## IMF TA Mission Report — Maldives (content unit 1mdvea2019003)

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### Mission and Executive Summary
- Mission: IMF technical assistance mission visited Malé, the Maldives from February 4-15, 2019.
- Mission composition: Shafik Hebous (head), Lee Burns, and John Norregaard (Fiscal Affairs Department experts).
- Purpose: Review tax policy in the Maldives and identify reform options to support efficiency, equity, and revenue.
- Key observation: Absence of a broad-based personal income tax (PIT) generates revenue leakages and significantly diminishes the role of tax policy in income redistribution.
- Recommended income tax architecture (package):
  - Employment income: a moderately progressive tax scale with two non-zero rates: 10 percent and a top rate of 15 percent (15 percent equal to the Business Profit Tax “BPT” rate).
  - Capital income of individuals: a uniform tax rate of 10 percent, equal to the first non-zero employment income tax rate and equal to the cross-border withholding rate on all capital income.
  - Simplified presumptive tax regime: a uniform turnover tax for small businesses below the GST threshold, e.g., a rate of 3 or 4 percent.
  - BPT rates: unify BPT rates at 15 percent, including for banks and foreign income.
- Preliminary estimated impacts:
  - Recommended PIT reform can raise total tax revenues in the Maldives by about 4 percent.
  - The reform lowers the Gini coefficient from 0.59 to 0.58.
  - Estimated distribution: about 60 percent of the PIT (including the presumptive tax) will be paid by the high-income group (top decile).
- Short-term to long-term integrity and base protection measures:
  - Adopt up-to-date anti-tax avoidance measures and repeal tax concessions.
  - Gradually harmonize GST rates and consider the potential for a recurrent property tax.

### Fiscal Context and Tax Structure — Key statistics and concentration
- Macroeconomic/fiscal:
  - Tax-GDP ratio: about 19.3 percent in 2018.
  - Budget deficit: 4.8 percent.
- Revenue concentration and main tax sources:
  - GST raises more than 48 percent of total tax revenues; most GST is from the tourism sector alone (30.5 percent of total tax revenues).
  - Business Profit Tax (BPT): 18 percent of total tax revenues.
  - Import duty: 19 percent of total tax revenues.
  - Green tax (a tax on tourists of 6 US dollar per night): generates 5 percent of total tax revenues.
- GST specifics (Table 3 figures preserved):
  - Tax rate, %: Non-Tourism GST 6.0, Tourism GST 12.0.
  - Revenue, million MVR: Non-Tourism 2,683 (39.0% of total), Tourism 4,199 (61.0% of total), Total 6,882.
  - Tax/GDP-ratio, %: Non-Tourism 3.6, Tourism 5.6, Total 9.2.
  - Taxable sales, million MVR: Non-Tourism 44,717 (56.1% of total), Tourism 34,992 (43.9% of total), Total 79,709.
  - Average rates, %: Non-Tourism 6.0, Tourism 12.0, Total 8.63.
  - Revenue per %-point of rate, million MVR: Non-Tourism 447 (56.1% of total), Tourism 350 (43.9% of total), Total 797.
  - Number of taxpayers: Non-Tourism 11,567 (85.8% of total), Tourism 1,912 (14.2), Total 13,479.
- GST—other:
  - Present standard GST rate: 6 percent; tourism sector rate: 12 percent.
  - Average (weighted) tax rate: about 8.6 percent.
  - GST revenue: 9.2 percent of GDP.
  - GST registration threshold: turnover level of MVR 1,000,000.

### Strengthening Tax Policy Making and Institutional Arrangements
- Findings on regulation and rulings:
  - Three legal sources: primary tax law (BPTA and GSTA); regulations under primary law; tax rulings under the Tax Administration Act (TAA).
  - Under current TAA practice, tax rulings are binding on taxpayers; report recommends changing this practice.
  - In practice MIRA has prepared/implemented regulations and tax rulings on tax policy matters sometimes without MOF input.
- Recommendations (preserved verbatim):
  - Amend the tax laws to provide that regulations on tax policy matters are made by the MOF.
  - Regulations on tax policy matters should be prepared by the MOF with input from MIRA and oversight by the Attorney General’s Department.
  - Regulations should be amended by making a subsequent amending regulation rather than by a tax ruling.
  - Amend the TAA to provide that tax rulings are binding on MIRA but not on taxpayers.
  - Tax rulings on purely administrative and procedural matters should continue to be made by MIRA.
  - Tax rulings on tax policy matters should be made by the MOF with input from MIRA. However, such rulings could be formally issued by MIRA.
- Establishing a Tax Policy Unit (TPU):
  - TPU to be established in the MOF (can be integrated into Fiscal Affairs Department).
  - Initial TPU core team example size: 4 staff members.
  - TPU critical functions:
    I. Guide general tax design and associated public consultations.
    II. Perform revenue and economic impact analyses, including revenue forecasting and tax expenditure analysis.
  - Data access: TPU must regularly access anonymized MIRA data, National Bureau of Statistics HIES/census data, Maldives Monetary Authority data.
  - Legal requirement: annual publication of a tax expenditure budget required by law (production and use of tax expenditure estimates to be legally required and presented to Parliament by MOF, conducted by TPU).

### Personal Income Tax (PIT) — Design and impacts
- Rationale and architecture:
  - PIT should cover employment income, individual capital income, and business income of the self-employed.
  - Recommendation: Adopt a Dual Income Tax (DIT) combining:
    - a uniform relatively low rate on all capital income of individuals, and
    - a modestly progressive tax on labor income with a carefully chosen initial threshold.
  - Emphasize withholding mechanisms and avoidance of individual allowances/reliefs.
- Example viable tax scale for employment income (one option):
  - Income Bracket: 0 to 130,000 MVR — Marginal Tax Rate: 0 — “0 – bottom tercile of governmental salary distribution (i.e., the lowest 1/3 of the distribution)”
  - Income Bracket: 130,000 to 275,000 MVR — Marginal Tax Rate: 10% — “bottom tercile – approximately the 90th percentile of governmental salary distribution”
  - Income Bracket: > 275,000 MVR — Marginal Tax Rate: 15% — “top 10 tercile of governmental salary distribution”
- Distributional implications and examples:
  - First tercile of governmental salary distribution would not be subjected to tax (zero-tax bracket).
  - Using HIES data: the 75th percentile would fall in the zero-tax bracket; HIES may overrepresent low wage earners.
  - Threshold note: threshold for first bracket is below, but close to, Gross National Income (GNI) per capita (about MVR 146,000).
  - Example average tax rates:
    - Average tax rate for an individual at the top 5th percentile (salary MVR 400,000) would be 8.3 percent.
    - Average tax rate for an individual at the top 10th percentile (salary MVR 300,000) would be 6.1 percent.
  - Alternative approach: provide a tax credit instead of a zero-tax bracket to lower-end taxpayers while keeping a positive marginal rate from the first MVR.
- Revenue and distributional estimates (key results):
  - Pre-tax Gini coefficient (HIES): 0.59.
  - After-tax Gini coefficient (if recommended options implemented): 0.58.
  - Progressivity: about 60 percent of the PIT tax (including the presumptive tax) will be paid by the high-income group.
  - Estimated overall revenue impact of the PIT reform (including presumptive regime): revenue increase of approximately 650 MRV million (about 4.2 percent of total tax revenues collected in 2018).
  - Sectors related to tourism contribute about 40 percent of the total estimated PIT revenue.
- Caveats and next steps:
  - Estimates preliminary and sensitive to HIES quality and informality; detailed follow-up study by TPU or working group recommended before final design.

### Capital Income and Capital Gains Tax (CGT)
- Recommendation:
  - Introduce a uniform tax rate on all individual capital income including capital gains at 10 percent.
- Rationale:
  - Uniform capital tax prevents tax arbitrage, reduces portfolio distortion, and improves equity.
- CGT scope and taxable assets recommended:
  I. Immovable property located in the Maldives (ordinary meaning under Maldives law), including leases and other interests; include mining and petroleum rights. Exception: principal residence.
  II. Interests in entities where value is derived principally from immovable property in Maldives (indirect transfers).
  III. Shares and other interests in entities resident in the Maldives.
  IV. Options or rights over an asset referred to in I–III.
  - Exclude any asset already subject to the BPTA; business assets remain taxable under BPTA.
- Methodology:
  - Two approaches: periodic net basis or separate taxation of individual gains; simplest recommended is separate taxation at time of transaction.
  - Recommended CGT rate: 10 percent (align with capital income rate).
- Transitional rule:
  - Preferred option: valuation day approach (pre-CGT assets given cost equal to market value at commencement).

### Business Profit Tax (BPT), Presumptive Tax and Microbusinesses
- Current BPT features:
  - BPT rate: 15 percent on taxable profit.
  - Tax-free threshold: MVR 500,000 applies to all taxpayers (individuals and entities).
  - Cash basis election: individuals with total annual turnover less than MVR 3,650,000 can elect cash basis.
  - Loss carryforward: 5 years.
  - Notional rental deduction: optional 20 percent of gross rental income.
  - Bank profits tax: separate tax at 25 percent on banks.
- Distribution under BPT (2017 findings):
  - About 60 percent of firms are businesses with revenue below MRV 500,000 and these paid altogether only 1 percent of BPT revenue.
  - Among these firms (5,456 firms) only 69 firms had a positive tax liability.
  - The top 1.3 percent of firms (107 firms) paid approximately 75 percent of total BPT revenue.
- Presumptive tax recommendations:
  - Replace BPT with a uniform turnover tax for businesses below the GST registration threshold.
  - Suggested uniform rate: moderate, e.g., 3 or 4 percent.
  - Example at 4 percent: business with income MRV 275,000 would pay MRV 11,000; if costs are 25 percent, effective presumptive rate becomes 5.3 percent (11,000/206,250).
  - Microbusinesses (turnover below MRV 250,000): recommend subject to a flat registration fee rather than presumptive regime.
  - Legal persons and individuals providing professional services should remain taxed under BPT even if below GST threshold.
- Domestic BPT changes consequent upon PIT introduction (explicit recommendations):
  - Remove the MVR 500,000 tax-free threshold under the BPT.
  - Repeal the ceiling on deductibility of salary and wages and directors’ fees.
  - Integrate banks into the BPT rather than a separate Bank Profits Tax.

### International Taxation, Withholding, PE, and Anti‑Base Erosion Measures
- Source rules and gaps:
  - Current gaps: no taxation of dividends and interest paid to non-residents; limited sourcing rules for royalties and fees; uncertainty on taxation of gains on disposal of immovable property for non-residents absent PE.
  - Recommendation: impose a uniform cross-border withholding tax of 10 percent on dividends, interest, royalties, and management and technical fees (preserved verbatim proposal).
  - Recommendation: provide for taxation of gains derived on a direct or indirect transfer of immovable property located in the Maldives.
  - Align PE definition in the BPTA with the Maldives Model Tax Treaty and update for BEPS changes; consider a representative office exception; align scope of taxation of PEs with treaty provisions.
- Permanent Establishment (PE) issues:
  - BPTA PE definition narrower than Maldives Model Tax Treaty (omits services and insurance PE rules) and broader in other respects (no preparatory/auxiliary exception or independent agent exception).
  - Recommendation: align BPTA PE definition with Maldives Model Tax Treaty, including BEPS updates.
- Transfer pricing and service fees:
  - Cross-border related-party service fees, management and technical fees, and equipment leases are base erosion risks.
  - Recommendation: adopt transfer pricing legislation based on OECD guidelines and specify in Regulations that the OECD Transfer Pricing Guidelines (2017) apply.
  - Reimbursements should be treated for withholding purposes as having the same character as the underlying payment.
  - Apply the same arm’s length price for BPT purposes and for GST valuation when sales are to related booking companies.
- Thin capitalization and interest limitation:
  - TR-2018/B64 (revised by TR-2018/B68) limits interest deduction to a percentage of taxable income (initially 25 percent then increased to 30 percent).
  - Report recommends including a legislated thin capitalization rule in the BPTA and reviewing technical design; consider global ratio/group ratio options for MNEs.
  - Policy measure recommended: impose a 10 percent withholding tax on dividends and interest paid to non-residents; also consider withholding on interest paid to resident individuals to reduce domestic base erosion opportunities.
- Tax concessions and SEZs/FIAs:
  - Recommend repeal of the 5 percent concessional rate on residents deriving exclusively foreign income (remove concessional rate; tax foreign income at 15 percent BPT with credit for foreign tax paid).
  - Recommendation: repeal all tax concessions in the SEZ Act.
  - Recommendation: remove the option of including a tax exemption in a Foreign Investment Agreement (FIA); if retained, impose strict conditions including MOF consultation and approval/Parliament oversight.

