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For many years it has been an expressed view by successive Ministers of Finance to address the issue of taxing interest received by persons investing in securities of various types. On each occasion, Government has backed down - a combination of fear of disturbing the foreign exchange market and capital flight as persons react to paying taxes, where they paid none before. The formal introduction of a withholding tax at source has been done for several reasons. The first is increased revenue. Important but not the only reason. Second, the issue of equity. By and large, those involved in this market are from the higher income groups and there can be no doubt that whilst the ordinary savers still remain within basic savings accounts, and hence have no option but to pay the tax - clear question of equity arises when those at the top of the ladder avoid this payment while those at the bottom have no option. Also the question of clearing up the jungle of the financial sector. The fact is that most existing legislation was for a more simple, less complicated, time with commercial banks, building societies and life insurance companies being the major players in the sector. Over time, they were joined by merchant banks, industrial and provident societies, security dealers, insurance companies behaving like banks, and banks like insurance companies. Furthermore, in several instances, there were "banks" within banks, with many transactions kept "off the" books with the objective of minimizing tax obligations. In such a climate it was inevitable that the opportunity for corruption would be exploited. In the process some innocent investors/savers have "got burnt". e.g. Cement Company or investors in Caribbean Trust and Finance Company. The meetings with the security dealers indicated a way we could move forward, whereby Government having articulated a clear policy position, worked with the major players in finding the most efficient way of achieving the stated objectives. There are some operational problems to be ironed out - hence, the appointment of a working group, headed by Dr. Owen Jefferson, former Senior Deputy Governor of the Bank of Jamaica and President of the Securities Commission. The Task Force has a short-term deadline as we must be in the position to implement the new arrangement by June 1. Tax on Savings Accounts Interest The tax on interest earned on securities has been set after extensive discussion with the security dealers, to take tax at source of 15% of interest earned. The Government, consistent with objective of equity, has simultaneously decided to reduce the tax on interest income for savers in commercial banks, etc., predominantly, small savers. This decision will mean giving up revenue of $800M for fiscal year to be compensated for by receipt from a tax on securities. Long term saving instruments were originally mooted last year with a time frame of seven (7) years. In other words, savings held for seven (7) years would be free from taxes on interest. The sector indicated that this was not an attractive instrument and further discussion we settled on five (5) years. Such an instrument can be offered by any duly licenced institution. This must represent a major stimulus to encourage saving and to encourage the industry and the population to begin to look long term. Consider a situation of someone who is just about to be retire and who has the option of taking a lump sum and a smaller monthly payment. Investment advisors should suggest that the lump sum payment be used to purchase a long term saving instrument to be held for five (5) years without touching the principal. At the same time, pensioners can live on their monthly pension payments plus the interest payments. This process can be repeated on maturity of the instrument, thus guaranteeing the pensioner security of flow in her/his retirement years. From the point of view of the institution, particularly the insurance firms, they will be able to operate, secure in the knowledge that a set amount of funds will be with them for at least five (5) years. Stamp Duty and Life Insurance Policy For some time now, the insurance industry has protested the imposition of the stamp duty which they argued has reduced their ability to compete with overseas companies which are offering policies on the domestic market. It is well known that the insurance companies face some difficulties and this is reflected in the fact of the amount collected from stamp duty over the last three (3) fiscal year has been $106 million in 96/97, $76 million in 97/98 and $71 million in 98/99. What is clear is that this is not a major sum which one may argue would negatively affect the industry. However, in my most recent meeting with the executives in the industry, they have indicated that removal of this duty would send a powerful signal to assist them in competing with external firms. I hereby announce that the stamp duty on policy will be reduced with effect from July 1, 1999. I will be reporting to the House subsequently on the necessary legislation to give full effect to this measure. When we take these changes into account, in summary two major objectives have been attained. The first is that there has been a streamlining of the sector which allows for all different types of entities to compete for the savings of householders and institutions on a level playing field. There is an opportunity, through a long term saving instrument, for institutions to have access to long term funds with corresponding benefits of no taxes for their clients on interest earned. It is clear that the country must benefit as the national debt profile is lengthened. The second major benefit is merely for small savers will see their tax burden reduced and greater equity in sharing the burden of taxation. || Previous | Table of Contents | Next ||
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