VCCI stand to Vanuatu Revenue Review Committee

The Vanuatu Chamber of Commerce and Industry (VCCI) position on Personal Income Tax (PIT) and Corporate Income Tax (CIT) is outlined in the report Vanuatu Revenue Review, Consultation Feedback of Vanuatu Chamber of Commerce and Industry of November 2016. This analytical study report was submitted formally to the National Revenue Review Committee in a letter dated 25 November 2016 addressed to the Chairman of National Revenue Review Committee, Ministry of Finance and Economic Management. A letter of reminder on this matter was forwarded to the Chairman of National Revenue Review Committee on 1 March 2017. So far, VCCI has not yet received any reply in an official printed written format to its submission. The content of VCCI letter of 25 November 2016 is as follows.

“On behalf of the Vanuatu Chamber of Commerce members and particularly those who work in the International Financial Centre industry, we urge you to re-evaluate the proposed introduction of Personal and Corporate income Tax in Vanuatu. Proposed tax reforms would be absolutely detrimental to the Offshore Financial Centre (OFC) which plays a key role in attracting international businesses and foreign funds to Vanuatu. The financial sector is an essential part of our economy and contributes between two and three percentage points to GDP, providing stable income for a small with limited opportunities. With an active and competitive policy towards international business, tourism, real estate and several other field of investments, it nicely benefits GDP growth. There has been substantial benefits to the nations who have understood and supported the growth of their nation’s Financial Centre, their populations benefiting in a number of ways. We would therefore like to suggest alternative options for the tax reform which are better suited for Vanuatu.

Current Situation

Starting from 2018, Vanuatu will have to exchange information following the CRS (Common Reporting Standard).  Each country will annually automatically exchange with the other country the below information:

  •  the name, address, Taxpayer Identification Number (TIN) and date and place of birth of each Reportable Person:
  • the account number;
  • the name and identifying number of the Reporting Financial Institution;
  • the account balance or value as of the end of the relevant calendar or, if the account was closed during such year or period, the closure of the account.

Currently, Vanuatu is note able to share these details with OECD countries as such information is not being collected. While Vanuatu, like all other nations, has committed to participate, it does not have an income Tax Office and therefore does not have the means to collect such information from its own and foreign citizens residing in the country.

The OECD countries are well-aware of the current financial situation in Vanuatu, including the Volumes of Swift Transfers, currency movements, and inflows and outflows, as all of this is closely monitored by First World Countries. The volumes are relatively low and well within the expected range given the size of Vanuatu economy.

Global agenda of OECD countries

By implementing CRS globally, First World Countries aim to avoid a potential future situation where someone could use Vanuatu to transfer or hold funds. It has become the mission of OECD countries to convince Vanuatu Government that it must set up an Income Tax Office and start collecting and sharing the information with other nations, as intended by the CRS.

The decision to implement Income Taxation in Vanuatu is therefore not made independently, but is primarily guided by First World Countries. For instance, the goal of Australia is to implement Taxpayer identification Number system in Vanuatu and start collecting the data in order to share it annually to avoid any potential asset and wealth transfer from Australia (or any other OECD nation) to Vanuatu after 2018.

First World Countries do not want Vanuatu to benefit and are not concerned about Vanuatu wealth, our nation’s future and the interests of our people. The entire Vanuatu tax reform is based on making CRS system work globally at the expense of our citizens. TINs would have to be issued to all Ni Vanuatu residents aged 18 or older (it will effectively be a Social Security Number). This means that Vanuatu will have to bear the massive costs of issuing around 200 thousand of these numbers, just so that – 10 thousand of them could be monitored by OECD countries.

Tax reform decisions should be made independently

Vanuatu Government should primarily take into account the interests of Vanuatu, just like the US Government is looking at US citizens’ interests first. Vanuatu is ready to cooperate and to work with other nations to be a good planet citizen and participate openly to fight corruption, money laundering, crime, terrorism – as long as this is not affecting negatively the people of Vanuatu.

Vanuatu must decide independently, for its own national interest if Corporate Income Tax (CIT) and Personal Income Tax (PIT) is a positive policy and the best way to raise money for public expenditure. This decision should note be dictated behind closed doors by our neighbours and by First World Countries which have their own agenda instead of Vanuatu interests at heart.

Vanuatu does not need CIT and PIT system to achieve compliance and transparency

We agree that Vanuatu and all its financial institutions must be FATCA compliant, in line with CRS-2018. We also agree that we should have measures in place to show that we are monitoring our economy and cash flows within the country. However, introduction of CIT and PIT is not necessary to achieve these goals. The two subjects are often wrongly mixed up, and this can be demonstrated by the fact that none of the 18 countries with no PIT are on the FATF list of high-risk and non-cooperative jurisdictions except Vanuatu:

High-risk and non-cooperative jurisdictions: Countries with no PIT:
AfghanistanBosnia and HerzegovinaDemocratic People’s Republic of Korea

(DPRK)

Iran

Iraq

Lao People’s Democratic Republic

Syria

Uganda

Vanuatu

Yemen

AndorraAnguillaBahamas

Bahrain

Bermuda

British Virgin Islands

Brunei

Kuwait

Maldives

Monaco

Oman

Qatar

Saudi Arabia

St. Kitts & Nevis

Turks and Caicos

United Arab Emirates

Vanuatu

As shown in the table above, Vanuatu is not on FATF list based on its CIT or PIT legislation as it has nothing to do with it. Vanuatu will still be on the ‘grey list’ even after implementation of CIT and PIT as these subjects are not related.