### Tax Treaties — Policy, Baseline and Procedures
- Current treaty landscape:
  - Only tax treaty in force: United Arab Emirates (UAE).
  - Treaties under negotiation with Bangladesh, Hong Kong, Malaysia, Seychelles, and Singapore.
- Policy recommendations:
  - Develop MOF-led tax treaty policy and negotiating baseline; consider moratorium on negotiating tax treaties until after tax reform project concluded.
  - Baseline minimum contents to require:
    I. A positive rate of tax on dividends, interest, royalties, and management and technical fees.
    II. Taxation of indirect transfers of immovable property located in the Maldives.
    III. An anti-abuse rule.
  - Prepare a Tax Treaty Impact Statement before signing any treaty, including quantification of potential revenue loss.
  - Negotiating team: Ministry to lead with technical input from MIRA and possibly Foreign Affairs.
  - Consider revising Maldives Model Tax Treaty to include anti-fragmentation rule for services and construction PE inclusions.

### GST Policy, Exemptions, E‑Commerce, and Threshold
- GST reform priorities:
  - Short-to-medium term: gradual harmonization of rates (remove zero-rating except exports; increase the 6 percent rate as needed).
  - Medium-to-long term: introduction of a modern broad-based VAT at a uniform tax rate as overriding objective.
  - Preserve existing GST registration threshold (MVR 1,000,000) for time being.
- Exemptions and zero‑rating:
  - Restrict zero‑rating to exports and repeal all zero‑rating of domestic supplies.
  - Critically review and substantially narrow remaining exemptions to those critical to low‑income households.
  - Estimate revenue consequences of GST reform measures and expand direct social transfers to offset higher consumption prices.
- E‑commerce:
  - Treat digital products as services; adopt OECD International VAT Guidelines for locating B2C imported services.
  - Recommendation: set up internal working group (TPU and MIRA) to prepare reform plan and engage regional partners for coordinated approach.
- GST threshold justification (key points preserved):
  - Reasons to retain threshold: reduces compliance/admin costs; base highly concentrated among large businesses; voluntary registration exists; many below-threshold suppliers already contribute via input GST paid by purchasers.
  - Recommendation: keep the GST threshold at present nominal level for the time being.

### Property Tax Options and Implementation Roadmap
- Current partial property levies:
  - Stamp duty at 0.01 percent on registration of mortgages.
  - Tourism land rent tax: USD 8 per square meter; total revenue ~ MVR 1½ billion in 2017.
- Rationale for recurrent property tax:
  - Less distortive, progressive, immobile base, good for local revenues and land-use efficiency.
- Revenue formula and administrative sensitivity:
  - Revenue = Legal Tax Base × Tax Rate × Coverage Ratio × Valuation Ratio × Collection Ratio.
  - Illustrative example: with market value base $1,000 and tax rate 0.10, expected $100; with Coverage Ratio 0.70, Valuation Ratio 0.80, Collection Ratio 0.85, actual collected = $47.60.
- Suggested staging for Maldives:
  - Short-term: political decision; set up steering committee; seek TA; introduce simple area-based m2 tax for land in Male and tourist resorts with basic threshold; establish property registration.
  - Medium-term: extend m2 system to include buildings; build fiscal cadaster; develop valuation capacity.
  - Long-term: move to market-value-based property tax covering whole country when administrative readiness achieved.
- Recommendation: resist introduction of property transfer taxes due to pro-cyclicality, market distortion, and incentive to under-report transactions.

### EBITDA Rule and Design Issues (interest limitation)
- Context:
  - TR-2018/B64 limits interest deduction (initially to 25 percent of taxable profit before interest, tax, and capital allowances; increased to 30 percent under TR-2018/B68).
  - BEPS Action 4 recommends limiting net interest deduction relative to EBITDA with acceptable ratio range 10 percent–30 percent and inclusion of group ratio and carryforward rules.
- Main design issues to address (preserved verbatim):
  I. Meaning of interest.
  II. The calculation of EBITDA.
  III. The acceptable ratio.
  IV. The group ratio approach for MNEs.
  V. The carry forward of excess interest expense and excess interest capacity.
- Specific concerns and recommendations:
  - Clarify definitions of “interest” and “dividends” in the BPTA and interaction with the 6 percent interest ceiling and TR-2018/B64.
  - Prefer to include thin capitalization rule in BPTA rather than rely solely on rulings; review technical details of TR-2018/B64.
  - Consider a 30 percent fixed ratio in absence of group ratio; provide explicit carryforward rules for excess interest consistent with loss carryforward.
  - Given domestic base erosion risks, consider removing SME exception and use 30 percent where appropriate.

*Source: PREFACE, Executive Summary, and chapters/sections of IMF technical assistance mission report to the Maldives (mission dates February 4-15, 2019).*

### PREFACE ................................................................................................................

### PREFACE

### Mission and Participants
- An IMF technical assistance mission visited Malé, the Maldives from February 4-15, 2019 at the request of the Ministry of Finance (MOF).
- Mission composition: Shafik Hebous (head), Lee Burns, and John Norregaard (Fiscal Affairs Department experts).
- Meetings held with:
  - Ministry of Finance (MOF) led by Mr. Ibrahim Ameer (Minister of Finance); Mr. Ismail Ali Manik (Minister of State for Finance); Mr. Ahmed Saruvash Adam (Chief Financial Budget Executive); Mrs. Aishath Hasna Ahmed (Assistant Fiscal Executive); Mr. Arshad Jameel (Fiscal Affairs Department of the MOF).
  - Ministry of Economic Development led by Mr. Fayyaz Ismail (Minister of Economic Development); Mr. Abdulla Husaam (Under Secretary, President Office).
  - Maldives Inland Revenue Authority (MIRA): Mr. Yazeed Mohamed (Commissioner General of Taxation); Mrs. Asma Shafeeu (Director General for Planning and Development); Mr. Hassan Zareer (Deputy Commissioner General of taxation); Mr. Mohamed Ali Waheed (Deputy Director General); Mrs. Aminath Zumra (Deputy Director); Mrs. Fathimath Amaanee Khalid (Deputy Manager).
  - Private sector representatives including Maldives National Chamber of Commerce and Industries, accounting firms, Maldives Association of Tourism Industry, and the Guesthouse Association of Maldives.
  - National Bureau of Statistics (for access to the latest household survey data).
- The mission offered a workshop in Malé covering establishing a tax policy unit, tax design issues, and international tax matters including tax treaty policy.
- Special acknowledgment: Mr. Ahmad Naeem (Fiscal Affairs Department of the MOF) for mission support and meeting scheduling.

### Executive Summary Highlights
- Purpose: Review tax policy in the Maldives and identify reform options to support efficiency, equity, and revenue.
- Key observation: Absence of a broad-based personal income tax (PIT) generates revenue leakages and significantly diminishes the role of tax policy in income redistribution.
- Recommended income tax architecture: elements of a dual income tax comprising the following package:
  - Employment income: a moderately progressive tax scale with two non-zero rates: 10 percent and a top rate of 15 percent (15 percent equal to the Business Profit Tax “BPT” rate).
  - Capital income of individuals: a uniform tax rate of 10 percent, equal to the first non-zero employment income tax rate and equal to the cross-border withholding rate on all capital income.
  - Simplified presumptive tax regime: a uniform turnover tax for small businesses below the GST threshold, e.g., a rate of 3 or 4 percent.
  - BPT rates: unify BPT rates at 15 percent, including for banks and foreign income.
- Preliminary estimated impacts:
  - Recommended PIT reform can raise total tax revenues in the Maldives by about 4 percent.
  - The reform lowers the Gini coefficient from 0.59 to 0.58.
  - Estimated distribution: about 60 percent of the PIT (including the presumptive tax) will be paid by the high-income group (top decile).
- Short-term to long-term revenue and base protection measures:
  - Adopt up-to-date anti-tax avoidance measures and repeal tax concessions.
  - Gradually harmonize GST rates and consider the potential for a recurrent property tax.

### Fiscal Context and Tax Structure
- Macroeconomic and fiscal indicators:
  - Tax-GDP ratio: about 19.3 percent in 2018.
  - Budget deficit: 4.8 percent (and larger deficits in previous years).
  - Public debt carrying capacity remains weak and external financing of public investment is gradually declining.
- Revenue concentration and main tax sources (Figure 1 summary):
  - GST raises more than 48 percent of total tax revenues; most GST is from the tourism sector alone (30.5 percent of total tax revenues).
  - Business Profit Tax (BPT): 18 percent of total tax revenues.
  - Import duty: 19 percent of total tax revenues.
  - Green tax (a tax on tourists of 6 US dollar per night): generates 5 percent of total tax revenues.

### Reform Priorities and Process Strengthening
- Strengthen the role of the MOF in tax policy making and tax analytics:
  - Tax policy should be formulated at the MOF with a holistic view of the tax system, guided by policy objectives and economic analysis.
  - Amend tax laws so that regulations on tax policy matters are made by the MOF.
  - Establish a Tax Policy Unit (TPU) in the MOF and ensure institutional arrangements that enable the TPU to regularly access relevant data.
  - Require annual publication of a tax expenditure report by law to inform tax policy debate and enhance transparency.
- Regulatory and ruling practices:
  - Regulations should be amended by making a subsequent amending regulation rather than by a tax ruling.
  - Amend the Tax Administration Act (TAA) to provide that tax rulings are binding on MIRA but not on taxpayers.
  - Tax rulings on tax policy matters should be made by the MOF with input from MIRA; such rulings could be formally issued by MIRA.

### Key Recommendations (by timing)
- Short-term (S):
  - Amend the tax laws to provide that regulations on tax policy matters are made by the MOF.
  - Regulations should be amended by making a subsequent amending regulation rather than by a tax ruling.
  - Amend the TAA to provide that tax rulings are binding on MIRA but not on taxpayers.
  - Adopt a transfer pricing legislation based on OECD guidelines.
  - Include the limitation on interest deductions in the law.
  - Impose a uniform cross-border withholding tax of 10 percent on dividends, interest, royalties, and management and technical fees.
  - Provide for the taxation of gains derived on a direct or indirect transfer of immovable property located in the Maldives.
  - Align the PE definition in the BPTA with the definition in the Maldives Model Tax Treaty, including updating for BEPS changes.
  - Repeal all tax concessions from the SEZ Act.
  - Remove the option of including a tax exemption in a Foreign Investment Agreement (FIA).
  - Repeal the basic allowance of MV 500,000 (listed as S-M in package items but the action itself is a near-term reform element).
- Short- to medium-term (S-M):
  - Establish a TPU in the MOF and ensure institutional arrangements that enable the TPU to regularly access the relevant data.
  - Introduce a moderately progressive tax scale on employment income (salaries and benefits) with elements:
    - zero-tax bracket (e.g., for the first tercile of income distribution),
    - 10 percent rate,
    - 15 percent rate (e.g., for the top 10th decile of income distribution).
  - Introduce a uniform tax of 10 percent on all individual capital income.
  - Maximize the use of withholding mechanisms and avoid providing deductions.
  - Introduce a presumptive tax regime with a uniform turnover tax at a rate of 3 or 4 percent for businesses below the GST threshold.
  - Apply the standard BPT rate (of 15 percent) on banks and foreign income.
  - Impose a uniform cross-border withholding tax of 10 percent on dividends, interest, royalties, and management and technical fees (also listed under S).
  - Gradually harmonize the GST rates by removing the zero-rating (except for exports) and increasing the 6 percent rate.
  - Preserve the existing GST threshold.
  - Review and improve the policy of negotiating tax treaties.
- Long-term (L):
  - Consider introducing a recurrent property tax.

### International and GST Policy Priorities
- International tax:
  - Update the tax system to cope with recent international developments to safeguard revenues.
  - Address gaps in the base for taxing non-residents and strengthen rules on permanent establishments (PE).
  - Tackle international tax avoidance through transfer pricing rules, limitation on interest deductions, uniform withholding rates, and aligning domestic PE definitions with treaty-language and BEPS updates.
  - Review tax concessions, including those under SEZ and FIAs, and repeal concessions that erode the tax base.
  - Review and improve tax treaty negotiation policy and the Maldives Model Tax Treaty.
- GST:
  - Strengthen the GST to raise revenues in the short- to medium-term.
  - Gradually harmonize GST rates by removing zero-rating (except for exports) and increasing the 6 percent rate.
  - Preserve the existing GST threshold to balance administration and compliance burdens.
  - Consider VAT treatment for e-commerce and review exemptions and zero-ratings to improve revenue and equity outcomes.

