounts for approximately 39% of the total revenue approximately 39% of the total revenue collections. collections.

Introduction (cont’d)Introduction (cont’d)France is credited as the first country to France is credited as the first country to implement Value Added Tax. This was in implement Value Added Tax. This was in 1955; and today over one hundred & fifty 1955; and today over one hundred & fifty (150) countries have implemented a type (150) countries have implemented a type of VAT.of VAT.

Value added tax was introduced in Value added tax was introduced in Jamaica on October 22, 1991, as General Jamaica on October 22, 1991, as General Consumption Tax (GCT). GCT simplifiedConsumption Tax (GCT). GCT simplified and modernized the Jamaican indirect tax and modernized the Jamaican indirect tax system.system.

Introduction (cont’d)Introduction (cont’d)The GCT replaced eight (8) taxes:The GCT replaced eight (8) taxes:

1.1. Excise DutyExcise Duty2.2. CARICOM DutyCARICOM Duty3.3. Retail Sales TaxRetail Sales Tax4.4. Telephone Service TaxTelephone Service Tax5.5. Entertainment DutyEntertainment Duty6.6. Hotel Accommodation TaxHotel Accommodation Tax7.7. Consumption Duty -other than for products Consumption Duty -other than for products

covered under a Special Consumption Tax covered under a Special Consumption Tax (SCT)(SCT)

8.8. Additional Stamp Duty levied on importation of Additional Stamp Duty levied on importation of goods – except for specific “protected” goodsgoods – except for specific “protected” goods

How does the tax work?How does the tax work?

Tax is charged on certain transactions Tax is charged on certain transactions such as the supply of goods and such as the supply of goods and services.services.

It is charged at each stage of the It is charged at each stage of the production and distribution chain by production and distribution chain by businesses and other persons businesses and other persons conducting continuous or “taxable” conducting continuous or “taxable” activity.activity.

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

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

Income Tax vs VAT Income Tax vs VAT

Income Tax, taxes profits accruing Income Tax, taxes profits accruing to the business; while VAT taxes to the business; while VAT taxes spending or amounts going out of spending or amounts going out of the business. the business.

Income tax is classified as a direct Income tax is classified as a direct tax while VAT is an indirect tax or tax while VAT is an indirect tax or consumption tax. consumption tax.

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

Jamaica’s Primary ObjectiveCollect 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.

Low

COMPLIANCE STRATEGYATTITUDE TO COMPLIANCE

Have Decided Not To Comply Use the Full Force of the Law

Do Not Want to Comply But Willif Given Due Attention

Enforce by Detection andAction

Try To Comply But DoNot Alw ays Succeed

Consistently Succeedin Complying

Strategies Aimed at CreatingDow nw ard Pressure

Assist in Complying

Make It EasierTo Comply

High

STRATEGIC OVERVIEWSTRATEGIC OVERVIEW

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

OPTIONS & OPTIONS & INNOVATIONSINNOVATIONS

SERVICESERVICE

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 1.1. Increase the VAT standard rate and reduce the Increase the VAT standard rate and reduce the

Income Tax (IT) rate to attract international Income Tax (IT) rate to attract international businesses and discourage under-reporting of businesses and discourage under-reporting of profits or tax avoidance schemes. Reduction in profits or tax avoidance schemes. Reduction in the IT rate and the stimulation of investment will the IT rate and the stimulation of investment will generate more employment, resulting in more generate more employment, resulting in more disposable income available for consumption. disposable income available for consumption. There is greater equity in VAT as it affects a There is greater equity in VAT as it affects a greater majority of persons than Income Tax.greater majority of persons than Income Tax.

Jamaican GCT rate is now Jamaican GCT rate is now 16.5%16.5% up from 15%, up from 15%, Income Tax threshold increased to $193,440 Jan Income Tax threshold increased to $193,440 Jan 2, 2006 and will again increase to $275,000 Jan 2, 2006 and will again increase to $275,000 Jan 1, 2007. 1, 2007. These tax free allowances will boost These tax free allowances will boost consumption and consequently revenue inflowsconsumption and consequently revenue inflows

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 2.2. To make it easier and less costly for the To make it easier and less costly for the

administration and for taxpayers to administration and for taxpayers to comply, a single tax rate is desirable. comply, a single tax rate is desirable. This also reduces discrimination in the This also reduces discrimination in the market place.market place.

The standard rate in Jamaica is The standard rate in Jamaica is 16.5%16.5% (effective May 1, 2005). The exceptions (effective May 1, 2005). The exceptions are 20% charged on phone calls, 8.25% are 20% charged on phone calls, 8.25% for tourism revenue and varying rates for tourism revenue and varying rates on motor vehicles depending on engine on motor vehicles depending on engine capacity.capacity.

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 3.3. Reduce the number of zero-rated Reduce the number of zero-rated

goods and services as input tax on goods and services as input tax on zero-rated goods is refundable while zero-rated goods is refundable while the revenue receives no output tax.the revenue receives no output tax.

