## fftrmpicea ## Source details **Canonical URL:** [fftrmpicea](https://www.imf.org/-/media/files/publications/dp/2022/english/fftrmpicea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2022/english/fftrmpicea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2022/english/fftrmpicea.pdf.json) --- ### Executive Summary — key findings - Pacific Island Countries (PICs) face daunting spending needs for the UN Sustainable Development Goals (SDGs) and climate adaptation; the Pacific islands are among the world’s most exposed to climate-related natural disasters (tropical cyclones, drought, rising sea levels). - Financing options are limited: - Many PICs rely heavily on grants, commodity exports, and fishing revenues; these sources are volatile and could decline given climate risks. - Grants are beyond PIC governments’ control. - Virtually none of the PICs have access to international capital markets; domestic capital markets are shallow where they exist. - Scope for additional borrowing is limited because most PICs are already at high risk of debt distress. - Conclusion: Boosting tax revenues is essential to create fiscal space to meet SDG and climate-adaptation spending needs. ### SDG and climate adaptation spending needs (selected statistics) - Median additional annual spending need for PICs to achieve selected SDG targets (five key sectors): 6.3 percent of 2030 GDP. - Sectoral priorities (median, percent of 2030 GDP): Hard infrastructure (electricity and roads) largest; education second; health third; WASH included. - Climate-related spending needs (median annual, percent of GDP): - Making existing and planned infrastructure climate resilient: 3.1 percent of GDP annually. - Protecting coastlines (investment and maintenance): 3.1-4.3 percent of GDP. - Retrofitting existing physical assets (annual adaptation costs): 0.5 percent of GDP. - Upgrading new projects (additional annual adaptation costs): 0.1 percent of GDP. - Disaster impact examples: - Tonga: four major natural disaster events (January 2014–January 2021) caused physical damages ranging from 11 percent of GDP to 38 percent of GDP. - Fiji: TC Winston (2016) caused damages equivalent to 30 percent of GDP. ### Fiscal and financing constraints - Market access: Virtually none of the PICs have international capital market access; very few have domestic debt markets. - Green financing: Market-based green instruments (Green and Blue Bonds) are typically too expensive given limited revenues and debt service capacity. - Debt distress: Seven out of the 12 PICs are already at high risk of debt distress (IMF-World Bank DSAs). - IMF pandemic response: The IMF provided total emergency financing amounting $424.1 million at zero percent interest rates through the Rapid Credit Facility and the Rapid Financing Instrument (IMF 2021f). - Development finance gaps: Gaps remain large between estimated spending needs, GCF approved financing, and GCF disbursed financing (GCF data as of May 2021). ### Tax revenue stylized facts and estimated potential - Current revenue mix: - Non-tax revenues (including grants and mostly fishing license fees) account for about 56 percent of PICs’ total revenue. - Six island countries (Kiribati, Tuvalu, Nauru, Micronesia, Marshall Islands, and Palau) have more than 50 percent of non-tax revenue in their mix. - Recent trends: - Tax revenue to GDP in the Pacific increased by about 4.4 percentage points during 2010-2019 to about 21 percent of GDP prior to the pandemic. - Indirect taxes average about 68 percent of total tax revenue; goods and services taxes account for about 46 percent of total tax revenue and about 69 percent of indirect taxes. - Trade-related taxes' share decreased by about 8 percentage points over a decade to about 18 percent of total taxes in 2021. - Estimated additional tax revenue potential: - "PICs could collect an additional 3 percent of tax revenue in the short to medium term." - The average tax potential in the Pacific is above other small states (1.8 percent of GDP) and landlocked countries (2.0 percent of GDP) but below commodity exporters. - Heterogeneity: tourism-dependent economies have the lowest tax gap; fragile states and commodity exporters have larger potentials. ### Main bottlenecks preventing higher tax collection - Policy and legislative constraints: - Over-reliance on fishing revenue and grants. - Lack of reform momentum; limited tax policy reforms in recent years. - Unwinding COVID-19 tax measures is challenging while revenue needs persist. - Need to address EU and OECD requirements and understand legal/compliance implications. - Administrative and capacity constraints: - Tax administrations are understaffed and underfunded; critical mass lacking. - Staff-to-population ratio: Caribbean = 1:1701; PICs = 1:3894 (the Caribbean ratio was 56 percent lower than the comparable ratio in PICs). - High vacancy rates, low skill levels, difficulty attracting and retaining qualified staff. - Reliance on donor capacity building; limited in-house training. - ICT and infrastructure constraints: - Limited management reports, data analysis, risk and case management, e-tax electronic filing and payments. - Key platform RMS 7 will reach end of life support by 2024. - Internet connectivity and data integrity issues; limited e-banking infrastructure. - Other administrative issues: - Inaccurate tax registers, weak management of outstanding returns and arrears, early-stage compliance improvement strategies. - Transfer pricing and personal income tax design issues induce revenue losses and regressivity in some cases. ### VAT systems: unrealized potential and country-level evidence - Coverage and exploitation: - Five out of 12 PICs currently have no VAT system. - The average PIC collects about 50 percent of its potential VAT. - PICs average VAT rate = 12; World average VAT rate = 16. - Role of customs: - Customs collect up to 80 percent of VAT in some PICs but face undervaluation, smuggling, ghost exports, round tripping. - Exemptions and zero-rating: - Widespread exemptions and zero-rating undermine VAT effectiveness, administrative simplicity, and transparency. - Examples of foregone revenue from exemptions: - Fiji: tax exemptions account for 24 percent of total tax revenue. - Tonga: tax exemptions account for 30 percent of total tax revenue. - Quantified potential VAT gains (selected reported country figures from source Table 1): - Fiji: VAT rate 9.0; Actual C-efficiency 65.6; Revenue impact of increasing VAT rate to world average (16 percent) = 4.7 (percent of GDP). - Kiribati: VAT rate 12.5; Actual C-efficiency 51.5; Revenue impact of increasing VAT C-efficiency = 0.2 (percent of GDP); increasing VAT rate to 16 percent = 1.9 (percent of GDP). - Papua New Guinea: VAT rate 10.0; Actual C-efficiency 24.4; Revenue impact of increasing VAT C-efficiency = 2.8 and 4.0 (percent of GDP reported across scenarios); increasing VAT rate to 16 percent = 1.5 (percent of GDP). - Samoa: VAT rate 15.0; Actual C-efficiency 71.3; Revenue impact of increasing VAT rate to 16 percent = 0.9 (percent of GDP, sign noted in source as --0.9). - Tonga: VAT rate 15.0; Actual C-efficiency 56.1; Revenue impact of increasing VAT C-efficiency = -1.3 (percent of GDP); increasing VAT rate to 16 percent = 0.7 (percent of GDP). - Tuvalu: VAT rate 7.0; Actual C-efficiency 36.9; Revenue impact of increasing VAT C-efficiency = 1.1 and 1.9 (percent of GDP across scenarios); increasing VAT rate to 16 percent = 3.4 (percent of GDP). - Vanuatu: VAT rate 15.0; Actual C-efficiency 42.6; Revenue impact of increasing VAT C-efficiency = 1.5 and 3.3 (percent of GDP across scenarios); increasing VAT rate to 16 percent = 0.5 (percent of GDP). - Interpretation: Countries with low C-efficiency and low rates (e.g., Papua New Guinea and Tuvalu) have large potential gains from both improving C-efficiency and raising rates; Fiji’s largest potential is from raising the VAT rate; Vanuatu’s largest potential is from improving C-efficiency. ### Lessons from successful revenue mobilization experiences - Typical successful package components: - Indirect tax reforms (VAT introduction/rate increases, excise adjustments, reduction of exemptions, simplification). - Focus on large taxpayers and broadening the tax base. - Revenue administration measures: audits, verification, governance and HR strengthening, IT improvements, taxpayer segmentation, registration and filing improvements. - Political will, stakeholder buy-in, and international partner support were critical. - Observed outcomes in other countries: VAT reforms contributed to revenue gains up to 0.5 percent of GDP per year over multi-year periods in case studies cited. - Fragile states: recovery patterns show a tax revenue trough at peak fragility and potential recovery of about 3.5 percentage points of GDP over a three-year window, but momentum often not sustained beyond three years without strong institutions and commitment. ### Policy recommendations and reform priorities (concise actions) - Unwind temporary pandemic/war-related fiscal relief measures gradually as recovery proceeds to restore lost revenues. - Strengthen or introduce VAT: - Countries with VAT consider a single broad-based rate, increasing rates where appropriate, reducing exemptions/zero-rating, and improving customs administration. - Countries without VAT should consider introducing VAT while eliminating/simplifying inefficient wholesale taxes. - Rationalize tax exemptions: - Subject tax expenditures to formal and regular assessment in annual budgets and rationalize to limit forgone revenue. - Use time-bound, targeted incentives with clear eligibility criteria and continuous review. - Close loopholes and address transfer pricing: - Implement deemed export prices for resource stocks (e.g., timber) and regularly review deemed prices. - Consider introducing PIT in countries without income tax and increasing tax-free thresholds where appropriate to improve progressivity. - Strengthen tax administrations: - Reach critical mass of staff; increase funding for ICT, e-tax, e-commerce, and digitalization. - Implement compliance improvement strategies, risk-based compliance management, and large taxpayer offices. - Tackle corruption via procedural reforms, internal integrity units, and independent integrity agencies where feasible. - Adopt Medium-Term Revenue Strategy (MTRS): - Develop