Income Tax Position by Thomas Bayer – Representative of Private Sector

As the private sector representative on the Revenue Review Committee I wish to indicate my support of the VCCI proposals included in their submission to the Committee in preference to the recommendations of the Committee as a whole.

I acknowledge the need for modernisation of tax laws and administration in Vanuatu to help increase public revenues to support sustainable economic growth. However, at the same time, tax system adjustments should ensure overall efficiency and minimize market disruptions. Therefore it is important to have an open discussion among stakeholder groups about alternative means of reaching the goals and objectives set by the government.

There are two critical issues that needs to be highlighted with the current process of Review undertaken by the Government. The Review committee did not seek broad input during review process as consultations were presentation of decisions already taken by the Committee. The review process also lacked the involvement of independent economists to evaluate the implications of introducing income and corporate tax on the economy. Impact study should have been conducted and evaluated by at-least three independent economists to ensure transparency and well-informed decision making process.

I agree with the VCCI/VFCA and support the Guiding Principles suggested in the Consultation Paper put forward by the Revenue Review Team in September 2016. However, I also take the view that the proposed tax reforms are in conflict with most of these principles.

Key Issues – It is expected that the shortfall in potential revenue through proposed tax reform will be greater than that modelled by Revenue Review due to size of shadow economy (30-50% GDP of Vanuatu) leading to low compliance. In addition, introducing complex taxes will incur significant tax administration costs that are currently underestimated in the model by Revenue Review. Corporate income tax collection process would be inefficient as a large share of businesses would contribute insignificantly to corporate income tax collections while cost of administration would be borne by all tax-payers. The principle of equity and fairness is not accomplished by the proposed reforms as 97% of personal income tax burden would be borne by 9% of the working population. Furthermore, Foreign Direct Investment is expected to be severely hit as a result of the introduction of taxes leading to lower economic growth and employment rate.

Abolishing fees and charges will only benefit those who will no longer need to pay them and not the public at large. There will not be any material gain to the businesses as the introduction of income and corporate tax will increase cost structure of businesses. Reducing import duties will have little benefit on prices as businesses will increase prices to compensate for income tax and majority of reduced import duties will be retained by large retailers and importers. Income and corporate taxes are claimed to not be fair and effective because of their progressive tax rate structure, and the tax burden will be carried by only a small percentage of the population. Household data shows that majority of households spend all of their income on consumption, hence VAT is already progressive and easier to administer without causing any economic disruption and VAT ensures that everyone who purchases goods or services subject to VAT, contributes to government revenue.
Recommendations – In view of the above issues, I support the VCCI alternative proposal to augment government revenues. Increasing VAT rate to 17.5% and reducing 50% of the proposed offsets along with VAT exemptions on first necessity items would ensure comparable revenue inflow and progressivity. These measures supplemented by land value tax, reduction of import duties and sale of unproductive government assets will produce net proposed surplus similar to the model proposed by Revenue Review. In addition, the expenditure changes suggested by Revenue Review must be reconsidered.

Hidden Agenda –Revenue Review claims that the tax reform is focused around improvements to the financial system of Vanuatu and for funding public sector services. However, in reality, I agree with the VCCI that the reform is primarily driven by the hidden agenda of the Government and OECD countries. As Vanuatu is not collecting information regarding Tax Identification Number, transactions and balances of Vanuatu citizens, third parties are interested in pushing these reforms to acquire this information. Such a reform would be costly to implement, and not beneficial to Vanuatu. The benefits would be obtained by other countries through Common Reporting Standard system (CRS) without cost.

The future of Vanuatu’s Offshore Financial Centre is now clouded. With the introduction of personal and corporate taxes, Vanuatu would lose its competitive position as a low tax jurisdiction and offshore financial companies would completely disappear.

We hope that the arguments presented against the proposed tax reforms will be closely examined to facilitate an open public discussion of major concerns of stakeholder groups which are not being fairly represented currently.

This is the view taken by the Private Sector Representative on the Vanuatu Revenue Review Committee in relation to the introduction of an income tax, Thomas Bayer, President of Vanuatu Chamber of Commerce and Industry (VCCI). He supports the recommendations put forward by the VCCI in their formal submission and does not support the recommendations of the Vanuatu Revenue Review Committee in respect to the proposed income tax. VCCI has not yet received a reply from the Vanuatu Revenue Review Committee in response to its VCCI public proposal.