## 1mdvea2022002 ## Source details **Canonical URL:** [1mdvea2022002](https://www.imf.org/-/media/files/publications/cr/2022/english/1mdvea2022002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1mdvea2022002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1mdvea2022002.pdf.json) --- ### Mission, purpose, and participants - Request from the Maldivian Ministry of Finance on October 17, 2021 led to a remote technical assistance mission during January 6-24, 2022. - IMF Fiscal Affairs Department (FAD) mission: Ms. Maria Coelho (head), Mr. Lee Burns, Mr. Peter Mullins (FAD external experts). - Principal interlocutors: Minister of Finance Ibrahim Ameer; MOF staff including Mr. Ahmed Saruvash Adam; Tax Policy Unit (TPU) members and consultants including Ms. Mariyam Juwairiya, Mr. Arshad Jameel, Ms. Aishath Hasna Ahmed, Mr. Mohamed Raaidh, Ms. Nadheema Latheef. - Meetings with Maldives Inland Revenue Authority (MIRA) (Commissioner General Fathuhulla Jameel), multiple ministries, USAID consultants, private sector representatives, and a half day workshop on VAT coverage of the digital economy. - Report purpose: review existing Goods and Services Tax (GST) legislation and propose concrete priority reforms to be included in a GST Act amendment; contains mission findings and consultations. ### Executive summary — objectives, context, and key high-level findings - Objectives: - Review the Maldives GST regime and identify policy and legal reform options to support modernization, enhance efficiency, equity, and revenue mobilization. - Context: - Core GST parameters have barely changed in nearly 12 years despite five amendments to the GSTA and 28 amendments to associated regulations. - Rapid digitalization and changing global business models have rendered place of supply rules increasingly inadequate. - Key findings on GST performance and weaknesses: - GST revenues ~9 percent of GDP (about half of all total government tax revenues in 2021); nearly two-thirds of GST revenue comes from the tourism sector. - Major weaknesses: - Lack of contemporaneous refunds of excess input tax credits. - Amortized crediting of GST on capital equipment. - Current design effectively exempts imported goods and services. - Relatively low GST registration threshold and lack of an alternative presumptive regime for SMEs, raising compliance costs and administrative burden for MIRA. - High-level recommendations: - Consider full redraft of the GSTA to consolidate provisions scattered across regulations, rulings, and the Tax Administration Act (TAA). - Medium-term (from 2024 onwards once global inflationary pressures abate): consider gradual increases to both GGST and TGST and consider gradual alignment of the two rates depending on homestay/guesthouse growth and administrative/enforcement assessment. - Do not expand current list of exempt and zero-rated goods and services in the short run; rationalize exemptions with review of direct subsidies and social assistance. ### Abbreviations and acronyms (selected) - B2B Business-to -business - B2C Business-to -consumer - BPT Business Profit Tax - CD Capacity Development - GAAR General Anti-Avoidance Rule - GGST General Goods and Services Tax - GST Goods and Services Tax - GSTA Goods and Services Tax Act - MIRA Maldives Inland Revenue Authority - MOF Ministry of Finance - OTA Offshore Travel Agent - P2P Peer-to -Peer - SME Small and Medium Enterprise - TAA Tax Administration Act - TGST Tourism Goods and Services Tax - TPU Tax Policy Unit - VAT Value-Added Tax --- ### GST rates, revenue contribution, and recommended rate changes - Current statutory rates: - GGST: 6 percent (domestic sector). - TGST: 12 percent (tourism sector). - Historical note: GST imposed at 3.5 percent from commencement in October 2011; increased to 6 percent from 1 January 2012; GST rate on tourism increased to 8 percent from January 2013 and then to 12 percent from 1 November 2014. - Revenue shares and efficiency: - GST revenues account for around 9 percent of GDP and about half of all total government tax revenues in 2021. - Nearly two-thirds of GST revenue comes from the tourism sector. - Maldives C-efficiency in 2019: 1.3 (actual revenue collection is 130 percent of hypothetical revenue collection); weighted average GST rate used: 8.8 percent for the whole economy; focusing narrowly on GGST at 6 percent yields measured C-efficiency of 0.7. - Recommended rate reforms (Table 1 summary): - Increase GGST Rate to 8-10 percent - Timing: MT - Revenue Impact: 0.9-1.8 (% of GDP) - Increase TGST Rate to 14-15 percent - Timing: MT - Revenue Impact: 0.9-1.3 (% of GDP) - Align GGST and TGST Rates - Timing: LT - Revenue Impact: ++ - Fiscal mechanics: - Each percentage point increase in GGST or TGST raised around 0.5 percent of GDP prior to the COVID crisis (caveat on avoidance reducing per-point yield as rates rise). - Estimated examples: - Increase GGST to 10 percent: may increase revenue by around 1.8 percent of GDP. - Increase TGST to 15 percent: may raise additional revenue of around 1.35 percent of GDP. - Timing caveat: advisable to wait until at least 2024 to begin increasing rates given global inflationary pressures and the COVID-19 pandemic. ### Tourism, dual-rate structure, and sectoral levies - Dual-rate design: - GGST (6 percent) and TGST (12 percent) with separate registration and returns (Section 14 of the GSTA). - TGST effectively has no registration threshold (effectively zero). - Sectoral levies complementing GST: - Green Tax: USD 6 per night for tourist resorts, hotels and vessels; USD 3 for guesthouses. - Mandated 10 percent minimum service charge collected by tourism employers and distributed to employees (mandated since January 2021). - Tourism land rent: raised substantial revenue ~2 percent of GDP pre-pandemic. - Rationale for differential rates: - Given inelastic demand and robust economic rents in high-end tourism and segmentation between tourism and domestic markets, dual rates have functioned without substantial distortion to date. - Long-term objective: single GST rate across broadest consumption base, with long transitional period and protections for vulnerable households. --- ### Exemptions, zero-rating, distributional implications, and reform priorities - Distributional findings: - Most exemptions and zero-rating are regressive; household incidence study shows, except for zero-rating of basic food items, most tax expenditures (including residential rent, electricity, fuels, domestic flights for residents, education, water services) disproportionately benefit the richest quintiles. - Aggregate tax expenditure estimates (2021 FAD report reference): - Cost of tax expenditures for zero-rated goods and services: 6.0 percent of total tax collected. - Cost for exemptions: 4.5 percent of total tax collected. - Short-run guidance: - At a minimum, do not expand the current list of exempt and zero-rated goods and services. - Some narrower exemptions could be eliminated more swiftly: commercial leases, certain financial services, de facto exempt domestic transport. - Specific items identified for review and preferred treatments: - Public utilities (electricity, water, sewerage): fully tax or limit exemptions to households; consider limited exemptions (e.g., exempt first 50 or 100 units) to protect low-income households. - Postal services: impose VAT/GST. - Financial services: narrow exemption scope by taxing fee-based services and general insurance; continue exempting margin-based transactions where administrative difficulty exists. - Domestic transport: tax all domestic transport services including taxi services and ride-sharing apps. - International transportation services: replace exemption with zero-rating. - Donor funded projects: reconsider exemptions in the medium term; impose VAT on goods and services purchased for donor projects except in special humanitarian circumstances. - Real estate/immovable property: remove exemption for commercial leases; tax first sale of new residential property with resale exempt; apply tourist accommodation TGST treatment to timeshare-like arrangements as appropriate. - Essential goods (Schedule 1 zero-rated items): consider replacing zero-rating with targeted subsidies financed by GST revenue rather than broad zero-rating; any reform to fuels should be coordinated with review of government subsidies to fuel importer (State Trading Organization). - Ministries/agencies granting ad hoc concessions: ensure Ministry of Finance (with MIRA) advises and approves exemptions; Special Economic Zones (SEZ) Act exemptions included in review. - Potential revenue gains: - Review and rationalization could yield up to 1.1 percent of GDP for zero-rated items and 0.9 percent of GDP for exemptions (based on 2021 FAD estimates). - Other restraint: - Resist pressure to expand exemptions and zero-ratings. --- ### Digital economy, cross-border transactions, and offshore tourism sellers - Growth drivers: - Digitally deliverable services more than doubled as a share of total trade in services over the last decade and now account for almost half of all service trade in the country. - Widespread internet usage, accelerated by COVID-19, increased e-commerce and digital media consumption. - Short-term direct revenue potential (mission estimate): - Around 0.11 percent of GDP (range consistent with other countries: between 0.02 and 0.17 percent of GDP). - Classification and place of supply: - Conceptually treat digital products as services; expressly exclude digital products from definition of “goods.” - Place of supply rules should locate B2C remote services by residence of the recipient using commercially observable indicators. - Main collection models: - Reverse charge model for B2B imported services (recipient self-charges and claims input credit). - Vendor collection model (vendor registration model) for B2C imported services and low-value imported goods. - Policy recommendations for digital and cross-border supplies: - Apply reverse charge to B2B imported services and internal transfers from related offshore entities. - Apply vendor collection model to B2C remote services and to low value imported goods (LVIG). - Require operators of electronic marketplaces and platforms to register and collect GST where supplies to residents occur through the platform. - Treat digital products as services so imported service rules apply. - Adopt residence-based place of supply using commercially observable indicators (examples: billing address, IP address, recipient bank details) with a two-factor evidence approach. - Electronic marketplaces and operator liability: - Operator liable regardless of whether underlying supplier is registered or required to register. - Exception: where underlying supplier is GST registered in the Maldives, underlying supplier is responsible (operator may meet obligations by agreement; underlying supplier remains liable if operator fails to pay). - Distinguish underlying supply value and platform service fees for GST treatment. - Treat marketplaces as suppliers where operator authorises charge, makes/authorises delivery, or sets terms; count third-party sales in operator threshold. - Offshore booking platforms and inbound tourism: - Nearly 70 percent of accommodation bookings in 2021 were through foreign tour operators or offshore travel agents. - Estimated capture of offshore tourism value-added could yield about 0.2 percent of GDP in additional TGST revenue (assumes offshore seller markup of 5 percent and sector adjustment). - Business models: - Principal (bulk sale) model: resort sells rooms to offshore platform; current law taxes only discounted price charged to platform and treats on-sale as outside TGST scope. - Agency model: platform acts as agent charging commission/fees. - Recommended approaches: - Include a special place of supply rule that a supply of inbound tourism products is a supply in the Maldives so offshore operator supplies become taxable in the Maldives and required to register (no TGST threshold). - Strictly enforce open market value adjustments for related-party discounted sales in short term. - Medium-term: introduce simplified supplier registration and collection mechanisms for non-residents; introduce reporting requirements to leverage marketplace information. - Low-value imported goods (LVIG): - Current LVIG exemption threshold: MVR 6,000 (USD 388) applies to import duty; creates distortion favoring foreign suppliers. - Recommendation: apply LVIG taxation via vendor collection or operator/intermediary liability, with special place-of-supply rules and simplified registration/accounting for foreign suppliers/operators. - Estimated revenue from LVIG collection expansion: at least 0.1 percent of GDP (extrapolated from Customs data for December 2021). --- ### Registration threshold, presumptive tax for small businesses, and simplification - Current registration rules: - GGST registration threshold: MVR 1,000,000 annual supplies. - TGST: effectively zero threshold. - In 2021 Q3, over 97 percent of GGST revenue was collected from businesses with annual turnover > MVR 2,000,000. - Recommended registration changes: - Increase GGST registration threshold to MVR 1,500,000 or MVR 2,000,000 to reduce number of registered taxpayers and compliance burden with marginal revenue impact. - Apply presumptive tax to tourism sector to facilitate uniform registration threshold across TGST and GGST. - Consider limiting voluntary registration (e.g., floor on voluntary registration or restrict to suppliers mainly to registered persons). - Presumptive tax proposal: - Introduce turnover-based presumptive tax set at 2 or 3 percent for businesses below registration threshold. - Rationale: calibrated to be compatible with current BPT and GGST/TGST rates; break-even example given as 2.4 (3.3) percent for certain company profiles. - Exclusions: liberal professionals and publicly listed companies with turnover below threshold should be excluded and required to register. - Need review of compatibility with PIT tax-free threshold of MVR 720,000 and PIT first marginal rate of 5.5 percent. - Simplification for small registered businesses: - Do not introduce simplified GST calculations (turnover-based GST calculation not preferred). - Provide cash flow and compliance relief via option of quarterly reporting. - Eliminate both payments-based and hybrid GST accounting; if payments accounting retained, law must provide clear rules for movement between accounting methods. - Quarterly reporting preferred over payments accounting given risks and complexity. --- ### Input tax credits, refunds, capital expenditure, and transition rules - Current refund and credit practices: - No contemporaneous refund mechanism for excess input tax credits in current GST legislation; Regulation 69(e) provides indefinite carry forward of excess input tax to offset future output tax. - Regulation 46(a)(2) requires input tax on capital expenditure in excess of MVR 500,000 be credited equally over 36 months, with period not commencing until output tax is first generated (Regulation 