### Analytical Gaps and Next Steps
- A detailed follow-up study of the impact of a proposed PIT reform should be conducted (e.g., by the TPU) to guide design choices and assess distributional and revenue impacts accurately.
- Implementation sequencing: strengthen MOF role and TPU and update international tax rules and GST settings in the short- to medium-term; consider property tax reform in the long-term.

*Source: PREFACE and Executive Summary of the IMF technical assistance mission report to the Maldives (mission dates February 4-15, 2019).*

### 2.   While important measures have been taken since 2011, there is significant scope

### 2.   While important measures have been taken since 2011, there is significant scope

### Reforms since 2011 and current revenue structure
- In 2010, the Maldives Inland Revenue Authority (MIRA) was established.
- In 2011, two new taxes were introduced: the BPT (top rate of 15 percent) and the GST, whereby the latter in lieu of a sales tax.
- The main revenue raising strategy since 2011 has been gradually increasing the top GST rate from initially 3.5 percent to currently 12 percent.
- There is no tax on employment income in the Maldives.
- Numeric items presented in the source (preserved verbatim):
  - 30%
  - 18%
  - 19%
  - 4%
  - 18%
  - 5%
  - 4%
  - 2%
  - GST on tourismGST OthersImport dutyBank profit tax
  - Business profit taxGreen TaxAirport service chargeOthers

### Report scope and structure
- The report reviews:
  - overall design of the tax system and tax policy reform options for the Maldives.
  - role of the Ministry of Finance (MOF) in tax policy formulation (Section II).
  - income taxes including potential for introducing a PIT and improving the existing BPT (Section III).
  - robustness of the system to international tax base erosion (Section IV).
  - tax treaty policy (Section V).
  - GST (Section VI).
  - primer on property taxes in the Maldivian context (Section VII).

### II. STRENGTHENING TAX POLICY MAKING — Preparation of Regulations and Tax Rulings
Findings:
- Three legal sources under Maldives tax laws: (i) primary tax law (BPTA and GSTA); (ii) regulations made under the primary tax law; and (iii) tax rulings made under the Tax Administration Act (TAA).
- TAA prescribes that tax rulings are binding on taxpayers, a departure from international practice where rulings are administrative guidance.
- While Tax Acts are passed by the People’s Majlis, the executive arm prepares and implements regulations and rulings. Currently this is done by MIRA, which is established as an independent body that reports directly to the People’s Majlis.
- Under the TAA MIRA’s powers relate to administrative and procedural matters; MIRA’s powers in relation to tax policy are limited to: (i) providing technical input into the making of tax policies as required by the Government; and (ii) implementing tax policies developed by the Government.
- The TAA provides for a clear separation of powers: MOF develops tax policies and MIRA implements them.
- In practice, MIRA has prepared and implemented regulations and tax rulings on tax policy matters, sometimes without MOF input, due to how regulation-making power is framed in tax laws and absence of a tax policy unit in MOF.
- The composition of the MIRA Board lacks a MOF representative; many comparator countries include MOF representation to facilitate policy implementation.
- The Constitution allows delegation of regulation-making power; both the BPTA and GSTA delegate regulation-making power to MIRA.
- Some provisions in tax laws require regulations involving policy matters (e.g., GSTA: exempt supplies; BPTA: deductions).
- There is potential conflict between provisions requiring regulations on tax policy matters and MIRA’s limited tax policy powers under the TAA.
- TAA empowers the Commissioner General (CG) to issue tax rulings for two purposes: (i) to amend the regulations; and (ii) to establish principles required for implementation of tax laws and regulations. Both types of rulings are binding on taxpayers.
- Use of tax rulings to amend regulations is uncommon internationally and lacks the same oversight as regulations (no required consultation with Attorney General’s Department or MOF).
- Example: TR-2018/B64 (revised by TR-2018/B68) on Thin Capitalization purports to limit deduction for interest expense:
  - Interest is fully deductible under the BPTA provided that: (i) it is incurred wholly and exclusively for the purpose of producing income; and (ii) the rate of interest does not exceed 6 percent.
  - TR-2018/B64 limits interest deduction to 25 percent of the taxable income of the taxpayer before interest, tax, and capital allowances; recently increased to 30 percent under TR-2018/B68.
- Two issues with tax policy rulings like TR-2018/B64 being made by MIRA: (i) legality of the ruling; and (ii) appropriate body to make the ruling. The subject matter is clearly tax policy and under the TAA tax policy is a MOF responsibility.
- Rulings should be limited to procedural and administrative matters (example: CG discretion to grant extension of time under section 81 of the TAA).
- Interpretive rulings are important for self-assessment; interpretive rulings should be binding on MIRA so taxpayers can self-assess, but as an administrative matter rulings are not normally binding on taxpayers.
- Interpretive rulings inevitably raise tax policy issues and therefore should be made by MOF with technical input from MIRA; formal issuance could continue to be by MIRA but process should shift to the TPU.

Recommendations (preserved verbatim):
- Amend the tax laws to provide that regulations on tax policy matters are made by the MOF.
- Regulations on tax policy matters should be prepared by the MOF with input from MIRA and oversight by the Attorney General’s Department.
- Regulations should be amended by making a subsequent amending regulation rather than by a tax ruling.
- Amend the TAA to provide that tax rulings are binding on MIRA but not on taxpayers.
- Tax rulings on purely administrative and procedural matters should continue to be made by MIRA.
- Tax rulings on tax policy matters should be made by the MOF with input from MIRA. However, such rulings could be formally issued by MIRA.

### II.B Establishing a Tax Policy Unit (TPU)
Findings and design:
- A TPU should be established and located in the Maldivian MOF, accompanied by the reorganization of responsibilities between MOF and MIRA.
- TPU can be integrated into the Fiscal Affairs Department of the MOF and can initially comprise a small core team (e.g., 4 staff members) with potential to expand as technical capacity develops and financing permits.
- Two critical initial TPU functions:
  I. Guide general tax design and associated public consultations — guide tax policy reform, produce objective analysis of tax options, and explain economic rationale behind tax policy changes and legislation.
  II. Perform revenue and economic impact analyses, including revenue forecasting, tax expenditure analysis, economic and revenue impact of a proposed tax reform including a distributional analysis.
- Other functions to grow over time: (i) initiate, participate, and oversee policy content during legal drafting processes (drafting may initially be assigned to Attorney Generals’ Office with growing TPU involvement); (ii) contribute to international tax commitments and obligations by assessing impact of implementing international minimum standards for corporate income taxation and supporting negotiation teams for tax treaties.

Data and coordination:
- TPU must be able to access relevant data regularly, including from MIRA (e.g., anonymized taxpayers data disaggregated at the needed level), National Bureau of Statistics (e.g., household survey and censuses data), and Maldives Monetary Authority (e.g., data on international cross-border dividends flows).
- Close coordination between MIRA and the TPU (and generally MOF) is key. A Task Force Team comprising selected staff from the TPU and MIRA can be established to regularly discuss tax measures (including income tax reform, international tax issues, the GST, and data exchange).
- Annual publication of a tax expenditure budget should be required in law to inform tax policy debate and enhance transparency.
  - Tax expenditures measured as deviations from a baseline “benchmark tax” system, and are as important for the overall financial position of the government as outlay expenditures.
  - A tax expenditure estimate is not a revenue estimate; it reflects the amount by which tax liability is reduced due to a specific tax provision and does not include any behavioral response.
  - Production and use of tax expenditure estimates should be legally required and presented to Parliament by the MOF (conducted by the TPU).
  - Examples of tax expenditures in the Maldives include zero-rated goods for the GST. Tax expenditures should be incorporated into the budget process.

Recommendations (preserved verbatim):
- Establish a TPU in the MOF.
- Ensure institutional arrangements that enable the TPU to regularly access the relevant data.
- Require in the law the annual publication of a tax expenditure budget to inform the tax policy debate and enhance transparency.

### III. INCOME TAX — Background
Findings:
- The Maldivian Government has expressed strong interest in introducing a modern, broad-based PIT to support stronger equity and general revenue raising.
- Existing tax system does not tax employment income (salaries or benefits), but includes a very narrow element of a PIT on income of the self-employed.
- Under the BPTA, business income of individuals is subject to a tax of 15 percent, but with a basic allowance of MVR 500,000.
- A proposed Personal Income Tax Bill was rejected by the parliament in 2011, and a new proposal for an income tax is expected to be made in the short-term, possibly in 2019.
- The lack of a PIT has generated incentives for the self-employed to characterize income as salaries rather than business profits. A cap on deduction of salaries of owners of self-employed businesses has not completely resolved this issue.
- The system’s capability to redistribute income is very limited due to non-taxation of some income sources and complex taxation of small businesses, adversely affecting revenues and limiting policy scope to address income inequality.

Box 1 — Summary of the Rejected 2011 Personal Income Tax Bill (preserved verbatim)
- The personal Income Tax Bill proposed a progressive tax scale on all sources of individual income (salaries, capital income, and business income) as follows:
  - Income Bracket Marginal Tax Rate
  - 0; 360,000 MVR 0
  - 360,000; 720,000 MVR 2.5%
  - 720,000; 1.2 million MVR 6%
  - 1.2 million; 1.8million MVR 9%
  - >1.8 million MVR 15%

### III.B Designing a PIT for the Maldives
- Introducing a PIT is a balancing act between the social choice of the degree of income redistribution (progressivity) of the system, revenue impact, simplicity, and administrability.
- Policy objectives and tax principles should guide the design of the PIT.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1mdvea2019003.pdf*

### 28.      Moreover, the PIT should be viewed as an integral component of the entire tax

### 1mdvea2019003 - 28.      Moreover, the PIT should be viewed as an integral component of the entire tax

### PIT as part of the tax system
- The PIT covers i) employment (labor) income, ii) capital income of individuals, and iii) business income of the self-employed.
- Neutrality between the various sources of income and among the legal forms of taxpayers, to the extent possible, should be maintained to avoid arbitrage opportunities that lead to revenue leakages and unequal treatment of taxpayers.
- A clear choice of income tax ‘architecture’ is important at the outset of reform.

### Recommendation: Adopt a Dual Income Tax (DIT) for the Maldives
- A DIT imposes a uniform and relatively low rate of tax on all capital income of individuals plus a (modestly) progressive tax applied to labor income with a carefully chosen initially relatively high threshold.
- To secure maximum simplicity (at least in initial reform stages), allow for maximum utilization of withholding mechanisms for basically all taxed income types.
- Crucially avoid the use of individual tax allowances and other tax reliefs dependent on individual taxpayer circumstances.
- The DIT design differs from the 2011 Personal Income Tax Bill.

### Preliminary analysis and study needs
- The report uses the Household Income and Expenditure (HIES) dataset (provided by the National Bureau of Statistics (NBS)) and other data sources to:
  - Explore options for a tax scale to be applied to employment income.
  - Recommend options to tax individual capital income and income of the self-employed.
  - Illustrate analysis of redistribution effects of a proposed PIT design and estimate overall revenue impacts.
- Estimates presented are preliminary and accuracy depends on data quality.
- A detailed follow-up study by Maldivian authorities (e.g., the TPU or a Working Group comprising the MOF and MIRA) is important for final estimates and analysis.
- Preparations in legal drafting and administrative capability development are vital; further Technical Assistance (TA) is warranted.

### PIT design alternatives (summary)
- Dual Income Tax (DIT):
  - Combines a relatively low flat tax on capital income with progressive taxation of labor and (possibly) other non-capital income.
  - Flat capital tax should be broad-based with no exemptions or allowances to achieve neutrality.
  - Introduced in Nordic countries in the early 1990s to address capital mobility and tax arbitrage.
- Global income tax:
  - Levies tax on the sum of income from all sources with a progressive rate structure (Haig-Simons-Schanz principle).
  - Secures horizontal and vertical equity but is administratively complex; can generate high marginal rates on capital income and be vulnerable to erosion.
- Flat tax:
  - Administrative simplicity, but highly regressive; progressivity can be partially achieved via a basic allowance.
  - Revenue gains often linked to enforcement rather than inherent design; high rates risk harming middle-income earners.