holistic, MTRS-rooted approaches to tax reforms, sequencing, and capacity building to finance SDG and climate-resilient infrastructure. - Use MTRS to coordinate tax policy, administration modernization, and donor-supported capacity development. ### Practical implementation priorities for administrations (core functions) - Develop a post-crisis revenue collection action plan to re-establish compliance. - Improve taxpayer registration accuracy and cleanse duplicate records; require proof of identity and physical location. - Implement standard operating procedures for foundational administration tasks. - Improve on-time filing, payment, and management of outstanding returns and tax arrears. - Support voluntary compliance through taxpayer services and communication. - Improve audit techniques, large taxpayer audits, and capabilities to address international tax issues including transfer pricing. - Increase participation in Exchange of Information protocols and TADAT measures. ### Annex case highlight — Fiji (selected facts and recommendations) - Pre-pandemic tax reforms raised tax revenue to 24 percent of GDP by 2018-19. - Pandemic/fiscal relief measures are estimated to have reduced tax revenue by around 5 percent of GDP in 2021 (to 15 percent in 2020–21). - Goods and services tax (customs duties) fell from above 10 to about 8 percent of GDP. - Income taxes fell from 7 to 4 percent of GDP. - Climate adaptation cost estimate: about 10 percent of GDP over the next 10 years to develop climate-resilient infrastructure. - Fiscal and tax reform options suggested: - Impose a single broad-based VAT rate. - Increase corporate income tax rate above current 20 percent and broaden the base. - Consider increasing excise rates and expanding excise coverage to fuel and motor vehicles. - Reduce exemptions (estimated at 24 percent of total revenue) and broaden the tax base. - Strengthen compliance, IT systems, and large taxpayer auditing (NTIS, online registration, VAT and PAYE e-filing implemented). *Source: Executive Summary and selected chapters of "Funding the Future: Tax Revenue Mobilization in the PICs" (IMF Departmental Paper).* ### Executive Summary ................................................................................................v ### Executive Summary ### Pressing spending needs and limited financing options - Pacific Island Countries (PICs) face daunting spending needs related to the UN Sustainable Development Goals (SDGs) and adapting to climate change; the Pacific islands are among the world’s most exposed countries to climate-related natural disasters—most notably tropical cyclones, drought, and rising sea levels. - Except for a few countries, progress toward reaching the SDGs is lagging, and sizable additional spending will be required to upgrade or build new climate-resilient infrastructure and reduce vulnerability to climate hazards. - Financing options are limited: - Many PICs rely heavily on grants, commodity exports, and fishing revenues to finance development needs; these revenue sources remain volatile and could substantially decrease in the future given risks associated to climate change. - Grants are beyond the control of PIC governments. - Virtually none of the PICs have access to international capital markets; domestic capital markets remain shallow where they do exist. - Scope for additional borrowing is limited given that most PICs are already at high risk of debt distress. - Conclusion: Boosting tax revenues will need to be an essential pillar in creating fiscal space to meet SDG and climate-adaptation spending needs. ### Tax revenue stylized facts and estimated potential - Current revenue mix: - Non-tax revenues account for about 56 percent of total revenue in the region. - Tax revenues are dominated by indirect taxes; performance of goods and services taxes has been mixed recently and has not offset losses on trade taxes. - Estimated additional tax revenue potential: - "PICs could collect an additional 3 percent of tax revenue in the short to medium term." - Potential additional tax revenue varies across countries: fragile states and commodity exporters have among the largest potential; tourism-dependent economies have the lowest. ### Main bottlenecks preventing higher tax collection - Identified constraints include: - Over-reliance on fishing revenue and grants. - Lack of reform momentum. - Policy and legislative constraints. - Insufficient information and communication technology (ICT) support. - Understaffed and underfunded tax administrations. ### VAT systems: unrealized potential - The potential offered by efficient VAT systems is not fully exploited: - Many PICs do not yet have a VAT system; those with VAT are not exploiting its full potential. - The gap between current VAT revenue and potential VAT revenue is on average about 50 percent. - VAT rates tend to be low in the region, and VAT tax exemptions and zero rating are widespread. - Advantages of a good VAT system include reducing noncompliance and boosting non-VAT taxes. ### Lessons from successful experiences (high level) - Improvements in tax revenue mobilization in the region have occurred, but a notable share of recent improvement has come through windfall gains rather than policy reforms. - There has been limited momentum toward durable gains via major tax policy and revenue administration reforms. - The COVID-19 pandemic and the war in Ukraine induced significant revenue losses in some countries as governments introduced fiscal relief measures; these measures diverted resources from development projects and exacerbated public finance pressures. ### Recommended reforms to increase tax revenue in the Pacific Islands - Unwinding recent fiscal relief measures: - Gradually unwind tax policy and revenue administration measures introduced during the pandemic and the war in Ukraine as countries recover to restore lost revenue streams. - Strengthening or introducing a VAT system: - Countries with VAT could consider introducing a single broad-based rate while increasing tax rates (given low levels compared to international standard) and improving customs administration due to its importance for VAT collection. - Countries without VAT should consider introducing VAT together with elimination/simplification of inefficient wholesale taxes. - Rationalizing tax exemptions: - Tax expenditures need to be formally and regularly assessed in annual budgets and rationalized to limit forgone revenue—especially with the VAT. - Continued use of tax exemptions to incentivize investment erodes the tax base and encourages other investors to seek exemptions. - Closing loopholes in the tax system: - Transfer pricing induces important revenue losses for some Pacific Islands; moving together toward deemed export prices for resource stocks (for example, timber) could help protect tax revenue. - Introducing personal income tax (PIT) in some countries while increasing tax-free thresholds in countries that already have PIT could help improve progressivity. - Reforming tax administration: - Many Pacific Islands’ tax administrations are understaffed; they need to reach a critical mass to carry out their mandate. - Sufficient funding is needed for investment in ICT support, e-tax, e-commerce, and digitalization. - Tackling corruption remains a priority. - Introducing a Medium-Term Revenue Strategy (MTRS): - PICs need a more holistic approach to tax reforms given daunting structural issues (for example, climate change). - A holistic approach, rooted in MTRS principles, could be one of the most effective pathways to finance spending requirements related to SDGs and climate-resilient infrastructure. ### Paper objectives (as stated) - Review critical medium-term development spending requirements and available financing options. - Document main stylized facts about tax revenues in the PICs and estimate additional tax revenue that countries could raise. - Highlight main bottlenecks preventing PICs from increasing tax revenue collection, with emphasis on VAT weaknesses. - Draw lessons from successful emerging and developing countries that have increased tax revenues. - Propose tax policy and revenue administration reform priorities for Pacific Island Countries to boost tax revenues. *Source: Executive Summary of "Funding the Future: Tax Revenue Mobilization in the PICs" (IMF Departmental Paper).* ### 1. By Income: Emerging Market Economies2. By Region: Emerging and Developing Asia ### fftrmpicea - 1. By Income: Emerging Market Economies2. By Region: Emerging and Developing Asia ### Additional spending to achieve the SDGs - Median additional annual spending need for PICs to achieve selected SDG targets (five key sectors): 6.3 percent of 2030 GDP. - Sectoral distribution of additional SDG spending needs (median, percent of 2030 GDP): - Hard infrastructure (electricity and roads): largest share (Figure 3b). - Education: second largest. - Health: third largest. - WASH (water, sanitation, and hygiene): reported alongside other sectors. - Source of SDG costing: Tiedemann and others 2021 (IMF staff calculations). ### Climate exposure and adaptation needs - PICs are highly exposed to climate hazards including tropical cyclones, tsunamis, earthquakes, and rising sea levels. - Examples of disaster impacts on GDP: - Tonga: four major natural disaster events from January 2014 to January 2021 caused physical damages ranging from 11 percent of GDP to 38 percent of GDP. - Fiji: TC Winston (2016) caused damages equivalent to 30 percent of GDP. - Climate-related spending needs (median annual, percent of GDP): - Making existing and planned infrastructure climate resilient: 3.1 percent of GDP annually. - Protecting coastlines (investment and maintenance costs): 3.1-4.3 percent of GDP. - Retrofitting existing physical assets (annual adaptation costs): 0.5 percent of GDP. - Upgrading new projects (additional annual adaptation costs): 0.1 percent of GDP. - Rationale: Climate-proofing infrastructure is a critical step to mitigate disaster impacts and durably raise economic growth. ### Financing constraints and debt sustainability - Market access and domestic markets: - Virtually none of the PICs have international capital market access. - Very few PICs have domestic debt markets. - Green financing constraints: - Market-based green instruments (Green and Blue Bonds) are typically