Transfer pricing regime illegal and unconstitutional
WHETHER he is being straitjacketed by the International Monetary Fund (IMF) or it’s a case of his own ignorance of how economies work, Dr Peter Phillips is recklessly betraying the cause of Jamaican businesses.
The finance minister, with the tacit support of the Cabinet – and his self-serving cabal – has gone completely off-message in promulgating an illegal and unconstitutional piece of legislation called the Income Tax (Transfer Pricing Documentation) Regulations, 2015.
The legislation is the worst example of a Government that is prepared to trample on the rights of all Jamaicans in its wanton disregard for the very Constitution which it is sworn to protect. This action is unprecedented in its implications. Simply put, it is a bad law which will be struck down the first instance it is challenged in court. It must not be allowed to stand.
The new law says that, with effect from year of assessment 2016, any person who fails to certify that the accounts and information which are used to prepare their income tax return include the particulars of all connected party transactions – which are largely overseas – is liable to criminal prosecution, involving fines or imprisonment.
This draconian piece of legislation is retroactive to January 1, 2015, which is a clear breach of Section 20 (7) of the Constitution which reads:
“No person shall be held to be guilty of a criminal offence on account of any act or omission which did not, at the time it took place, constitute such an offence.”
Dr Phillips’ assurance that prosecutions would not occur before 2017 is a comfort only to fools. And fools he is taking us for. If there is no intention to use it, why include a retroactivity clause in the law? In any event, the minister can change his mind or a new minister could decide to impose it.
The finance minister knows that not many Jamaicans are familiar with the transfer pricing regime, so this bit of illegality will largely go unnoticed. Yet, it is something that even major international businesses in the developed world are resisting, because it is a major disincentive to growing a business and making profits.
If businesses in more powerful economies are fearful of it, how much more careful should small islands, like ours, which are cannon fodder to such arrangements, be about avoiding that trap?
Smart administrations the world over are doing everything to attract businesses and investments. We know that in some states, cities are competing with each other to encourage big businesses to relocate there by offering serious tax and other concessions to sweeten profits.
Dr Phillips’ transfer pricing legislation will drive businesses out of Jamaica and scare those looking to come here into finding other less hostile locations to plant their businesses. It is not everything that is done overseas that should be transplanted to Jamaica without great care and preparation.
Transfer pricing issues are never clear-cut and are likely to involve lengthy and complex analyses of the contracts and transactions involved. Such a drastic change as will be required needs time and painstaking attention, given our fragile economy and peculiar historical and cultural contexts.
For this reason we find it hard to fathom the reckless haste to introduce such a far-reaching regime before the necessary consultations, training, staffing and other issues are complete to assist businesses to comply and to arbitrate the inevitable disputes. Indeed, interpreting the so-called arms-length principle is itself still evolving in other jurisdictions.
If the IMF will not take ‘no’ for an answer, the best scenario would have been to make the law effective in 2017 governing the tax assessment year 2016, thereby giving more time to sort out the mess we are getting ourselves in.
The retroactivity clause is a painful acknowledgement that Dr Phillips is not all he’s being made out to be.