### C. Taxing Labor Income — proposed approach
- Recommended: apply a moderately progressive tax scale on individual employment income (wages, salaries, benefits, service charge, and directors’ fees) with an appropriate zero-tax bracket.
- Important to avoid several income brackets; first income threshold should balance revenue and progressivity.
- The 2011 Bill proposed threshold MRV 360,000 — based on 2017 HIES data this is very high and would exclude salary earners approximately up to the 95th percentile of the income distribution.
- Multiple rate structure with very wide income brackets in the 2011 Bill would have little impact on revenue and progressivity; marginal tax rate for most of the top 5th percentile would be only 2.5 percent.
- Top rate of 15 percent applied on income of more than MRV 1.8 million would apply only to a very modest fraction of top salary earners.

### Example viable tax scale for employment income (one option)
- Following a zero-tax bracket, first tax rate 10 percent (equal to proposed flat uniform tax rate on individual capital income and cross-border withholding tax rate).
- Top rate: 15 percent — the same as the BPT rate.
- Table 1 (illustration):
  - Income Bracket: 0 to 130,000 MVR — Marginal Tax Rate: 0 — “0 – bottom tercile of governmental salary distribution (i.e., the lowest 1/3 of the distribution)”
  - Income Bracket: 130,000 to 275,000 MVR — Marginal Tax Rate: 10% — “bottom tercile – approximately the 90th percentile of governmental salary distribution”
  - Income Bracket: > 275,000 MVR — Marginal Tax Rate: 15% — “top 10 tercile of governmental salary distribution”
- Percentiles are based on government salaries.

### Progressive features and distributional implications
- Using governmental salary distribution:
  - First tercile of governmental salary distribution would not be subjected to tax (zero-tax bracket).
- Using HIES data for the universe of wage earners:
  - The 75th percentile would fall in the zero-tax bracket.
  - HIES may overrepresent low wage earners; true economy-wide figure likely between first tercile and 75th percentile.
  - Choosing first threshold of MVR 130,000 implies more than one third of wage earners (likely more than 50 percent) will not be subject to tax on employment income.
  - A significantly higher first threshold (more than MVR 130,000) would be ineffective and unwarranted.
- Average tax rate increases from the second income bracket upward.
- Threshold for the first bracket is below, but close to, Gross National Income (GNI) per capita (about MVR 146,000).
  - A salary equal to GNI per capita would pay tax only on amount in excess of tax-free threshold (MVR 16,000) → tax of MRV 1,600.
  - Implies average tax rate for individual with salary equal to GNI per capita would be 1.1 percent.
- Top PIT rate applies only to top 10th percentile of governmental salary distribution; according to HIES data this could be only the top 1 percentile.

### Specific average tax-rate examples
- Average tax rate for an individual at the top 5th percentile (salary MVR 400,000) would be 8.3 percent.
- Average tax rate for an individual at the top 10th percentile (salary MVR 300,000) would be 6.1 percent.
- These rates would be modest in international comparison.

### Alternative to zero-tax bracket
- Offer a tax credit that directly reduces the amount of tax while maintaining a positive tax rate from the first MVR.
- This can replicate tax relief given in Table 2 to lower end of income distribution but would imply a higher marginal tax rate at the top.
- Exact choice of tax rates and income brackets requires follow-up study.

### Recommendations on labor income taxation
- Introduce a moderately progressive tax scale on employment income (possible with two rates 10 and 15 percent).
- Zero-bracket threshold should not be too high (one option: set at the first tercile of government salaries).
- Allow maximum utilization of withholding mechanisms and avoid providing deductions.

### D. Taxing Capital Income of Individuals — uniform rate rationale
- The tax on employment income should be complemented by a uniform tax on all individual capital income (dividends, interest income, and capital gains) of 10 percent consistent with DIT principles.
- Under present system, scope of capital income taxation is narrow: limited to capital income derived by a business under the BPT; no separate taxation of interest, dividends, capital gains.
- Differences in taxation of personal capital income produce undesirable effects:
  - Uniform tax rate on capital income prevents tax arbitrage.
  - Disparities across sources distort portfolio choices and invite conversion of taxable returns to lightly/non-taxable returns (e.g., transforming interest to capital gains).
  - Violates equity by allowing lower effective rates on income accruing mainly to better-off segments.

### Capital Gains Tax (CGT) — rationale and scope
- Currently no CGT applicable in the Maldives; gains on disposal of any business asset are subject to BPT. Definition of “business” includes leasing of immovable property (commercial and residential) and thus gains on disposal of leased property are subject to BPT.
- Rationale for CGT:
  I. Prevent tax evasion through re-characterization to lightly taxed capital gains;
  II. Generate revenue;
  III. Improve horizontal and vertical equity;
  IV. Minimize efficiency costs from distorted portfolio decisions.
- Absence of CGT impacts investment assets of individuals: immovable property not leased out and financial assets such as shares.
- Proposal: extend tax base to cover capital income and capital gains.

### Taxable assets for CGT (recommended list)
- I. Immovable property located in the Maldives (ordinary meaning under Maldives law), including leases and other interests; include mining and petroleum rights. Exception: immovable property that is the principal place of residence of the taxpayer.
- II. Interests in entities (e.g., companies, partnerships) where entity value is derived directly or indirectly principally from immovable property located in the Maldives (indirect transfers of immovable property).
- III. Shares and other interests in entities resident in the Maldives.
- IV. Options or rights over an asset referred to in I–III.
- Exclude any asset that is subject to the BPTA; current position where all assets of a business are subject to tax under BPTA should continue after CGT introduction.

### Methodology of CGT
- Two methodologies:
  (i) Taxation on a periodic net basis: annual CGT liability = total capital gains during year reduced by total capital losses during year; CGT reporting/payment combined with BPT reporting/payment; recognizes capital losses.
  (ii) Separate taxation of individual gains: CGT reported and paid separately for each capital gain within specified time (e.g., one month) after the transaction.
- Simplicity argument: as CGT transactions are irregular, simplest is to tax separately on each capital gain at the time it arises.
  - Timing CGT contemporaneously with the transaction likely ensures better compliance, especially if taxpayer has only one CGT transaction in a year.
- Recommended CGT rate: 10 percent to align with rate applicable to capital income.

### Transitional rule for CGT
- Need transitional rule for taxable assets held at commencement of CGT.
- Two options:
  1. Grandfathering: CGT applies only to taxable assets acquired on or after commencement of CGT.
     - Concerns: delays CGT revenue; encourages arrangements converting post-CGT assets into pre-CGT assets.
  2. Valuation day approach: pre-CGT assets given cost equal to market value at commencement of CGT.
     - Preferred despite compliance burden of valuing assets; proposed taxable assets (immovable property and financial assets) should be readily valu able at commencement.

### Recommendation on capital income taxation
- Introduce a uniform tax rate on all individual capital income including capital gains.

*Source: Chapter/section content from the provided IMF PDF content unit.*

### 48.      The BPTA imposes BPT at the rate of 15 percent on the taxable profit derived by an

### The BPTA imposes BPT at the rate of 15 percent on the taxable profit derived by an

### Overview of BPT rules and base
- BPT rate: 15 percent on taxable profit derived by an individual or entity (company or partnership) carrying on business.
- Tax-free threshold: MVR 500,000 applies to all taxpayers (individuals and entities).
- Taxable profit: calculated by reference to financial accounting profit prepared in accordance with IFRS or other international financial accounting standards recognized in the Maldives, subject to modifications in the BPTA or the BPTR (for example, depreciation rates for tax purposes specified in the BPTR).
- Cash basis election: Individuals with a total annual turnover of less than MVR 3,650,000 can elect to account for the BPT on a cash basis.
- Loss carryforward: A taxpayer that has a net loss for a tax year can carry the loss forward for 5 years.

### Leasing, rental income, and notional deduction
- Definition of “business” includes leasing of immovable property (commercial and residential).
- Rental income is taxed under the BPTA.
- Optional notional deduction: a taxpayer can elect to claim a notional deduction equal to 20 percent of the gross rental income derived rather than claiming a deduction for actual expenditures incurred in deriving rental income.

### Limitations on deductions and thin capitalization
- Limitations on deductible payments to directors and employees who are associates of the company to protect against base erosion (necessary because of absence of a PIT on salaries, wages, and directors’ fees).
- Thin capitalization rule: applies under TR-2018/B64 and may limit deductible interest payments; TR-2018/B68 provides that the rule does not apply to SMEs.
- The thin capitalization rule applies to all interest payments (not limited to foreign investment) and addresses absence of a tax on interest income derived by individuals to prevent extraction of profits as tax-free interest via excessive debt capitalization.

### Treatment of dividends and banks
- No taxation of dividends paid by a resident company.
  - Dividends paid by a resident company to another resident company are excluded from the taxable profit calculation of the shareholder company.
  - Dividends paid to a resident individual are not taxed (no tax on capital income).
  - Dividends paid to non-residents are not taxed (no withholding tax on dividends).
- Effective corporate tax rate on distributed profits equals the 15 percent BPT rate.
- Bank profits tax: separate tax applicable to banks at the rate of 25 percent against the net profit of the bank; calculation rules are briefly stated in the Bank Profit Tax with more detailed rules provided administratively by the Ministry (and presumably MIRA).

### Need for a presumptive tax (key findings and statistics)
- BPT generates very low revenues from businesses below the GST threshold (MRV 1 million) while imposing high administrative and compliance burdens.
- 2017 distribution under BPT:
  - About 60 percent of firms are businesses with revenue below MRV 500,000 and these paid altogether only 1 percent of BPT revenue.
  - Among these firms (5,456 firms) only 69 firms had a positive tax liability.
  - The top 1.3 percent of firms (107 firms) paid approximately 75 percent of total BPT revenue.
- Almost the entire BPT is being collected from businesses above the GST threshold.

### Presumptive tax design recommendations and rationale
- Replace BPT with a uniform turnover tax for businesses below the GST registration threshold.
  - Suggested uniform rate: moderate, e.g., 3 or 4 percent (in line with international best practices).
  - Example at 4 percent: a business with an income of MRV 275,000 would pay tax of MRV 11,000.
    - If costs are 25 percent, effective presumptive rate becomes 5.3 percent (i.e., 11,000/206,250), equal to the average tax rate on a salary of 275,000 (based on the scale in Table 2).
  - As costs decline or income rises, the effective presumptive tax rate declines.
- Microbusinesses (e.g., turnover below MRV 250,000) recommended to be subject to a flat (registration) fee instead of the presumptive regime.
- Legal persons and individuals providing professional services (lawyers, accountants, physicians) should remain taxed under the BPT even if below the GST registration threshold because they can maintain accounting and tend to earn high margins.

### Domestic BPT reforms consequent upon PIT introduction
- I. Remove the MVR 500,000 tax-free threshold under the BPT:
  - Rationale: with small businesses moved into simplified presumptive regime, BPT will mainly apply to companies (artificial entities without “ability to pay”).
- II. Repeal the ceiling on deductibility of salary and wages and directors’ fees:
  - Rationale: employees and directors will be subject to PIT; continuing the ceiling could lead to double taxation (non-deductible to employer and taxed to employee/director).
  - Use of general anti-avoidance rule recommended where payments to associates do not correspond with service value.
- III. Integrate banks into the BPT rather than a separate Bank Profits Tax:
  - Rationale: consistent tax rules across business taxpayers.
  - Note: imposition of 10 percent withholding tax on dividends paid to non-residents means effective BPT rate on distributed profits of banks is 23.5 percent, marginally lower than 25 percent Bank Profits Tax.
  - If a non-resident bank operates as a branch (PE) rather than subsidiary, a branch remittance tax can equalize treatment with dividends by a subsidiary.

### Explicit recommendations (from the text)
- Replace the BPT with a uniform turnover tax (e.g., 3 or 4 percent) for all businesses below the GST threshold. (Legal persons and individuals providing professional services (such as accountants, lawyers, and physicians) should be taxed under the reformed BPT).
- Repeal the MRV 500,000 basic allowance and the ceiling on the deductibility of salary and wages, and directors’ fees.
- Banks should be taxed under the BPT rather than being subject to a separate tax.