too expensive given PICs’ limited revenues and debt service capacity. - Debt distress and borrowing space: - Seven out of the 12 PICs are already at high risk of debt distress according to IMF-World Bank debt sustainability assessments (DSAs). - The risk of debt distress has been on the rise over the past decade (Figure 7). - Public debt rose sharply compared to pre-pandemic levels because of economic contraction and countercyclical fiscal measures that widened fiscal deficits (Figure 8). - IMF pandemic response: - The IMF provided total emergency financing amounting $424.1 million at zero percent interest rates through the Rapid Credit Facility and the Rapid Financing Instrument (IMF 2021f). - Development finance for climate adaptation: - PICs rely significantly on grants and concessional loans for climate adaptation projects. - Gaps remain large between estimated spending needs, GCF approved financing, and GCF disbursed financing (Figure 9). - GCF data are as of May 2021. ### Fiscal pressures and revenue risks - Expected revenue losses from PACER Plus: - PACER Plus (Pacific Agreement on Closer Economic Relations with Australia and New Zealand) came into force since December 2020. - Ratifications and signings: - Ratified: Samoa, Solomon Islands, and Tonga. - Signed and expected to ratify: Tuvalu and Vanuatu. - Because PACER Plus is a free trade agreement, it is expected to induce revenue losses over a long horizon—particularly from trade tax revenue. - Implication: With constrained borrowing space and limited concessional finance, mobilizing domestic revenue will be essential to finance SDG and climate adaptation investments. ### Key indicators and comparative notes reported - Figures and indices referenced (2019 unless otherwise noted): - SDG3, SDG4, SDG6 indices range from 0 to 100 (left scale). - SDG7: access to electricity as percentage of population (left scale). - SDG9: 2018 World Bank Logistics Performance Index Quality of Trade and Transport Infrastructure Component Score ranging from 1 to 5 (right scale). - Infrastructure vulnerabilities index: 0 to 1 (1 = worse performance). - Human Capital Index: 0 to 1 (1 = best outcome). - Universal Health Coverage Index: 0 to 100 (100 = best outcome). - Regional comparisons: - Median additional spending to meet the SDGs by region (percent of 2030 GDP, median): regions shown include SSA & MENA, PICs, Caribbean (Figure 3a). - Public annual adaptation costs (Percent of GDP, median): PICs higher compared to other Asian countries (Figure 5). - PICs’ exposure to climate change indexed for specific countries including Fiji, Samoa, Vanuatu, Papua New Guinea, Palau, Tonga, Solomon Islands, Nauru, Marshall Islands, Micronesia, Kiribati, Tuvalu (Figure 4). *Source: IMF staff calculations using Sachs and others (2021); content excerpted from IMF Departmental Paper “Funding the Future: Tax Revenue Mobilization in the PICs.”* ### 2. Tax Revenue and Tax Potentials ### 2. Tax Revenue and Tax Potentials in the Pacific Region ### A. Tax Revenue in the Pacific: Key Features - Revenue composition and volatility - Non-tax revenue (including grants and mostly fishing license fees) accounts for about 56 percent of PICs’ total revenue. - Six island countries (Kiribati, Tuvalu, Nauru, Micronesia, Marshall Islands, and Palau) have more than 50 percent of non-tax revenue in their revenue mix. - Grants and other non-tax sources tend to be more volatile than tax revenue. - Recent trends in tax collection - The ratio of tax revenue to GDP in the Pacific increased by about 4.4 percentage points during 2010-2019 to reach about 21 percent of GDP prior to the pandemic. - Income taxes experienced a large increase in the last decade but driven by large windfalls in Micronesia and Nauru. - Between 2017 to 2019, Micronesia received corporate income tax windfalls from occasional sale of foreign assets. - Nauru experienced large increases in corporate income tax collected from the Nauru Regional Processing Center (NRPC) since 2018 following an increase in the CIT rate; income taxes from the NRPC are expected to decrease from July 2022 because the NRPC could reach its maximum capacity. - Most other PICs had stable income taxes during this period; Papua New Guinea recorded a decrease in income tax collection. - Tax structure - Indirect taxes represent an average of about 68 percent of PICs total tax revenue. - Goods and services taxes account for about 46 percent of total tax revenue and about 69 percent of indirect taxes in the Pacific region. - Trade-related taxes' share decreased by about 8 percentage points in about a decade to reach about 18 percent of total taxes in 2021. - Goods and services tax collection increased in the early 2010s but has been stagnant for PICs as a group since 2014. - Country exceptions with significant GST increases in the last decade include Fiji, Nauru, Samoa, Tonga, and Tuvalu. - Comparisons with peers - Between 2000 and 2019, the median tax revenue ratio increased by 5.3 percentage points of GDP in the Pacific region. - The PICs’ tax-to-GDP ratio compares well with other small states (SDSs excluding PICs) and Caribbean countries, and all three groups are below advanced economies. - Average annual increase in tax-to-GDP for PICs, other small states, and the Caribbean was 1.3–1.5 percent versus 0.4 percent for advanced economies. ### B. Tax Potentials in the Pacific: An Estimation - Estimated additional tax potential - PICs could potentially collect an additional 3 percent of tax revenue to GDP in the short to medium term by implementing key tax policy and revenue administration reforms. - The average tax potential in the Pacific region is above the estimated numbers for other small states (1.8 percent of GDP) and landlocked countries (2.0 percent of GDP) but far below commodity exporters. - Heterogeneity across country groups - Tourism-dependent economies have the lowest tax gap for additional tax revenue (tourism economies include Fiji, Palau, Samoa, Tonga, and Vanuatu). - Compact countries (Marshall Islands, Micronesia, and Palau) have potential additional tax revenue at par with the regional average and often rely heavily on grants. - Fragile countries (Kiribati, Marshall Islands, Micronesia, Papua New Guinea, Solomon Islands, and Tuvalu) face relatively large tax gaps. - Commodity exporters in the Pacific (Papua New Guinea and Solomon Islands) have a large unexploited tax potential; Papua New Guinea is a notable example. - The “Others” group (Kiribati, Nauru, and Tuvalu) shows a relatively low tax-to-GDP ratio except Nauru and an over-reliance on non-tax revenue. - Constraints facing small developing states (SDS) - Typical constraints: lower levels of capacity, small and dispersed populations, weak absorptive capacity, and lower economic diversification. - These constraints can limit the pace at which tax gaps are closed, but external support (capacity building from donors and partners) can help. ### C. Determinants of Tax Capacity and Policy Implications - Key determinants for PICs’ tax capacity (consistent with the literature) - Government effectiveness - GDP per capita - Size of the informal sector (proxied by the share of agriculture in GDP) - Openness to trade - Control of corruption - Relative importance for the Pacific - The most important determinants appear to be government effectiveness, GDP per capita, and the size of the informal sector. - Improving government effectiveness can considerably reduce the gap between tax capacity and actual tax revenue. - Policy implications and priorities - Domestic tax revenue mobilization should be an essential part of the strategy to finance SDGs—especially for climate adaptation given constraints and limitations of other financing sources. - Boosting non-trade-based taxes is necessary given expected long-term reductions in trade tax revenues (including from PACER Plus implementation). - Closing the tax gap requires tax policy and administrative reforms and attention to political economy considerations about whether and how much to raise taxes. - Not every tax gap needs to be closed; the tax potential indicates room for higher taxation but is not necessarily the optimal tax level for a country. ### D. Box: Appropriate Tax Level—Trade-offs to Consider - Main trade-offs in setting the appropriate revenue level - Too little revenue: challenges in providing critical government services, insufficient capital expenditures, and constrained long-term growth. - Too high taxation: risks stifling private sector growth, discouraging investment, and prompting mobility of skilled labor. - Intertemporal household trade-off: higher taxes reduce short-term consumption but may raise long-term consumption via better public services; in low-income contexts heavy weighting toward future consumption can cause short-term hardship. - Sectoral considerations: subsistence agriculture may be taxed lightly to avoid widespread hardship despite lower government revenue. - Macro-fiscal consideration: debt sustainability and maintaining a downward trajectory for the debt-to-GDP ratio are primary concerns. - Guiding principle - Asking whether more can be done is different from asking whether more should be done; determining the appropriate revenue level requires case-by-case judgment considering country-specific circumstances, trade-offs, and tax potential. *fftrmpicea - 2. Tax Revenue and Tax Potentials (PDF).