Vanuatu has everything to lose and nothing to gain from introducing income taxes

The future of the Vanuatu Offshore Financial Centre is not clear. The offshore sector, directly and indirectly, represents a large share of economy, with around 5,000 registered institutions offering a wide range of offshore banking, investment, legal, accounting, insurance and trust company services. However, with the introduction of PIT and CIT, Vanuatu would lose its competitive position as a tax jurisdiction and the OFC could completely disappear. The OFC seems to be already written off by the Revenue Review committee without saying it out loud.

Bringing money from Offshore Financial Centre businesses positively contributes to our nation’s development as is not affecting the local economy while at the same time helps raise public revenues. While the taxes collected from the Offshore Financial Centre (OFC) businesses are relatively small and cannot be the main source of funding for our government, it would be irrational to completely dismiss them. In fact, modernizing the Offshore Financial Centre by following successful countries such as Cayman, Singapore, Hong Kong, BVI, Luxemburg, Belize, Jersey, Mauritius, Bermuda, etc. could bring a lot of additional revenues to the government from International Corporations, forex dealers, residency, and other sources.

There are a number of countries that are offering similar tax jurisdiction benefits to international businesses as it is wise to do so. It is a way to demonstrate a small nation’s independence and self-reliance as well as a tool to attract foreign investments and bring skilled talent who would otherwise not be there. Hundreds of expats living in Vanuatu are directly or indirectly related to the OFC. The setup has been in place in Vanuatu since 1970, and it should be protected and nurtured by the government. It should not be written off for nothing based on ideology of foreign advisers.

Strategic positioning

Vanuatu is currently one of the few countries that does not have formal TINs and does not collect income data on individuals and corporations. Within the next few years this could become a real asset for Vanuatu. This could help establish strong and unique strategic positioning as a tax jurisdiction by offering freedom and independence in a World which is closing down, and everything is becoming standardized and uniform. Such unique jurisdiction would help attract many new foreign investors in the coming years, potentially many more than we have seen previously.

Residential taxation VS Territorial taxation VS no personal income tax

Currently, Vanuatu is in the group of 18 countries and territories which do not impose Income taxation. On the other end of the spectrum, there is a large number of large and developed economies which have territorial Income taxation.

 

The proposition led by Australia specialists advocates for a tax regime that will directly move Vanuatu from one end of the spectrum to the other, without any consideration for our country size, tax jurisdiction positioning, and implications for the Offshore Financial Centre.

 

Residential taxation should not be considered

It is the current proposition to move Vanuatu from No Income Tax to the other end of the spectrum, by implementing a worldwide source tax (Residential taxation base).

If Vanuatu decides to implement Income tax, it should firstly move to a group of countries that tax only local income and not foreign income i.e. territorial taxation.

Territorial taxation is the “middle ground” between No Income Taxes and Residential taxation. It is implemented in a number of countries which are similar to Vanuatu: French Polynesia, Marshall Islands, Micronesia, Palau, Tuvalu, Singapore, Hong Kong, Seychelles and 25 others. Territorial taxation could one day be the first step to introduction of income taxes as it would not kill foreign investment and tax jurisdiction attractiveness overnight.

Conclusions and final recommendations

We strongly urge the Revenue Review Committee to reconsider Vanuatu tax system changes now proposed by foreign advisors.

The Vanuatu tax reform decisions are not being made independently – they are guided by First World Countries which do not have the interest of the Vanuatu nation as a priority. The reforms are not a good fit for our country and will negatively affect the people of Vanuatu.

We would like the Government to review alternative systems for raising public revenue. Modernizing the Offshore Financial Centre could help bring in additional public revenues. Together with other fiscal reforms such as raising VAT rate, reviewing business license and fees, and potentially introducing land value taxation, it would help bring the needed public revenues.

Strategy Labs of Europe has completed an independent study on Vanuatu taxation alternatives. It concludes that raising VAT to 17½% and other adjustments would raise more revenue than Income Tax and not scare off Foreign Direct Investment. This study can be downloaded from www.revenuereview.gov.vu Click on SUBMISSIONS then the first entry from the VCCI, which is entitled Vanuatu Revenue Review Feedback. Signed, Thomas Bayer, President of VCCI”

After struggling with the tropical cyclone Pam in 2015 and international airport runway infrastructure works in 2016, in 2017, all existing local businesses are currently planning an exit strategy to restructure their businesses with reduced employment, relocate overseas, or close down the business operations and cease to exist, to anticipate the negative impacts the introduction of Personal Income Tax and Corporate Income Tax would cause to the economy of Vanuatu. At the 5th Australia-Vanuatu Business Forum in Port Vila on 28 February 2017, it was anticipated that Foreign Direct Investment (FDI) trends in Vanuatu would drop following the introduction of Personal Income Tax and Corporate Income Tax in Vanuatu. It is also anticipated that goods and services’ prices would sharply increase to cover the costs of personal income tax and corporate income tax.

If Vanuatu is not yet ready for the introduction of Personal Income Tax and Corporate Income Tax to be paid by only 10,000 people out of a population of more than 280,000 people, what would be the options left for Vanuatu to pay for its national expenditure?

Vanuatu is to look for and focus on alternative tax options and strengthening its systemic commitment to free markets, friendly regulatory systems and very strong rule of law to finance its education, health, security, infrastructure development, foreign affairs, national debt, area council and provinces.

Vanuatu’s competitive advantage is to develop its economy, education, health, security, infrastructure development, foreign affairs, area councils and provinces, and pay its national debt by choosing this innovative step forward of no income tax, compared to regional Pacific Island countries.