INCOME TAX ACT 1999
The principal features of the new draft, and the main revisions to the existing law, are: -
1. Tax Unit
The draft retains the existing Saint Lucia treatment of taxable persons. The basic tax unit remains the individual. To prevent income-splitting, attribution rules apply to transfers of property between spouses (s.62) and the property income of a minor is taxed at the top marginal rate (s.5(2)). Companies are taxed as separate persons and Trusts are taxed separately on retained income.
2. Tax Rates
Individuals are taxed at progressive rates -- of 10, 15, 20 and 30 percent. The 15 percent rate could probably be eliminated. Companies are taxed at 33 1/3 percent -- this could probably be reduced to 30 percent. The personal tax threshold is raised from EC $10,000 to EC $15,000. Most withholding tax rates are at the rate of 30 percent.
3. Tax Base
The existing tax base has been broadened substantially, though further broadening would be possible and desirable. In particular, some previously exempt income has been included and numerous deductions of a personal nature have been eliminated.
4. Specific Measures
In implementation of the Budget Speech and the report of the Fiscal Affairs Department, the following measures are introduced:
(a) Personal Income Tax
* a number of special reliefs have been eliminated, including the deductions for insurance premiums (other than to insure business assets against loss or damage), tuition fees, housekeeper expenses, medical expenses, charitable gifts and subscriptions to co-operative and building societies.
* the exemption for the first $6,000 of pension income has been removed.
* the exemption for bank interest is restricted to $500 -- it is assumed that the exemption is primarily for administrative purposes.
* only dividends received from Saint Lucia companies are exempt.
* other exemptions, principally of importance to companies, have been eliminated.
Some exemption and deductions have been retained, but could be eliminated at a later date:
* the existing exemption for the farming or fishing income of individuals is retained.
* the deduction for mortgage interest is retained.
* the exemption for expatriate pensions is retained.
* a deduction is introduced for interest on student loans, so long as the taxpayer is working in Saint Lucia.
Self-employed persons will be allowed to deduct contributions to an approved retirement fund.
(b) Corporate Income Tax
* the tax base has been broadened by eliminating some exemptions, including the exemption fpr profits from the construction of residential accommodation, and of interest received on housing mortgages.
* the exemption for hotels has been removed, since these will presumably already enjoy substantial tax holidays.
* the provisions for granting of tax holidays have been tightened-up to some extent.
* a "pooling" system of depreciation has been adopted, and is extended to commercial buildings.
* the provisions for deduction of interest have been modified to prevent deductions being claimed on loans used to earn tax-exempt income.
* a simple system of group relief is introduced.
A corporate minimum tax has not been introduced, but there are measures restricting the amount of loss that may be carried forward and deducted in any year.
(c) Capital Gains
Capital gains continue not to be taxable, except gains on the disposal of business assets. Speculative gains on undeveloped real estate should be taxed as "adventures in the nature of trade".
A number of anti-avoidance rules are introduced, including
* a thin capitalisation rule;
* a controlled-foreign-company rule;
* attribution between spouses.
Among the changes proposed by the draft are --
* the introduction of a system of self-assessment;
* the introduction of taxpayer identification numbers;
* increased powers of enforcement, including imposing liability on company directors in certain instances.
"Chargeable income" is defined as "assessable income" less permitted personal allowances. This preserves the terminology of the existing Act, and also retains the deduction method (rather than adopting a tax credit method). The only tax credit is the foreign tax credit. The term "year of assessment" has been preferred to "year of income".
This rate scale approximates to the existing one. Given the increase in the basic tax threshold (to EC $15,000), it might be desirable to eliminate the 15 percent rate band and go from 10 percent directly to $20,000?
Property income of minors is taxed at the top marginal rate to prevent income-splitting. An alternative would be to aggregate it with the income of the higher-income parent, or to adopt attribution rules. Either solution would be more complicated than the present one. Families in which children have property income are likely to be in the top bracket anyway.
