Market stakeholders are making the case that the Government of Jamaica should rethink its stance on a planned phaseout of corporate tax benefits allotted to companies on the Junior Market of the Jamaica Stock Exchange (JSE).

Last Thursday, the Exchange grabbed the world’s attention with its number one ranking – by performance — among 92 markets tracked by Bloomberg.

Investors and market specialists said Monday that the government itself would benefit from keeping incentives on the Junior Market on which some 20 equities — nearly one half of the combined market — are now listed, instead of the planned phase-out of all corporate tax relief.

The corporate incentive benefit was slashed under recent legislation from 10 to five years, with further plans to phase out the award of tax breaks by the end of this financial year — March 31, 2016.

According to Devon Barrett, General Manager of VM Wealth: “I think the GOJ should reconsider the plan to discontinue the tax break afforded to new JSE Junior Market listings for the reason including the fact that tax credits allow for re-investment to improve profitability. Under the current JSE Junior Market structure, companies pay no corporation tax for the first five years of listing, after which they pay this tax at the full rate. Companies benefit by using this period to reinvest the tax benefit into revenue-generating and cost-saving activities, and this results in more profits. These profits can then be redeployed in the business in order to cover the early working capital needs of the company and enhance its growth. It is then expected that after five years, these companies will increase their annual profits and will start paying taxes on higher profit levels — which should more than make up for the tax breaks received earlier.

“For example, LASF had pre-tax profit of $14.96 million for the year ended 2010 when it was listed on the Junior Market. Pre-tax profits have now grown to $191.07 million for the year ended March 2015 – a 1,273 per cent increase over the period 2010 to 2015. Therefore, the company will pay significantly more corporation taxes than it did prior to listing.”

JSE General Manager Marlene Street-Forrest noted that based on the Fiscal Incentives (Miscellaneous Provisions) Act 2013, the incentive is slated to end March 31, 2016. “It means, therefore, if a company listed on the 31st of March 2016, it would have this incentive through to the end of February 28, 2021. Therefore if there is no change of heart, the incentive will end in 2021.”

She stated that if the government does not reconsider changing its mind and lengthen the period, the benefit will therefore no longer be available to new SMEs seeking to list.

“Government enjoys revenues in the form of Securities Commission Fees every day that there are trades on the Exchange along with the other positives as increasing employment taxes and general consumption taxes. It is therefore counter-productive not to reconsider this decision in light of the fact that there is more fiscal space now,” Street-Forrest stated.

“The incentive was designed in order to induce and spur action in respect to growth and development. It has succeeded in doing this as is demonstrated by the level of employment, other taxes gained from these companies. Why destroy something which provides hope and can be used effectively as part of the growth inducement plan? And most importantly, it helps the small and medium-sized businesses. Shouldn’t that be the concern of any government to propel the SMEs?” Street-Forrest asked.

The Junior Market arrangement introduced in 2009 was a full-income tax holiday for five years and a half-income tax holiday for the next five years. It also included an exemption from tax on dividends or other distributions by Junior Markets and relief from transfer tax and stamp duty on transfers of shares in JSE Junior Market companies.

If a company exceeded its maximum market capitalisation of $500 million, it was expected to list on the main JSE Board. Additionally, if it delisted within 15 years of being listed on the combined exchanges, it would be required to repay Government the tax benefits enjoyed during the incentive period.

In late 2013, the GOJ introduced a transition period for the phasing out of the special scheme of income tax incentives which Finance Minister Dr Peter Phillips said would provide “a more competitive tax environment for businesses across the board”.

Companies listed on the exchange prior to January 1, 2014 continue to enjoy the old benefits for the remainder of their unexpired incentive period. Between January 1, 2014 and March 31, 2016, companies that list on the Junior Market will be entitled to enjoy full relief from income tax for only five years from the date of listing.

Barrett of VM notes that with the tax break, companies will need to hire more employees as they increase their business activities. These employees will be liable for income taxes and will have more purchasing power, which increases the GOJ’s tax base and results in a multiplier effect on economic growth.

He said JSE Junior Market listed companies are able to increase their business activities and in the process purchase goods and services from the rest of the economy. This leads to higher tax payouts for GCT, import duties and other non-corporation taxes.

“For example, Lasco Distributors, a major importer of goods for local distribution, has grown revenue from $5.8 billion for the year ended March 31, 2010 to $11.1 billion for the same period ended 2015 – a 90 per cent increase. This growth has led to higher non-corporation tax payments to the GOJ.”

Barrett said growth in the market capitalisation of the JSE Junior Market listed companies will increase the wealth of shareholders. These shareholders will now have more spending power and can use their new found wealth for other investment activities generating more taxes for the GOJ.

“For example, in 2009 AFS raised $100 million in the market for 20 per cent of the company. By 2015, the value of that stake had increased to $878.4 million. Additionally, over the same period investors have also gained from significant dividend payouts. These investors have significantly increased purchasing power and will spend some of the funds and incur GCT and other taxes.”

Don Wehby, Group CEO of GraceKennedy and a former Senator and Minister without Portfolio in the Ministry of Finance and the Public Service, in his original proposal for the Junior Market said other countries have had notable successes in the establishment of Junior Markets, namely the London Stock Exchange junior market – with its Alternative Investment Market (AIM); and the Toronto Stock Exchange junior market – Venture X. “These junior markets allow investors to put capital into legitimate small- and medium-sized companies that are listed. The fundraising and development activities of the listed investment securities have demonstrated their ability to grow the local economy by creating established and transparent businesses, jobs and ultimately, economic confidence,” said Wehby.

Professor Densil Williams, Principal, Mona School of Business, told the Jamaica Observer, “I think the tax benefits are critical in helping small firms to upgrade their plants and expand capacity. This can only augur well for the growth of the economy. It is critical, however, that tax benefits are accompanied by some clear performance criteria which the firms will have to adhere to.

“One such criterion is the generation of jobs. Firms that receive tax benefits must be required to generate a certain number of jobs. The tax benefits must be used for the national good and not the private benefits of individual investors.”

Up to press time, questions sent to the Ministry of Finance and Planning for an update on the tax incentive regime were not answered.