* ### 3. Bottlenecks in Pacific Islands’ Tax System ### 3. Bottlenecks in Pacific Islands’ Tax System ### A. Overview: Key bottlenecks - Administrative and policy bottlenecks prevent the PICs from raising tax collections to their tax potential. These include: - the gap between tax legislation and the available tax base; - weak compliance; - weak capacity and ICT systems; - inefficiencies in the tax system—particularly in VAT systems. ### A Myriad of Constraints in the Tax System — findings - Lack of reform momentum: - Tax policy reforms in PICs over the past four years have been limited—other than some recent reforms in response to COVID-19. - Most PICs rely on indirect taxes for revenue; some interest exists in a small business tax as a simplification measure but little progress has been made. - Recent VAT reforms have been modest, with rates (other than in Vanuatu) and thresholds remaining unchanged. - Increasing use of excises to raise revenue and address negative impacts of certain goods. - Revenue administrations must reinvigorate collections post-COVID and develop business continuity plans to safeguard operations during pandemics, epidemics, and natural disasters. - Policy and legislation constraints: - Unwinding COVID-19 tax measures is challenging while also needing measures to reverse revenue declines. - Reforms should focus on VAT—especially exemptions, zero-rated items, and refunds—for countries with VAT. - Non-tax revenues (fishing and compact grants) are significant but volatile or limited in the future; need to strengthen traditional taxes for stability. - Countries must address EU and OECD requirements to be removed from EU ‘black’ or ‘grey’ lists and fully understand legal, compliance, and revenue implications before adopting systems to satisfy those requirements. - Access to revenue forecasting expertise is a high priority. - ICT and infrastructure constraints: - Few PICs have good ICT support: limited or no management reports, data analysis, risk and case management, e-tax electronic filing and payments. - A key technology platform (RMS 7) used by several PICs will reach end of life support by 2024. - Data integrity, internet connectivity and infrastructure limitations hamper operations. - Weak ICT systems in other government departments limit information exchanges. - E-tax adoption constrained by under-developed e-banking infrastructure and limited taxpayer access to fast, reliable, and affordable internet services. - Limited funding and investment in revenue administrations (Customs and Tax) impose a ceiling on modernizing and reforming tax administrations. - Capacity constraints in tax administrations: - Tax administrations are severely constrained in capacity with a lack of critical mass. - Comparative staff-to-population metrics: The tax administration staff-to-population ratio in the Caribbean was 1:1701. This ratio was 56 percent lower than the comparable ratio in PICs of 1:3894. - Most PICs face staff shortages, high vacancy rates and low skill levels. - Smaller island countries struggle to attract and retain talented and suitably qualified staff. - Lack of in-house training capacity; reliance on donor agencies for capability development, which is often generalized and does not meet individual technical needs. - Despite many training interventions by PFTAC in partnership with PITAA and other development partners, skill levels remain low; longer-term on-the-job training and coaching are needed. - Larger countries have difficulty dealing with tax avoidance and evasion, international tax and other complex tax issues requiring specialized expertise. - Absorptive capacity of tax administrations should be considered when launching new projects from PFTAC, ADB, EU, World Bank, DFAT, MFAT. - Other administrative constraints: - Inaccuracies with tax registers; deficiencies in management of outstanding tax returns and tax arrears. - Implementation of Compliance Improvement Strategies and risk management is at an early stage; many approved strategies yet to be implemented. - Compliance management of large taxpayers has progressed; SME segment is typically less developed. - Poor data and inability to reliably identify sector participation and monitor compliance by industry inhibit establishing baselines and monitoring and evaluation. - Transfer pricing and personal income tax issues: - Transfer pricing encourages unsustainable use of resource stocks, is often environmentally sensitive and induces significant revenue losses. - Personal income tax: relatively low tax-free thresholds can put burdens on low-income earners and could discourage businesses from hiring lower skilled workers. ### B. VAT potential is not fully exploited — findings and evidence - Role of VAT: - VAT has been centerpiece of domestic resource mobilization reform strategies in many emerging and developing countries. - Successful tax reform programs (Akitoby and others 2018) enhanced revenue collection up to 0.5 percent of GDP per year over three years or more, relying primarily on VAT reforms. - Effective VAT systems can improve compliance by reducing informality through VAT refunds on inputs and a self-enforcing mechanism. - Empirical evidence referenced: Rios and Seetharam (2017) (India), Agostini and others (2014) and Pomeranz (2015) (Chile) support VAT’s formalization and self-enforcing effects. - VAT in the Pacific: - Five out of 12 PICs currently have no VAT system. - The average PIC collects about 50 percent of its potential VAT. - For PICs that already have VAT, inefficiencies in tax policy and weaknesses in tax administration are preventing full exploitation. - Customs administrations play a significant role: customs collect up to 80 percent of VAT but face undervaluation, smuggling, ghost exports, round tripping, etc. - Even PICs with relatively high VAT rates have room to increase given world average VAT rates. - Lack of timely VAT refunds in PICs hinders VAT effectiveness. - Tax exemptions and zero-rating: - Widespread tax exemptions and zero ratings are used to achieve development goals, incentivize investment, and support the vulnerable. - Many exemptions are costly economically and financially, complicate administration, encourage higher tax rates, decrease efficiency, reduce tax compliance, and undermine transparency. - Tax exemptions are frequently not subject to a formal estimate in annual budgets. - Examples of foregone revenues from exemptions: - tax exemptions account for 24 percent of total tax revenue in Fiji; - tax exemptions account for 30 percent of total tax revenue in Tonga. - Rationalizing tax exemptions could improve VAT C-efficiency ratios and help countries reach full potential. ### C. Quantitative indicators and specific figures (as reported) - Average PIC VAT exploitation: the average PIC collects about 50 percent of its potential VAT. - VAT and tax revenue comparisons: - Figure 21: Tax Revenue with and without VAT (Percent of GDP) shows With VAT and Without VAT series with values in the 16.5–19.5 Percent of GDP range (data average 2010–20). - VAT efficiency and rates: - VAT C-efficiency conveys the additional percentage of potential VAT a country can collect. Data pertains to 2020. - World average VAT rate = 16 - PICs average VAT rate = 12 - Staff-to-population ratios: - Caribbean tax administration staff-to-population ratio = 1:1701. - PICs staff-to-population ratio = 1:3894. - The Caribbean ratio was 56 percent lower than the comparable ratio in PICs. - ICT timeline: - RMS 7 will reach end of life support by 2024. - VAT exemptions examples: - Fiji: tax exemptions account for 24 percent of total tax revenue. - Tonga: tax exemptions account for 30 percent of total tax revenue. ### D. Potential VAT revenue gains — synthesis of reported estimates - There is major VAT revenue gain by improving C-efficiency and/or increasing standard VAT rates. - Scenario design used in analysis: - Improving VAT C-efficiency to world threshold values (Q3 and world average C-efficiency benchmarks). - Retaining current C-efficiency but increasing standard VAT rates to the world average (16 percent). - Figure 25 and Table 1 summarize potential additional revenue from VAT reforms (percent of GDP) — reported outcomes indicate: - Gains from increasing VAT C-efficiency and gains from increasing VAT rate vary across PICs. - Reported country-specific numbers from Table 1 (as presented in source): - Fiji: VAT rates (percent) 9.0; Actual C-efficiency (C E ) (percent) 65.6; Revenue Impact of Increasing VAT C-efficiency (percent of GDP) C E = 53 C E = 65 -- ; Revenue impact of Increasing VAT Rate (percent of GDP) World average VAT rate (16 percent) 4.7 - Kiribati: VAT rates (percent) 12.5; Actual C-efficiency (C E ) (percent) 51. 5 0.2; Revenue Impact of Increasing VAT C-efficiency (percent of GDP) 1.6; Revenue impact of Increasing VAT Rate (percent of GDP) World average VAT rate (16 percent) 1.9 - Papua New Guinea: VAT rates (percent) 10.0; Actual C-efficiency (C E ) (percent) 24.4; Revenue Impact of Increasing VAT C-efficiency (percent of GDP) 2.8 4.0; Revenue impact of Increasing VAT Rate (percent of GDP) World average VAT rate (16 percent) 1.5 - Samoa: VAT rates (percent) 15.0; Actual C-efficiency (C E ) (percent) 71.3; Revenue Impact of Increasing VAT C-efficiency (percent of GDP) -- ; Revenue impact of Increasing VAT Rate (percent of GDP) World average VAT rate (16 percent) 0.9 (negative sign in source: --0.9) - Tonga: VAT rates (percent) 15.0; Actual C-efficiency (C E ) (percent) 56.1; Revenue Impact of Increasing VAT C-efficiency (percent of GDP) -1.3; Revenue impact of Increasing VAT Rate (percent of GDP) World average VAT rate (16 percent) 0.7 - Tuvalu: VAT rates (percent) 7.0; Actual C-efficiency (C E ) (percent) 36.9; Revenue Impact of Increasing VAT C-efficiency (percent of GDP) 1.1 1.9; Revenue impact of Increasing VAT Rate (percent of GDP) World average VAT rate (16 percent) 3.4 - Vanuatu: VAT rates (percent) 15.0; Actual C-efficiency (C E ) (percent) 42.6; Revenue Impact of Increasing VAT C-efficiency (percent of GDP) 1.5 3.3; Revenue impact of Increasing VAT Rate (percent of GDP) World average VAT rate (16 percent) 0.5 - Interpretation highlighted in source: - Countries with relatively low C-efficiency and low rates (for example, Papua New Guinea and Tuvalu) have large potential gain from both improving C-efficiency and rising rates. - Fiji’s largest revenue potential is from rising its standard VAT rate while Vanuatu’s largest revenue potential is from improving its C-efficiency ratio. - PICs can learn from New Zealand, which is close to the region and has one of the most effective and successful VAT systems in the world. *Italic: Source — fftrmpicea - 3. Bottlenecks in Pacific Islands’ Tax System* ### 0.5 percentage points of GDP each year for at least three consecutive years. A holistic view of the ### fftrmpicea - 0.5 percentage points of GDP each year for at least three consecutive years. A holistic view of the ### A. Background - Builds on Akitoby and others (2018, 2019) empirical and case study analyses of selected LIDCs and EMs that achieved significant and sustained improvements in domestic tax revenue mobilization. - Emphasis on a holistic view of countries’ course of achievement: tax policies, revenue administration measures, and social and political