46(a)(4)). - Possible inconsistency between Regulations and Act: section 37(b) of the Act appears to provide for crediting the “full” amount of input tax. - Consequences: - Registered persons mainly making zero-rated supplies accumulate excess input credits indefinitely. - Immediate credit on capital inputs may increase excess credits. - Current stock of outstanding GST refunds estimated not more than 0.04 percent of GDP — transition fiscally feasible. - Recommendations: - Provide immediate refunds of excess credits for registered persons primarily making zero-rated supplies. - For other registered persons, provide a short carry forward period (3-6 months); at end offset against other tax liabilities and refund residuals. - Eliminate limitations on claiming input tax credits for capital expenditure (remove 36-month write-off and deferred start rules). - Develop transitional strategy for existing carried forward credits (e.g., lump sum or instalment refunds for zero-rated suppliers; bundle pre-existing credits for other registrants with first-period crediting and subsequent carry forward). --- ### Anti-avoidance, joint ventures, and other design features - GAAR recommendation: - Include a General Anti-Avoidance Rule (GAAR) in the rewritten GSTA. - GAAR should target arrangements with the principal purpose of obtaining a tax benefit (reduction in GST liability, increase in input credit entitlement, refund entitlement, deferral of GST liability). - GAAR should be more focused than ITA section 66 and exclude genuine commercial transactions incentivized by the law. - Joint venture simplification: - Provide a GST simplification rule for unincorporated joint ventures where operator accounts for output tax and claims input credits on supplies/acquisitions made on behalf of participants; participants jointly and severally liable for operator failures. - Payments/hybrid methods: - Delete hybrid method; do not introduce simplified GST calculation methods. - Deferral for large construction imports: - For eligible large construction projects, consider GST deferral on imports of building materials with reporting of deferred GST and corresponding input credit allowed; require “good standing” criteria and possible deposit by new registrants. --- ### Legal framework, Act vs Regulations, and rewrite recommendation - Observed issues: - Core rules (e.g., place of supply) currently in Regulations (section 104 and 104-1) whereas they should be in the Act. - Disputes about whether some Regulations (e.g., Regulation 46 on capital input credit timing, Regulation 69(e) on refund offsets) are consistent with Act provisions (e.g., section 37(b)). - Recommended legislative approach: - Prefer full rewrite of the GSTA to incorporate core rules in the Act, reduce ambiguity, harmonize with Regulations and the TAA, and lower litigation. - Ensure MOF (through TPU) is responsible for Regulations concerning tax policy/interpretation with technical input from MIRA; MIRA responsible for administrative/procedural Regulations. - Include a general regulation-making power in the Act to enable efficient administration while maintaining core principles in primary legislation. - Provide only GST-specific administrative/procedural rules in GSTA and retain generic administrative provisions in the TAA; coordinate TAA/GSTA relationship in rewrite. --- ### Annex highlights — real estate, vacation properties, and B2C imported services design - Real estate principles (Annex I summary): - Principle: all supplies of services and goods regarding real property should be subject to GST with three limited exceptions (first sale of newly constructed principal residence meeting conditions; sales by non-commercial entities; long-term rent of a dwelling used as residential property). - Commercial property: taxable supply with input tax credits. - Residential resale and long-term leasing: exempt supply. - Builders of new residential units: collect GST and claim input credits. - Vacation properties and dual-use rules: detailed pooling and night-count approaches (e.g., 183 nights threshold) recommended to determine taxable vs exempt treatment and input credit entitlements. - Annex II — B2C imported services design: - Maintain reverse charge for B2B imported services; vendor collection for B2C imported services and LVIG. - Residence of recipient determined by commercially observable indicators; two-factor evidence approach recommended. - Registration threshold for foreign providers: foreign providers should count B2B and B2C supplies towards threshold; once registered, foreign provider accounts for B2C supplies; reverse charge continues for B2B. - Currency reporting: TGST reported and paid in USD (or as determined by MIRA); GGST in MVR (Section 62 references). - Simplified procedures for foreign providers: online registration, returns, payments, right to keep records offshore subject to production obligations; options for security or local agent to mitigate compliance risk. - Sample legislative drafting provisions provided for supplies of goods, services, electronic distribution platforms, and residence tests. --- *Source: IMF Fiscal Affairs Department mission report to the Maldives — PREFACE and EXECUTIVE SUMMARY (January 6-24, 2022 mission).* ### PREFACE _________________________________________________________________________________________ 5 ### PREFACE ### Mission background and participants - Request from the Maldivian Ministry of Finance on October 17, 2021 led to a remote technical assistance mission during January 6-24, 2022. - Mission of IMF Fiscal Affairs Department (FAD): Ms. Maria Coelho (head), Mr. Lee Burns, Mr. Peter Mullins (FAD external experts). - Principal interlocutors: Minister of Finance Ibrahim Ameer; MOF staff including Mr. Ahmed Saruvash Adam; Tax Policy Unit (TPU) members and consultants including Ms. Mariyam Juwairiya, Mr. Arshad Jameel, Ms. Aishath Hasna Ahmed, Mr. Mohamed Raaidh, Ms. Nadheema Latheef. - Meetings held with Maldives Inland Revenue Authority (MIRA) staff including Commissioner General Fathuhulla Jameel and multiple MOF, Ministry of Economic Development, Ministry of Tourism officials, USAID consultants to MOF, private sector representatives (PwC Maldives, CTL Strategies, S&A Lawyers, Maldives Association of the Tourism Industry, Maldives Association of Travel Agents and Tour Operators, Maldives National Chamber of Commerce and Industry). - A half day workshop on international best practice for VAT coverage of the digital economy provided to MOF, MIRA and the Tax Appeal Tribunal. ### Report purpose - Review the existing Goods and Services Tax (GST) legislation and propose concrete priority reforms to be included in a GST Act amendment. - Report contains the mission’s findings, incorporating consultations with the authorities. ### Acknowledgement - Mission expresses gratitude for the collaboration of the authorities and efficient support in organizing discussions. ### Abbreviations and acronyms (selected) - B2B Business-to -business - B2C Business-to -consumer - BPT Business Profit Tax - CD Capacity Development - GAAR General Anti-Avoidance Rule - GGST General Goods and Services Tax - GST Goods and Services Tax - GSTA Goods and Services Tax Act - MIRA Maldives Inland Revenue Authority - MOF Ministry of Finance - OT A Offshore Travel Agent - P2P Peer-to -Peer - SME Small and Medium Enterprise - TAA Tax Administration Act - TGST Tourism Goods and Services Tax - TPU Tax Policy Unit - VAT Value-Added Tax --- ### EXECUTIVE SUMMARY ### Objectives and context - Review the Maldives GST regime and identify policy and legal reform options to support modernization, enhance efficiency, equity, and revenue mobilization. - Despite five amendments to the GSTA and 28 amendments to associated regulations, core GST parameters have barely changed in nearly 12 years. - Rapid changes to global business models and increasing digitalization have made key features of the legislation – such as place of supply rules – increasingly inadequate. ### Main findings — overall GST performance and weaknesses - GST is a workhorse for Maldivian tax revenue collection but efficiency is undermined by design and implementation flaws. - GST revenues represent around 9 percent of GDP (about half of all total government tax revenues in 2021), with nearly two-thirds coming from the tourism sector. - Key weaknesses cited: - Lack of contemporaneous refunds of excess input tax credits. - Amortized crediting of GST on capital equipment. - Current design effectively exempts imported goods and services. - Relatively low GST registration threshold and lack of an alternative presumptive regime for SMEs, causing elevated compliance costs and administrative burden for MIRA. ### Tourism and dual-rate structure - Maldives GST comprises: - General GST (GGST) applying a rate of 6 percent for the domestic sector. - Tourism GST (TGST) applying a rate of 12 percent to the tourism sector. - Dual rate design has replaced a tourist accommodation tax and reduced reliance on customs tariffs. - Given inelastic demand and robust economic rents for high-end tourism, and segmentation between tourism and domestic markets, dual rates have functioned without substantial distortions to date. - Recommendation: From 2024 onwards (once global inflationary pressures abate), consider gradual increases to both the general and tourism GST rates; consider gradual closer alignment of the two rates in the long-term depending on homestay/guesthouse growth and administrative/enforcement assessment. ### Exemptions and distributional implications - Most exemptions and zero-rating are regressive; recent household incidence study shows that, except for zero-rating of basic food items, most tax expenditures (including residential rent, electricity, fuels, domestic flights for residents, education, water services) disproportionately benefit the richest quintiles. - Rationalizing exemptions/zero-ratings requires comprehensive review of direct subsidies and social assistance programs; current social assistance may not yet be sufficiently developed to fully compensate vulnerable households. - Short-run recommendation: at a minimum, do not expand the current list of exempt and zero-rated goods and services. - Some narrower exemptions could be eliminated more swiftly: commercial leases, certain financial services, de facto exempt domestic transport. ### Digital economy and cross-border transactions - Widespread internet usage is underpinning growth in e-commerce and online marketplaces, including offshore sellers and online transactions for services consumed in the Maldives that fall out of current GST scope. - Policy recommendations: - For cross-border digital services provided directly to final consumers (B2C) and low-value goods imported from online marketplaces, adopt the vendor collection model. - For cross-border digital services (and imported goods and services more generally) provided to GST registered businesses, introduce a reverse charge rule (currently absent). - Address offshore travel agents (OTAs) and online platforms re-selling tourist packages and accommodation: treat a supply of inbound tourism products and related booking services as a supply in the Maldives (see Table 1 revenue impacts). ### Legal framework and reform approach - Given the extensive reforms proposed, consider a full redraft of the GSTA to incorporate provisions scattered over regulations, tax rulings, and the Tax Administration Act (TAA). - A sixth amendment could pass key reforms, but a full redraft would be less ambiguous, more harmonized with secondary legislation, more taxpayer friendly, and likely reduce litigation. --- ### I. INTRODUCTION — Key context and implications - Fiscal context: - Fiscal deficit projected to remain in the double digits as a share of GDP until 2022. - Maldives currently stands at a high risk of external and overall debt distress. - High dependence on tourism tax revenue complicates tax base broadening; medium-term policy should shift to diversifying the tax base towards domestic (non-tourism sector) sources. - Pandemic effects: - Total revenue declined by 32 percent in 2020 relative to 2019. - Since 2019, notable tax policy reforms: Tax Policy Unit setup, introduction of Personal Income Tax, abolition of tax incentives under the Foreign Investment Act, implementation of international minimum standards for corporate income taxation. - Macroeconomic indicators (including tax revenues) expected to rebound to pre-pandemic levels by 2023. - Timing of implementation: - Implementation of new revenue mobilization measures should be delayed until 2023 at the earliest to mitigate temporary contractionary effects. - Economic effects of comprehensive GST reform: - Fully functioning excess input tax credit refund mechanism and GST coverage of imports expected to improve the current account. - Higher medium-term consumption tax rates can encourage greater domestic private saving. - Immediate refunds of GST on capital inputs can support investment. - Policies recommended are unlikely to lead to permanently higher inflation rates despite a small one-off upward price adjustment. - Structure of the report: - Section II.A: revenue productivity and taxpayer characteristics. - Section II.B: harmonization of taxation in tourism and domestic sectors. - Section II.C: rationalization of exemptions and zero-rated goods and services. - Section II.D: treatment of digital transactions (domestic, cross-border, and offshore tourism services). - Section II.E: other design and implementation challenges (refunds, registration threshold). - Section III: legal framework and proposed GSTA and regulation reforms. --- ### II.A. TAX POLICY FRAMEWORK — Revenue Productivity and Taxpayer Characteristics ### Current GST rates and revenue contribution - GGST: 6 percent (domestic sector). - TGST: 12 percent (tourism sector). - Both rates were increased from the original 3.5 percent rate in 2011. - Footnote details: GST imposed at 3.5 percent from commencement in October 2011, increased to 6 percent from 1 January 2012. GST rate on tourism increased to 8 percent from January 2013 and then to 12 percent from 1 November 2014. - GST revenues account for around 9 percent of GDP and about half of all total government tax revenues in 2021. - Nearly two-thirds of GST revenue comes from the tourism sector. ### International comparison and efficiency - By international standards these rates are at the lower end, yet Maldives attains high measured collection efficiency. - VAT revenue as a share of GDP is higher than averages for small island developing countries and for emerging and developing Asia. - C-efficiency (ratio of actual VAT revenue to theoretical revenue derived from aggregate final consumption and VAT standard rate) is a relevant determinant of differences in VAT revenue as a share of GDP. --- ### Table 1 (selected): Revenue Impact and Timeline of Main Policy Recommendations — summary bullets (preserves original numeric values and timing labels) - GST Rates - Increase GGST Rate to 8-10 