Concept Tax Bonds (CTBs)

Concept Tax Bonds

Municipal Bonds

The use of municipal bonds to finance government projects is a common practice by governments worldwide. Municipal bonds are bonds issued by governments or government agencies to finance projects. These types of bonds are not new to the Jamaican economy. Therefore, it comes as no surprise that the Government of Jamaica (“GOJ”) has utilized this tool to raise funding.

The GOJ has issued bonds which are a type of municipal bond which generates interest income to

recipients. Like municipal bonds, the interest on some GOJ Bonds are tax exempt, and some are taxable.

Concept Tax Bonds

What if municipal bonds could be used to settle a taxpayer’s tax liability to the Tax Administration of Jamaica (“TAJ”)? At present, there are a variety of ways that TAJ allows a person to pay their taxes.

These include:

1. Online use of a credit card or a debit card on TAJ’s RAiS platform via www.jamaicatax.gov.jm.

2. Physically visiting a tax office at their several locations island wide and using a Credit Card, Debit card or Cash; or 3. Direct Fund Transfer from one bank to TAJ’s.

Concept Bonds

I am proposing that a “Concept Tax Bond” be introduced by TAJ as an innovative payment mechanism that taxpayers are permitted to use to settle their tax liabilities, avoid attendant penalties and interest, as well as potentially earn income. The creation of this new payment option and income generator would be a global first that sets the Jamaican Government apart from other jurisdictions in a positive way. As the name suggests, a “Concept Tax Bond” would be futuristic and ergonomic. Essentially, the Concept Tax Bond may have the features of a zero coupon, callable, and a perpetual bond with the flexibility of being traded on an established stock exchange such as the Jamaican Stock Exchange (“JSE”) or on an “over-the-counter” market.

The idea is that TAJ will issue these Concept Tax Bonds at a discount from their face value to taxpayers with no fixed maturity date. Usually, perpetual bonds, though they have no maturity date, would pay a steady interest to the bondholder. However, I propose that this Concept Tax Bond incorporate a zero-coupon, in that it does not pay interest during the life of the bond. Additionally, a key attribute of these bonds should be that they can be surrendered to TAJ to settle outstanding tax liabilities along with the discharge of any attendant interest and penalties arising from tax assessments.  

Benefits of Concept Tax Bonds to Tax Authority

1. It would increase tax revenue intake as the proceeds generated from the issue of the Concept Tax Bond can be placed in the consolidated fund and used just like tax.

2. Zero Coupon rate would allow the government to access cheaper credit as there will be no recurring annual interest payments.

3. Reduction in government debt burden. Because the bond is perpetual, it would mean the government would not have to payback the principal. Even when taxpayers use the bond to settle their tax liabilities, the government can replace those bonds surrendered with future issues on similar terms.

4. The fact that the Concept Tax Bonds can be used to settle future tax liabilities of holders will threaten to reduce future tax collections, but that will not be at a net loss as the same value would be available to the government earlier.

5. The fact that the Concept Tax Bonds will eliminate or cause the taxpayer not to suffer interest and penalties arising on an assessment settled with the Concept Tax Bond may appear to be a loss to the government, but that will be compensated by the government accessing credit at zero percent interest and getting the money earlier and thus benefiting from the time value of money.

Benefits of Concept Tax Bonds to Holders/Taxpayers

1. The holder of Concept Tax Bonds can be assured that any successful tax assessment on them by TAJ will not give rise to attendant interest and penalties if that liability is settled by surrender of their Concept Tax Bond.

2. The holder of Concept Tax Bonds can reduce the administrative burden and cost associated with their tax preparation in relation to the level of materiality of adjustments for tax accounting purposes. That is, taxpayers can accept a higher materiality level and be comfortable with a greater margin of error in relation to their tax calculations. It would therefore cost Concept Tax Bond holders less to prepare their tax returns.

3. The holders of Concept Tax Bond may also benefit from speculating regarding the demand and supply of these bonds. The holders may sell the bonds to other taxpayers who are assessed even if the holder has not suffered from an assessment. It is theorized that the higher the successful number of tax assessments raised by TAJ relative to the initial take up of the bonds, the greater the demand would grow for the bond by the persons assessed.

Benefits of Concept Tax Bonds to Holders/Taxpayers

4. Because the Concept Tax Bond is a zero-coupon bond, it might be thought to be a way to erode the capital invested by taxpayers. However, taking into consideration that it will eliminate interest and penalties arising on assessments, there will likely be a comparison of the value associated with potential interest and penalties and that associated with the potential coupon which will create a mechanism for speculation and allow holders to calculate an expected/desired yield. Interest for overdue payment of taxes to TAJ is currently greater than 16% per annum and penalties for late payments can go as high as 50% of the amount unpaid per annum until paid.

5. Holders of Concept Tax Bonds can use it to edge against uncertain or aggressive tax positions which they have taken over the years until the period affected is statute barred, which means TAJ would no longer be able to raise an assessment.

Tax Implications of Trading Gains on Concept Tax Bonds

The income tax act assesses tax on any profits or gains or financial return accruing to an investor from the investment in bonds, among other things, by treating such gains or profits as interest. However, in the same way that the government can legislate that the interest on some government bonds is exempt of tax, it may choose to do so in relation to Concept Tax Bonds to make it more attractive.

It is noteworthy to mention that where the TAJ pays interest to taxpayers on refunds of income tax, the interest is treated as tax exempt. Given that Concept Tax Bonds arise from acquiring the bonds before the tax liability is assessed, it may be a basis for TAJ to look favourably on treating same as tax exempt. 

Similar Examples in other Jurisdictions

We did not find an identical example elsewhere, however, see some examples of some of the features found in other jurisdictions below:

Tax Credit Bond in United States. According to a Congressional Research Service report dated April 1, 2021, viewed via www.sgp.fas.org/crs/misc/R40523.pdf “nearly all state and local governments sell bonds to finance public projects…One such policy is the Tax Credit Bonds (TCB), which provides a tax credit or direct payment to the issuer or investor that is proportional to the bond’s face value”. TCB’s in the US allow holders to use the bonds to pay their income taxes with the face value of bonds, which is a feature of the proposed Concept Tax Bond. However, TCBs in the US do not eliminate or result in the discharge of interest and penalties arising on tax assessments raised as I am proposing. Further, TCB’s were not issued in perpetuity or at zero coupon. The unused tax credit from a surrendered TCB is not refundable, but may be carried forward to succeeding years.

The information contained in this article does not constitute legal or other professional advice or an opinion of any kind and is intended for general information purposes only. We cannot guarantee that at the time of being published that the information contained herein will still be current