### Distributional and revenue analysis of the proposed PIT (key results)
- Pre-tax Gini coefficient (based on HIES data): 0.59.
- After-tax Gini coefficient (if recommended options implemented): 0.58.
- Progressivity: about 60 percent of the PIT tax (including the presumptive tax) will be paid by the high-income group.
- Estimated overall revenue impact of the PIT reform (including the presumptive regime): revenue increase of approximately 650 MRV million (about 4.2 percent of total tax revenues collected in 2018).
- Sectors related to tourism contribute about 40 percent of the total estimated PIT revenue.
- Caveats:
  - Informality lowers revenue potential and the system’s redistributive capacity because PIT will primarily be collected via withholding by formal businesses.
  - Accuracy of estimates depends critically on HIES data quality and ignores the informal economy; potential underestimation of top incomes could mean larger improvements in income equality.
- Recommendation:
  - Prepare a detailed study of a proposed income tax reform including its distributional impacts.

### International tax: source rules and gaps in taxing non-residents
- International tax in BPTA:
  - Residence principle: resident companies taxed on worldwide income.
  - Source principle: non-resident companies taxed on Maldives source income.
  - Individuals are taxed territorially (resident and non-resident individuals taxed only on Maldives source income).
- Schedular nature for non-residents:
  - 15 percent BPT rate applies to taxable profit of a PE of a non-resident in the Maldives.
  - Separate taxes at 10 percent apply (with withholding) to royalties, equipment lease payments, and fees for management, personal, and technical services.
  - No taxation of dividends or interest paid to non-residents under current BPTA.
  - No separate taxation of rent payable to a non-resident on immovable property; treatment depends on whether immovable property constitutes a PE.
- Source rules gaps and recommendations:
  - BPTA lacks a comprehensive set of source rules; “attributable to a Maldives PE” acts as a general source rule for business profits of a non-resident.
  - With one exception, no connection to the Maldives is specified for payments subject to the 10 percent withholding tax (exception: rent for the viewing of films limited to viewing in the Maldives).
  - Important to specify sourcing rules for royalties (including equipment lease payments), and management and technical fees. International-norm-based sourcing rule suggested:
    - Treat as Maldives sourced if (i) paid by a resident of the Maldives other than as an expenditure of a foreign PE of the resident; or (ii) paid by a non-resident as an expenditure of a PE in the Maldives.
  - Taxation of indirect transfers of immovable property located in the Maldives is important and should apply under both the BPTA and CGT; currently no taxation of indirect transfers under the BPTA.
- Gaps in base for taxing non-residents:
  - Currently no taxation of dividends and interest paid to non-residents.
  - Recommendation: extend the 10 percent withholding tax applicable to royalties, and management and technical fees, to dividends and interest.
    - Rationale for dividends: serves as an exit charge on repatriated profits and captures tax on under-declared taxable profit.
    - Rationale for interest: limits base erosion through financing transactions.
    - Definitions of “dividends” and “interest” need inclusion in the BPTA; definitions should be broad enough to cover disguised dividends (e.g., upstream loans) and align the definition of “interest” with TR-2018/B64.
  - Clarify scope of taxation of royalties derived by a non-resident as a priority and make necessary amendments to the BPTA.
  - Rental income derived by a non-resident from lease of immovable property located in the Maldives is taxable on an ordinary assessment basis (Sections 3(c)(1) and 4(b)(1) of the BPTA).
    - The 10 percent withholding tax currently applies only to rental income from leases of equipment and similar property.
    - Consider extending withholding tax to rental income from immovable property where property is passively leased and may not constitute a PE; such withholding would be non-final and creditable against assessed liability on taxable profit of the non-resident.

*Source: IMF staff text from the provided content unit.*

### 73.      There is some uncertainty as to the taxation of a gain on disposal of immovable

### 1mdvea2019003 - 73.      There is some uncertainty as to the taxation of a gain on disposal of immovable

### Taxation of gains on disposal of immovable property
- Finding: A gain derived on disposal of immovable property located in the Maldives is included in taxable profit under the BPT because leasing out immovable property is a business activity and the immovable property is a business asset.
- Finding: For a non-resident company, the gain is taxed only if it is attributable to a PE in the Maldives. (See footnote: Section 3(1c)(2) of the BPTA. It is noted that section 3(c)(1) of the BPTA applies only to rental income.)
- Issue: Immovable property “passively” leased out by a non-resident company may not constitute a PE in the Maldives, creating a gap where gains on disposal could escape Maldives taxation.
- International alignment: There should be taxation of gains arising from disposal of immovable property located in the Maldives regardless of whether there is a PE, consistent with Article 13(1) of the OECD and UN Model Tax Treaties and the Maldives Model Tax Treaty.
- Finding: Gains can be avoided via “indirect transfer” (disposal of interests in entities whose value is principally derived from Maldives immovable property).
- International alignment: Taxation should extend to gains on disposal of interests in entities where value is derived directly or indirectly principally from immovable property in the Maldives, consistent with Article 13(4) of the OECD and UN Model Tax Treaties and the Maldives Model Tax Treaty.
- Recommendations:
  - Provide for the taxation of gains derived on a direct or indirect transfer of immovable property located in the Maldives.
  - Consider extending the 10 percent withholding tax on rental income from the lease of movable property to rental income derived by a non-resident from the lease of immovable property located in the Maldives where the non-resident does not have a PE in the Maldives. The withholding would be creditable against the assessed liability on the rental income.
  - Extend the 10 percent withholding tax to apply also to dividends and interest paid to non-residents.

### Permanent Establishments (PEs)
- Principle: Under international norms, the source country has the primary taxing right over business profits, subject to the non-resident having sufficient economic presence defined by the PE concept.
- Exception noted: An exception to the PE requirement for management and technical fees is now accepted for developing countries via new Article 12A in the UN Model Tax Treaty.
- Maldives practice: The Maldives asserts jurisdiction to tax business profits of a non-resident if the profits are attributable to a PE in the Maldives (Section 3(c)(2) of the BPTA).
- Implication: No Maldives tax on business profits if (i) a non-resident does not have a PE in the Maldives; or (ii) business profits are not attributable to a PE in the Maldives.
- Alignment issues:
  - The BPTA definition of PE is narrower than the Maldives Model Tax Treaty: the BPTA does not include the services and insurance PE rules. (See Article 5(3)(b) and (6) of the Maldives Model Tax Treaty.)
  - The BPTA definition is broader in other respects: there is no preparatory and auxiliary activities exception or independent agent exception.
  - The BPTA limits taxation to business profits attributable to a PE, whereas Article 7(1) of the Maldives Model Tax Treaty also permits taxation of: (i) income from sales in the Maldives of goods or merchandise of the same or similar kind as those sold through the PE; and (ii) income from other business activities (such as provision of services) carried on in the Maldives of the same or similar kind as those carried on through the PE.
- Recommendation bullets:
  - Align the PE definition in the BPTA with the definition in the Maldives Model Tax Treaty, including updating for BEPS changes.
  - Consider including an exception for a representative office.
  - Align the scope of taxation of PEs under the BPTA with that provided for in the Maldives Model Tax Treaty.

### International tax avoidance — overview and base erosion risks
- Identified revenue risks:
  - Separate taxation of different income classes enables recharacterization to obtain untaxed or lower-taxed income.
  - Increase in cross-border trade in services within MNEs raises service fees as a major base erosion and transfer pricing risk.
  - Intragroup financing of subsidiaries (and PEs) raises base erosion risks.
- BEPS engagement:
  - Maldives is a member of the BEPS Inclusive Framework and will be subject to peer review on implementation of four minimum standards.
  - A review regarding BEPS Action 5 (on ‘harmful tax practices’) has been initiated, including reviewing the 5 percent rate on foreign income and the Special Economic Zone (SEZ) regime.
  - Maldives will be required to implement country-by-country (CbC) reporting for large MNEs and provide for an improved mechanism to resolve cross-border tax disputes.
  - MIRA has issued a tax ruling implementing the EBITDA approach to limiting interest deductions above 30 percent of profits, in line with Action 4.

### Taxation of cross-border services and withholding on fees
- Finding: Foreign investment structures often isolate core activity in Maldives while related parties offshore supply marketing, branding, bookings, leasing, logistics, and treasury, paid as service fees or royalties — creating base erosion and transfer pricing risks.
- Vulnerable items: Management and technical fees, and equipment lease rentals (treated as royalties), paid to non-residents are particularly vulnerable to base erosion.
- Current tax treatment:
  - Payer of fee/rental deducts at the 15 percent BPTA rate.
  - Non-resident recipient is subject to the lower 10 percent tax on management and technical fees, and royalties, collected by withholding.
- Issue: Uncertainty exists whether the 10 percent tax applies comprehensively to all classes of service fees; some service-like payments may escape the 10 percent tax, increasing base erosion.
- Clarification proposal: Align the application of the 10 percent tax with new Article 12A of the UN Model Tax Treaty (fees for technical services defined broadly as services of a managerial, technical or consultancy nature and involving specialized knowledge, skill, or expertise). Article 12A is included as Article 13 in the Maldives Model Tax Treaty.
- Reimbursements issue: Payments routed via group payment centers may be argued to be reimbursements and escape the 10 percent withholding tax. A rule should be included in the BPTA treating reimbursements as having the same character as the underlying payment and therefore subject to the 10 percent withholding tax.
- Transfer pricing risk: Fees charged by related parties offshore may be inflated; deductibility should be limited to the extent services are supported by functions, assets, and risks (“FAR”) in the foreign subsidiary and consistent with an arm’s length price.
- Guidance: The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 should be applied in allocating FAR and determining arm’s length prices; this should be provided for in the Regulations to the BPTA.
- Tourism-specific risk: Resorts “sell” bulk rooms at a discount to offshore booking companies (related or unrelated) which resell at a mark-up outside Maldives, shifting profits offshore and avoiding Maldives taxation where the booking company lacks a Maldives PE.
  - Comparable uncontrolled price: Sales to unrelated online booking companies can provide comparables for arm’s length pricing when related booking companies are used.
  - FAR requirement: Any profit allocated to the related booking company must be supported by FAR in that subsidiary.
- GST implication: When guests book through offshore booking companies:
  - The payment made by the offshore booking company to the resort is subject to GST and is consumption in the Maldives.
  - The amount paid by the guest to the offshore booking company is not subject to Maldives GST, so the booking company’s value added is not taxed in the Maldives and may not be taxed anywhere depending on the booking company’s jurisdiction.
  - The arm’s length price used for BPT purposes should also be used to value the supply for GST when the sale is to a related booking company.
- Recommendations:
  - Clarify the definition of “management and technical fees” to ensure comprehensive coverage of services subject to the 10 percent withholding tax.
  - Specify in the Regulations that the OECD Transfer Pricing Guidelines (2017) apply to determine the arm’s length price for services and intangibles provided by related parties offshore.
  - Apply the same arm’s length price for the purposes of calculating the GST on services provided by related parties offshore.

### Thin capitalization, equity vs. debt, and limits on interest deductions
- Finding: MNE financing mixes equity and debt; differing tax treatment of equity and debt creates BEPS risks because interest is deductible while dividends are not.
- Current tax parameters producing bias:
  - BPT at 15 percent.
  - No tax deduction for dividends.
  - Deduction for interest.
  - No dividend or interest withholding tax.
- Effective tax rates under current law:
  - Equity investment: 15 percent effective tax rate.
  - Debt investment: 0 percent effective tax rate.
- Policy recommendation: Impose a 10 percent withholding tax on dividends and interest paid to a non-resident.
  - Impact for interest: raises effective tax rate on debt investment to 10 percent (interest deduction at 15 percent BPT offset by 10 percent withholding).
  - Impact for dividends: imposition of dividend withholding tax increases the effective tax rate on an equity investment to 23.5 percent as compared to 10 percent on debt investment.
- Remaining bias: Even with 10 percent withholding on dividends and interest, bias in favor of debt investment remains.
- Ways to exploit bias: Excessive interest rates on in-house debt (transfer pricing), excessive levels of debt (thin capitalization), or both.
- BPTA existing constraint on excessive interest rates: deduction for interest expense subject to a ceiling based on a 6 percent interest rate (Section 11(a)(5) of the BPTA). The ceiling does not apply to interest paid to an approved bank or financial institution.
- Current thin capitalization regime:
  - BPTA lacks a legislated thin capitalization provision; interest is fully deductible provided it is incurred wholly and exclusively for producing income and the rate does not exceed 6 percent.
  - MIRA ruling TR-2018/B64 limits interest deduction to 25 percent of taxable profit before interest, tax, and capital allowances; this ratio was subsequently increased to 30 percent. Tax rulings are binding on taxpayers.
- International standard adopted: The TR-2018/B64 rule is based on OECD BEPS Action 4 recommendation — limiting interest deductions relative to interest income and a specified ratio of EBITDA in the range of 10 to 30 percent.
- Distinction from traditional rules: The EBITDA approach departs from traditional legislated acceptable debt-to-equity ratio rules (commonly 2:1 or 3:2) which typically apply only to foreign-controlled resident companies as an anti-avoidance rule.