positioning to sustain tax revenue gains over a long period. - Notes uniqueness of LIDCs and that policies might not be exactly replicable, but generalized trends yield a roadmap if there is sufficient political commitment. - Fragile states face pronounced challenges constraining capacity to sustain revenue recovery beyond three years (see Box 2). ### B. Tax Policy Measures and Fiscal Reforms - Common effective measures: - Indirect tax reforms: introduction and rate increases for VAT and excise, reduction of exemptions, simplification of taxation to reduce compliance costs. - Focus on large taxpayers and broadening the tax base. - Indirect taxes often associated with large revenue periods; frequent instruments include VAT, sales tax, and excises (examples: The Bahamas, Bosnia and Herzegovina, Dominica, The Gambia, Guyana, Barbados, Tuvalu). - Examples of multi-instrument strategies: - Belize, 2013–14 (GST and excise taxes). - Kyrgyz Republic, 2011–12 (CIT, VAT, excises, and other GST). - Seychelles, 2008–11 (PIT, CIT, VAT, excises, other GST, trade taxes and subsidies). - Common strategies included: - Rate increases (general VAT, excise, trade taxes). - Curbing exemptions related to VAT, general GST, and CIT. - Specific measures: reducing statutory and discretionary exemptions (Guyana, Solomon Islands); ending tax holidays (Burkina Faso); ending CIT exemptions (Mauritania); eliminating VAT exemptions (Uganda). - Broadening the tax base and reducing the number of taxes helped concentrate collection on large taxpayers who in certain cases contributed up to 80 percent of revenues. ### C. Revenue Administration Measures - Revenue administration measures accompanied tax policy measures in 90 percent of the episodes. - Most common measures: - Audits and verification programs to reduce tax evasion and corruptive practices. - Strengthening governance, management, and HR. - Hiring qualified staff for planning and monitoring. - Capacity development for technical skills. - Empowering revenue agencies with improved IT systems: strategic IT plans, enhancement of existing systems, computerization of tax and customs administration, support for tax payments, filing, and use of third-party information. - Registration and filing improvements, improving compliance, large taxpayers’ office and segmentation, management of payment obligations, customs clearance. - Automation and streamlined tax payment processes yielded: - Faster revenue earnings. - Standardization of processes. - Improved voluntary compliance via one-stop shops. - Reduced corruption. - Examples: management of payment obligations and arrears in Burundi, Comoros, Dominica; taxpayer segmentation in Cabo Verde and Uruguay with large taxpayers accounting for up to 80 percent of tax revenues. - Note: Studies could not precisely quantify the impact of administrative measures but underlined their importance alongside tax policy. ### D. Political Will, Social Awareness, and International Support - Political will is key to sustained tax policy reform; example: Burkina Faso achieved sustained improvement over 10 years under strong political commitment. - Stakeholder buy-in and effective communication increase awareness, voluntary compliance, and reduce opposition (example: Senegal). - International partner support was important in about 58 percent of analyzed episodes; IMF programs tended to have a positive effect on tax revenue mobilization, especially where revenue conditionality was applied and in LIDCs with tax revenue to GDP ratios below the group average. ### E. Policy Lessons - Common policy and administrative measures correlated with significant tax revenue gains: - Rationalization of exemptions. - Implementation of or adjustments to broad-based VAT and other goods and services taxes. - Rate changes to or introduction of excises on selected goods. - Strong revenue administration management and governance arrangements. - Improvements in core tax administration functions. - Institutional factors (government effectiveness and control of corruption) are highly correlated with performance of revenue-specific institutions and revenue administration, and play a key role in sustaining realized tax revenue gains. - Tax revenues require political commitment and buy-in from key stakeholders. - International support plays a key role in developing policies for tax revenue mobilization. - Countries with weak institutions can pursue tax reforms and sustain long-lasting gains provided they have strong political commitment. - Despite long-term enhancements, there remains further scope to increase tax revenues and strengthen revenue performance. ### Box 2. Tax Revenue Mobilization in Fragile and Conflict-Affected States - About half of fragile states are LIDCs; characteristics: high institutional and social fragility measured by quality and policy of institutions and conflict-related deaths. - Among Asian and Pacific small states on the updated FY 2022 list of FCSs are Kiribati, Marshall Islands, Micronesia, Papua New Guinea, Solomon Islands, and Tuvalu. - Need for tax revenue mobilization is more predominant in FCSs, especially amid large socioeconomic crises (example: COVID-19 pandemic) and susceptibility to natural disasters, which strain governments’ ability to meet SDGs and spending needs. - FCSs face structural challenges: poor governance, weak institutional capacity, political and social instability, trapping them in a low-level equilibrium that makes transition out of fragility difficult. - Fragility’s impact on tax revenue mobilization: - A tax revenue trough identified at peak fragility corresponds to weak institutional and administrative capacity and inability to implement tax reform. - Tax recovery following such a trough was found to sustain for up to 2–3 years, with a steady increase of 3.5 percentage points of GDP over a three-year window. - Momentum of recovery was generally not sustained beyond three years, contributing to persistently weak tax revenues in FCSs. *IMF Departmental Papers • Funding the Future: Tax Revenue Mobilization in the PICs* ### 5. Raising Tax Revenue in the ### 5. Raising Tax Revenue in the Pacific: The Way Forward ### Background - Post COVID-19, Pacific Island Countries (PICs) need to prioritize domestic resource mobilization to: - Bring down public debt levels. - Restore fiscal space. - Finance spending needs related to the SDGs and climate change. - Key reform priorities identified: (i) tackling transfer pricing; (ii) seizing opportunities that VAT offers; (iii) rationalizing tax exemptions; and (iv) further investment in tax administrations. - Reducing the tax gap can help finance additional SDG- and climate-related spending. IMF staff calculations indicate that part of SDGs-related spending can be domestically financed by boosting tax revenue mobilization. - Temporary tax reliefs introduced during the pandemic should be gradually unwound as recovery proceeds; unwinding should restore lost revenues via the most efficient means even if that involves different or new taxes. - Examples of pandemic and price-mitigation measures: - Fiji: zero rating on VAT for 21 essential consumer items; also raised the VAT rate from 9 to 15 percent on a list of other goods to maintain revenue neutrality. - Papua New Guinea: removed the fuel excise and GST on fuel products and raised the income tax threshold. - New price-mitigation tax measures should be time-bound and removed as prices stabilize. ### Value Added Tax (VAT) - VAT is described as one of the least economically distortionary taxes when well designed and administered. - Covers final products and services rather than inputs. - Minimal distortionary impact on business investment if applied without significant industry exemptions. - Current VAT coverage in scope: only seven of the 12 countries covered by the paper have introduced VAT. - Recommendations: - Countries without VAT, even with low administrative capacity, should move toward implementation as soon as possible despite upfront training, IT, and taxpayer-education costs. - VAT implementation is an opportunity to abolish/simplify inefficient wholesale taxes and modernize revenue administration. - Countries with low VAT rates may consider raising them and introducing a single broad-based rate if the tax strategy aims to increase overall revenue or eliminate less efficient taxes. ### Personal Income Tax (PIT) - PIT often represents a sizeable share of overall revenue and can provide redistribution benefits if applied appropriately. - Some Pacific countries do not tax income (personal or corporate), e.g., Vanuatu, implying loss of a potentially large revenue base. - Design principles: - Moderately high tax-free thresholds reduce burden on low-income earners and do not discourage hiring lower-skilled workers. - Progressive tax scales should avoid excessively high rates that encourage migration to lower-tax jurisdictions. ### Tax Exemptions - Many PICs offer sizeable tax exemptions to foreign and domestic investors in the belief they spur development and jobs; evidence suggests risks: - Encourages rent seeking (legal and illegal). - Undermines investment climate and long-term growth. - Creates unfair competitive advantages for exempt firms and may allow inefficient firms to persist. - Policy guidance: - Where exemptions are issued, formal analysis and reporting should show any economic or employment benefits. - Broad rationalization and, where appropriate, phase-out of exemptions is implied. ### PACER Plus - PACER Plus can improve trade efficiency and raise living standards for participants. - For some countries, import duties slated for abolition under PACER Plus represent a sizeable share of overall revenue. - Such countries must identify alternative revenue sources to offset losses, though export-oriented activity increases could partially offset revenue declines. - Regardless of PACER Plus participation, replacing distortionary import taxes with more efficient taxes (VAT and excise) is recommended. ### Transfer Pricing - Transfer pricing erodes revenue in some PICs; example given: - Timber exports sometimes sold to parent companies in a second country well below market rate to reduce excise and other taxes. - Recommendation: - Adopt deemed export prices for timber and other products subject to export taxes, irrespective of actual sale price. - Deemed