In Jamaica, we have a saying, “there are two things which are sure – death and taxes. Well, the former is unavoidable but the things I frequently hear repeated about taxation makes my jaw drop! What is worse is that no one can ever say how they came by such information, which begs the question of ‘is it true or is it false?’
Regardless of how these myths came about, falling for them can have serious financial consequences for you and your business. So below are five (5) of the most common Jamaican tax myths. Let us debunk them.
‘I didn’t make a profit so why do I still have to pay taxes?’ One could see how this impression is formed. The business did not make a profit so what exactly is being taxed? This however is not so clear cut – here are two reasons:
Firstly, an entity’s accounting profit is not necessarily identical to its tax profit. The reason is that the accounting standards allow for certain expenses and valuation methods which are not allowed under our local tax legislation. For example, interest owed is a legitimate expense for accounting purposes, however, only interest paid is allowed for tax purposes. As a result, you may have an accounting loss, but removal of these accrued expense may result in a tax profit. Therefore, an entity may have a tax liability even though its financial statements are showing a loss.
Secondly, there are several taxes which are payable regardless of profits and/or even income. These include, General Consumption Tax, and Payroll Taxes. Note that some of these taxes may come back to you in the form of tax credits. Here is when it pays to be compliant. For example, payroll taxes paid on time and in full may be written off against your income tax liability for the year.
‘I have decided to take a break from operating this business so there’s no need to file my tax returns.’ This myth has sadly caused so many taxpayers to incur penalties that could have been avoided. The fact is that once an entity is registered, it is obligated to make certain tax declarations which are not contingent on whether the company is making a profit or has started operating. Therefore, once you have not de-registered the company or business, you are required to file all monthly/annual tax returns relevant to your business, whether it is making a loss or remains dormant.
Do not be fooled! This might easily be the most blatant and expensive falsehood on the list, however, surprisingly, many entrepreneurs believe this to be true.
Expenses such as your children’s tuition fee, residential mortgage, vacation, etc. are not allowable deductions, for tax purposes. The Jamaican tax legislation only allow expenses wholly and exclusively incurred from what the business earns. The legislation, however, grants a deduction for a few specific non-business-related expenses such as charitable donations made to an approved entity.
Expenses which serve both a business and personal purpose are unavoidably merged, a tax deduction is only allowed for the portion of the expense that relates to the business. Consequently, you must find a way to apportion these expenses. For example, expenses related to a home office may be apportioned based on square footage. For further guidance on reasonable ways to apportion these types of expenses, contact a tax professional.
Oh…no! This was probably possible in the last decade when the Companies Office of Jamaica and its supporting statutory bodies (TAJ, NHT, NIS, HEART) operated independently. Fast forward to today, where when an entity is registered with the Companies Office of Jamaica, as a part of the registration process, it is simultaneously registered for a TRN and NIS number. This solidifies the transparency of the transaction.
As a result, unlike registration, de-registration is not so simple. You are required to file all outstanding annual/monthly tax returns, settle all tax liabilities, and close each statutory account before the business is considered legally closed. Additionally, the law allows for the tax authorities to file warrants for any outstanding liability. While our tax legislation may have a few loopholes, this is not one of them.
If you are employed to a business entity, and you are also earning additional income from your entrepreneurial effort (business on the side), then you are expected to file a tax return by declaring this additional income and pay the relevant taxes.
Another point to note is that registration with Companies Office of Jamaica may not be required if you are operating your business using your given name. For example, a self-employed service provider operating under his/her given name (that is, your name is John Brown, and you are operating a business as John Brown) does not negate the fact is that you are still expected to file an annual income tax return and account for any additional taxes attached to the business.
With businesses trying to save a dollar and entrepreneurs trying to make a profit, it is not surprising that many are just trying to optimize their tax savings. However, this may be to your detriment as sometimes you end up creating bigger problems with the tax authorities. It is imperative that your tax decisions are made on facts, not myths. The best way to achieve this is by seeking the guidance of a tax professional when making any significant business decision.
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