*IMF staff report content (1mdvea2019003).*

### 96.      The EBITDA rule operates as a general limit on the deductibility of interest. The rule

### 1mdvea2019003 - 96.      The EBITDA rule operates as a general limit on the deductibility of interest. The rule

### EBITDA rule and thin capitalization (sections 96–99)
- The EBITDA rule operates as a general limit on the deductibility of interest and is not confined to non-resident investment; it can apply to interest payments made between two residents.
- Justification in Maldives context:
  - Interest derived by resident individuals as part of a passive investment activity is not taxable, creating domestic base erosion opportunities.
  - Owners of resident companies can extract profits tax free through debt financing.
- Policy measure recommended in the Report:
  - Imposition of a 10 percent withholding tax on interest paid to resident individuals.
  - Observation: this withholding tax will reduce but not eliminate base erosion risk with domestic debt financing.
- Limitation and risk:
  - In purely domestic financing, interest payable under a loan between two businesses is likely deductible and taxable at the same rate (15 percent).
  - The EBITDA rule can result in double taxation where interest is both non-deductible and taxable — a consequence of the rule being a “blunt” instrument.
- Interaction with other rules:
  - EBITDA approach argued to provide a single rule addressing excessive interest rates and excessive debt capitalization, avoiding separate transfer pricing/6 percent interest rate ceiling and traditional thin capitalization rules.
  - TR-2018/B64 makes no change to the ceiling on the deductible interest rate of 6 percent; treatment under TR-2018/B64 of interest not deductible due to the 6 percent ceiling is unclear.
- Design considerations:
  - Given base erosion opportunities in both domestic and international financing, applying the EBITDA approach to thin capitalization is appropriate.
  - TR-2018/B64 may lack legal support; preferable to include a thin capitalization rule in the BPTA.
  - EBITDA ruling is framed broadly with little technical detail; further work needed on design, including a global ratio option important for non-resident investors.
- Recommendations:
  - Include a thin capitalization rule in the BPTA.
  - Review the technical detail of the thin capitalization rule in TR-2018/B64.

### Tax concessions — lower rate on foreign income (sections 100–101)
- Current concession:
  - A resident company registered under the Companies Act is liable for tax at the lower rate of 5 percent if the only income derived by the company are certain specified classes of foreign income.
- Specified classes of foreign income include:
  I. Income from a business carried on wholly outside the Maldives.
  II. Income from debt and similar instruments issued by a non-resident person.
  III. Income from debt and similar instruments issued by a resident person for the purposes of a capital project carried on outside the Maldives.
  IV. Royalties payable by a non-resident person.
  V. Income from any immovable property located outside the Maldives.
- Recommendation:
  - Remove the 5 percent concessional rate on residents deriving exclusively foreign income so that all foreign income is subject to the 15 percent BPT rate with a credit allowed for any foreign tax paid.

### Special Economic Zones (SEZs) concession (sections 102–104)
- SEZA provides tax incentives to SEZ developers and investors:
  - For developers: (i) exemption from import duty on imports of capital goods; (ii) exemption from BPT; (iii) 10-year exemption from GST; and (iv) 10-year exemption from withholding tax.
  - For investors: incentives vary by industry and investment and include tax holidays from BPT, withholding tax, and GST.
- Concerns with tax holidays and incentives:
  I. Tax holidays often become open-ended via renewals or by establishing new companies to continue the concession.
  II. Tax holidays attract “mobile” investment that relocates when the holiday ends.
  III. Locally-owned businesses can exploit tax holidays via “fictitious” foreign investment.
  IV. Profit-shifting and manipulation (inter-company charges, allocation of costs, shifting capital allowances) can erode the tax base.
  V. Tax holidays may shift foregone Maldivian tax revenue to the investor’s residence country where foreign tax credits apply.
- Current status and recommendation:
  - No foreign investors have been granted tax incentives under SEZA to date.
  - Recommendation: Repeal all tax concessions in the SEZ Act.

### Foreign Investment Agreements (FIAs) (sections 105–106)
- Current rule:
  - Business profits of a foreign investor who is a party to an FIA entered under the Law on Foreign Investment are exempt from BPT to the extent provided in the agreement.
  - The exemption applies only to FIAs entered into after the commencement date of the BPTA.
  - No conditions, guidelines, or time limits are specified for granting a BPT exemption under an FIA.
  - Ministry responsibilities:
    - Tourism-sector FIAs entered into by the Ministry of Tourism; other sectors by the Ministry of Economic Development.
    - No obligation for MOF to be consulted before entering into an FIA.
- Recommendation:
  - Remove the option of including a tax exemption in an FIA.
- If tax exemptions under FIAs are retained, best-practice conditions to include:
  I. Clear and transparent conditions and guidelines for granting a tax exemption under an FIA in the Law on Foreign Investment.
  II. Requirement that the Ministry entering into an FIA must consult with MOF before agreeing to any tax exemption so revenue foregone can be identified and a cost/benefit analysis undertaken.
  III. Requirement that any FIA with a tax exemption is approved by the Peoples’ Majlis or laid before the Peoples’ Majlis accompanied by the cost/benefit analysis.

### Tax treaties — background and policy considerations (sections 107–119)
- General background:
  - Tax treaties are international agreements between Contracting States; the preamble usually states the purpose is relief from double taxation (Article 23).
  - Most countries provide unilateral relief from double taxation; the main role of a treaty is allocation of taxing rights between Contracting States.
  - Most tax treaties are based on the OECD Model Tax Treaty or the UN Model Tax Treaty; developing countries often rely on the UN Model.
- Current Maldives treaty status:
  - The tax treaty with the United Arab Emirates (UAE) is the only tax treaty in force.
  - Treaties under negotiation with Bangladesh, Hong Kong, Malaysia, Seychelles, and Singapore.
  - Maldives is signatory to the SAARC Treaty with limited avoidance-of-double-taxation scope.
  - Treaties with India and the Netherlands on international transportation income exist.
- Benefits and risks for Maldives:
  - Tax treaties trade off reduced source-country taxing rights for increased residence-country taxing rights.
  - For capital-importing countries like Maldives, treaties tend to cause overall reduction in tax revenue because outbound investment is low; treaty shopping can amplify revenue loss.
  - Maldives’ domestic tax environment is relatively low: BPT rate on business profits is 15 percent; currently no tax on dividends and interest paid to non-residents.
  - Proposed measures in Report (if implemented) include a suggested 10 percent rate on dividends and interest and royalties taxed at 10 percent; management and technical fees taxed at 10 percent under the BPTA.
  - Main treaty negotiation risk: removal of the 10 percent tax on management and technical fees would treat them as business profits and, absent a PE, not taxable in Maldives, posing serious revenue implications given common large payments in tourism and banking sectors.
  - UN Model Treaty Article 12A allows developing countries to preserve taxing rights over management and technical fees — legitimizing the 10 percent tax in the BPTA.
  - Administrative mechanisms in tax treaties (exchange of information, reciprocal assistance) exist also in TIEAs and MAC without giving up taxing rights.
- Policy recommendations:
  - Develop a Ministry of Finance (MOF) tax treaty policy ensuring treaties are entered into only where clear benefits (increased foreign investment or closer economic relations) justify revenue loss.
  - Consider putting a moratorium on negotiating tax treaties until after current tax reform project is finalized to avoid inconsistent treaty commitments.
- Components recommended for a tax treaty policy:
  1) The negotiating team (Ministry to lead with technical input from MIRA and possibly Foreign Affairs).
  2) Clear guidelines for choosing treaty partners.
  3) A baseline for negotiations.
  4) Use of a Maldives Model Tax Treaty in negotiations to strengthen the Ministry’s position.
  5) Preparation of a Tax Treaty Impact Statement once a treaty is negotiated but before signing.
- Negotiating team guidance:
  - Negotiating team should be headed by the Ministry, with technical input from MIRA and possibly a representative from the Ministry of Foreign Affairs.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1mdvea2019003.pdf*

### 120.      It is essential that clear guidelines are developed for choosing treaty partners. It is

### 1mdvea2019003 - 120.      It is essential that clear guidelines are developed for choosing treaty partners. It is

### Choosing Treaty Partners
- Principle: It is not incumbent on the Ministry to negotiate a tax treaty with every country that seeks a treaty with the Maldives; negotiating with every requester would not be in the country’s best interests.
- Main argument for treaties for a capital-importing country like the Maldives: treaties facilitate existing trade and investment into the country, and attract new investment.
- Starting criterion: consider the current level of trade and investment coming into the Maldives from the potential treaty partner.
- If current trade and investment are significant, greater justification exists for negotiating a tax treaty.
- If little or no current trade and investment exists, undertake an investigation to determine impediments and assess whether a tax treaty will help remove or overcome those impediments.
- If it is unlikely that a tax treaty will have any significant impact on trade or investment into the Maldives, there is no justification in negotiating a treaty with that country.
- Prohibition guidance: do not negotiate with countries whose tax rules or practices pose a revenue risk to the Maldives.
  - Countries that either have no income tax, a preferential regime for foreign income, or that tax only on a territorial basis pose a potential revenue risk.
  - A treaty with such a country is likely to result in double non-taxation of any income that Maldives is required to exempt from tax under the treaty.
- Benefit limitation: treaty benefits should be limited to genuine residents of the other Contracting States.
  - Ensure potential trade and investment coming from that country is genuinely sourced from that country.
  - Beware of countries that negotiate a broad treaty network to facilitate treaty shopping (residents from outside the country establishing base companies to access the network).
  - If Maldives negotiates with such countries, revenue loss can be much greater than if benefits were confined to genuine residents.
- Anti-treaty-shopping rules:
  - Inclusion of an anti-treaty shopping rule (such as a limitation of benefits (“LOB”) Article) will limit treaty shopping but may not counter all abuses, particularly in relation to services.
  - It would not be prudent to enter into a tax treaty with a high-risk country expecting that an anti-treaty-shopping rule will completely protect the Maldives.

### Baseline for Negotiations
- The tax treaty policy should set out a baseline identifying provisions Maldives is prepared to negotiate on and those that are non-negotiable.
- Baseline required minimum contents:
  I. A positive rate of tax on dividends, interest, royalties, and management and technical fees.
  II. The taxation of indirect transfers of immovable property located in the Maldives as provided for in Article 13(4) of the Model Tax Treaties.
  III. An anti-abuse rule.
- Strict adherence: where the policy provides no negotiation on particular subjects (such as zero rates), all treaty negotiations must abide by this baseline.
  - A single treaty departing from the agreed baseline effectively sets a new baseline and pressures future negotiations.

### Model Tax Treaty
- Maldives has a Model Tax Treaty used in negotiations; this is consistent with best practice and focuses negotiations on areas of disagreement.
- The Maldives Model Tax Treaty must be fully integrated with the tax treaty policy and must set out the baseline for negotiations.
- The Maldives Model has recently been updated for BEPS developments and aligned with the 2017 OECD and UN Model Tax Treaties.
- Comparability and source-country taxing rights:
  - Maldives Model largely follows the UN Model Tax Treaty, but rate limits on dividends and interest are aligned with the OECD Model.
  - Maldives Model provides for broader source-country taxing rights than asserted under the BPTA in several respects:
    (i) includes the limited force of attraction rule for taxing business profits as provided for in the UN Model Tax Treaty;
    (ii) provides for a positive rate of tax on dividends and interest;
    (iii) provides for taxation of indirect transfers of immovable property.
  - Note: a tax treaty does not itself impose tax; taxation must also be provided for in the BPTA for legal effect.
- Vulnerability to fragmentation:
  - Given anti-fragmentation rule inclusion for preparatory and auxiliary activities exception in Article 5(4), consider including a similar anti-fragmentation rule for services and construction PE inclusions in Article 5(3) to prevent fragmentation between related persons falling below the relevant 6-month threshold.