percent - Timing: MT - Revenue Impact: 0.9-1.8 (% of GDP) - Increase TGST Rate to 14-15 percent - Timing: MT - Revenue Impact: 0.9-1.3 (% of GDP) - Align GGST and TGST Rates - Timing: LT - Revenue Impact: ++ - GST Exemptions and Zero-Rating (aggregate review) - Review and rationalize exemptions and zero-ratings: - Expected aggregate Revenue Impact: <2.0 (% of GDP) - Specific items and timing/revenue direction: - Remove exemptions for public utilities - Timing: MT - Revenue Impact: + - Remove exemption for postal services - Timing: ST - Revenue Impact: + - Narrow scope of financial services exemption - Timing: ST - Revenue Impact: + - Tax all domestic transport services - Timing: ST - Revenue Impact: + - Zero-rate rather than exempt international transportation - Timing: ST - Revenue Impact: - - Consider taxing donor funded projects - Timing: MT - Revenue Impact: + - Remove exemption for commercial leases - Timing: ST - Revenue Impact: + - Assess whether zero-rating of essential goods could be replaced by targeted subsidies - Timing: MT - Revenue Impact: + - Ensure other ministries and government agencies cannot grant GST concessions - Timing: ST - Revenue Impact: None - Resist pressure to expand exemptions and zero-ratings - Timing: ST - Revenue Impact: None - Impose GST on imported goods and services - Timing: ST - Revenue Impact: 0.87 (% of GDP) - GST and the Digital Economy - Extend GST coverage to digital services through reverse charge for B2B and vendor collection model for B2C - Timing: ST - Revenue Impact: 0.1 (% of GDP) - Extend GST coverage to low value imported goods through vendor collection model - Timing: ST - Revenue Impact: 0.1 (% of GDP) - GST on Offshore Booking Platforms - Treat a supply of inbound tourism products and booking services related to these products as a supply in the Maldives - Timing: ST - Revenue Impact: 0.2 (% of GDP) - Other Reforms - Introduce a presumptive tax at 2 or 3 percent of turnover on small businesses along with a higher registration threshold of MVR 1.5-2m - Timing: MT - Revenue Impact: + - Allow for full refunds of excess input tax credit claims - Timing: ST - Revenue Impact: <-0.2 (% of GDP) - Legal Framework - Reform the GST legislation preferably through a rewrite - Timing: ST - Revenue Impact: None - Eliminate both payments and hybrid accounting - Timing: ST - Revenue Impact: None - Include a general anti-avoidance rule in the GST Act - Timing: ST - Revenue Impact: + - Provide a GST simplification rule for joint ventures - Timing: ST - Revenue Impact: None - Provide that a supply of digital currency for goods and services is as supply of money or an exempt supply of financial services - Timing: ST - Revenue Impact: + - Timing legend (as provided) - ST-Short term (12-18 months) - MT-Medium Term (2-5 years) - LT-Long Term (>5 years) - Revenue impact legend (as provided) - + small revenue gain - ++ significant revenue gain - - small revenue loss - -- significant revenue loss --- *Source: IMF Fiscal Affairs Department mission report to the Maldives — PREFACE and EXECUTIVE SUMMARY (January 6-24, 2022 mission).* ### 7. The Maldives has one of the highest VAT C-efficiency ratios in the world ( Figure 2). ### 7. The Maldives has one of the highest VAT C-efficiency ratios in the world (Figure 2) ### VAT/GST C-efficiency and drivers - C-efficiency in 2019: 1.3 (actual revenue collection is 130 percent of hypothetical revenue collection). - Interpretation: - A value greater than one is rare and can occur in tourism-dependent economies where C-efficiencies are skewed upward because tourist expenditures are treated as exports in national accounts rather than as domestic consumption. - The Maldives’ extreme dependence on tourism partly explains the high C-efficiency. - Additional determinants identified by prior technical assistance: - Large number of GST payers. - Lack of cash GST refunds: excess GST input credits are carried forward against future GST liability rather than paid out as refunds. - Amortization of credits for GST on capital inputs. - Footnote data: - Weighted average GST rate used: 8.8 percent for the whole economy. - Focusing narrowly on GGST collection at a 6 percent rate yields a measured C-efficiency of 0.7. ### GST structure, registration, and revenue distribution - Two GST categories with distinct features: - TGST (tourism GST): covers all goods and services provided by the tourism sector, including supplies by tourist resorts, hotels, guesthouses; tourist-related services; travel agency services; foreign tourist vessels; and domestic air transport to non-Maldivian citizens. No registration threshold (effectively zero). - GGST (general/non-tourism GST): registration threshold is MVR 1 million. - Taxpayer and revenue distribution (2019 data): - Number of GGST registered taxpayers is significantly greater than TGST taxpayers, despite TGST having no threshold. - TGST payers are significantly fewer than GGST payers but TGST raises much greater revenue, likely due to the higher TGST rate and relatively larger taxable sales impact. - Distribution of payments: - TGST: around 9 percent of payers account for around 93 percent of TGST revenue. - GGST: around 7 percent of payers account for around 82 percent of GGST revenue. - Consistent with international VAT experience where the largest 20 percent of taxpayers pay around 80 percent of VAT revenue. ### Tourism dependence, pandemic impact, and prospects - Pre-pandemic tourism contribution: - Direct travel and tourism services accounted for nearly a third of GDP pre-pandemic. - Over 80 percent of total exports. - Maldives had the second largest ratio of tourism services to both exports and GDP in the world. - Maldives geographic note: 1,192 islands across 26 atolls; approximately 200 islands inhabited; a further 100 designated ‘resort islands’, each with only one resort per island. - COVID-19 impact: - Onset of pandemic in 2020 resulted in a sudden stop of tourist inflows through July 2020 and an unprecedented contraction in both GDP and GST revenue collection from the sector by 32 percent. - Reopening to tourists: July 15, 2020. - Tourist arrivals: recorded 76 percent of their pre-COVID levels in 2021 up to end-November. - Medium-term projection: tourist arrivals projected to reach pre-COVID projections for 2020, around 2 million visitors per year, in 2023 (IMF staff projections). ### Dual-rate structure, ring-fencing, and international context - The Maldivian GST diverges from a uniform broad-based VAT by ring-fencing tourism (Section 14 of the GSTA requires separate registration and separate returns for GGST and TGST). - Internationally unusual because: - Multiple small tourist-dependent countries often grant a lower VAT rate to tourism services to incentivize the sector. - The Maldives is unusual in applying a higher rate to tourism (dual rate with higher TGST). - Comparable practice noted: Aruba; historical example: Fiji (had additional Services Turnover Tax effectively increasing tax on tourism, abolished in 2020). - Other tourism-specific levies in comparator countries temper VAT incentives (e.g., accommodation levies, environmental taxes). - Maldives’ sectoral levies: - Green Tax: USD 6 per night for tourist resorts, hotels and vessels; USD 3 for guesthouses. - Mandated 10 percent minimum service charge collected by tourism employers and distributed to employees (mandated since January 2021). - Tourism land rent (recurrent levy on resorts/hotels/guesthouses on public land): raised substantial revenue in the order of 2 percent of GDP pre-pandemic. ### GST rates comparison and recommended rate changes - Current position: - General GST (GGST) rate: 6 percent. - Tourism GST (TGST) rate: higher than GGST but still low compared to many standard VAT rates internationally. - GGST is the lowest among a selection of small island developing states and significantly below the average standard/general rate for those countries. - GGST is below the average standard VAT rate of 14.2 percent for other SAARC countries. - Recommendations (timing and amounts): - Medium-term: increase GGST to 8-10 percent and TGST to 14-15 percent. - Long-term: seek to align GGST and TGST by adopting a single GST rate. - Timing caveat: advisable to wait until at least 2024 to begin increasing rates given current global inflationary pressures and the COVID-19 pandemic. - Rationale and supporting evidence: - An increase would mobilize revenues and align rates closer to other small island tourist-dependent countries and SAARC countries. - Tourism demand in Maldives is relatively inelastic; sector high profitability provides scope to tax economic rents without materially reducing supply. - Hotel sector EBITDA margin per room in 2018: 18 percent. - Green Tax and mandated service charge increase effective government charges but are small relative to accommodation cost. - Inflation context: - Headline inflation projected: 1.4 percent in 2021; increasing to 2.3 in 2022 on the back of higher commodity and food prices; and to decline to 2 percent over the medium-term. - International evidence suggests limited persistent price hikes from VAT rate changes, especially when changing previously reduced rates. - Fiscal impact estimates: - Each percentage point increase in GGST or TGST raised around 0.5 percent of GDP prior to the COVID crisis. - Caution: as rates increase, avoidance incentives may reduce revenue per percentage point below 0.5 percent of GDP. - Estimated revenue impacts: - Increase GGST to 10 percent: may increase revenue by around 1.8 percent of GDP. - Increase TGST to 15 percent: may raise additional revenue of around 1.35 percent of GDP. ### Policy considerations on single rate and exemptions - First-best policy: single GST rate applied to the broadest consumption base (destination principle) to maximize VAT’s revenue-raising and non-distortionary properties. - Multiple VAT rates problems: - Excess credits due to input/output rate differences. - Complications with composite supplies and tax planning. - Complexity for taxpayers in determining applicable rates. - Maldives-specific mitigating factors: - Two distinct markets (tourism—largely foreign consumers—and domestic economy) with very little overlap reduces typical multiple-rate concerns. - Limited cross-over implies fewer issues with rate application and enforcement (exceptions include resorts buying domestic goods taxed at 6 percent and on-selling at 12 percent, which is treated under normal VAT rules). - Recommendation sequencing: - Aligning GGST and TGST towards a single rate should be a longer-term objective with a long transitional period to protect vulnerable households and manage political economy constraints as market overlaps expand (e.g., growth of homestay and guesthouse market). ### Treatment of cross-border supplies: Destination vs Origin principle - Destination principle overview: - GST/VAT taxes final consumption within the taxing jurisdiction. - Implements: (i) imports taxed; (ii) domestic supplies taxed with input tax credits so only final consumption taxed; (iii) exports zero-rated with refund of input tax incurred up to export. - Maldivian practice and origin-principle perception: - Authorities have referred to Maldivian GST as based on the origin principle largely because imports of goods and services are not immediately taxed and exports are zero-rated. - Specific features: - No taxation of imported goods at the border. - No reverse charge rule for imported services acquired by registered persons. - Place of supply rules for imported services focus on place of performance, not place of consumption. - A supply of services by a person outside the Maldives without a physical presence in the Maldives is not a supply in the Maldives and is therefore not subject to GST, even if services are utilized in the Maldives. *Source: IMF staff chapter content (1mdvea2022002).* ### 22. While there is no immediate taxation of imported goods or services in the ### 22. While there is no immediate taxation of imported goods or services in the Maldives, ### Taxation of imports and the destination principle - Current practice: No immediate taxation of imported goods or services; however, value added by imports may be taxed if ultimately used to produce taxable supplies in the country (applies where the imported goods or services are used by a registered person as an input to make taxable supplies). - Exceptions to import taxation: No taxation of imports of goods or services used to make exempt supplies, imported for personal use, or on-sold in the informal sector. - Distortions and competitive effects: - Foreign suppliers may obtain a competitive advantage over local suppliers, since local suppliers must impose GST on goods sold. - Possibility of double non-taxation because the country of export may zero-rate exports to the Maldives on the assumption the Maldives will tax under the destination principle. - Implementation needs: - Taxation of imported services requires the implementation of the reverse charge rule and reform of the place of supply rules. - Deferred payment schemes can be introduced to mitigate cashflow concerns for importers with good compliance records. - Revenue estimate: - Capturing GST on imported goods and services used to produce exempt supplies in the Maldives is estimated to potentially yield 0.87 percent of GDP in added revenues due to unrecoverable input tax (based on 2014 SUTs). - Legal/regulatory reference: Section 22(b) of the GSTA Regulations 104 and 104-1. - Recommendation: - Fully implement the destination principle by imposing GST on imported goods and services. ### Exemptions and zero-rating: rationale and adverse consequences - Common rationales for exemptions and zero-rating: 1. Improving progressivity by low or no taxation of necessities. 2. Advancing social purposes for ‘merit’ goods (e.g., education). 3. Simplifying administration for difficult-to-tax services (e.g., margin based financial services). 4. Encouraging investment (often a misperception). 5. Meeting international agreement requirements (e.g., diplomats, consular officials). - Adverse consequences of exemptions and zero-rating: 1. Impacting revenue (usually adversely). The 2021 FAD report on tax expenditures in the Maldives (Hebous and others, 2021) estimated the cost of tax expenditures for zero-rated goods and services was 6.0 percent of total tax collected, and 4.5 percent for exemptions (these estimates may not include all zero-ratings or exemptions). 2. Creating distortions leading to inefficiencies in production and consumption. 3. Cascading (tax on already taxed goods) from exemptions of intermediate business-to-business supplies. 4. Encouraging ‘exemption creep’. 5. Increasing opportunities for tax evasion. 6. Complicating tax administration and compliance. 