Consideration might be given to reducing the CIT rate to 30 percent, so that it would be the same as the top individual rate. This might be justifiable, given the broadening of the tax base.
Income of a non-resident falls into two main categories: income from employment or business, which should be taxed at "normal" rates, and income subject to final withholding. Subs.(2) applies the top rate to "other income", in case there may be some category of income that is not employment or business income, for which no withholding rate is prescribed.
It is assumed that separate Regulations will determine the withholding procedure (PAYE) from employment income, both for residents and non-residents. Those Regulations should also apply to certain types of pension income. Provision is made for withholding from certain payments for services - see s.96. A problem is to decide where to fix the rates. It is assumed that dividends will remain tax-free (even where paid to non-residents?), reflecting the fact that the company has already paid tax on its profits. The rate for contractors' services should also probably be relatively low. For the rest, a rate of 30 percent seems realistic, since most recipients are likely to be in the higher tax bracket, and it provides flexibility in negotiating tax treaties; it also seems advantageous to have the same rate for domestic and foreign payments, where possible, so that the payer is nor concerned with the status of the payee.
In the case of a spouse or child, there is no need to show dependancy - it can be presumed since there will be no credit if the spouse or child has income in excess of the limit. Other relatives must be resident and be dependants - the "wholly or principally" requirement prevents more than one claim in respect of the same relative. The amount of allowance is reduced if the spouse, child or dependant has more than a very small amount of income. These allowances are to be distinguished from allowable deductions.
The 183-day rule here drafted is somewhat less strict than in the present Act, but is simpler to apply.
No provision has been made for the taxation of capital gains. Speculative gains may be liable to tax as business income under the heading "venture in the nature of trade". A question here is whether it is necessary to include a catch-all "any other income" provision - as (d)? It is difficult to see what has been omitted to make this necessary, though it may be an advisable precaution to guard against unpredictable court decisions. But if it is inserted, that raises questions of what deductions might be allowed.
Employment income is essentially a "gross" concept; i.e. it is defined as the sum of payments and benefits, from which only specific deductions may be taken to arrive at taxable income.
(1) (g),(h) - pensions, redundancy payments, etc. - the intention is that any payment in connection with termination of employment, other than a pension from an approved retirement fund, is taxable as employment income. This is subject to (3)(i), namely payments up to an amount specified in Regulations (presumably in the Approved Retirement Fund Regulations), or deposited in an ARF, may be exempt. Further, under (1)(p), the employers contributions to a fund, other than an ARF, constitute a taxable benefit.
Subs.(2)(i) assumes the adoption of Regulations relating to automobile benefits. These could be part of the PAYE Regulations?
Subs. (3) exempts some of the items otherwise included in income by subs.(1). The payments in subs.(3)(b) could also be included in the PAYE Regulations. (3)(f) is more restrictive than the present s.34(2) and does not exempt leave passages during an employment. (3)(h) preserves the present s.34(3) -- the prohibition on deduction is contained in s. 25(3). Subs.(3) does not include an exemption for tips -- an exemption such as that introduced by S.I.1997, No.102 could be included but should probably be more narrowly drafted and restricted to hotel and restaurant workers (and taxi drivers?).
(4) This taxes tax employee stock options. Normally, any gain subsequent to the exercise of the option will be exempt as a capital gain.
Para (b) taxes (capital) gains on the disposal of non-depreciable business assets and losses are fully deductible.
The definition of property income includes pension payments (other than payments that are included in employment income). It also includes the income of a beneficiary under a trust. This brings such income within the main charging provision of s.19. [Section 18 refers only to the taxable income of the trust.] The trust can receive income that is business income, property income or capital gain.
Subs. (1) preserves many of the existing exemptions.
- (1)(k)(v) restricts the exemption for bank interest to $500 -- it is assumed that the exemption is primarily for administrative purposes.
- (1)(m) preserves the existing exemption for the farming or fishing income of individuals. (Since expenditure to earn exempt income is not deductible there is no need to make provision re losses from such activity.)