export prices should be regularly reviewed to reflect market realities. - Expected outcomes: better compensation for natural resource loss, reduced taxation pressure on other sectors, and protection of environmentally sensitive stocks. ### Tackling Corruption - Corruption within customs and tax administrations undermines revenue bases and investor confidence. - Example: 67 per cent of businesses in Papua New Guinea reported that corruption had negatively affected them (ADB and INA, 2012). - Anti-corruption measures: - Administrative procedural reforms, internal integrity units, and organizational cultural change help reduce corruption. - Independent integrity agencies (e.g., independent commissions against corruption) can have potent impact if given appropriate powers, independence, and funding. - Reductions in corruption raise overall government revenue and reduce unfair tax incidence across the tax base. - Fiji created an independent commission against corruption in 2017. ### Tax Administration Reforms - Many PIC tax administrations lack the critical mass and capacity needed to implement reforms and carry out mandates. - Priorities for investment and reform: - Provide sufficient funding to revenue administrations to implement strategies and reforms. - Build critical mass of capable staff, ICT support, e-tax systems, and capabilities to manage digitization and e-commerce. - Enhance compliance risk management supported by compliance improvement strategies and revenue activation plans, with a focus on the large taxpayer segment. - Increase participation in Exchange of Information protocols and build capacity to address international tax issues, including transfer pricing. - Core functions to strengthen: 1. Develop a “post-crisis revenue collection action plan” to re-establish compliance and collections quickly while considering COVID-19 economic impacts. 2. Improve taxpayer registration accuracy via robust policies, cleansing duplicate records, and introducing proof of identity and physical location. 3. Develop standard operating procedures to get foundational administration right. 4. Improve on-time filing and payment and management of outstanding returns and tax arrears. 5. Support voluntary compliance through taxpayer services and communication. 6. Improve audit techniques and mechanisms to audit large and international corporations. - Medium-term revenue strategies (MTRS) should be designed and implemented, supported by: - Developing tax policy capacity and reviewing/rationalizing widespread tax exemptions and incentives (especially VAT and CIT) and pandemic-related tax measures. - Reviewing and updating tax legislation. - Modernizing tax administrations and supporting adoption of TADAT measures. - Raising awareness of human resource management good practice and developing minimum standards to support effective tax administration. - The Platform for Collaboration on Tax (PCT, 2021) notes for small states: - Political economy issues have been less problematic and consensus-building less challenging than in many larger countries. - Awareness of critical issues is high and MTRS approaches could be successfully introduced. - IMF Fiscal Affairs Department technical assistance on MTRS has been and should continue to be a valuable resource. ### Annex — Case Study 1. Fiji: The Standard Setter - Pre-pandemic tax performance: - Tax reforms raised tax revenue to 24 percent of GDP by 2018-19. - Pandemic impact and fiscal relief measures: - Loss of tourism revenue and significant reductions in taxes, tariffs, and excises in 2020-21 sharply reduced Fiji’s revenue envelope. - Tax policy measures aiming at economic relief are estimated to have reduced tax revenue by around 5 percent of GDP in 2021 to 15 percent in 2020–21. - Goods and services tax (customs duties) fell from above 10 to about 8 percent of GDP. - Income taxes fell from 7 to 4 percent of GDP. - Climate vulnerability and financing needs: - Tropical Cyclone Winston estimated damage: 30 percent of GDP and growth slowed to 0.4 percent. - Cost of adaptation to develop climate-resilient infrastructure estimated at about 10 percent of GDP over the next 10 years. - Meeting adaptation needs will require increased capacity to evaluate and create a pipeline of environmental projects and realistic approaches to accessing climate finance given borrowing constraints. - Tax policy and administration reforms in Fiji: - VAT revenues contributed about 34 percent of total tax revenue and were concentrated among large taxpayers. - VAT Act rewritten in 2018 to clarify substantive, procedural, and administrative provisions. - Direct tax reforms included increasing the PIT tax-free threshold, rate increases and base broadening of the Environment and Climate Adaptation Levy (ECAL). - Tax reductions and exemptions introduced for relief led to forgone tax revenues estimated at FJD 127 million. - Revenue administration reforms and results: - Emphasis on governance, business strategy, and information technology. - Tax administration operating budget increased by 30 percent, with IT investments and organizational changes (units for Productivity Enhancement, integrated roles for revenue management, debt collection, and dispute resolution). - Implemented a fully-online taxpayer registration process with identity verification to combat identity mismatch and duplication. - Implemented the New Tax Information System (NTIS) for VAT and Withholding Tax to move from paper-based to digital tax administration. - Enhanced tax compliance measures: compliance improvement strategies (CIS) for taxpayer segmentation (agriculture, construction, wholesale and retail), and new CIS for fishing, logging, customs, and agriculture to identify compliance risks. - Established a tax audit unit for large taxpayers, an SME support center for advisory and audit services, and a dedicated tax audit unit for detection of profit-shifting practices and transfer pricing audits (the only country in the study with a CIS to manage international taxpayers). - Way forward for Fiji (selected recommendations): - Determine a medium-term revenue target (e.g., a primary surplus) to reduce public debt. - Achieve fiscal targets through a combination of measures: - Raise selected tax and excise rates. - Reduce exemptions (estimated at 24 percent of total revenue). - Broaden the tax base. - Increase compliance and efficiency of revenue collection. - Specific policy options mentioned: - Impose a single broad-based VAT rate across all sectors and producers. - Increase the corporate income tax rate (CIT) over the current 20 percent and broaden the base. - Consider increasing excise rates and expanding excise coverage to fuel and motor vehicles. - Raise departure tax. - Impose withholding tax on dividends paid to nonresidents. - Develop a Model Tax Treaty for selection of tax partners to safeguard Fiji’s economic benefits in negotiations. - Rationalize tax incentives and exemptions via well-targeted incentives with clear eligibility criteria, limited timeframes, continuous review, and phase-out. *IMF Departmental Papers — Funding the Future: Tax Revenue Mobilization in the PICs (chapter 5).* ### Annex Figure 1.1. Fiji: Tax Revenue Mix, 2010–21 ### Annex Figure 1.1. Fiji: Tax Revenue Mix, 2010–21 ### Figure description and metadata - Title: Annex Figure 1.1. Fiji: Tax Revenue Mix, 2010–21 - Measure: (Percent of GDP) - Timeframe shown: 2010–21 - Annotated years visible in the figure area: 2011 1213 1415161718192021 - Sources cited in figure: Fiji authorities; and IMF staff calculations. ### Key observation from surrounding text - Simplification of tax structure: - "Simplification of tax structure. It brings down administrative cost and increases voluntary compliance amongst taxpayers." - Example cited: "the repeal of the ECAL in favor of higher VAT rates (although the use of multiple VAT rates has introduced a new distortion and reduced the simplicity of the tax regime)." ### Implications (as presented) - Simplifying the tax structure is linked to lower administrative costs and higher voluntary compliance. - Policy changes such as repealing ECAL in favor of higher VAT rates can simplify structures but introducing multiple VAT rates can reintroduce distortions and reduce simplicity. *Sources: Fiji authorities; and IMF staff calculations.* ### Annex Table 2.1. Tax Frontier Regression Results(Dependent Variable: Log of Tax-to-GDP) ### Annex Table 2.1. Tax Frontier Regression Results(Dependent Variable: Log of Tax-to-GDP) ### Regression results (Dependent Variable: Log of Tax-to-GDP) - Sample partitions reported: All sample (specifications A and B) and EMDCs (specifications A and B). - Explanatory variables and reported estimates: - Log of real GDP per capita - All sample A: Coefficient = 0.580; Std. err. = 0 . 0 61 - All sample B: Coefficient = 0.004; Std. err. = 0.004 - EMDCs A: Coefficient = 0.829; Std. err. = 0.087 - EMDCs B: Coefficient = 0.638; Std. err. = 0.076 - Log of real GDP per capita squared - All sample A: Coefficient = −0.031; Std. err. = 0.003 - All sample B: Coefficient = 0.015; Std. err. = 0.004 - EMDCs A: Coefficient = −0.053; Std. err. = 0.005 - EMDCs B: Coefficient = −0.036; Std. err. = 0.004 - Trade openness - All sample A: Coefficient = 0.001; Std. err. = 0.000 - All sample B: Coefficient = 0.002; Std. err. = 0.000 - EMDCs A: Coefficient = 0.001; Std. err. = 0.000 - EMDCs B: Coefficient = 0.001; Std. err. = 0.000 - Share of agriculture in GDP - All sample A: Coefficient = − 0 . 011; Std. err. = 0.001 - All sample B: Coefficient = −0.005; Std. err. = 0.001 - EMDCs A: Coefficient = −0.015; Std. err. = 0.001 - EMDCs B: Coefficient = − 0 . 013; Std. err. = 0.001 - Commodity exporters dummy - All sample A: Coefficient = 0. 