7. Concealing the true cost of government support for favored sectors or projects. - Empirical incidence: - A USAID study found the GGST is highly regressive when measured against income and slightly regressive when measured as a percentage of expenditure. - The study found exemptions and zero-ratings reduce the burden on the poorest households but the rich benefit most from the concessions; GGST does not have a significant impact on household poverty levels. - Policy implication from the study: Better to focus on raising revenues and then provide social welfare through targeted subsidies rather than through GST concessions. ### Specific exemptions and zero-rated supplies identified for review - Items currently consistent with international practice (no immediate need to review): - Exemptions for education services, health services, medicines and medical devices, sale of donated goods by non-profit bodies, day-care services, and zero-rating of exports and sales of business as a going concern. - Items the mission identified for review (listed below with rationale and preferred treatment): - Public utilities (electricity, water, and sewerage services): - Preferred approach: Fully tax these utilities or limit exemptions to households only; consider limited exemptions (e.g., exempting the first 50 or 100 units of electricity) if assistance is needed for low-income households. - Postal services: - Preferred approach: Impose VAT/GST on postal services to avoid competitive advantage for government postal companies. - Financial services: - Current: Comprehensive list of exempt financial services in regulation 35. - Preferred approach: Narrow exemption scope by taxing fee-based services and general insurance; continue to exempt margin-based transactions where administrative difficulty exists. - Domestic transport: - Issues: Some taxi services not taxed in practice; bus services taxed. - Preferred approach: Impose VAT on all domestic transport services, including taxi services and ride-sharing apps; consider registration/compliance measures for small providers. - International transportation services: - Current: Exempt. - Preferred approach: Replace exemption with zero-rating. - Donor funded projects: - Current: Often exempt. - Preferred approach: Reconsider exemptions in the medium term as more donors allow taxation of their projects; impose VAT on goods and services purchased as part of donor projects except in special humanitarian circumstances. - Real estate/immovable property: - Best practice summarized: Commercial real property fully taxable; residential property taxed when first sold (new) and other residential premises exempt. - Current Maldives practice: Exempts leases of all immovable property, including commercial leases and peer-to-peer accommodation rentals. - Preferred approach: Remove exemption for commercial leases; apply tourist accommodation TGST treatment to timeshare-like arrangements as appropriate. - Essential goods: - Current: List of essential goods zero-rated (Schedule 1; includes basic foodstuffs, cooking gas, diesel and petrol, baby and adult diapers and sanitary napkins). - Analysis: Zero-rating is not usually the best instrument for equity; the better policy is to tax at the standard rate and use revenue to finance pro-poor spending via targeted subsidies. - Note: Any reform to tax fuels should be done in tandem with comprehensive review of government subsidies to the fuel importer (State Trading Organization). - Exemptions granted by ministries or agencies other than the Ministry of Finance: - Risk: Ministries/agencies granting exemptions may prioritize policy goals over budgetary costs. - Preferred governance: Ministry of Finance, with MIRA assistance, should advise on and approve exemptions; include exemptions under the Special Economic Zones (SEZ) Act in the review. ### Revenue impact and restraint on expansion of concessions - Potential revenue gains from rationalization: - Based on 2021 FAD estimates, revenue gains could be as high as 1.1 percent of GDP for zero-rated goods and services and 0.9 percent of GDP for exemptions. - Recommendation to authorities: - Review and rationalize GST exempt and zero-rated goods and services to ensure they are still necessary and achieving objectives, with potential reforms including: - Removing exemptions for public utilities or limiting exemptions to household services. - Removing the exemption for postal services. - Narrowing the scope of financial services exemptions by taxing fee-based services and general insurance. - Ensuring all domestic transport services, including taxis and ride-share apps, are taxable. - Replacing exemption for international transportation services with zero-rating. - In the medium term, reconsidering the GST exemption for donor funded projects as more countries allow taxation. - Removing the exemption for commercial leases. - Assessing whether zero-rating of essential goods (including fuels) would be better achieved through targeted subsidies rather than via the GST. - Ensuring that ministries and government agencies, other than the Ministry of Finance, do not have authority to grant GST exemptions or zero-rating. - Resist pressure to expand the range of exempt and zero-rated goods and services. *Source: IMF content unit 1mdvea2022002* ### 32. Widespread internet usage is underpinning growth in e-commerce, online ### 1mdvea2022002 - 32. Widespread internet usage is underpinning growth in e-commerce, online ### Internet usage, e-commerce and digitally deliverable services - Internet penetration levels in the Maldives have been high and steadily grown over 2007-2017 (last year with available survey data). - Survey-based estimates for comparator countries show a marked upward trend in average growth in e-commerce sales in recent years, particularly during the pandemic. - Over the last decade digitally delivered services more than doubled as a share of total trade in services for the Maldives (a growth rate twice as large as the average for other small island developing states), and now account for almost half of all service trade in the country, though that level continues to be modest relative to comparators. - Social distancing measures related to the COVID-19 pandemic led to a spike in demand for digital media services. - Example comparators: In Indonesia and Singapore, e-commerce sales grew by 30-50 percent in 2020 alone. ### Policy priority: taxation of digital transactions - Authorities have identified taxation of digital transactions as a priority issue in the context of a rapidly digitalizing global economy. - Definition guidance: - Digital transactions: transactions conducted wholly or partly electronically (internet, email, social media, other electronic platforms). - Example wholly electronic transaction: purchase of a digital product (e.g., an e-book). - Example partly electronic transaction: online purchase of physical goods (ordering/payment electronic, physical delivery). ### Categories of digital transactions - Four broad categories: - Business-to-Business (B2B) - Business-to-Consumer (B2C) - Consumer-to-Consumer (C2C) - Consumer-to-Business (C2B) - Primary issue: GST treatment of B2B and B2C cross-border digital transactions (digital products, electronic services, electronically ordered goods). - C2C issues arise particularly where transactions are conducted through electronic marketplaces or platforms (cross-border and domestic C2C supplies). ### Short-term revenue potential from taxing remotely delivered digital services and electronically ordered goods - Mission estimate of direct short-term revenue potential: around 0.11 percent of GDP. - Range consistent with other countries: between 0.02 and 0.17 percent of GDP. - Country examples: - Australia projected introduction of GST on digital services (2017) would generate 0.02 percent of GDP over two years. - Thailand expects to raise about 0.017 percent of GDP from implementation of a 7 percent VAT on non-resident service providers in 2021. - Assumptions underpinning the mission estimate (as used for modelling): - Apply the 12 percent TGST rate to mobility and travel services and the 6 percent GGST rate to everything else. - Assume 100 percent of transactions of digital media content, 10 percent of all e-commerce transactions, 5 percent of digital advertising, and 15 percent of e-services, mobility and travel services captured by Statista are provided by unregistered remote suppliers to final consumers and/or unregistered resident entities. - Definitions used in the Statista-based categorization: - E-commerce includes B2C sale of physical goods via a digital channel. - E-services capture sales of services and digital goods (event ticket reservation, dating, food delivery, etc) with an online checkout process. - Digital media captures spending on audiovisual media contents and applications distributed online. - Digital advertising captures advertisement spending for online channels. ### Wider gains beyond revenue - Level the GST playing field for domestic suppliers vs foreign competitors. - Provide information for compliance management (e.g., tourism sector, mobility services) via requests to online marketplaces and platforms for suppliers’ income data. - Contribute to income tax revenues through improved reporting and platform-supplied data. - Introducing reporting obligations for platform operators is an important complementary measure; OECD (2020) model reporting rules provide a useful reference. ### GST classification of digital products - Digital products delivered and utilized online may have physical equivalents (e.g., a book) but do not pass through border control. - Conceptual recommendation: treat digital products as services for GST purposes. - Legal drafting recommendation: expressly exclude digital products from the definition of “goods.” - Define digital products as transmitted by means of a wire, cable, radio, optical, or other electromagnetic system, or by means of a similar technical system. - As “services” is defined to mean anything that is not “goods,” this express exclusion makes digital products services and subjects them to rules on imported services. ### Main models for taxation of imported services - Two main models: - Reverse charge model: recipient self-charges and reports GST on imported services (normally applied to B2B imported services). - Vendor collection model (vendor registration model): foreign supplier required to register and account for GST (normally applied to B2C imported services and low-value electronically ordered imported goods). - Note on alternative: requiring financial intermediaries to withhold GST has been used in some jurisdictions but is limited in scope and difficult to operate, and may be especially difficult in the Maldives because of the dual rate structure. ### Taxation of B2B imported services (reverse charge) - International norm: reverse charge applies to B2B imported services. - Mechanism and effects: - Registered recipient self-charges GST; if services wholly used to make taxable supplies, input tax credit offsets reverse-charged GST, netting to zero. - If services are used wholly or partly to make exempt supplies, reverse charge generates a net GST liability. - Policy considerations: - Extend reverse charge to internal acquisitions from parts of the same entity located abroad to prevent avoidance and protect local suppliers. - Extend reverse charge to large unregistered businesses making exempt supplies and to unregistered government bodies (effectively requiring registration on a pay-only basis) but limit such extension to persons with annual turnover (counting all supplies) exceeding the registration threshold amount. ### Taxation of B2C imported services (vendor collection / remote services) - Reverse charge not feasible for B2C imports; vendor collection model should apply. - Foreign service provider required to register for GST if their taxable supplies in the Maldives exceed the registration threshold, even without a place of business in the Maldives. - Administrative facilitation: - Allow foreign suppliers to deal wholly electronically with MIRA. - Simplified online registration and compliance process, guidance on payments, and reliance on voluntary compliance are typical. - Conceptual norm: “remote services” (supplier and recipient not in same jurisdiction at time of supply) used to locate B2C supply in Maldives, applying to digital and non-digital services provided by foreign suppliers without a fixed place of business in the Maldives. - Residence-based place of supply: - Place of supply should be based on the residence of the recipient rather than the recipient’s physical location at time of supply. - Residence for GST purposes should be determined by commercially observable indicators easily collected by the supplier in normal course of business, not by income tax fiscal residence rules (e.g., 183-day physical presence test). - International experience: - Over 60 countries have adopted the vendor collection model, including a growing number in Asia and small island developing states. - Modelling GST legislation on approaches introduced by other countries is advisable to minimize compliance costs for large digital providers. - Alternative of listing taxable digital services in law is not preferred due to susceptibility to tax planning and need for frequent updates. ### Supplies made through electronic marketplaces or platforms - Marketplace operator can be treated as the supplier and required to register if the value of taxable supplies made through the marketplace or platform exceeds the registration threshold. - Threshold should account for value of third-party supplies made through the marketplace or platform as well as any service fee charged. - Registered operator liable to account for GST payable on supplies ordered through the marketplace or platform. - Targeting operators increases compliance due to smaller number of operators versus underlying suppliers; typically applied where operator has control over terms of supply or is intermediary for payment. *Source: 1mdvea2022002 - Chapter excerpt on digital transactions and GST in the Maldives* ### 53. The operator is liable regardless of whether the underlying supplier is registered or ### 53. The operator is liable regardless of whether the underlying supplier is registered or ### Operator liability and marketplace treatment - The operator is liable regardless of whether the underlying supplier is registered or even required to apply for registration. - Requiring the operator to account for GST: - avoids arguments about whether the host is carrying on a taxable activity, - removes the compliance burden from the host, - ensures fairness between hosts that are registered and those that are not. - Exception: where the underlying supplier is GST registered in the Maldives, the underlying supplier is responsible for the GST on the supply. - As a simplicity measure, the underlying supplier may permit the operator to meet the GST obligations on supplies made through the marketplace or platform. - The underlying supplier remains liable if the operator fails to pay the GST. ### Distinguishing underlying supply and platform service fees - For goods or services supplied through an electronic marketplace or platform, the consideration for payment