Jamaica has significantly reduced the Jamaica has significantly reduced the list of zero rated goods as this list of zero rated goods as this proved counterproductive and costly proved counterproductive and costly to administer.to administer.

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 4.4. Consider an amnesty Consider an amnesty programmeprogramme for a for a

specified time to encourage potential specified time to encourage potential taxpayers to register without the taxpayers to register without the imposition of punitive actions.imposition of punitive actions.

While compliance and revenue inflows While compliance and revenue inflows usually increase, an amnesty has to be usually increase, an amnesty has to be carefully managed to minimize ill-will by carefully managed to minimize ill-will by compliant taxpayers, who may feel compliant taxpayers, who may feel benefits accrue to delinquent persons.benefits accrue to delinquent persons.

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 5.5. Encourage Voluntary Disclosure Programme Encourage Voluntary Disclosure Programme

without the imposition of penalty to allow without the imposition of penalty to allow businesses operating outside the net to businesses operating outside the net to legitimize and formalize their operations.legitimize and formalize their operations.

We have accommodated registered We have accommodated registered taxpayers who inadvertently understated taxpayers who inadvertently understated their tax liability to make amendments their tax liability to make amendments without imposing penalties. Persons who without imposing penalties. Persons who should be registered are given the should be registered are given the opportunity to do so.opportunity to do so.

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS

6.6. Make voluntary compliance an easy and low Make voluntary compliance an easy and low cost experience for taxpayers. cost experience for taxpayers.

• provide information channels, e.g. provide information channels, e.g. 1-888-Tax-Help 1-888-Tax-Help andand websitewebsite www.jamaicatax.gov.jm www.jamaicatax.gov.jm (May 2001)(May 2001)

• provide alternative payment options, e.g. e-payment provide alternative payment options, e.g. e-payment of tax of tax www.jamaicatax-online.gov.jmwww.jamaicatax-online.gov.jm (Dec 2004)(Dec 2004)

• install drop boxes at Collectorates to facilitate quick install drop boxes at Collectorates to facilitate quick cheque payments and returns filing cheque payments and returns filing (Mar 2006)(Mar 2006)

• have customer service staff in banking hall to attend have customer service staff in banking hall to attend to taxpayers who need help to taxpayers who need help (peak period)(peak period)

• decentralize operations allowing filing at any officedecentralize operations allowing filing at any office• introduce: e-filing of Tax Returns introduce: e-filing of Tax Returns (awaiting legislation)(awaiting legislation)

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 7.7. Consider outsourcing certain Consider outsourcing certain

collection functions to increase the collection functions to increase the options available to make payments.options available to make payments.

A Survey conducted showed that this A Survey conducted showed that this would be an acceptable payment would be an acceptable payment method which would improve method which would improve collections. collections.

(Draft Bill currently under discussion (Draft Bill currently under discussion with the Ministry of Finance.)with the Ministry of Finance.)

OPTIONS & OPTIONS & INNOVATIONSINNOVATIONS

EDUCATIONEDUCATION

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 8.8. Implement an aggressive taxpayer Implement an aggressive taxpayer

education programme to encourage education programme to encourage higher levels of voluntary compliance.higher levels of voluntary compliance.

A major thrust of Jamaica’s Tax Administration is A major thrust of Jamaica’s Tax Administration is Taxpayer Education:Taxpayer Education:

Publications Publications Update accountants on legislative changes, Update accountants on legislative changes,

interpretations & rulingsinterpretations & rulings Website/Toll-free help lineWebsite/Toll-free help line Workshops/Seminars/Workshops/Seminars/School’s Tax Education School’s Tax Education

Programme (STEP)Programme (STEP) Marketing (advertising, promotions, Marketing (advertising, promotions,

interviews, etc)interviews, etc) ExposExpos

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 9.9. Isolate and conduct seminars to Isolate and conduct seminars to

educate delinquent taxpayers where educate delinquent taxpayers where the tax potential is greatest.the tax potential is greatest.

Targeted workshops/seminars held Targeted workshops/seminars held with various interest groups through with various interest groups through strategic partnership arrangements.strategic partnership arrangements.

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 10.10. Conduct regular meetings with stakeholders Conduct regular meetings with stakeholders

to obtain feedback on any programme to obtain feedback on any programme implemented to allow for continuous implemented to allow for continuous improvements and the strengthening of improvements and the strengthening of legislationslegislations..

The inputThe input of interest groups is encouraged of interest groups is encouraged through strategic partnership in the through strategic partnership in the implementation of programmes. E.g. Focus implementation of programmes. E.g. Focus group sessions and recommendations for group sessions and recommendations for legislative changes from staff, etc.legislative changes from staff, etc.