### Tax Treaty Impact Statement
- Because a tax treaty will involve loss of revenue through reduction in Maldives’ taxing rights as a source country, prepare a Tax Treaty Impact Statement before signing any treaty to facilitate cost/benefit analysis.
- A Tax Treaty Impact Statement should set out:
  I. The reasons for choosing the other country as a treaty partner, including a statement of the current volume of trade and investment into the Maldives from the country.
  II. An assessment of how the tax treaty will increase the level of trade and investment into the Maldives, or otherwise improve closer economic relations.
  III. A statement of any other benefits to the Maldives that may be obtained under the treaty.
  IV. A quantification of the potential revenue loss for Maldives under the treaty.

### Recommendations (Tax Treaties)
- Given the low tax environment in the Maldives for foreign investors, review the policy of negotiating tax treaties; at the least, adopt a moratorium on the negotiation of tax treaties until after the current tax reform project is concluded.
- The Ministry to take the lead in tax treaty negotiations with technical input provided by MIRA.
- Develop a Tax Treaty Policy applicable to all treaty negotiations, including:
  - A baseline for negotiations that identifies matters that are non-negotiable.
  - Preparation of a Tax Treaty Impact Statement.
- Consider revising the Maldives Model Tax Treaty to include an anti-fragmentation rule for the services and construction PE inclusions.

### GST — Background and Reform Context
- The GST was introduced in 2011 to replace a rudimentary tax system relying heavily on import tariffs.
- Strengthening of tax administration accompanied the GST introduction through establishment of MIRA starting in 2010.
- This chapter discusses remaining shortcomings of the GST and options for further reform, focusing mainly on tax policy issues and noting that policy reforms typically require improved administrative capabilities.

### GST Revenue Issues — Key Figures and Findings
- Present standard GST rate: 6 percent; tourism sector rate: 12 percent.
- Average (weighted) tax rate: about 8.6 percent.
- GST revenue: 9.2 percent of GDP.
- Findings on sectoral revenue responsiveness:
  - A 1 percentage point GST rate raises less revenue from the tourism sector than from the non-tourism sectors; the difference is 28 percent (rows (6) and (7) in Table 3).
  - Overall GST revenue is significantly larger in the tourism sector than in the domestic sector, but taxable supplies (row (4)) are almost 30 percent higher in the domestic sector than in the tourism sector.
- Potential explanations for the tourism sector’s lower responsiveness per percentage point:
  I. Number of GST payers: significantly larger number of taxpayers in the domestic sector than in the tourism sector (row (9)), although tourism businesses on average may be considerably larger economically.
  II. Possible erosion of the GST base through transfer mispricing:
    - Practice: selling “tourist packages” to affiliated operators abroad, who resell to foreign customers.
    - If sold package is underpriced (deviates from arm’s length), part of value added (profit margin) may not be captured by local GST (and BPT), reinforcing recommendation to adopt modern transfer pricing legislation.
  III. GST refund practices:
    - No cash GST refunds are provided to registered persons (even exporters); refunds are provided through a corresponding downward adjustment to BPT liability.
    - This increases reported nominal GST revenue (row (2)) and simultaneously decreases reported nominal revenues of other affected taxes, causing reported revenue to deviate from true economic values and overstate GST revenue capacity.
  IV. Cross-sectoral differences in administration and enforcement may affect collections despite structural similarity.
- Table 3 key parameters (exact figures preserved):
  - Tax rate, %: Non-Tourism GST 6.0, Tourism GST 12.0.
  - Revenue, million MVR: Non-Tourism 2,683 (39.0% of total), Tourism 4,199 (61.0% of total), Total 6,882.
  - Tax/GDP-ratio, %: Non-Tourism 3.6, Tourism 5.6, Total 9.2.
  - Taxable sales, million MVR (2)/(1): Non-Tourism 44,717 (56.1% of total), Tourism 34,992 (43.9% of total), Total 79,709.
  - Average rates, (2)/(4), %: Non-Tourism 6.0, Tourism 12.0, Total 8.63.
  - Revenue per %-point of rate, (2)/(1), million MVR: Non-Tourism 447 (56.1% of total), Tourism 350 (43.9% of total), Total 797.
  - Sectoral percent differences in (6): +28-- (Non-Tourism), -22-- (Tourism).
  - Sectoral GDPs, million MVR: Tourism N.A., Total 74,866, Tourism sector listed separately as 14,913 in context.
  - Number of taxpayers: Non-Tourism 11,567 (85.8% of total), Tourism 1,912 (14,2), Total 13,479.
- Source for table: IMF staff calculation based on data obtained from MIRA.

### Present GST: ‘Dichotomized’ VAT
- The Maldives GST resembles a multistage invoice-credit based VAT system but deviates importantly by separating tourism and non-tourism sectors.
- This formal separation is explicit in GST law and regulations (Section 14 of the GST Act): (a) tourism goods and services; and (b) general goods and services apart from those under (a).
- GST Regulations (Chapter 1, section 3(c)) require separate reporting to MIRA if a person carries on taxable activities in both areas; in practice, sales between tourist and non-tourist companies are treated under normal VAT charging and crediting rules.
- Policy objectives of VAT reiterated: raise a large share of total taxes in a non-distortionary manner by applying a uniform rate to a broad base; neutral with respect to relative prices and international trade under the destination principle; allow full input tax credits for investment costs.
- Excises as supplementary revenues:
  - Excises on tobacco, alcoholic products, fuels, and motor vehicles recommended; should be introduced in tandem with trade liberalization and tariff reductions on same products.
  - Short-term revenue option: increase the airport service charge.

### GST Policy Recommendations
- Short-to-medium term: consider gradual harmonization of rates by increasing the 6 percent rate as needed by revenue requirements.
- Medium-to-long term: introduction of a modern broad-based VAT at a uniform tax rate should remain an overarching policy objective.
- Keep the GST registration threshold at its present level for the time being.

### GST Threshold — Key Points and Recommendation
- Present registration threshold: turnover level of MVR 1,000,000 (roughly corresponding to US$64,500 at present exchange rates).
- Importers of goods to the Maldives and suppliers of tourism goods and services are required to register even if turnover is below MVR 1,000,000.
- Voluntary registration for businesses below the threshold is allowed.
- Reasons to keep the threshold at present level:
  I. Thresholds reduce taxpayers’ compliance costs and increase tax administration efficiency by limiting control work over many small taxpayers whose revenue contribution is typically small. Reducing the threshold may significantly increase registered taxpayers and both administrative and compliance costs.
  II. Net revenue gain of reducing the threshold may be close to nil or negative due to highly concentrated GST base among largest businesses.
    - Figure 11 evidence: about 90 percent of GST revenue in the tourism sector comes from less than 20 firms, despite about 30 percent of registered firms being below the threshold.
    - In non-tourism sectors, approximately 90 percent of the GST is collected from firms with turnover above MRV 5 million; approximately 30 percent of registered firms are below the GST threshold but contribute no more than 1 percent of GST revenue.
  III. Present threshold is aligned with thresholds in other island economies and neighboring countries of similar structure and development (Figure 12).
  IV. Many taxpayers below the threshold already contribute to revenue:
    - All importers of goods and suppliers of tourism services are required to register even if below the threshold.
    - Voluntary registration option exists for businesses with turnover smaller than MRV 1 million.
    - Most unregistered businesses below the threshold contribute to revenue through GST payments on their input.
  V. Introduce a simplified tax regime (uniform turnover tax) for taxpayers with turnover below the threshold (as recommended in Chapter III) to reduce economic distortions and ease transition to the regular GST regime.
- Recommendation: Keep the GST threshold at its present nominal level for the time being.

*Italic source attribution: Excerpt from the IMF PDF chapter/section provided in content unit 1mdvea2019003.*

### 143.      There are basically three justifications for the use of exemptions and zero-rating in

### Exemptions, Zero‑Rating, VAT on E‑Commerce, and Property Taxes

### Justifications for exemptions and zero‑rating
- Three stated justifications:
  - Improve progressivity by lowering or eliminating tax on necessities disproportionately consumed by low income consumers.
  - Apply to “merit” goods (consumption associated with strong positive externalities) that would be consumed in sub‑optimal quantities if taxed (example: education).
  - Administrative difficulty or high cost of taxing some goods (example: margin‑based fees for financial services).

### Exemptions versus zero‑rating
- Exemption (VAT context) specifics:
  - No VAT levied on sales, but no credit allowed for VAT on inputs used in production.
  - Input VAT becomes embedded in the sales price; exempt seller is outside the VAT system.
- Zero‑rating specifics:
  - Completely removes VAT from the goods while the seller remains part of the VAT system.
  - Administrative considerations sometimes make exemption preferable to zero‑rating because exempt traders are outside the VAT system.
  - The EU Commission views zero rating as a transitional measure tolerated only temporarily.

### Costs, efficiency, and administrative considerations
- Policy and administrative arguments against exemptions and zero‑rating:
  - Generally erode the tax base and typically reduce revenues, requiring higher tax rates to achieve a given revenue level.
  - Reduce economic efficiency by creating widely dispersed and often non‑transparent effective tax rates across consumption goods.
  - B2B zero‑rating: may not affect revenue but is conducive to fraud and higher administration and compliance costs.
  - B2B exemptions: likely increase revenues but cause “cascading”—double taxation of consumption—reducing economic efficiency.
  - VAT reliefs aimed at progressivity are very costly and often poorly targeted.
  - Exemptions and zero‑rating complicate tax administration by requiring traders and tax administration to distinguish taxed and non‑taxed supplies, increasing compliance and administration costs.
  - Provision of tax reliefs leads to continued political pressure for broader reliefs.

### Measurement and targeting
- It is sound practice to estimate tax expenditures (revenue losses) associated with VAT exemptions and zero‑ratings.
  - MOF should, in close consultation with MIRA, seek to develop tax expenditure estimates of GST reliefs.

### Distributional impact evidence and policy implications
- Empirical point: Assumed progressivity of VAT reliefs for basic foods is questioned.
  - Although low‑income households spend a higher share of total consumption on food and have a higher propensity to consume, high‑income households spend more in absolute terms on food (e.g., more expensive foods).
  - Result: Higher income deciles often receive the largest share of associated tax expenditures despite VAT regressivity.
  - Jamaica data (Figure 13) provided as representative evidence of this phenomenon.
- Policy implication:
  - VAT reliefs are generally a poorly targeted and cost‑inefficient instrument to support low income families.
  - More efficient alternative: tax broadly and distribute a share of revenue directly to the poor through targeted social transfers (for example, a cash transfer program, preferably based on existing social support programs).

### Items where reliefs may be regressive
- Tax reliefs likely regressive (taxing them would likely improve progressivity) include:
  - Fuels (consumed in larger quantities by high income individuals),
  - Electricity,
  - Financial services (consumed proportionally more by higher income individuals).
- Other policy reasons might justify exemptions despite distributional concerns (example: VAT on financial services).

### Recommendations on exemptions and zero‑rating
- Restrict zero‑rating to exports and repeal all zero‑rating of domestic supplies.
- Critically review and substantially narrow the spectrum of remaining exemptions to those critical to low‑income households.
- Estimate revenue consequences of GST reform measures.
- Expand direct social transfers to low‑income families to offset higher consumption prices resulting from removing reliefs.

### VAT applied to electronic commerce — core issues
- Key objective: secure economic efficiency, neutrality, and equity in tax treatment of electronically traded goods and services identical to other channels, consistent with OECD International VAT Guidelines (principles of “neutrality” and “destination” taxation).
- Core administrative challenge: capturing growing cross‑border electronic commerce, particularly digital products delivered without passing customs control.
- Digital products are treated as services under modern VAT laws for the purpose of importation and VAT treatment.
- Table 4 summary (descriptive):
  - Tangible products delivered to consumers: VAT collected at the border.
  - Digital products to consumers: the key problem area for VAT collection.
- Reverse charge mechanism commonly used for cross‑border B2B supplies of services (including digital products):
  - VAT‑registered recipient charges itself VAT and may claim input tax credit if used for taxable supplies.
  - Reverse charging simplifies administration for foreign providers not established in the destination country.
- B2C cross‑border supplies of services:
  - Reverse charge infeasible; consumers unlikely to comply.
  - Option: require foreign service provider to register for VAT if their taxable transactions exceed the registration threshold.
- OECD work (including BEPS Action 1) focuses on uniform standards for locating B2C imported services:
  - Distinction between “on‑the‑spot” supplies and “remote” supplies.
  - On‑the‑spot: place of supply is place of performance.
  - Remote supplies: place of supply is place of residence of the recipient, using indicators such as IP address, billing address, bank details, mobile country code of the IMSI stored on recipient’s device.
- Practical difficulty: enforcing registration of foreign suppliers for GST in a small country like the Maldives; effective taxation of B2C imported services likely requires coordinated international effort.