for the underlying supply, and the service fee charged for the use of the digital platform need to be distinguished. - Marketplaces/platforms may charge fees to suppliers only, or to both suppliers and users (example: Airbnb charge fees to both hosts and guests). - Treatment examples: - Fee charged to hosts: subject to GST either under the reverse charge rule if the host is registered or as a supply of remote services in a B2C supply. - Fee charged to guests: will not be a remote service where the guest is not a resident of the Maldives; a special rule is needed providing that the place of supply of the service provided to the user is the place of consumption of the underlying supply (e.g., place where the accommodation is located). ### Ride-sharing companies and classification issues - There is significant controversy around GST liability of ride-sharing companies (e.g., AVAS Ride), with Uber subject to several national court challenges. - If classified as transportation companies with employed drivers, entire turnover from the provision of services would be subject to GST. - If considered intermediation service providers to self-employed individuals, current practice has been to exempt these services as most drivers do not have enough turnover through the app to meet GST registration thresholds. - Recommendation: Maldivian legislation should closely track international developments as practices normalize. ### Major online intermediaries and widening the GST net - Major intermediaries (e.g., Airbnb, VRBO) are increasingly making provisions to collect taxes on behalf of governments; the Maldives should take advantage of this option. - Most Airbnb hosts in the Maldives and comparator countries do not earn enough per year through the platform to meet the GST registration thresholds. - Recent international precedents: - Canada and India: revisions to VAT rules for accommodation/hospitality services facilitated by online marketplaces/platforms to require collection of tax on supplies made through their platforms by all nonregistered domestic suppliers, including small suppliers below the VAT registration threshold. - The Bahamas: clarified that online marketplaces such as Airbnb and VRBO are required to remit VAT on the value of rental services, as well as their commissions. - Rationale: attractive means to mitigate negative impacts on GST revenue and administrative burden from growth of small suppliers in the sharing economy (Aslam and Shah, 2017). - Example data and estimates: - As of January 2020, Airbnb had over 400 agreements with local and national governments and organizations around the world on automated collection of tourism taxes. - Based on an average daily rate of USD 132 per night and barely over 500 current listings, the mission estimates the potential added GST revenue from starting to tax existing Airbnb hosts in the Maldives is minute at present (only about 0.01 percent of GDP). - Estimates from other small tourism dependent countries with a larger presence of online marketplaces for vacation homes go up to 0.3 percent of GDP, suggesting potential growth over time. - In collecting taxes, the online retailer usually: - favors simplicity (levying one tax/levy rather than a combination), - advocates equal treatment (all online platforms should be asked to collect and remit taxes). ### Imported goods ordered online and LVIG - Currently, only import duty is imposed on imported goods. The imposition of import duty is subject to a low value imported goods (LVIG) exemption set at MVR 6,000 (USD 388). - In other countries, LVIG exemption commonly applied to both import duty and GST to facilitate trade and balance collection cost with revenue; however, LVIG exemption creates a distortion in favor of foreign suppliers as equivalent local purchases are subject to GST. - E‑commerce growth has increased volumes of foreign-to-domestic consumer supplies, exacerbating fairness issues and revenue forgone. - Several countries have eliminated or reduced GST relief for LVIG while maintaining customs duty exemption thresholds (examples include Australia in 2018, New Zealand 2019, Norway 2020, and EU members in 2021). - Where LVIG relief is reduced/eliminated, simplified methods for foreign businesses to register, account, and remit GST have been introduced and/or intermediary liability extended to LVIGs to avoid border collection difficulties. - Taxation scope: - LVIG taxation can apply to foreign sellers, electronic marketplaces and platforms, and re-deliverers (foreign entities that provide Maldivian consumers with access to goods not normally shipped to the Maldives, by redelivering goods or acting as agents). - Threshold and registration: - The normal GST registration threshold should apply to foreign sellers, electronic marketplaces and platforms, and re-deliverers. - For operators of electronic marketplaces and platforms, and re-deliverers, the threshold should take account of the value of third-party sales made through the marketplace, platform, or re-deliverer, as well as any service fee charged. - Simplified registration, accounting, and remittance methods for foreign businesses should apply to registered persons under the LVIG regime. - Place of supply and collection: - A special place of supply rule for LVIG: where the foreign supplier, operator, or re-deliverer arranges delivery of LVIG to the Maldives, the supply is a supply in the Maldives and therefore taxable. - If registered, the foreign supplier/operator/re-deliverer is required to charge GST on the supply of the goods. - Where the LVIG rule applies, import rules are excluded so GST is not charged at the border; arrangement typically limited to low value goods based on the previous exemption threshold. - GST on imports of other goods should be collected at the border. - Revenue estimate: - The mission estimates expanding collection of GST to LVIG could yield at least 0.1 percent of GDP in additional revenues, extrapolating from data shared by the Customs authority for December 2021. ### Recommendations on cross-border services, LVIG, and marketplaces - Treat digital products as services so that the rules for imported services apply. - Apply the reverse charge model to B2B imported services requiring registered persons to account for GST on imported services received including on internal transfers of services. - Consider applying the reverse charge rule to imported services received by unregistered persons primarily making exempt supplies and Government entities. - Apply the vendor collection model to B2C supplies of remote services and LVIG. - Require operators of electronic marketplaces and platforms through which remote services and LVIG are supplied to be registered and collect GST. ### GST treatment of digital currencies — overview and classification options - Context: Maldives has experience of supplies of goods or services being paid in digital currencies (i.e., cryptocurrencies). - Money under the GSTA: - Money is the measure of value under the GST; no definition of “money” in the GSTA so ordinary meaning applies — coins and notes that are legal tender. - Section 62(a) of the GSTA indicates money is intended to include foreign currency (i.e., foreign legal tender). - Digital currencies are not money within ordinary meaning because they are not issued by a central bank and are not legal tender. - International approaches: - Some countries (initially Australia) classified digital currency as intangible property for GST purposes. - Based on EU case law, the UK and EU classified supply of digital currency as a supply of financial services (i.e., an exempt supply). - Australia now treats digital currency used as the price for goods or services to have the same GST treatment as money. ### Digital currency as intangible property (taxable services) - Classification as intangible property: digital currency is “services” for GST purposes; supply of digital currency is a taxable supply of services, and using digital currency to pay for goods/services treated as barter. - Example illustrating double taxation effect: - X purchases MVR 100 worth of digital currency from a domestic digital currency exchange. - Supply of digital currency by operator is a taxable supply of services and, assuming a 6 percent GST rate, MVR 6 in GST is charged on the supply. - X uses the digital currency to purchase goods costing MVR 100 with MVR 6 in GST payable on the supply. - Consequently, X has borne MVR 12 in GST in purchasing goods worth MVR 100. If X had used legal tender, GST cost would be MVR 6 (no GST charged on acquisition of money). ### Exempt supply treatment (financial services) - Treating supply of digital currency as an exempt supply of financial services means no GST on acquisition of digital currency. - Operator of the digital exchange will not be entitled to input tax credits in making an exempt supply of digital currency. - Traders accepting digital currency as payment may incidentally make exempt supplies that could result in some loss of input tax credits. - The de minimis rule in Regulation 49 may apply to limit this possibility depending on the volume of purchases made with digital currencies. ### Digital currency treated the same as money (preferred approach) - Alternative: digital currency has same GST treatment as money when used to pay for supplies of goods or services (approach now used in Australia). - Only conversion between local/foreign currency and digital currency (and vice versa) is treated as a supply, typically an exempt supply of financial services. - Arguably technically correct to treat digital currency as the equivalent of money. ### Definition of digital currency — recommended criteria - Definitional challenges: ongoing technical change; difficult to define in legislation; some digital assets (e.g., non-fungible tokens) are not similar enough to fiat currencies. - Two approaches: central criteria test vs. express listing in Regulations (central criteria preferred for flexibility and lower administrative burden). - Recommended definition: “digital currency” defined by key features aligning with fiat currencies; digital units of value that satisfy all the following conditions: - The digital unit is fungible (fully interchangeable for use as the price for a supply). - The digital unit can be provided as the price for a supply of goods or services (suitable as medium of exchange). - The digital unit must be generally available to members of the public without substantial restrictions on their use to pay for supplies of goods or services. - The digital unit is not denominated in the currency of any country (e.g., value pegged to a fiat currency is not a digital currency). - The value of the digital unit does not depend on, nor is derived from, the value of anything else (e.g., a derivative is not a digital currency). - The digital unit does not give an entitlement to receive, or to direct the supply of, a particular thing or things (with an exception where entitlement is incidental to holding or using the digital units as consideration). - To avoid overlap, definition should expressly exclude money (legal tender). ### Conversion rules and valuation - Value of a taxable supply is expressed in local currency or USD in the case of tourism supplies. - Where price is paid by digital currency, the digital currency amount must be converted to currency. - Challenges: - No central authority or foreign exchange reference rate for digital currencies. - Digital currencies may be traded on multiple exchange platforms; values may vary across platforms and time. - A definitive conversion rule may not apply; instead require conversion based on the most appropriate exchange rate in the circumstances. ### Recommendation on digital currency - Provide that a supply of digital currency in return for goods or services is either a supply of money (preferably) or an exempt supply of financial services. *Italic: IMF staff analysis as presented in the source content.* ### 75. Offshore booking platforms for tourist accommodation are a special case of digital ### 1mdvea2022002 - 75. Offshore booking platforms for tourist accommodation are a special case of digital ### Overview - Offshore booking platforms can act where both the platform and consumer may be outside of the Maldives while the underlying service is ultimately supplied in the Maldives. - Globally, online sales channels have been capturing an expanding market share of tour packages and travel bookings. For the Maldives specifically, nearly 70 percent of all accommodation bookings in 2021 were made through either foreign tour operators or offshore travel agents. - The mission estimated adequately capturing this type of offshore tourism value-added could yield about 0.2 percent of GDP in additional TGST revenue (assuming an offshore seller markup of 5 percent and adjusted for the Maldivian tourism sector). ### Business models for offshore booking platforms - Two business models are identified: - Principal (bulk sale) model: A Maldives resort makes a bulk “sale” of rooms at a discount to the offshore booking platform which then “on-sells” the rooms to tourists. - Agency model: The offshore booking platform acts as agent to facilitate room bookings by tourists and charges commission or fees. ### Bulk sale of rooms — findings and legal/tax issues - Economically the resort “sells” a right to occupy accommodation in the Maldives; this right is an intangible and counts as “services” for GST purposes. - Under current law, TGST applies only to the discounted price charged by the resort to the operator of the booking platform. The on-sale by the offshore platform to tourists is treated as outside the scope of TGST because it is a supply that takes place from a place of business outside the Maldives to a customer outside the Maldives. - As a result, price discounts to related offshore platforms can shift a significant share of value added outside the Maldives and outside the current TGST base. - There is an argument that the resort’s supply to an offshore platform could be zero-rated as an export of services because the recipient has no place of business in the Maldives; however, services relating to immovable property (the accommodation) are typically treated as supplied at the place where the property is located and therefore may not qualify as exports. - To avoid ambiguity, it is recommended that the GSTA expressly provide that the supply of any inbound tourism product is not an export. For this purpose, “inbound tourism product” means accommodation, meals, transport (transfers), tours, and other tourist activities in the Maldives. - Transfer pricing/related-party concern: one option is to adjust the consideration for related-party supplies to open market value (Regulation 25), which would increase the TGST base for the resort’s supply to the offshore operator but may not capture the full value of accommodation. - Market trends (package holiday providers buying hotels/cruise ships) increase transfer pricing opportunities that could lower the value