INCOME TAX VANUATU and a bit more (a few thoughts.)
Vanuatu is an Island State and has similar problems as a land locked state but more-so it has to be understood that this geographic fact cannot be changed and therefore special consideration should be given to the ways that the country can survive and nourish under a tax regime and also be protected by selective tariffs to develop it Financial independence taking into account the difficulties of what being an Island state entails.
Recent world events have occurred with major first world economics reversing their income tax regimes this includes among other things, the exit of the U.K. from the EU and reduction of taxes eventually considering a similar tax haven approach, the Trump win in the USA where he has promised tax cuts by 50% with a corporate rate at 15%. He plans to stimulate the economy and to impose duty tariffs to bring jobs back to America and to get out of free trade agreements.
This has not just occurred in the U.S.A. but also since then, Australia and New Zealand have announced plans for large tax cuts as well. These actions have been made with two aims, one to stimulate development and the other to remain competitive in attracting investment.
This recent change in events has turned the financial policies of many western countries upside-down compared to their long pushed doctrine of imposing taxes on incomes and profits and places more emphasis on taxes like Vanuatu’s VAT. This change in policy contradicts the recent proposal for Vanuatu to introduce Income tax, rendering the arguments presented to impose tax empty, as the consultants themselves will now be faced with this in their own countries to adapt to a degree where Vanuatu is at the moment. Also, in the case of multilateral institutions, they will need to rewrite the International monetary philosophy.
The most effective way to increase government revenue and to maintain growth is to:
- Ensure all contribute to the VAT procedure which allows tax to flows on to all through the Reverse Multiplier System throughout the country. Many honest businesses comply with the VAT system but :
- Attention should be paid to those who blatantly avoid proper adherence through non-disclosure of sales avoiding VAT particularly for those businesses working on a cash basis.
- Better compliance and a modest increase in the VAT rate would give the government the additional revenue it needs while maintaining growth and investment.
The introduction of an income tax system to Vanuatu will lead to disinvestment.
VAT does not require massive numbers of staff or does it require professional help (to a degree) to do returns. A vital need though is for the Revenue Department to recruit compliance Officers who can read and write foreign languages other than Bislama, French and English.
The flow-on effect of the VAT system and the Development Incentives in Rural Areas
The cash economy and contribution to GDP in rural areas is vital to the country’s growth and is only stimulated by the wants of rural people. This means the incentive to produce comes from the desire to obtain something of need or luxury.
Such income comes from Copra, Cocoa, Kava, Coffee, Marine products, Agriculture and Services.
Rural people who have the means to do so, generally will produce enough cash flow to service their economic needs. If the cost of obtaining this includes VAT, then they contribute to Government revenue but also contribute to the country’s GDP through rural development and support the national economy.
Development of the rural economy and its contribution to the county’s GDP is a must for economic Independence. It is an essential element of developing the rural economy beyond subsistence living but at the same time not underestimating the need to be in partnership with the informal economy.
Therefore it is incorrect to say that the rural populace should not have VAT but instead pay Income Tax as that will not happen and that will further narrow the tax base and government revenues and push the tax burden back to urban societies only.
As a check on this, if the cost of imported goods such as rice as an example etc., becomes too expensive for a rural consumer, then they will then revert back to consuming local product such as kumala and other traditional root crops instead of rice. This can be the same case across the board such as fishing, local housing, and other activity in the informal non cash economy so the rural population will be no worse off relatively. The informal economy in itself is a vital part of, but an unmeasured contributor to the GDP.
Most businesses in Vanuatu are small and mainly are run by a one key investor and family members.
The compliance with all rules regulations including VAT and other licenses usually comes back to that one key person and the burden of administrative tasks that he or she has to do, in many cases outweigh the time spent on actually running the business.
In many cases, these jobs have been delegated to staff but not the responsibilities and considerable time has to still be spent ensuring all is correct. If income tax is introduced, this will again place a bigger burden on Management to the detriment of their business management.
Another important point is that for income tax for businesses, it is expected that most companies in Vanuatu make large profits. That is definitely not the case for most small to medium businesses run only on break- even levels and even at losses where they only survive with the owners borrowing money to keep them afloat. This means that there would be zero income for the government with corporate tax in these cases which is the majority with a few exceptions for those with monopolies and well- founded control over brands.
It must be recognized and realized that Vanuatu is a small developing country and cannot be expected to take on first world larger economy systems which require a lot of man power and support costs to service them.
Also their economies and tax systems are based on paid employment of most of their population with the aim of having less than 10% only out of work. Whereas Vanuatu only has a small percentage of the population in paid employment with around 80% of the population in rural areas with little or no paid employment.
As mentioned beforehand, these first world countries are now cutting back on their tax regimes and Vanuatu should question why in relation to the push to introduce Income Tax and Profits Tax here.
Another factor restricting growth in some countries is the effect of Free Trade Agreements like the MSG and Pacer Plus trade agreements. The only real benefits which flow from this are to the larger countries in the group i.e. with the former Fiji and Papua New Guinea and with the latter Australia and others in that proposed loop.
The situation is like this; in the case of MSG trade agreement, those countries have larger populations compared to the other smaller members. Also they have had the advantage of being able to develop businesses which have passed the critical level of production to be sustainable, have satisfied their domestic markets, and are in a position to sell (or dump) excess capacity to other member countries taking advantage of duty free import status.
This may look good at first sight but in affect precludes smaller states being able to reach the stage of developing their own industries and surviving to grow within, if local production efforts are faced with cheaper imports from the larger members.
This example can be extended to the effect of larger agreements with metropolitan Powers or subscription to International Trade Agreements but Vanuatu must look at its current level of development where it needs to have some tariff protection for both to raise revenue and on the other hand assist in growing locally based businesses within the country.
Whilst cheaper imports in the short term may look good, it can delay domestic production of certain items and shackle small countries forever to be just consumers without entrepreneurs being able to develop under the umbrella of a selective tariff regime that will keep them in business until the domestic market volume gets to the stage where it can invest and stand on its own feet and compete with imports.
These arguments support the maintenance of selective import duties to encourage infant industries which can be developed over time and also gives the government revenue as well.
So in conclusion, thoughts are, forget about income tax, sharpen up and broaden compliance with VAT and be very cautious with trade agreements.
VCCI wishes to remind local businesses that there will be a Meeting on PACER-Plus Trade Agreement, MSG TA3, China Trade Agreement with Pacific Island countries including Vanuatu, and Vanuatu New Caledonia Trade Agreement, at VCCI in April 2017. Any manufacturers, exporters, any businesses of any economic industry sectors including services, and all businesses interested to hear more about these trade agreements PACER-Plus Trade Agreement, MSG TA3, China Trade Agreement with Pacific Island countries including Vanuatu, and Vanuatu New Caledonia Trade Agreement and ask their questions, are welcome to come to VCCI to attend this meeting on Thursday 20 April 2017 at 3pm. You can confirm your attendance and get more information on PACER-Plus Trade Agreement by contacting VCCI at 27543 or by email firstname.lastname@example.org