OPTIONS & OPTIONS & INNOVATIONSINNOVATIONS

ENFORCEMENTENFORCEMENT

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 11.11. Develop and maintain a strong audit Develop and maintain a strong audit

and investigations team to conduct and investigations team to conduct enforcement activities to support enforcement activities to support voluntary compliance.voluntary compliance.

Visible field work is carried out by Visible field work is carried out by trained technical staff with an audit trained technical staff with an audit coverage not exceeding 5% of taxpayer coverage not exceeding 5% of taxpayer population, supported by investigations population, supported by investigations and court action where necessary.and court action where necessary.

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS

12.12. Strengthen your intelligence gathering Strengthen your intelligence gathering capabilities to identify persons who are liable capabilities to identify persons who are liable to be registered for VAT.to be registered for VAT.

– Conduct street surveys.Conduct street surveys.– Use linkages across tax departments (e.g. Use linkages across tax departments (e.g.

cross matching Income Tax & GCT data cross matching Income Tax & GCT data bases, customs data, & taxpayer bases, customs data, & taxpayer registration).registration).

– Collaboration with Govt Agencies.Collaboration with Govt Agencies.– Use third (3Use third (3rdrd)party information.)party information.– ““Force” register taxpayers.Force” register taxpayers.– Use computerisation.Use computerisation.

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 13.13. Strengthen the offence provisions of the Strengthen the offence provisions of the

relevant tax laws and impose penalties relevant tax laws and impose penalties on those delinquents who refuse to on those delinquents who refuse to comply with the statutory requirements.comply with the statutory requirements.

Legislative changes are currently being Legislative changes are currently being considered to make penalties more considered to make penalties more punitive to encourage greater punitive to encourage greater compliance. Court actions have been compliance. Court actions have been taken against delinquents, which are taken against delinquents, which are publicised through the media, resulting publicised through the media, resulting in greater inflows.in greater inflows.

OPTIONS & OPTIONS & INNOVATIONSINNOVATIONS

INFORMATION TECHNOLOGYINFORMATION TECHNOLOGY

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 14.14. Implement an effective and reliable Implement an effective and reliable

computerized system to aid in risk computerized system to aid in risk management and the classification and management and the classification and selection of taxpayers for auditing selection of taxpayers for auditing purposes.purposes.

A classification module is being A classification module is being developed in Jamaica’s Integrated developed in Jamaica’s Integrated Computerized Tax Administration System Computerized Tax Administration System (ICTAS) to be used to select cases for (ICTAS) to be used to select cases for audit based on certain variables, such as audit based on certain variables, such as sales turnover, net profit margin, industry sales turnover, net profit margin, industry average, business complexity, aging of average, business complexity, aging of case, auditor’s compliance rating report.case, auditor’s compliance rating report.

OPTIONS & OPTIONS & INNOVATIONSINNOVATIONS

MANAGEMENT & MANAGEMENT & ORGANISATIONORGANISATION

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 15.15. Ensure continuous education and Ensure continuous education and

specialized training for staff to develop specialized training for staff to develop their auditing, investigations and their auditing, investigations and intelligence gathering capabilities and also intelligence gathering capabilities and also to provide updates on the implications of to provide updates on the implications of certain legislative amendments.certain legislative amendments.

Training is a key component of Jamaica’s Training is a key component of Jamaica’s Tax Administration. A 13 months Tax Audit Tax Administration. A 13 months Tax Audit & Revenue Administration (TARA) Post & Revenue Administration (TARA) Post Graduate Training Programme, accredited Graduate Training Programme, accredited by the University Council of Jamaica.by the University Council of Jamaica.

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 16.16. Ensure potential revenue is greater Ensure potential revenue is greater

than the administrative cost.than the administrative cost.

The GCT threshold was increased to The GCT threshold was increased to J$1M. Entities with sales less than J$1M. Entities with sales less than J$1M are no longer required to be J$1M are no longer required to be registered or to file returns. This has registered or to file returns. This has improved the cost effectiveness of improved the cost effectiveness of administering the system and reduced administering the system and reduced cost of compliance for many taxpayers.cost of compliance for many taxpayers.

OPTIONS AND OPTIONS AND INNOVATIONS INNOVATIONS 17.17. Closely manage accounts receivables Closely manage accounts receivables

to minimize arrears and to ensure a to minimize arrears and to ensure a better cash flow.better cash flow.

Jamaica implemented a Jamaica implemented a Call CentreCall Centre on on June 6, 2006, which manages accounts June 6, 2006, which manages accounts not paid up for 1 – 30 days (J$ 200M not paid up for 1 – 30 days (J$ 200M from 471 accounts collected in 6 from 471 accounts collected in 6 weeks). Accounts in arrears over 30 weeks). Accounts in arrears over 30 days are selected for compliance days are selected for compliance action using the Accounts Receivables action using the Accounts Receivables Conversion (ARC) approach.Conversion (ARC) approach.

CONCLUDING STATEMENTCONCLUDING STATEMENT

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