added recorded in the Maldives absent explicit digital service taxation targeted at offshore tourism sellers. ### Policy option proposed for bulk-sale model - Include a special place of supply rule in the GSTA that a supply of inbound tourism products is a supply of services in the Maldives. Consequences: - Supply of accommodation and other inbound tourism products by the offshore booking platform becomes a taxable supply in the Maldives. - No registration threshold for TGST means offshore operators would be required to register for GST and charge TGST on supplies of inbound tourism products to customers, with input tax credit allowed for TGST paid to the Maldives resort. - This ensures full taxation of the value of rooms and inbound tourism products in the Maldives and neutrality regardless of whether accommodation is acquired directly or through an offshore supplier. ### Offshore booking platform as agent — findings and treatment - Under the agency model the contract for supply of accommodation is between the resort and the tourist; the platform acts as agent and charges commission or booking fees. - Two payment methodologies: - Tourist pays resort the full amount; resort pays commission to agent. - Tourist pays agent full amount; agent remits to resort net of commission. - Under both methodologies, the Maldives resort should account for GST on the full amount of the accommodation cost payable by the tourist (before commission). - Where the tourist pays the resort directly, the agent’s value-added is captured inside the room price. - Where the agent receives payment and remits net, resorts have sometimes paid TGST only on the net remitted amount; resorts should instead use the agreed commission rate to convert net amounts to gross room prices and account GST on that gross amount. - Booking fees charged separately by the agent to tourists are not captured in the room cost and should be treated as a supply that occurs in the Maldives based on the proposed rule for electronic marketplaces and platforms. - Given risks of double non-taxation and business model shifting toward fee charging, the mission recommends equal TGST treatment of all fees (agency and booking) as well as value-added pertaining to the on-sale of any inbound tourism services ultimately consumed in the Maldives. - The offshore booking agent would be required to register and account for GST on booking fees charged to tourists. ### Recommendations specific to offshore booking platforms - Treat a supply of inbound tourism products and booking services related to these products as a supply in the Maldives. - In the short term, strictly enforce adjusting the consideration for the supply to its open market value (using the arm’s length principle) for discounted accommodation sales to related parties to mitigate transfer pricing risks. - Over the medium term, introduce a simplified supplier registration process and collection mechanism to facilitate compliance by non-residents. - Introduce reporting requirements to leverage marketplace information for compliance management. ### Registration threshold — findings and recommendations - GSTA registration rules: both compulsory and voluntary registration exist. A registration threshold applies to the GGST but not to the TGST. - The GGST registration threshold is set at an annual value of supplies in excess of MVR 1,000,000 (approx. USD 65,000). Importers of goods for business purposes must register for GST regardless of turnover. - In 2021 Q3, MIRA administrative data show over 97 percent of GGST revenue was collected from businesses with an annual turnover in excess of MVR 2,000,000. - Given low revenue contribution from small registered businesses, consideration should be given to increasing the registration threshold. The mission endorses increasing the threshold to MVR 1,500,000 or MVR 2,000,000. - Increasing the threshold would significantly decrease the number of registered taxpayers and lower administrative and compliance costs while having only marginal impact on revenues. - Increase is further supported by the recommended introduction of a presumptive tax for unregistered small businesses. - Voluntary registration concerns: options include (i) floor on voluntary registration (e.g., only allow voluntary registration for businesses with turnover above MVR 500,000 — the amount applicable for deregistration), or (ii) limit voluntary registration to businesses principally making taxable supplies to registered persons. Given zero-rating of basic foodstuffs, the first option may be preferred. Recommendations (registration) - Increase the registration threshold to MVR 1,500,000 or 2,000,000. - Apply the presumptive tax to the tourism sector to facilitate a uniform registration threshold for both the TGST and GGST. - Consider including a limit on voluntary registration. ### Small business presumptive tax — findings and recommendations - The Maldives lacks a simplified tax regime for small businesses; small businesses face the same income tax and GST system as other businesses and incur significant compliance costs. - Most simplified SME regimes internationally use a presumptive turnover-based tax for businesses below the GST/VAT registration threshold, often allowing voluntary registration. - The mission endorses introducing a turnover-based presumptive tax set at a moderate rate of 2 or 3 percent for businesses not registered for GST. - Note: the recommended rate range (2–3 percent) reflects compatibility with current BPT and GGST (TGST) rates and was calibrated so that a domestic (tourism) company with a 10 percent taxable profit margin and 15 percent value-added in sales would break-even at a 2.4 (3.3) percent rate. - Exclusions: liberal professionals and publicly listed companies with turnover below the registration threshold should be excluded and required to register. - Introducing a presumptive tax will require review of PIT brackets and compatibility with the high PIT tax-free threshold of MVR 720,000 and the low first marginal rate of 5.5 percent to avoid incentivizing sole traders to register under PIT to lower overall tax liability. Recommendations (presumptive tax) - Introduce a presumptive tax set at 2 or 3 percent of turnover for small businesses with turnover under the registration threshold. - Review compatibility of the presumptive tax and the PIT tax-free threshold. ### Small GST registered businesses — findings - Two primary options for simplification for registered small businesses: - Simplified GST calculation (e.g., applying a specified percentage of turnover) — not considered best practice due to administrative complexity. - Simplified administrative procedures (focus on cash-flow problems and record-keeping burdens). - Small registered businesses may face cash flow problems under invoice GST accounting and difficulty complying with record-keeping and reporting obligations; simplification through administrative measures is preferred over turnover-based calculation methods. *Source: 1mdvea2022002 - 75. Offshore booking platforms for tourist accommodation are a special case of digital service provision (PDF).* ### 95. The GST compliance burden for small, registered businesses can be best addressed ### 1mdvea2022002 - 95. The GST compliance burden for small, registered businesses can be best addressed ### Administrative simplifications for small, registered businesses - Two primary simplification options identified: - Allowing payments-based GST accounting. - Providing for a longer reporting period (usually quarterly). - Definition of payments accounting: - A registered person reports output tax in the taxable period in which it is received and claims input tax credits in the taxable period in which the input tax is paid. - Focuses primarily on cash flow by aligning GST burden with business cash flow. - Risk of payments accounting co-existing with invoice accounting: - Facilitates potential missing trader fraud (buyer using invoice method may claim an input tax credit that is due to be paid by a payments-based supplier only upon receipt of the payment, which may never happen). - Quarterly reporting benefits: - Eases cash flow burden. - Reduces compliance burden through reduced reporting requirements. ### Current GSTA provisions and assessment of options - GSTA already provides for: - Payments accounting. - Quarterly reporting. - Thresholds differ: - Quarterly reporting threshold: MVR 1 million taxable supplies per month. - Payments-based accounting threshold: MVR 2 million per year. - Practical issues with payments accounting: - Requires complex rules for movement between payments and invoice accounting to avoid non-taxation and double taxation. - Currently no rules in GST legislation for movement between GST accounting methods. - GSTA already provides for reduction in GST liability corresponding to irrecoverable debts under invoice accounting. - Assessment conclusion: - Given payments accounting’s narrow focus on cash flow and complexity of transitions, quarterly reporting provides greater compliance relief for small, registered businesses. - Movement between quarterly and monthly reporting is less complex than movement between payments and invoice accounting. - Recommendation bullets (from source): - Do not introduce simplified GST calculations. - Provide cash flow and compliance relief for small, registered GST businesses through the option of quarterly reporting. - Eliminate both payments-based and hybrid GST accounting. ### Movement between accounting methods (if payments accounting retained) - If payments accounting retained, the law should expressly provide for treatment of GST on change of accounting method to avoid: - Double taxation or double crediting. - Non-taxation or non-crediting. - Example treatment needed: - On move from payments to invoice accounting: - Output tax invoiced before the change but received after the change should be reported in the taxable period after the change. - Input tax invoiced before the change but paid after the change should be credited in the taxable period after the change. ### Hybrid method status - Hybrid method described: - Accounting for output tax on an invoice basis and input tax on a cash basis. - Observations: - Likely copied from New Zealand GST legislation. - Little relevance to the Maldives situation. - Understood by private sector and MIRA to be not used. - Recommendation: - Delete hybrid method in the rewritten GSTA. ### Refund of excess input tax — findings - Situations where input tax exceeds output tax: - Registered persons primarily making zero-rated supplies (regular feature). - Large purchase of inventory. - Purchase of capital equipment. - Downturn in sales. - Current legal position: - No refund mechanism for excess input tax under GST legislation. - Section 32 of the GST Act provides refunds only where a registered person has overpaid tax to MIRA — does not cover excess input tax credit situations. - Regulation 69 of the Tax Administration Regulations applies to overpayment of tax and provides for offset of overpayment against other tax liabilities, including future tax liabilities. - Regulation 69(e) expressly provides that excess input tax can only be carried forward and offset against future output tax. - There is indefinite carry forward. - Consequences: - For registered persons primarily making zero-rated supplies (e.g., exporters and suppliers of basic foodstuffs), carried forward excess input tax continues to grow due to little or no output tax. - For other registered persons, excess input tax likely offset over time; recovery periods vary (short for inventory sold quickly; longer for start-ups). - Immediate credit for input tax on large capital purchases will increase excess input tax. - Best-practice recommendation (from source): - For Maldives, provide immediate refunds of excess input tax to registered persons primarily making zero-rated supplies. - For other registered persons, provide short carry forward period (3 – 6 months) to allow smoothing without immediate administrative burden of refunds. - At end of carry forward period, excess could be set off against other tax liabilities and, if none exist, refunded. - Transition considerations: - Change in law requires strategy for existing stock of carried forward excess input credits. - Carried forward excess relating to businesses that have shut down can be written off. - Transitional rules needed: - For registered persons primarily making zero-rated supplies: refund either in a lump sum or in instalments over several taxable periods. - For other registered persons: pre-existing carried forward excess can be bundled into a single amount of input tax allowed as a credit in the first period after the refund rule comes into operation; carried forward along with new excess over the carry forward period; any uncredited amount at end applied against other taxes or refunded. - Administrative data: current stock of outstanding GST refunds should not amount to more than 0.04 percent of GDP, indicating transition is fiscally feasible. - Recommendation bullets (from source): - Provide immediate refunds of excess credits for registered persons primarily making zero-rated supplies. - Provide for a short carry forward period (3-6 months) for excess credits in other cases. - Develop a transition strategy for refunding existing excess credits. ### Input tax credits on capital investment - Current limitations in Regulations: - Three-year write off period and deferred start of that period for input tax related to capital expenditure. - Regulation 46(a)(2): input tax incurred for capital expenditure in excess of MVR 500,000 is credited equally over 36 months from the taxable period in which the expenditure was incurred rather than being fully creditable in that period. Any uncredited amount at end of 36-month period is carried forward indefinitely. - Regulation 46(a)(4): 36-month period does not commence until output tax is first generated by the taxable activity. - Legal issue: - Possible inconsistency between Regulations and Act: section 37(b) of the Act seems to expressly provide for crediting the “full” amount of input tax that satisfies the section. - Policy implications: - Input tax credit mechanism ensures GST neutrality (GST payable only on private consumption). - Limitations on claiming input tax credits can impose GST on investment and production, causing tax cascading; distort neutrality across sectors and disadvantage businesses requiring significant capital investment. - Compliance and administrative costs increase due to monitoring over 36-month period. - Recommendation: - Eliminate limitations on claiming input tax credits for capital expenditure. ### General Anti-avoidance Rule (GAAR) - Distinction: - Specific anti-avoidance rule: targeted at particular transaction/arrangement; reactive. - GAAR: not targeted; ongoing application to different types of transactions; proactive. - Current status: - GSTA and Regulations contain some specific anti-avoidance rules (e.g., open market value rules for related party