316; Std. err. = 0.340 - All sample B: Coefficient = 0.284; Std. err. = 0.354 - EMDCs A: Coefficient = 0.255; Std. err. = 0.429 - EMDCs B: Coefficient = 0.343; Std. err. = 0.368 - Control of corruption - All sample A: Coefficient = 0.039; Std. err. = 0.016 - EMDCs A: Coefficient = 0.024; Std. err. = 0.021 - Government effectiveness - All sample A: Coefficient = 0.030; Std. err. = 0.016 - EMDCs A: Coefficient = 0 .111; Std. err. = 0.023 - Error component and sample statistics: - Sigma_u - All sample A: 0 .14 5; Std. err. = 0.005 - All sample B: 0 .141; Std. err. = 0.006 - EMDCs A: 0 .159; Std. err. = 0.008 - EMDCs B: 0 .16 3; Std. err. = 0.007 - Sigma_v - All sample A: 0.053; Std. err. = 0.003 - All sample B: 0.063; Std. err. = 0.005 - EMDCs A: 0.071; Std. err. = 0.006 - EMDCs B: 0.062; Std. err. = 0.005 - No. of obervations - All sample: 2566 (A and B) - EMDCs: 1972 (A and B) - No. of countries - All sample: 167 (A and B) - EMDCs: 129 (A and B) - Notes on specifications: - Specification B excludes institutional variables (control of corruption and government effectiveness). - EMDCs = emerging markets and developing countries. ### Key interpretation points from regression table - Positive estimated association between log real GDP per capita and log tax-to-GDP in specifications A for both samples (All sample A: Coefficient = 0.580; EMDCs A: Coefficient = 0.829) with negative coefficients on the squared term (All sample A: −0.031; EMDCs A: −0.053), consistent with a concave (inverted-U) relationship between income and tax-to-GDP in those specifications. - Trade openness shows small positive coefficients across all specifications (coefficients reported as 0.001 or 0.002 with Std. err. = 0.000). - Share of agriculture in GDP has negative coefficients in all specifications (e.g., All sample A: − 0 . 011; EMDCs A: −0.015). - Institutional variables (control of corruption and government effectiveness) enter positively in specification A estimates where reported (e.g., Government effectiveness in EMDCs A: 0 .111; Std. err. = 0.023). ### Annex Table 2.2. Tax Potential in the Pacific Region (Percent of GDP) - Group estimates (Tax to GDP) reported for All Sample and EMDCs under specifications A and B: - Tourism dependent: All Sample A = 21.2; All Sample B = 22.4; EMDCs A = 22.5; EMDCs B = 22.7; summary figure = 22.5 - Commodity exporters: All Sample A = 19.0; All Sample B = 23.3; EMDCs A = 23 .1; EMDCs B = 23.3; summary figure = 23.3 - Compact countries: All Sample A = 18. 2; All Sample B = 21.2; EMDCs A = 21.1; EMDCs B = 20.6; summary figure = 21.1 - Fragile countries: All Sample A = 17. 4; All Sample B = 21.6; EMDCs A = 21.2; EMDCs B = 21.1; summary figure = 21.5 - Other countries: All Sample A = 19.5; All Sample B = 24.5; EMDCs A = 23.8; EMDCs B = 23.6; summary figure = 24.5 - PICs (unweighted avg.): All Sample A = 19.7; All Sample B = 22.9; EMDCs A = 22.7; EMDCs B = 22.6; summary figure = 22.9 - Notes: - Model B excludes institutional variables (control of corruption and government effectiveness). - Tourism economies include Fiji, Palau, Samoa, Tonga, and Vanuatu. - Commodity exporters include Papua New Guinea and Solomon Islands. - Compact countries include Marshall Islands, Micronesia, and Palau. - Fragile countries include Kiribati, Marshall Islands, Micronesia, Papua New Guinea, Solomon Islands, and Tuvalu. - Others include Kiribati, Nauru, and Tuvalu. ### Annex Figure 2.1. Tax Frontier and Its Determinants (description) - Panels plot Tax capacity against: 1. Logged real GDP per capita (axis ticks shown 6 7 8 9 10 11 12) 2. Control of corruption (axis ticks shown 3—2—1012) 3. Government effectiveness (axis ticks shown —3—2—101 2 3) 4. Share of agriculture in GDP (axis ticks shown 0 20 40 60 80) 5. Openness to trade (axis ticks shown 0 100 200 300 400 500) - Note: Pacific Islands Countries are denoted in red. ### Capacity Development (CD) delivered to PFTAC member countries — objectives, modality, volumes, and selected country summaries - Revenue Program Objectives - Tax Policy Program focuses on: - (1) providing technical advice on designing and implementing tax policy to raise revenue in an efficient, fair, and simple manner - (2) developing capacity on tax policy analysis - Revenue Administration Program focuses on: - (1) strengthening revenue administration management and governance arrangements - (2) improving core tax administration functions (customs duties, excises, income taxes, social contributions, VAT, specialist regimes) - Tailored advice includes taxpayer compliance management, tax gap and compliance risk analysis, and strengthening operational processes (registration, filing, payment, reporting). - Revenue Program Modality - Blended approach: headquarters missions and visits, appointment of a long-term resident advisor (PNG), short-term expert visits, PFTAC activities, and remote engagements during the COVID pandemic. - Direct IMF headquarters support examples: Third Review of Tax Reforms (2021), development of a MTRS in Papua New Guinea (2018-2021), identification of tax administration reform priorities in Samoa (2020). - PFTAC provides backstopping and operational implementation support. - PFTAC-financed CD volumes and financing - CD funded by the IMF, Revenue Mobilization Thematic Fund (RMTF), and the PFTAC Revenue program with largest contribution from PFTAC. - PFTAC revenue program delivered 238 missions and activities totaling 3,482 workdays (Cook Islands included) up to the end of the third quarter of the 2022 financial year. - Annex Table 3.1. PFTAC-Financed Assistance (annual breakdown) - TA missions: FY18 = 28; FY19 = 53; FY20 = 48; FY21 = 30; FY22 up to end of third quarter = 20; Total = 209 - Training events: FY18 = 7; FY19 = 5; FY20 = 7; FY21 = 6; FY22 up to end of third quarter = 4; Total = 29 - Number of TA days: FY18 = 482; FY19 = 726; FY20 = 799; FY21 = 877; FY22 up to end of third quarter = 598; Total = 3,482 - Selected country summaries: CD delivered, outcomes/achievements, and revenue risks - Fiji - CD Delivered: Renewed FRCS’ Corporate Strategy and Business Plan; redrafting income tax, VAT, and tax administration legislation and regulations; strategic review and assistance for New Tax Information System (NTIS); strengthened management of outstanding tax returns and tax arrears; strengthened tax audit; compliance improvement strategy; plan to introduce public and private rulings program; improved taxpayer services; skills development for auditors and investigators; quality reviews of NTIS implementation. Remote tax policy mission (April 2021) exploring short- and medium-term tax policy options post-COVID. - Outcomes/Achievements: NTIS procured; first of two phases of implementation completed; registration now fully online; VAT and Pay As You Earn returns filing online; improvements in compliance risk management and debt management; standard interpretation guidelines; joint tax and customs audit function implemented. - Revenue Risks: Turnover of CEOs (three acting CEOs during period of two years, newly appointed CEO from January 2022); workforce instability including 25 percent staff reduction and three-year contracts for all staff; outstanding returns and tax arrears remain high; significant COVID-19 impact on collections and from rate reductions and concessions. - Kiribati - CD Delivered: Drafting and implementation of VAT, excise tax, and a Revenue Administration Act (introduced on April 1, 2014); transition to functional model; standardizing work processes; strengthening audit and taxpayer compliance management; strengthened risk-based approaches; taxpayer services improvements; FAD short-term expert tax policy review in FY 2021. - Outcomes/Achievements: Administrative reforms in tax arrears, VAT compliance and registration; three compliance improvement plans; improved debt management via top 10 debtor program and tax clearance process; taxpayer outreach program launched in 2019 (paused due to COVID-19 until late 2020); internal performance measurement based on TADAT indicators adopted. - Revenue Risks: Low compliance culture; lack of resources. - Marshall Islands - CD Delivered: Drafting Bills for a new Revenue Authority, Net Profits Tax, Excise Tax and Consumption Tax (not yet passed); strategic and operational plan development; improving on-time filing and payment; strengthening audit and taxpayer services. Progress on implementation slow. - Outcomes/Achievements: Access to real-time filing and payments data from Ministry of Finance 4Gov accounting system enabling structured risk management and better filing/payment compliance management; PFTAC enhanced an Excel-based system. - Revenue Risks: Lack of capacity; no tax information system; high non-compliance culture. - Micronesia - CD Delivered: Incremental improvements via PFTAC TA; planned diagnostic review postponed; President established a National Tax Reform Commission to complete tax review including VAT (originally by end of 2021); assistance requested for revenue modeling of reform options. - Outcomes/Achievements: No evidence of notable achievements; World Bank funded assistance to procure a new ICT system started two years ago and is moving slowly. - Revenue Risks: Fragmented field operations across four island states; outdated business processes; lack of IT system support; poorly trained staff. - Nauru - CD Delivered: PFTAC provided TA assisting the introduction of wide-ranging reforms including the introduction of Revenue Administration Act and Employment & Services Tax Act (effective October 1, 2014). *Sources: World Bank, World Development Indicators; World Bank, Worldwide Governance Indicators; IMF, World Economic Outlook; and IMF staff estimates.