- (1)(p) preserves the exemption for expatriate pensions. However, the general exemption for the first $6,800 of pension income is withdrawn, as is that for the earned income of persons aged over 60: that is largely compensated for by raising the basic threshold. The treatment of pension payments is considered later, under s.27.
Other exemptions included in the present Act have not been included. Thus -
- hotels (the exemption is presumably covered by the new s.24 where a tax holiday has been granted);
- profits from the construction of residential accommodation;
- interest received on housing mortgages;
the recommended broadening of the tax base would seem to require these to be eliminated, especially if mortgage interest is to remain a deductible expense.
This provision is inserted to implement the recommendations of the Fiscal Affairs Department. It preserves existing tax holidays but imposes some restrictions upon new incentives.
Part IV - Deductions
A number of deductions allowed by the existing Act have been eliminated in order to broaden the tax base. These include:
- insurance premiums (other than to insure business assets against loss or damage);
- tuition fees;
- housekeeper expenses;
- medical expenses;
- charitable gifts;
- subscriptions to co-operative and building societies.
Subs.(2) limits the deductions that may be claimed against employment income to commissions of salespersons. A commission salesperson should be treated as self-employed, but only up to the amount of commission earning. A possible addition might be to allow certain deductions by temporary resident (expatriate) employees - either a general deduction of a fixed percentage (e.g. 35%), or specific deductions such as contributions to pension funds, social security, etc., in the home country.
Subs.(5) contains a general prohibition against deduction of unreasonable expenses, which can be useful to counter certain types of avoidance (e.g. disguised personal living expenses or excessive salaries paid to relatives).
A distinction is made between pensions from an approved retirement fund and other forms of pension and annuity.
In the case of a pension under an ARF, the pension should be taxable, but
(i) the taxpayers contribution to the ARF -- within prescribed limits -- should be deductible [and this is so whether the taxpayer is employed or self-employed];
(ii) any contribution to the ARF made by an employer is deductible;
(iii) an employers contribution is not regarded as employment income of the employee; and
(iv) the income from the fund is exempt.
Regulations need to be adopted prescribing the deductible amounts. For example, the total contributions that might be made -- by employer and employee together -- in respect of an individual (whether employed or self-employed) might be restricted to 20 percent of the individuals total income from employment and business.
The treatment of other types of pension payments is rather problematical. Pensions provided by an employer should be taxable except those under an approved retirement fund, but to the extent that an employers contributions are treated as remuneration and are taxed to the employee, those contributions should be deductible by the employer in the same way as salary, etc.
In the case of self-funded annuities (whether purchased by an employee or a self-employed person), the recipient will not have been allowed to deduct contributions and should thus be taxable only on the portion of the annuity/pension that does not represent a return of contributions. It is assumed that there will be Regulations to determine the return-of-capital proportion of annuity payments: see s.99, which deals with withholding from pension and annuity payments.
Subs.(3) deals with the problem of the deduction of interest on money borrowed to earn exempt income. Although subs.(1) requires the funds to have been used to produce assessable income, that requirement is easily circumvented by investing retained profits or other funds to earn tax-exempt interest or dividends while borrowing to finance business or other investments. Subs. (3) operates on the assumption that borrowed funds are fungible and apportions those funds between taxable and exempt income. The limitation in subs.(1) still applies, however; thus, if it is shown that funds are borrowed to buy shares in order to realize a tax-free capital gain, no deduction is allowed.
Subs. (4) preserves the existing deduction for mortgage interest, though it would be preferable (and would facilitate the operation of the PAYE system) if this were eliminated. Subs.(5) implements the proposal made in the budget speech: the deduction is available only so long as the taxpayer works in Saint Lucia. (That could presumably be extended by agreement with other East Caribbean countries.)
This section implements the proposals in the budget speech.
Subs.(1) - restricts the deduction to business and property income. The words "may be claimed" are intended to make it clear that the deduction is not automatic; a taxpayer may choose (e.g. in a year where there is a loss or little income) not to claim the deduction, thus increasing the amount that may be claimed in subsequent years.