transactions). - No GAAR in GSTA. - ITA section 66 contains a GAAR applicable to income tax. - Characteristics and concerns about ITA GAAR: - Applies where Commissioner General has reasonable grounds to believe one purpose of arrangement was avoidance of tax or reduction of tax liability. - Broad framing could apply to many commercial transactions because tax is often a consideration. - Risk courts will read down a broadly framed GAAR. - Recommended design for GST GAAR: - Include a GAAR in rewritten GSTA. - Better focus GAAR than ITA section 66 by: - Defining scope around countering of tax benefits. - In GST context, main tax benefits include: - (i) a reduction in the liability of a person to pay GST; - (ii) an increase in the entitlement of a person to an input tax credit; - (iii) creating an entitlement to a refund of GST; - (iv) the deferral of a liability for the payment of GST. - GAAR should apply only where an arrangement has the principal purpose of obtaining a tax benefit (contrast with ITA section 66 which can apply where avoidance is one of several purposes). - GAAR should not apply where a taxpayer has genuinely entered into a transaction incentivized by the tax legislation or makes an election provided for in the tax legislation. - Recommendation: - Include a GAAR in the rewritten ITA that applies to arrangements that have the principal purpose of obtaining a tax benefit. ### Joint ventures — GST simplification rule - Context: - Unincorporated joint ventures are common in Maldives due to ownership restrictions for small foreign direct investment. - Unincorporated joint venture: contract-based arrangement without formation of separate entity; participants usually unrelated; operator often appointed. - Current GST treatment and complexity: - Under normal GST operation, each participant must account for GST in respect of their percentage interest in acquisitions and supplies made by the operator — can be complex. - Proposed simplification rule (summary of design): - Applies only where all participants are registered persons. - Operator liable for output tax and claims input tax credits in relation to supplies/acquisitions made to/from third parties on behalf of joint venture participants for sole purpose of joint venture operations. - Aggregation rule limited to supplies/acquisitions made by the operator on behalf of all participants. - Internal supplies between operator and participant for sole purpose of venture are ignored for GST purposes. - GST applies normally to other supplies and acquisitions, including those partly or solely for purposes other than joint venture operations. - Operator responsible for GST administration requirements (filing returns, paying VAT, making adjustments, documentation, receipt of refunds). - Need rules for changes in participants (e.g., adjustments where operator transfers goods to participant who later leaves retaining ownership). - Participants remain jointly and severally liable for administrative responsibilities operator fails to perform. - Recommendation: - Consider providing a GST simplification rule for unincorporated joint ventures. ### Legal framework overview and core legislative design issues - GST legislation comprises: - The GSTA and Regulations. - MIRA has power to make rulings, which are binding on MIRA but not taxpayers. - GSTA enacted in 2011 (replaced Tourism GSTA 2010). - Section 14 of GSTA provides for TGST and GGST; many rules apply uniformly to both categories. - Core GST provisions present in GSTA: supplies; taxable activity; zero-rated supplies; exempt supplies; input tax credits; GST accounting; GST documentation; reporting and payment of GST on a periodic basis. - Issues in practice: - Disputes about whether certain Regulations are consistent with or enabled by the Act. - Importance of Act content: - Core rules should be in the Act rather than Regulations. - Example gap: no place of supply rules in the Act (necessary because GST imposed on supplies of goods or services “in the Maldives”). - Place of supply rules are currently in Regulations (section 104 and 104-1 of the Regulations, Chapter 16 Miscellaneous Provisions) — these are core rules that should be in the Act. - Destination principle and reform implications: - Design needs reform to fully implement the destination principle. - Requires fundamental reforms to legislation structure, particularly taxation of imported goods and services. - Taxation of imported services (including digital services) will involve: - Inclusion of the reverse charge rule. - Fundamental redesign of place of supply rules for B2C supplies. *Source: 1mdvea2022002 - 95. The GST compliance burden for small, registered businesses can be best addressed (PDF chapter).* ### 120. The authorities have begun a review process of the GSTA, with the objective of ### 1mdvea2022002 - 120. The authorities have begun a review process of the GSTA, with the objective of ### Review of the GSTA: scope and recommended approach - Authorities have begun a review process of the GSTA to clarify ambiguous provisions and modernize it to cover the growing digital economy and other developments. - Key issue discussed: whether reform should amend the existing legislation or rewrite it. - Rationale for rewrite: - GST reform will involve fundamental changes to the structure of the legislation. - Review of the relationship between the Act and Regulations, and between GST legislation and tax administration legislation, is required. - Some rulings issued by MIRA may be more appropriately placed in the Regulations. - Recommendation: - Undertake fundamental reform of the GST legislation preferably through a rewrite of the legislation. ### Enabling provisions for Regulations — conflicts and responsibilities - Observed disputes: whether the GSTA properly enables the making of all regulations in the GST Regulations; arguments that some Regulations conflict with the GSTA. - Specific statutory tensions: - Section 37(a) permits a registered person to credit input tax against output tax for a taxable period. - Section 37(b) provides that input tax paid for goods or services acquired in carrying on a taxable activity is to be credited “in full” against output tax. - Regulation 46 requires the input tax credit for large capital expenditure to be claimed equally over 36 months, raising an argument that this Regulation may not be supported by the Act. - Examples where GSTA clearly enables Regulations: - Section 17(c) and 19(d) enable Regulations concerning the time and value of supply, respectively. - Section 19(d) lists valuation cases exhaustively: (i) supplies between related parties; (ii) supplies made through a machine, meter, or other device operated by coins or tokens; (iii) supplies paid for by a voucher; and (iv) supplies paid for by loyalty points — and may not support valuation Regulations in other cases (e.g., lotteries). - Governance of Regulation-making (endorsed position): - MOF (through the TPU) should be responsible for making Regulations concerning tax policy or interpretive matters, with technical input from MIRA. - MIRA should be responsible for making Regulations concerning administrative and procedural matters. - Current limitation: - Section 67 of the Act deals with Regulations procedurally (responsibility and publication) but does not contain a general regulation-making power. - Preferred approach: - Maintain core principles in the GSTA and enable special cases in Regulations where properly supported by the Act. - Include a general regulation-making power to support efficient administration. - Regulations concerning special cases should be made by MOF with MIRA input. - Recommendations: - Use the rewrite as an opportunity to ensure that GST Regulations are properly enabled by the Act. - Provide that MOF is responsible for the making of Regulations concerning tax policy matters or interpretive matters, albeit with technical input from MIRA, and that MIRA has responsibility for the making of Regulations concerning administrative and procedural matters. - Include a general power to make Regulations for the efficient administration of the GSTA. ### Relationship between the GSTA and the TAA - Legislative principle: - Maldives has a separate TAA for administrative and procedural rules applicable to all taxes. - Normal structure: tax-specific administrative/procedural rules in the primary taxing Act; general rules applicable to all taxes in the TAA to ensure consistency. - Filing example: - Due date for filing a tax return is specific to a tax and should be in the primary Act (e.g., income tax annual; GST monthly or quarterly). - Section 28(a)(1) of the GSTA requires tax returns to be filed by the 28th day following the end of the taxable period (calendar month or quarter). - General rules (e.g., extension of time to file a return, presumption as to authority) should be in the TAA; for GST these general provisions are currently in the GSTA (sections 26, 28(a)(2) and (b), 30, 31, 32, 33, 40, 48(a), 61, and 63 are cited as examples). - Misplacement examples: - Chapter 5 of the TAA contains double tax relief provisions relevant only to income tax and should be in the ITA. - Chapter 5 provisions on mutual administrative assistance are appropriately in the TAA. - Regulation 69(e) of the Tax Administration Regulations states excess input tax of a registered person for a taxable period is not an overpayment and can only be offset against output tax in the subsequent taxable period — identified as a GST-specific rule that should be in the GSTA. - Scope note: - A full review of the TAA and its relationship with primary tax laws is outside the scope of the Report, but the GSTA rewrite is an opportunity to improve coordination. - Recommendation: - As part of the GST rewrite, provide only for GST-specific administrative and procedural rules in the GST legislation with generic rules in the TAA legislation. ### Annex I — GST treatment of real estate in small tourist-dependent countries: principles and best practices - Overarching principle: - All supplies of services and goods regarding real property should be subject to GST with only three exceptions: - The first sale or transfer of relatively newly constructed property if the property has been occupied by the owner or an immediate relative as their principal place of residence for at least two years and no credit for input GST has been granted. - The sale or transfer of real property by entities not engaged in a commercial business, such as religious organizations, charities, hospitals and schools. - The long-term rent of a dwelling or condominium unit used as a residential property. - Broad application: - All other supplies regarding real property (including improved or undeveloped land) should be subject to GST if carried out by a supplier that is registered or should be registered for GST — including sale or lease of real property by entities engaged in a GST-exempt commercial business and construction, repair, maintenance, renovation and alteration of real property. - Table summary of international best practice (as presented in source): - Sales: - Commercial Properties: taxable supply with input tax credits - Residential Properties — First Sale: taxable supply with input tax credits for builder - Residential Properties — Resale and Owner Constructed Personal Residence: exempt supply (e.g., embedded GST on initial construction plus on costs of repairs, renovations and additions) - Construction goods and services: taxable supply, whether supplied in relation to an exempt residential property or a taxable property that could claim an input tax credit - Leasing: - Commercial Properties: taxable supply with input tax credits - Residential Properties: exempt supply - Residential property specifics: - Best practice: repairs, renovations, additions or purchase of a newly constructed home or condominium unit should be fully taxable; resale, lease, transfer, or license of residential property should be exempt from VAT. - Resale of used residential property: exempt supply with no right to an input tax credit. - Builder of a new residential unit: collects GST, claims input tax credits, remits net amount to MIRA. - Owner who built, renovated or expanded residence: pays GST on purchases of construction supplies and services. - New residential property includes any residential property not used as the vendor's primary place of residence for at least two years. - Residential rent exemption may include longer stays at university residences, old age homes, rehabilitation facilities; difficulty exists in defining threshold between taxable short-term tourist accommodation and exempt residential property. - Recommendation: eliminate exemption covering commercial leases; consider resale of residential property as an exempt supply. - Relief for low-income households: - Proposal: a rebate targeted at low-income households that buy or build a new home. - Design parameters: - Rebate for homes with value below a suitable threshold. - Only available to individuals in respect of their principal place of residence (possibly applying a de minimis holding period of two years). - Not available to corporations (including condominium corporations), trusts, or individuals co-owning with non-individual entities. - GST treatment of vacation properties with potential dual use: - If primarily rented or leased (i.e., 183 nights or more per year) treat as commercial property with restrictions on input tax credits to limit tax planning. - Where supplies exceed the GST registration threshold, the owner should: - be required to register for the GST; - be required to collect GST on any sale, lease, transfer, or license of the property; - be allowed to claim input tax credits for all related operating costs; - be allowed to claim input tax credits for a portion of the GST paid on purchase or construction of the property. - Rules to determine portion of capital GST allowed as input tax credits could be based on: degree of personal use; confidence of tax administrator in reasonable expectation of profit; risk that GST would not be collected on a subsequent sale (e.g., deny input tax credits for nonresident corporations deriving value from the real property). - If input tax credits were claimed on last acquisition or improvements, GST should be required to be collected on any subsequent sale, deemed disposition, lease, transfer, or license. - Tractable pooling approach: - Require all GST paid to purchase, construct or improve the property to be pooled. - Properties rented or leased for 183 nights or more in a year could be allowed a (refundable) capital input tax credit equal to five or ten percent of the pool. - If owner-occupied during the year, reduce capital input tax credit proportionally (example formula: 200/(200+50)=80 percent). - If occasionally rented (less than 183 nights) or without reasonable expectation of profit: - Purchase of new vacation property should be fully taxable and capital input tax credits denied. - If supplies exceed GST registration threshold, owner must