The Tax System of Jamaica countries and the US only authorize the deduction of interest from the tax base if any loan is not higher than 150% of the equity of the firm (these are called “thin-capitalization� rules). In some Latin American countries like Argentina or Mexico governments introduced a minimum income tax equal to 1 to 2% of the value of the asset of the firm. In some developed countries minimum income taxes attempt to ensure minimum revenue for the government.27 Taxes on assets have been highly controversial because firms have to pay taxes even in years where they lose money. This is not a solid argument because a project has to be evaluated in several years and if the income tax and the tax on assets are integrated (one is a prepayment of the other) a good system of carry forward of losses takes care of most of the problem. But when capital markets are not well developed and firms face difficulties to finance their losses the pressure to eliminate the tax on assets would likely find the support of politicians. An alternative is to introduce thin-capitalization and transfer pricing rules, facing their higher administrative costs. Taxation of capital gains. Capital gains are not taxed in Jamaica, except in cases where the assets are sold before they are fully depreciated. Many countries opt for a lower tax rate on capital gains or even to exempt them from taxation. There are several trade offs: a.
Different tax rates between normal profits and capital gains eases tax arbitrage movements that reduce revenues. This is an argument to apply the same statutory rate to all gains. However, capital gains for the purchase of shares have been usually taxed indirectly with the CIT at the firm level.
b.
If there is a decision to tax capital gains only real capital gains should be taxed. But this creates a bias against high-risk investments because for auditing reasons capital losses generally are not allowed to be deducted against ordinary income or former capital gains. Moreover, as it is very difficult to tax capital gains on accrual basis (at least from many assets) taxation of capital gains creates a bias to defer the selling of the asset because a lower tax in present value terms will be paid under realization of the gain.
Tax rate structure. Unlike most countries, Jamaica has a progressive PIT but with a flat marginal tax rate of 25%. The average tax rate for any taxpayer clearly increases with income because of the minimum exempt level that is approximately equal to one per capita GDP. This system is good defined. It is simpler than those systems with progressive tax rates and the minimum exempt level is higher than those observed in developed countries (e.g. about
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In the US the Alternative Minimum Tax forces firms and individuals to pay a lower tax rate on a restricted tax base so as to limit the tax break that any taxpayer can get. Switzerland and Canada are other examples of minimum taxes based on the value of assets or equity. The US administration has recently proposed to abolish the Alternative Tax.
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