* ### introduction of a small Business Tax Act (effective1 July 2016); (3) assistance to develop processes for regis- ### introduction of a small Business Tax Act (effective1 July 2016); (3) assistance to develop processes for regis- ### Nauru — CD Delivered - Assistance included implementation of a Design and Monitoring function, compliance improvement strategy and monitoring compliance of large taxpayers; assistance to develop processes for registration, filing, and payment of taxes; development of a roadmap for the merger of the Customs and Revenue agencies, including a new organizational structure and development of technical guides. Recent assistance delivered remotely includes a tax policy review and assistance with drafting tax legislation. - Outcomes/Achievements: - The Compliance Improvement Plan (CIP) was approved and is operational. - The CIP addresses identified risks and treatment strategies with a focus on improving large taxpayer compliance by addressing registration, filing and payment risks. - On-time filing and on-time payment for large taxpayers has improved but remains lower than planned CIP targets. - Tax arrears remains a relatively low risk. - Revenue Risks: - Lack of resources have an impact on successful reforms. - Nauru faces one of the largest adjustments from lost trade tax collections given obligations under the PACER Plus free trade agreement—however, recent information suggests that the Nauru government will not ratify the agreement. - Had Nauru become a signatory to the agreement, the ability to replace this revenue source is challenged by the extent to which the authorities are willing to tax domestic consumption and/or income. - Uncertainty regarding DFAT-funded contracts for Nauru Ministry of Finance positions of Deputy Secretary and Resident Adviser is having impact on the administration. - The Refugee Processing Centre (RPC) has an uncertain future with extension by Government of Australia only until 30 June 2022. The RPC is the major contributor to revenue and employment in Nauru. ### Palau — CD Delivered - PFTAC assistance provided for: (1) developing Strategic and Business Plans; (2) implementing new function-based structure; (3) developing the taxpayer services function; (4) providing overview of how VAT system operates and potential impact on the operations; and (5) managing outstanding returns and tax arrears. An IT system assessment provided options for successful implementation of the tax reform. - Outcomes/Achievements: - The tax reform legislation developed with assistance from PFTAC was passed into law in September 2021 and will be implemented on January 1, 2023. - The new tax system replaces existing import taxes and the gross revenue tax (GRT) with a 12 percent business profits tax, excise taxes applying to select imported and locally produced goods, and a 10 percent broad-based goods and services tax. - The Palau Bureau of Revenue and Taxation (BRT) incorporated PFTAC advice into a 2020 to 2025 BRT Operational Roadmap document approved by the Minister of Finance in August 2021. - Revenue Risks: - Capacity and management capability as well as great difficulty in recruiting staff for new structure. - Tax information system deficient in many areas and will not provide good support for the tax reforms. ### Papua New Guinea — CD Delivered - The medium-term revenue strategy program funded by the RMTF that started during 2018 ended in April 2021, with revenue administration support now being provided by PFTAC while tax policy support continues with a mixture of IMF and bilateral funding. - Assistance focused on tax policy design and capacity building, designing, sequencing and integrating the MTRS implementation program, governance arrangements, large taxpayer management, and taxpayer services. Implementation support included a new organization structure, detailed action plans, revised charters for new business groups, and a governance committee framework. - Outcomes/Achievements: - Papua New Guinea had a target of K9.2 billion and collected K9.5 billion in the past year. - The IRC approved the high-level structure design on February 10, 2022. - The key design element to separate the operational tax administration activities from the design and monitoring role of the IRC is maintained. - Substantial progress made on modernizing and simplifying the Income Tax Act; Treasury revenue policy team, supported by a legal expert, conducted comprehensive stakeholder consultations on the draft legislation; expected completion following the national elections in mid-2022. - Revenue Risks: - Capacity, IT systems support, the depth of leadership capability to fill the additional leadership positions and sufficiently resourcing the new structure within reasonable time are concerns. - Revenue performance remains vulnerable to commodity price volatility, with natural resource revenue foregone from concessions provided in contract negotiations and compliance challenges. ### Samoa — CD Delivered - PFTAC assistance included review of current compliance improvement plan (CIP) and development of a renewed CIP focused on COVID-19 impact, managing tax debt and returns, improving taxpayer services, strengthening audit and TIMS, development of BCP, development of an IT strategy and legal assistance on territorial tax and BEPS. An FAD tax policy mission advised on options to replace revenue losses from future import tariff reforms. - Outcomes/Achievements: - Tax revenues peaked in 2019 and were relatively stable during 2020 and 2021. - Rollout of the Tax Invoice Monitoring System (TIMS) and stepped-up taxpayer services improved voluntary compliance. - Samoa has continued to strengthen core tax administration and build risk-based compliance capability. - An Information Technology Strategic Plan to guide future key IT decisions has been commissioned and nearing completion. - Revenue Risks: - Inadequate IT system support is a constraint to improving core tax functions and management of operations. - Samoa seeks to be removed from the EU blacklist of non-cooperative tax jurisdictions and is weighting the pros and cons of a territorial tax system, which could result in a small reduction in revenue. - The intended organizational split between Customs and Tax and Outsourcing of debt collection poses risks to the continuity and efficiency of revenue collection. ### Solomon Islands — CD Delivered - PFTAC-supported modernization initiatives included: (1) improving management of tax debt and outstanding returns; (2) renewing Strategic and Operational Plans; (3) implementing a function-based organizational structure; (4) setting up a Large Taxpayer Office (LTO); (5) developing a first generation audit plan; and (6) developing core documents underpinning tax reforms including introduction of VAT. - Outcomes/Achievements: - The Solomon Islands is preparing to modernize the Solomon Islands Inland Revenue Division (SIIRD) with a comprehensive modernization strategy that includes a revised organization structure, new business processes and a new information technology system. - Revenue Risks: - Human resource capacity, current COVID-19 impact. ### Tonga — CD Delivered - PFTAC TA contributed to reforms including: (1) designing a compliance improvement strategy; (2) strengthening taxpayer services; (3) improving the audit function; (4) improving tax arrears and returns management; (5) establishing a Large Taxpayer Office (LTO); (6) legal assistance to modernize the Revenue Services Administration Act (RSAA) and rewrite the Consumption Tax Act; (7) tax audit skills development; (8) implementing Industry Partnership with a focus on the whale watching industry; and (1) developing guidelines for the Point of Sale System. A TADAT assessment in May 2021 reflected good progress. - Outcomes/Achievements: - MoRC moved to a functional structure in 2017 and has established an LTO building on the Heilala initiative. - Improving audit capability and continued attention to improving debt recovery. - Strategic planning aligned to the government planning cycle is in place with annual plans developed from the strategic plan. - Improved services to taxpayers using technology are a priority, but require an update to the existing system. - Revenue Risks: - Slow pace of filling vacant positions and lack of funding for the tax administration. - Lack of capability to deal with multinational company tax avoidance/evasion. ### Tuvalu — CD Delivered - Assistance restarted with a June 2018 modernization plan and continued with assistance on the tax information system, compliance improvement strategy and plan, large taxpayer framework, taxpayer service unit, design and monitoring function, implementation of the VAT audit methods. Recent assistance included development of a corporate strategic plan, business continuity plan and renewed compliance improvement strategy. - Outcomes/Achievements: - The draft 2021- 2023 Inland Revenue Department (IRD) Strategic Plan has been adopted and is guiding the work of the IRD. - Measurable progress made with implementation of the 2021 Operational Plan. - The IRD completed key activities including steps to improve accuracy of large taxpayer data in the IRD taxpayer register. - The Taxpayer Services Unit (TSU) updated large taxpayer contact details and started review to ensure each of the 22 large taxpayers are registered for all correct tax types. - The IRD adopted previous PFTAC recommendations to capture all information from returns into Excel spreadsheets and use a new format to make it easier for the Debt Management Unit (DMU) to detect unfiled returns and allow auditors to view history across tax periods. - Revenue Risks: - Resources and funding, low skills levels. ### Vanuatu — CD Delivered - Recent reforms included: (1) development of a new strategic and business plan; (2) a risk-based CIS; (3) implementation of performance standards; and (4) a review of the IT system service agreement and options for the future. Recent assistance focused on debt and returns management, taxpayer services, renewal of the compliance improvement strategy and improving tax audits. - Outcomes/Achievements: - A new Corporate Plan has been developed and implemented for 2021 to 2025, identifying core initiatives and proposed year of completion. - The Tax Administration Act (TAA) of 2018 implemented from January 1, 2020, introduced important changes including redefined and simplified segments: merging large and very large taxpayers in one group, retaining the medium segment, and merging small and micro taxpayers into a small segment. - The new CIS includes a strong focus on the large segment which contributes around 80 percent of total tax revenues. - A proposal for full staffing of the function-based structure has been submitted to the Director General of the Ministry of Finance and Economic Management. - The Taxpayer Services function is making good progress; on-time filing, on-time payment and management of tax arrears showed significant progress with debt almost halved—from VT10.8 billion to VT6 billion. - Revenue Risks: - Lack of capacity and funding for the administration. - Vanuatu is one of very few PICs without income tax given reliance on revenues from citizenship/passport fees, placing significant burden on the indirect tax system. - The DCIR is trying to proceed with a “Tax Week” to promote tax awareness notwithstanding there is no budget for this initiative. *Source: https://www.imf.org/-/media/files/publications/dp/2022/english/fftrmpicea.pdf* ### References ### fftrmpicea - References ### References - Abdel-Kader K., and R. 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