Classes 3 and 4 allow a deduction in respect of "nothings" - expenditure of a capital nature that does not acquire a tangible asset. Class 5 is extended to commercial buildings, including hotels.
Subs.(3) preserves the initial allowance of 20 percent (which is additional to the annual capital allowance), but only for tangible assets other than land.
Subs.(2) provides a simple method of distinguishing between expenditures of a revenue and of a capital nature. If the expenditure on repairs, etc., is less than 5 percent of the balance of the class it is deductible as a revenue expense; otherwise it is added to the balance of the class and depreciated.
The existing treatment of maintenance payments has been retained -- they are deductible by the payer and taxable in the hands of the recipient. It would be simpler -- and would simplify the PAYE system -- if the reverse were the case. However, to change the system would probably require existing court orders and agreements to have to be reviewed.
The effect of this section is to aggregate the profits and losses from each source -- employment, business, and property. (It seems unlikely that it would be possible to have an employment loss). Subs.(2) requires any net loss to be carried forward against the income of the first year in which there is net income. No carry-back of losses has been provided for.
Subs.(3) limits the amount of loss that may be claimed on a carry-forward to 50 percent of the income that would otherwise be the assessable income for the year -- i.e. it has an effect somewhat similar to an alternative minimum tax.
Subs.(4) is intended to allow the carry-forward of losses incurred during a tax holiday period. The 5-year carry-forward limitation is still applicable.
This "income splitting" provision is restricted to transfers of property - or loans - between spouses. Since the property income of minors is taxed at the top rate, there is no need for income-splitting rules as between parent and child. As for other relationships, the general anti-avoidance rule and the "sham" principle should prevent abuse.
The intention in subs.(3) is that the partnership must decide how much, if any, deductions to claim for depreciation, etc.: i.e. the individual partners do not get to choose separately.
This section provides for a "roll over" where business assets -- inventory and both depreciable and non-depreciable assets -- are transferred by a partner to the partnership, or vice-versa.
By s.21(1)(c) trust income is defined as property income (even though it may derive from a business carried on by the trust). The fact that the income derives originally from business should not make it business income in the hands of a beneficiary - otherwise it would be simple to circumvent the rules on property income of minors. It is also desirable, so that in international situations withholding tax can be imposed and the permanent establishment provision is not relevant. Also, if the geographic character of the income is retained for all purposes it is difficult to apply withholding tax to payments to non-resident beneficiaries.
However, flow-through treatment is provided for resident beneficiaries with respect to exempt income.
The section has to be read in conjunction with the preceding section. Thus, under s.68(5), the trust is entitled to deduct the amount included in the assessable income of a beneficiary. Consequently, exempt income must be excluded - see subs.(2). Also, only amounts actually paid to non-resident beneficiaries (plus tax withheld) may be deducted. This prevents tax-free accumulation in the trust of amounts to which a non-resident beneficiary is entitled - see subs.(4).
A proviso has been added to subs.(1) to exclude income paid to a beneficiary under a grantor trust - otherwise there would be double taxation.
The intention of subs.(5) is to prevent the trustees allocating different types of income to different beneficiaries - e.g. exempt income to high-income beneficiaries.
This section treats shareholder benefits as property income, fully taxable, rather than as dividends (exempt), since it is likely that the company will have claimed a deduction for the cost incurred in providing the benefit. It also avoids problems of categorisation where the shareholder is also an employee.
The provision follows the general idea of the partnership rollover, but is simpler. Both transferor and company must be resident, and must elect. The transferor may be a resident company, so there is no need for a special provision to deal with group re-organisations.
Subs.(2) applies where the company is being liquidated and the assets returned to an individual shareholder. Where there are a number of shareholders, a combination of subss.(1) and (2) can be used. Each shareholder forms a separate company, and (1) is used to "butterfly" the assets into the new companies; then (2) can be used, if desired, to roll the assets out to the individuals.
