Jamaican Income Tax Facts

This is dedicated to two young persons I know well, who both want to go into business, but said to me recently that they know very little about tax.

What Makes an Expense Considered a Tax?

An expense is tax if all three below conditions are true:

1. It is a compulsory payment to a government authority

2. There is no direct benefit, goods or services provided in return

3. It is levied based on the laws of a government or state on persons deemed to be operating within that jurisdiction or deemed to reside within the jurisdiction.

Based on the above:

a) NIS and NHT are not taxes because condition 2 is not met.

b) toll paid to a private company is not a tax because condition 1 is not met.

Can you comment on other compulsory expenses which are not taxes?

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​What is Income Tax?

• Income Tax is tax calculated or assessed on a person based on his income for a specific period of time.

• Income tax may be assessed on individuals, companies and other bodies. ​

This article will focus primarily on corporate income tax facts.

​Corporate Income Tax Base

Corporate income tax in Jamaica is calculated on the net taxable income of a company.

It is important to point out that net income for income tax purposes is typically very different from net income for accounting purposes.

A company may have an accounting net profit/income and a taxable loss in the same period.

Likewise, a company may report an accounting loss and be subjected to an assessment for income tax in the same year because they have taxable income.

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Difference between Accounting Net Profit and Taxable Net Profit

Accounting Net Profit is based on International Financial Reporting Standards (IFRS), while taxable net profit or chargeable income is based on the provisions of the income tax act (ITA).

Some of the differences between IFRS and ITA regarding arriving at net profit are as follows:

• The basis for wear and tear calculation

• Accruals versus cash basis

• Treatment of capital items

• Some other specific differences

​Wear and Tear Calculation

Under IFRS, which prescribes the accounting treatment of property plant and equipment, wear and tear is referred to as depreciation and is based on each company’s estimate of the useful life of the assets it carries on its books, having regard to their expected usage of the assets, among other things.

However, the income tax act does not allow depreciation as a deductible expense in arriving at chargeable income. Instead, it allows capital allowances on specific assets, the amount of which is not based on the individual assessment of each company. The income tax act has specified rates for capital allowances, having regard to the description of the assets, their costs and dates of acquisition which must be applied to all taxpayers. For example, a trade vehicle’s capital allowance rate is not based on whether the vehicle is being used for commercial purposes, but rather how a vehicle of that type and description would normally be used.

Accruals versus Cash Basis

A fundamental principle in accounting is the accruals concept. It calls for income and expenses to be recognized as a person’s entitlement to them accumulates over time, whether they are received or not in the case of income, and whether paid or not in the case of expenses.

For example, even though rent may be due and payable on the 15th of the month, at the end of the month rental income must be recognized for the days between the 15th and the end of the month, whether paid or not.

However, for tax purposes there are several items which must be recognized only on the cash basis, including but not limited to:

• Rent of real estate

• Interest

• Dividend

• Foreign exchange gains or losses

Treatment of Capital Items

For accounting purposes some capital gains are recognized in calculating net profit and likewise, some capital losses are allowed. For example, gains or losses on the disposal of property plant and equipment are recognized in calculating net profit. Also, revaluation gains or losses on investments may be recognized in calculating net profit for accounting purposes. IFRS even allows expenses which, other than for immateriality would have been capitalized, to be recognized in calculating net profit.

However, for income tax purposes, income of a capital nature is not subject to income tax and expenses of a capital nature are not allowed as a deductions in arriving at chargeable income.

​Some Other Specific Differences

Here are some other specific differences between IFRS and ITA regarding income and expenses recognition:

• Donations are only allowed as a deduction for tax purposes if they are to registered charities and only to a limit of 5% of chargeable income.

• The deductibility of expenses incurred to generate investment income is restricted to 10% of the chargeable income from that source, other than some specified expenses including interest and accounting.

• Certain income deemed to be from a Caricom source based on the Caricom Double Taxation Treaty is only taxable in the country it arises.

Worthy of Note

To properly adjust accounting net income to taxable net income, you need to understand:

• Both the basis for accounting recognition and the basis for tax recognition of income and expenses

• How to properly classify expenses for capital allowance purposes in order to apply the correct rate of allowances

• How to identify all the items which are on the cash basis and how to calculate the necessary adjustments for each

• How to determine what should be regarded as capital as opposed to trading for income tax purposes, taking into consideration decided cases which match the current circumstance of a company

• How to determine when a specific treatment is applicable and how to calculate, for example, the adjustments necessary to restrict a particular expense to statutory income before statutory income is even calculated

Disclaimer

The positions included in this article are general in nature and may not match the specific circumstance of any particular company. These positions may not be in agreement with that of the Tax Authorities and likewise, the positions of a Tax Authority may not be in agreement with the ruling of a Revenue Court. We cannot guarantee that at the time you read this article our position will still be applicable or appropriate because tax laws are subject to continual change, at times on a retroactive basis. Should the law or its interpretation change, our position may change too. Please therefore ensure that you seek professional advice before application to any particular unique circumstance.