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VAT Planned In Palau Tax Reform Bill

by Mary Swire,, Hong Kong

08 May 2014

The International Monetary Fund (IMF) has recommended that Palau, a western Pacific Ocean island, should concentrate on its plans to enact a comprehensive tax reform bill, which is likely to include the introduction of a value-added tax.

After two years of strong expansion, the IMF expects growth in Palau to have stagnated in the fiscal year 2013, which ended in September, owing to a decline in infrastructure construction and tourism. Nevertheless, growth is projected to increase to 1.75 percent of gross domestic product (GDP) in FY2014, and to up to 2.5 percent over the medium-term, driven by a recovery in the same sectors.

Palau's fiscal deficit is estimated to have remained unchanged at 12.25 percent of GDP in FY2013. Tax revenue continued to rise thanks to increases in tourism-related taxes, higher prices in the tourism industry, and improvement in tax compliance, but current spending was larger than budgeted due to natural disasters.

The current fiscal deficit is projected to narrow by 1.5 percent of GDP in FY2014, as the Government intends to replenish its reserve fund by containing spending and through additional revenue gains that are expected with the adoption of a new customs administration IT system, a recent increase in the tobacco tax, and the recovery of tourism.

However, it is also known that a more substantial fiscal adjustment will be needed to ensure long-term fiscal sustainability, in view of the expiration of Compact of Free Association grants from the United States in FY2024. Revenue collection currently is said to rely too heavily on the "volatile and vulnerable" tourist sector.

The IMF has therefore encouraged the Government to build up the country's fiscal buffers, and welcomed its commitment to enact, as soon as possible, a comprehensive tax reform bill, which could promise a significant increase in budgetary resources.

The bill is expected to meet all of the recommendations made by the IMF/Pacific Financial Technical Assistance Centre (PFTAC): to move to cost, insurance, and freight (CIF) valuation of imports for tax purposes; the replacement of the gross revenue tax with a single rate value added tax, with no exemptions except for exports, which could be in place in 2015-16; reduce the wage and salary tax rates for low income households to offset any price increases from the adoption of VAT; and raise the net income tax (NIT) for financial institutions, which will be expanded to all VAT-registered businesses.

If all these measures are implemented in full, the IMF forecasts that domestic tax revenue could grow by about four percent in the period to FY 2019. The PFTAC has offered technical assistance to the territory to support the preparation of legislation to introduce a VAT.

TAGS: individuals | compliance | tax | economics | business | value added tax (VAT) | tax compliance | fiscal policy | gross domestic product (GDP) | budget | corporation tax | Palau | United States | tax reform | construction | individual income tax | Tax

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