This section provides a simple method of group relief. It allows a resident company to make either an actual or a notional payment to another related resident company. The amount of the payment is deducted from the assessable income of the payer company and included in the assessable income of the payee. This procedure is not available if either company is eligible for a tax holiday or other exemption, or to insurance and shipping companies.
Subs.(3) - the excess interest payment is treated as a dividend (rather than as interest), so it will not be subject to withholding tax. This seems consistent with the purpose of the provision.
This system is intended to be one of self-assessment. According to subs.(2)(c), the taxpayer is required to state the total amount of tax payable for the year.
This section assumes that if the taxpayers sole source of income is a single employment or a pension from which tax is withheld, the PAYE system should achieve an accurate result.
Subs.(2) treats the tax return as an assessment (i.e. a self-assessment). If the taxpayer fails to file, then any tax that has been withheld is deemed to have been assessed in the amount withheld.
One effect of changing to a system of self-assessment (with tax payable at the same time as the return is filed) would be to advance the payment date from September 30 to March 31. However, for most taxpayers, the bulk of tax would be collected by withholding, so this would not matter.In other cases, where tax is payable by instalments, advancing the due date would, again, not have serious consequences. In cases of real hardship, the new system could be phased in more gradually.
The instalment system is a very simple "three quarters plus balance" system. When the taxpayer files, he calculates his total liability for the year and deducts the instalments paid (plus any tax withheld). There is a safe-harbour rule, in that no penalty or interest will be incurred if the taxpayer pays instalments based on the previous years liability. An alternative would be to allow the taxpayer to pay instalments based on an estimate of the years eventual total income, but in that case there would have to be interest and penalty provisions for serious underestimates. As drafted here, subs.(3) does allow for a reduction with the approval of the Comptroller. The transition from the previous system to this system should not normally cause any real problem.
The aim of subs.(2) is to exclude the payment of residential rents from the withholding obligation -- the exemption limit should be fixed to achieve this. As a guiding principle, withholding should not be required where the number of payers is likely to be greater than the number of payees, or when the payee is likely to be more sophisticated than the payer.
The intention of subs.(2) is that employer-provided pensions should come within the PAYE Regulations. Other pensions, if taxable, should be governed by the PAYE Regs, or similar Regs. As for annuities, it should be possible to draw up a table so that the return-of-capital portion is not taxed.
Withholding tax on payments to non-residents is a final tax, except for withholding tax on employment income and on contractors payments. In particular, contractors payments may constitute business income of a permanent establishment or fixed base, and should be aggregated with other income of that source.
Subs.(1) leaves open the possibility that regulations - notably the PAYE Regulations - may stipulate some other period. For example, 15 days may be much too long for large employers.
These provisions have three tiers of sanctions:
1. Payment of interest on late payment - this is automatic, unless expressly waived. The rate should be a reasonable one (here, 3% above prime) - sufficient not to attract taxpayers to "borrow" from the exchequer by delaying payment.
2. Administrative penalties for (relatively minor) infractions of the Act - e.g. failure to file, omissions from the tax return, etc.) These may be imposed by the Comptroller, but may be appealed.
3. Penal sanctions for (serious, i.e. criminal) offences - fines and imprisonment - which require proof of intent or gross negligence and may only be imposed by a court.
This offence will usually be one of negligence - fraudulent misstatements may be prosecuted under Part III. But an omission may be intentional without being fraudulent - as where a taxpayer believes a particular item is not taxable. The offence is that of incorrectly stating the amount of taxable income - there should be no penalty for simply mis-calculating the amount of tax payable.
This penalty is for not accounting for tax actually withheld. A withholding agent who fails for whatever reason (except in circumstances that amount to tax evasion or aiding and abetting) is sufficiently penalised by having to pay the tax himself - with interest. But if he actually withholds tax but omits to pay it over, then there should be a penalty. The penalty is the same as that under s.126.
It may be desirable to have a single tribunal to deal with all tax appeals (including customs duties?).