### Recommendations on VAT for e‑commerce
- Set up internal working group with VAT experts from the MOF (the Tax Policy Unit) and MIRA to prepare a reform plan for adoption of VAT on E‑commerce, based in part on OECD Guidelines.
- Engage with regional trading partners to ensure an internationally coordinated approach to adoption of VAT on E‑commerce.

### Property taxes — background and current measures
- Existing charges that could be considered nascent property taxes in the Maldives:
  - Stamp duty at the rate of 0.01 percent on registration of mortgages.
  - Tourism land rent tax levied on tourist resorts, hotels and guesthouses if built on land owned by the Government, at the flat rate of USD 8 per square meter of land (subject to caps and floors as specified in the Act). The tax is recurrent (annual) and paid quarterly.
  - Total revenue of the rent tax was in the order of MVR 1½ billion in 2017.
- No broader property taxes are presently in place.
- Maldives context:
  - 209 local councils financed mainly by central government transfers.
  - Revenues of 0.1 - 0.5 percent of GDP are noted as the order of magnitude for selected countries in the broader region.

### Rationale for recurrent property taxes
- Advantages:
  - Less distortive than many other taxes (in particular income taxes) and progressive.
  - Property tax base immobility supports efficiency; can be a good local tax borne mainly by residents.
  - Can promote efficient land use and induce land development.
  - Can replace taxes on mobile bases or highly distortionary transfer taxes.
  - Potentially important revenue source for local governments.
- Preconditions:
  - Adoption requires careful planning and significant investment in administrative infrastructure.

### Understanding yield — the revenue formula
- Property tax revenue expression:
  - Revenue = Legal Tax Base × Tax Rate x Coverage Ratio × Valuation Ratio × Collection Ratio
- Definitions:
  - Legal Tax Base: properties identified in law as subject to property tax.
  - Tax Rate: rate applied against the defined base.
  - Coverage Ratio: proportion of properties that should be included in the base that have actually been identified and included in the cadaster.
  - Valuation Ratio: proportion of full defined value actually assessed for tax purposes.
  - Collection Ratio: proportion of assessed taxes actually collected.
- Illustrative numeric example from the text (administrative deficiencies can greatly reduce yield):
  - If market value base = $1,000 and tax rate = 0.10, expected tax revenue = $100.
  - With Coverage Ratio = 0.70, Valuation Ratio = 0.80, Collection Ratio = 0.85:
    - Actual tax collected = $1,000 x 0.10 x 0.70 x 0.80 x 0.85 = $47.60.
  - Conclusion: administrative deficiencies can cause a loss of more than half of potential revenue; administrative improvements could substantially increase yield without legislative changes.

*Source: IMF TA Report (excerpts provided in the supplied content).*

### 165.      It follows that property tax policy and administration involve not only defining the

### 1mdvea2019003 - 165.      It follows that property tax policy and administration involve not only defining the

### D. Tax Policy Options for a Future Modern Property Tax
- Broad base including both land and buildings:
  - Advantages: allows much lower tax rates, lower distortions, may enhance equity, and facilitates application of property values approximating actual market values.
  - Note: literature emphasizes efficiency of taxing only land since land is immobile; few countries tax only land and a few tax land and buildings differently.
- Valuation methods:
  - Spectrum: simple area-based (square meter) methods; rental values; pure market-value based methods.
  - Rental values reflect present use only and may not reflect alternative best use.
  - Market-value-based systems are broadly agreed superior to area-based and rental-based systems for revenue buoyancy and equity, but may be infeasible in many emerging and developing countries due to weak real estate markets and administrative capacity.
- Implementation requirements:
  - Valuation guidelines must be simple, transparent, and consistent to ensure consistent methodology.
  - Develop technical valuation capacity at the central level to facilitate transition to value-based tax.
  - Regular revaluations necessary; international norm: revaluations at least every five years, possibly with price indexation in the interim.
- Exemptions and thresholds:
  - Apply tax exemptions broadly consistent with international norms.
  - A basic zero-rated threshold for private residences would typically exclude a large share of the population with limited income and assets, reducing administrative burden and enhancing progressivity.
- Maldives-specific staging:
  - Initial phase: rely on a simple area-based system (flat m2 rate for land), possibly differentiated by location and nature of land; could phase out existing land rent tax in tourism sector.
  - Medium-term: extend m2 system to include buildings.
  - Long-term objective: move towards a market-value-based system.
  - Authorities should seek technical assistance to develop a detailed road-map for technical preparations and introduction.

### E. Tax Administration Reforms Supporting a New Property Tax
- Critical administrative elements for success:
  - Comprehensive identification and ‘capture’ of all relevant properties in the tax register through cooperation and data exchange among relevant entities.
  - Preparation and upkeep of a fiscal cadaster for property taxes.
  - Development of technical administrative infrastructure and expertise for property valuation and regular re-valuation.
  - Effective collection of the tax.
- Fiscal cadaster design and rollout:
  - Building a modern, computerized fiscal cadaster is data-intensive and requires cooperation among MOF, tax administration and local offices, ministry responsible for land management and urban planning, Ministry of Justice, local governments, courts, statistical offices, Geographical Information System (GIS), etc.
  - Minimum cadaster information per property: description; boundaries (with cadastral maps); ownership; size of lands and buildings.
  - Process can begin short term, evolve over time; initially rely on self-registration and self-appraisal, with administrative takeover over time.
- Appeals and dispute resolution:
  - Provide a process allowing taxpayers to appeal valuation or tax calculation errors, including sufficient time for appeal before tax is due.
  - Maldives should develop a fair, transparent, and independent dispute resolution process for the property tax.
- Phased geographic coverage:
  - Initial limitation: capital Male and tourist resorts on islands.
  - Longer term: gradual extension to whole country in tandem with administrative improvements.
- Key administrative dimensions to implement in parallel with policy reforms:
  1. Measures to secure comprehensive registration to raise share of properties ‘captured’ in the tax cadaster.
  2. Measures to ensure proper valuation to broadly track market prices, including regular updates.
  3. Measures to ensure strong enforcement of tax collection, including audits and penalties for non-payment.
  4. Efficient revenue estimation capability, including compilation of data to allow accurate simulations of revenue consequences.
- Capacity and assistance:
  - These dimensions require highly specialized technical expertise.
  - Government should seek technical assistance to formulate a detailed roadmap for establishing efficient property tax administration.

### F. Property Transfer Taxes
- Characteristics:
  - Prevalent revenue source in many countries.
  - Easy to administer and high compliance because registration of legal ownership often depends on payment.
  - Buoyant in active property markets.
- Adverse effects and concerns:
  - Reduce turnover of property, thinning the market and distorting capital allocation.
  - Increase overall transaction costs, potentially adversely affecting registration of property.
  - Efficiency costs if incidence falls on business inputs.
  - Strongly pro-cyclical and volatile revenue source.
  - May reduce labor mobility by making labor less willing to move for jobs.
  - Create incentives for collusion to under-declare transaction prices, undermining market price data for future recurrent property tax valuation.
- Recommendation for Maldives:
  - For all these reasons, the Maldives should resist introduction of property transfer taxes.

### Recommendations (summary)
- Longer-term objective:
  - Gradual and well-prepared move to a modern and comprehensive property tax preferably levied on the market value of property; introduce a broader tax on most urban property based on market values.
- Short to Medium Term:
  - Make a political decision whether or not to engage in a broad-based property tax reform.
  - If affirmative, set up a steering committee with representation from all relevant ministries and agencies to guide and monitor reform.
  - Seek technical assistance to formulate a detailed multi-year roadmap and action plan for tax policy design and administrative reform, specifically aimed at:
    - Introducing a simple area-based m2 tax, initially for land only, and with a basic threshold.
    - Limiting its coverage initially to the capital Male and tourist resorts.
    - Establishing property registration for tax purposes.
    - Establishing property valuation to track market developments.
    - Supporting tax enforcement.
    - Improving estimation and simulation capabilities.
    - Possibly phasing out the existing rent tax in the tourist sector.
  - Start drafting a general property tax law in accordance with the recommendations above.
- Long Term:
  - Introduce the new property tax, and gradually move towards a market-value-based system that covers the whole of the country, when necessary administrative preparations are in place.

### Appendix I. Design Issues with the EBITDA Rule (summary of main issues)
- Main design issues to address with an EBITDA-based interest deduction limitation:
  I. Meaning of interest.
  II. The calculation of EBITDA.
  III. The acceptable ratio.
  IV. The group ratio approach for MNEs.
  V. The carry forward of excess interest expense and excess interest capacity.
- Interest expenditure scope and concerns:
  - TR-2018/B64 applies to gross interest expense rather than net interest expense (i.e., after reduction for interest income), departing from BEPS Action 4 which allows full deduction to extent of interest income.
  - EBITDA limitation applies only if interest expense exceeds interest income (i.e., net interest expense).
  - Definition of “interest” in TR-2018/B64 includes payments “economically equivalent to interest” but gives no guidance on scope; needs clarification (could include bill discounts, defaulted interest by guarantors, amounts paid under hybrid instruments).
  - No definitions of “dividends” and “interest” in BPTA; under normal operation dividends under redeemable preference shares are non-deductible; treating such dividends also as “interest” in TR-2018/B64 would include non-deductible amounts in the base against which the 30 percent limitation is applied.
  - Unclear treatment of interest denied deduction due to the 6 percent ceiling on interest rate under BPTA; appears such interest is included for purposes of TR-2018/B64, again including already non-deductible amounts in the 30 percent base.
- Calculation of EBITDA:
  - EBITDA defined as earnings before interest, tax, depreciation, and amortization, and as a financial analytical tool refers to financial profit and financial-account measures.
  - BEPS Action 4 proposed EBITDA based on tax accounts (taxable profit and tax depreciation/amortization); TR-2018/B64 appears to follow taxable profit meaning.
  - For taxpayers with losses, EBITDA calculation starts from loss ignoring interest expense, then reduces loss by depreciation and amortization deductions.
  - Arguments for using tax accounts: simplicity; reduces risk of taxpayer with loss paying tax due to disallowance; harder to increase net interest deductions without increasing taxable profit.
- EBITDA ratio:
  - BEPS Action 4 recommended ratio range: 10 percent –   30 percent.
  - Factors supporting higher ratio include: use only fixed ratio (no group ratio); no carry forward of excess interest or excess debt capacity; higher domestic interest rates (last recorded benchmark interest rate in the Maldives was 7 percent); presence of other interest deductibility limits (e.g., 6 percent interest rate limit under BPTA).
  - TR-2018/B64 initially set ratio at 25 percent; later increased to 30%.
  - Same ratio applies to all taxpayers regardless of sector; may distort activity due to different sector risk profiles.
  - BEPS Action 4 suggested higher ratio for SMEs; TR-2018/B64 initially applied same ratio to SMEs and large businesses; TR-2018/D68 increased ratio to 30% and provided an SME exception. Given domestic base erosion risks, consideration should be given to removing the SME exception; increase to 30 percent should provide sufficient relief for SMEs.
- Group ratio rule:
  - BEPS Action 4 allows a group ratio rule for MNEs to supplement fixed ratio, applying net third party interest/EBITDA ratio of the group based on consolidated accounts.
  - Group ratio recognizes third-party leverage for non-tax reasons; requires consolidated financial accounts and potential adjustments.
  - TR-2018/B64 does not include group ratio rule; absence may justify setting ratio at 30 percent.
  - Implementing group ratio hinges on MIRA resources and technical capacity.
- Carry forward of excess interest deductions and excess debt capacity:
  - If net interest expense exceeds fixed ratio of EBITDA, deduction disallowed for excess interest.
  - BEPS Action 4 recommended carrying forward excess interest under same rules as carry forward of losses.
  - Carry forward of excess debt capacity (when interest expense below fixed ratio) would increase EBITDA in following year and is a more complex issue.
  - TR-2018/B64 does not expressly provide for carry forward of excess interest or excess debt capacity; it is understood excess interest is carried forward, presumably under same period as tax losses.
  - Absence of explicit carry forward rules justifies higher ratio within BEPS range.

*Source: IMF content unit 1mdvea2019003 - 165.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1mdvea2019003.pdf_