The Marshall Islands could see a revamp of a tax system that it has employed for more than a quarter of a century if the Nitijela (parliament) backs legislation recently introduced to the body, reports Islands Business.
The move for a tax change is being driven by donors, including as a condition for loans.
With the outgrowth of a joint government-business Tax Commission, the draft legislation aims to substitute the current business gross revenue tax for a net profit tax, change personal income taxes by eliminating taxes for low-income workers while raising taxes for high-income earners, and to eliminate import taxes and local government sales taxes with a value-added tax (VAT), which the legislation describes as a “consumption tax”.
Although five proposed tax bills were introduced just prior to the Nitijela closing its final session of 2012 in October, the sixth—income tax—was not included in the package.
It was expected to be introduced in late January. But the fact that it wasn’t included with the other bills has led to widespread speculation.
Some believe the reason is because it proposes to raise taxes from the current maximum of 12 per cent to 16 per cent on income over US$20,000. This is expected to be unpopular with the members of parliament who must approve all of the legislation for the tax overhaul to proceed.
At the same time, businesspeople involved in the drafting process in the 2010-11 period say while they agree with the need for changes to existing business taxes, which they say discourage growth and investment, they also say the Ministry of Finance and its consultants made objectionable changes after the joint government-private sector Tax Commission completed its work.
The Marshall Islands is ranked by the World Bank as a country in which it is increasingly difficult to do business. Lack of transparency, corruption, business legislation, and enforcement issues all contribute to this.
The World Bank’s annual publication “Doing Business” objectively ranks nations by the friendliness of their business environments. In the 2012 report, the Marshall Islands ranked 106. Five years earlier, the Marshall Islands ranked 87th.
“We are moving in the wrong direction,” said private sector members of the Tax Commission—Chairman Carlos Domnick, Vice Chairman Ben Chutaro, and members Phil Marshall and Jim McLean—in a published comment in December. By comparison, the two best nations in the region were Tonga and Samoa at 58 and 60, respectively.
“Introducing tax reform will help improve our rating,” they said, but they also listed many problems that need to be fixed in the proposed legislation.
In a five-week series of articles in the weekly Marshall Islands Journal in December, these four businesspeople presented an even-handed business view of the proposed changes. They strongly objected to the VAT rate, saying the 15 percent rate proposed violates a key point that guided the work of the Tax Commission.
“A founding principle of the Tax Commission was that the new taxes are to be revenue neutral,” said Domnick, Chutaro, Marshall and McLean.
“Taxes were not to increase but be more fairly assessed. We believe strongly in this. The 15 percent VAT rate represents a large increase. A problem with consumption taxes in general is that they disproportionately tax the poorest people in society who must live paycheck to paycheck (or without a paycheck).”
The four Tax Commission business representatives endorse the planned switch from gross revenue tax (GRT) to a net tax for businesses. They identified issues needing correction, but say: “The implementation of business income tax to replace GRT for the largest companies will benefit us all despite some expected and minor teething problems.”
They strongly urged eliminating a proposed new tax on airline and shipping companies. “There is a surprise tax in the legislation that was never discussed while we were developing our recommendations,” they said.
“The justification appears to be that it is done in the United States (and elsewhere). The adequacy of air and shipping services to the Marshall Islands cannot be compared to the US. The reality is that these companies would just surcharge us as customers, thus increasing our already high costs of service.”
While these four businessmen who were on the Tax Commission support a tax overhaul, others in the business community believe the proposed new system is too complex for the government to manage—given difficulties in implementation of the current, relatively simple system—and will require onerous paperwork from local businesses.
This discussion and the public hearings the Nitijela is expected to hold on the proposed legislation later in its session that will likely be ongoing into March, is being held against a backdrop of an ongoing takeover of the local economy by Asian businesses that are going up weekly as Marshallese-owned businesses are on the decline.
Combined with this have been long-expressed concerns by businesspeople about rampant smuggling and weak government tax enforcement.
It is unclear whether the parliament’s public hearing on the multiple pieces of tax legislation will prompt a debate about the directions the country is taking. What is clear is even supporters of the tax revamp have pointed out numerous problem areas that need to be fixed if the tax package is to gain legislative approval. The question remains whether the concerns of local businesspeople or plans pushed by donors will carry the day.