register and collect GST on full value of any lease or license. - Input tax credits denied for capital costs; registrants allowed input tax credits only for incremental operating expenses directly related to taxable supplies and allowed to carry-forward excess input tax credits in lieu of a refund. - Real property businesses that voluntarily register should be denied input tax credits related to capital costs and be ineligible for refund of excess input tax credits related to operating expenses. - Construction costs of tourism projects — deferral alternative to exemptions: - Developers often seek GST exemptions for construction/renovation; recommendation is to avoid exemptions and consider a GST deferral system for imports of building materials specified in Regulations for eligible large construction projects when the registered business is in good standing. - Deferral should not apply to local purchase of building materials nor to supply of construction services. - Suggested deferral mechanics: - Building materials imported by an eligible GST taxpayer could be released from Customs without payment of GST. - The GST deferred must be reported as tax due on the GST return covering the period during which the import took place, and a corresponding input tax credit would be allowed — resulting in no net tax payment. - GST legislation should authorize deferral only for eligible large construction projects when the business is in good standing. - Definition of good standing could require: - (i) throughout the 24-month period before importation, the business has remitted all amounts required under the GSTA and the BPTA; and - (ii) throughout the 24-month period before importation, the business has filed all returns required under the GSTA and the BPTA on or before the day those returns were required to be filed. - New GST registrants could be required to deposit a certain amount (e.g., three months of import GST) to be held in trust until they have a 24-month track record. - In event of non-compliance, government could end access to deferral and use trust funds to cover deferred GST and other arrears. - Operational requirements: - Customs must know upon clearance which importers and goods can benefit from deferral. - MIRA needs access to real time import data coded by tax identification number to reconcile Customs data with GST return information. - Note on scope of deferral: - The GST deferral regime should not affect the payment of customs duties, charges and excise taxes. Separate relief for those could be provided under other laws. *Source: IMF technical assessment excerpt (pages 120–64 of the provided content).* ### Annex II. Design Issues for B2C Taxation of Imported ### Annex II. Design Issues for B2C Taxation of Imported Services ### Relationship Between B2B and B2C Imported Services - GST-registered foreign service providers may make both B2B and B2C imported supplies; policy choice: continue reverse charge for B2B or require foreign provider to account for all supplies. - Arguments for continuing reverse charge on B2B supplies: - Reverse charging is simple to apply. - Most B2B supplies are tax neutral (reverse charged GST offset by input tax credit). - Requiring foreign provider to issue tax invoices to B2B customers increases administrative burden and creates revenue risk if the foreign provider fails to remit GST to MIRA. - Arguments against limiting foreign provider liability to B2C supplies: - Foreign provider must determine whether a customer is registered, which is difficult with no place of business in the Maldives. - Reliance on customer representations risks misrepresentation by consumers claiming registration to avoid GST. - Recommendation: - Applying the reverse charge rule to B2B supplies is preferred as simpler and less revenue-risky. - Registered persons should have an obligation to notify a registered foreign service provider that they are registered by providing a certified copy of their GST registration certificate or similar evidence. - A registered foreign service provider must charge GST on imported services where such notification is not provided. ### Registration Threshold for Foreign Service Providers - Considerations for a lower threshold for foreign providers: - Neutrality argument: foreign providers may fragment supplies across jurisdictions or use multiple entities to fragment supplies to a jurisdiction. - Counterarguments why a lower threshold is likely unnecessary: - The normal registration threshold in the Maldives is relatively low (and zero for the online supply of tourism services), so an even lower threshold may create enforcement difficulties. - If the normal registration threshold is increased (harmonized across TGST/GGST, along with a presumptive regime below the threshold), there may be merit to keeping the current threshold for foreign service providers. - Many digital products and electronic services may be supplied through electronic marketplaces or platforms; focus can be on collecting GST from the operator of the marketplace or platform, which is more likely to exceed the threshold. - Operational suggestion: - The value of B2B and B2C imported services should be considered in determining whether a foreign service provider exceeds the registration threshold. - Once registered, a registered foreign service provider should account for GST only on B2C imported services with reverse charge applying to B2B imported services. ### Determining the Residence of the Recipient of Imported Services - Residence determination should be based on commercially observable indicators (Section II. D. reference). - Commonly adopted indicators: - The recipient’s billing address. - The recipient’s home address. - Internet protocol (IP) address of the device used by the recipient. - The location of the recipient’s bank account. - The origin of the payment. - The recipient’s transaction history. - EU and New Zealand approaches: - Require a foreign provider to treat the recipient as resident if it has at least two non-conflicting pieces of evidence of the customer’s residence. - Quantitative two-factor test generally effective; where evidence conflicts, apply a qualitative test to determine the most reliable indicators. - New Zealand practice for conflicting evidence: - Supplier determines residence by reference to the most reliable indicators such as recipient’s address, transaction history, and credit card information (sim card and IP address may be less reliable). ### Foreign Service Providers and Input Tax Credits - Registration of a foreign service provider without a place of business in the Maldives can be on a “pay only” basis: foreign provider is not permitted to claim input tax credits for taxable supplies made. - Rationale: - Foreign service provider is unlikely to have input tax or significant input tax. - Difficult for MIRA to police input tax credit claims by non-resident providers. - Option to claim input tax credits: - If a foreign service provider wants to claim input tax credits for supplies made in the Maldives, they can establish a place of business in the jurisdiction. - Exception: - Online supply of accommodation and other inbound tourism products acquired and on-sold by the operator of a foreign booking platform: the service supplied is an intangible right acquired from a supplier (hotel or tour operator) in the Maldives with GST payable on the acquisition of the right. ### Currency Conversion - TGST is reported and paid in USD or other foreign currency as determined by MIRA,1 while GGST is reported and paid in MVR.2 - TGST reported in foreign currency because it is charged by registered persons in foreign currency; same approach could extend to remote services. - Options for foreign suppliers: - Registered foreign suppliers without a place of business could elect a functional currency on which to determine GST liability (government assumes associated currency exchange risk). - Alternatively, convert foreign currency amounts to local currency at the time of supply. - Simplified foreign currency conversion rules if GST reported in MVR and many foreign currency transactions: - (i) converting foreign currency amounts based on the average exchange rate for the taxable period; or - (ii) converting foreign currency amounts based on the rate applicable on the last day of the taxable period. - Conditions on simplified rules: - Apply only if the foreign supplier elects the rules. - Need rules to limit tax planning through movement between currency conversion methods. - Footnotes in source: - 1 Section 62(a), although the Minister of Finance may determine that TGST is payable in MVR (section 62(b)). - 2 Section 62(c). ### Simplified Procedures - Simplified procedures recommended to improve compliance by foreign service providers: - Foreign providers must be able to deal wholly electronically with MIRA: online GST registration, online return filing, and online payments. - All GST documentation and guidelines should be available in the main languages to facilitate compliance. - Foreign providers should have the right to keep GST records offshore and in a foreign language, subject to obligation to produce records to MIRA as required; failure to do so may result in privilege withdrawal and penalties. - Two options for addressing compliance risk: - Require the foreign service provider to provide security for the tax payment (simplest, apply where there is a real risk of non-compliance). - Require appointment of a local person as “agent” for meeting GST obligations (problematic because foreign providers typically have no physical or agency presence in the Maldives). ### Sample Legislation — Supply of Goods (selected provisions) - Supply of goods occurs in the Maldives if: - (a)(1) for supplies involving transportation, the transportation of the goods commences in the Maldives; or - (a)(2) for other supplies, the goods are made available in the Maldives by the supplier. - Electronically ordered goods supply in Maldives if: - (b)(1) goods are brought into the Maldives; - (b)(2) supply is made through an electronic distribution platform; - (b)(3) operator either (a) delivers the goods in the Maldives; or (b) procures, arranges, or facilitates the delivery of the goods in the Maldives; and - (b)(4) the value of the supply of the goods does not exceed [ ]. - Re-deliverer rules (subsection (c) and (d)): - Supply occurs in Maldives where goods are delivered to a re-deliverer outside Maldives who then re-delivers; value threshold noted as [ ]. - Where subsection (c) applies, the re-deliverer is treated as having made the supply. - Definitions: - “Electronic distribution platform” means a website, internet portal, gateway, store, marketplace, or other similar platform operated electronically through which a supplier makes a supply of remote services or electronically ordered goods through another person (operator) to a recipient, but only where the operator does any of: (1) authorises the charge for the supply to the recipient; (2) makes or authorises the delivery of the supply to the recipient; (3) directly or indirectly sets a term or condition under which the supply is made. - “Electronically ordered goods” means goods ordered from a supplier outside the Maldives by way an electronic communication. - “re-deliverer” defined by actions procuring use of an address outside the Maldives and redelivery in the Maldives. ### Sample Legislation — Supply of Services (selected provisions) - Supply of services occurs in the Maldives if supplied from a place of business of the supplier in the Maldives (subsection (a)). - Supply by person without a place of business in the Maldives occurs in the Maldives if recipient is not a registered person, Government entity, or exempt body and: - (b)(1) services physically performed in the Maldives by a person who is in the Maldives at time of supply; - (b)(2) services relate to immovable property in the Maldives; - (b)(3) services are remote services supplied to a person resident in the Maldives as determined under subsection (c); - (b)(4) services are inbound tourism product, or agency/booking services relating to an inbound tourism product. - Residence test for remote services (subsection (c)): - Recipient treated as resident if at least two of the following support residency: - (1) billing address; - (2) internet protocol address of device used or other geo-location method; - (3) recipient’s bank details, including account used for payment or billing address held by the bank; - (4) mobile country code of the IMSI stored on the SIM used by the recipient; - (5) location of recipient’s fixed land line through which service is supplied; - (6) any other commercially relevant information. - (d) If two factors support Maldives and two support another country, residence is based on the most reliable indicators. - (e) If supplier establishes recipient is resident in Maldives under (c), supplier must treat recipient as not being a registered person unless recipient has notified the supplier in accordance with (f). - (f) A registered person receiving remote services from a registered person without a fixed place of business in Maldives must notify the supplier in writing and include a certified copy of GST registration certificate or other evidence as required by MIRA. - (g) Notification must be provided at or before the time of supply. - Definitions: - “exempt body” means a person, other than a registered person, making supplies of goods or services a total annual value in excess of the amount specified in section 51(a)(1) and (2) of the Act. - “inbound tourism product” means accommodation, meals, transport, tours, or any other tourist activities in the Maldives. - “remote services” means services that, at the time of the supply, there is no necessary connection between: (1) the place where the services are physically performed by the supplier; and (2) the location of the recipient of the services. ### Sample Legislation — Supply through an Electronic Distribution Platform - Section applies where: - (a)(1) an “underlying supplier” makes a supply of remote services or electronically ordered goods through an electronic distribution platform; - (a)(2) the electronic distribution platform is operated by an “operator” who does not have a fixed place of business in the Maldives; and - (a)(3) the recipient is resident in the Maldives as determined under section 2(3). - Liability rule: - (b) Where conditions met and subject to subsection (3), the operator is treated as having made the supply of remote services or electronically ordered goods in the course or furtherance of a taxable activity carried on by the operator. - Exception: - (c) This section does not apply where the underlying supplier is registered for GST and the underlying supplier and the operator have agreed in writing with MIRA that the underlying supplier is liable for the payment of GST on the supply. *Annex II. Design Issues for B2C Taxation of Imported Services — source document.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mdvea2022002.pdf_