## tarea2025022-print-pdf ## Source details **Canonical URL:** [tarea2025022-print-pdf](https://www.imf.org/-/media/files/publications/tar/2025/english/tarea2025022-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tar/2025/english/tarea2025022-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/tar/2025/english/tarea2025022-print-pdf.pdf.json) --- ### Preface and mission overview - Mission: A capacity development mission of the Fiscal Affairs Department (FAD) of the IMF visited Majuro during the period December 4-13, 2024, in response to a request from the Marshallese authorities. - Objective: provide advice on tax policy and administration reforms to modernize and improve the income and consumption tax system. - Mission team: Messrs. Alexander Klemm (mission chief), Vincent de Paul Koukpaizan, Ross Warwick (all FAD), and John McAlister (PFTAC). - Principal meetings: Minister David Paul; Ministry of Finance staff; Mr. Frederick De Brum; Mr. Bryan Edejer; Ms. Ryana Kumar; Mr. Randel Silvester and Tax Reform and Modernization Commission members; donors (Graduate School USA, Asian Development Bank, Embassy of Japan); private sector (Marshall Islands Chamber of Commerce, Pacific International Inc.). - Acknowledgement: support from Mr. Niuatui Niuatui, Resident Economist, Ministry of Finance. ### Excise, customs, and import duty recommendations and estimated revenue impacts - 3.4 Introduce automatic indexing of all specific duty rates, with annual adjustments at the start of each fiscal year to alter specific duty rates in line with the change in the CPI in the preceding year. - Compared to baseline of no indexation: +0.04 (1-year) +0.17 (5-year) - 3.5 Introduce fuel excise tax rates of $0.50 per gallon for gasoline, $0.31 per gallon for diesel and jet fuel, and $0.12 per pound for LPG. In the medium-term, raise rates for diesel and jet fuel to be at least in line with gasoline. - +0.17 - 3.6 Abolish exemptions for fuel imports by energy utilities (or start by reducing them). - +0.32 (apply current fuel duty rates) - +1.54 (apply fuel duty rates in 3.5) - 3.7 Introduce a tobacco excise tax of $2 per pack of 20 cigarettes and $5 per 1.2oz pack of tobacco, maintaining the 151 percent rate on cigars. - +0.11 - 3.8 Introduce alcohol excise taxes of $0.375 per 12oz can of beer, $13 per gallon of wine, and $40 per gallon of spirits. In the medium-term, seek to apply a fixed rate per unit of alcohol of $100 per gallon, adjusted for inflation. - +0.24 - 3.9 Consider national harmonization of tobacco and alcohol taxation in collaboration with the governments of Majuro and Kwajalein, including through revenue-sharing agreements. - - - 3.10 Consider lowering purchase taxes on vehicles and increasing ownership fees or taxes, with differentiation by size and fuel efficiency. - 0 ### Context on current indirect tax structure (selected details) - Import duties provided 21.6 percent of total tax revenue in FY2024. - General import tariff: 8 percent; most imported foodstuffs: 5 percent (subject to exemptions). - Imported fuel specific duty example: diesel duty is $0.08 per gallon. - Alcoholic drinks and tobacco: taxed using specific rates; cigars attract a 151 percent duty; mixed drinks receive a 26 percent tariff. - Exemptions from import duty include: milk, rice, flour, vegetables, fruit, poultry, canned fish; aviation imports (e.g., fuel, components); fuel imported by the Marshalls Energy Company (MEC) or for the Kwajalein Atoll Joint Utility Resource Inc. (KAJUR); fishing equipment; renewable energy and energy-efficient equipment; inputs imported by local manufacturing industries. - Local sales taxes: Majuro—4 percent retail sales; Kwajalein—10 percent wholesalers. Majuro also: 3 percent professional services, 35 percent tobacco and liquor products, $3 per room daily hotel room tax. Kwajalein (as of 2012): 4 percent gross rent tax, fuel taxes at $0.06 per gallon, $2 per room daily hotel room tax, specific tax rates on alcohol. ### Rationale and priorities for indirect tax reform - Replace special import duties and local government taxes on alcohol, tobacco, motor vehicles, and fuel with excises as part of broader reform. - Broaden the consumption tax base and modernize indirect taxation while targeting revenue and administrative feasibility. - Implementation timing: All policy recommendations are for implementation from October 2026 (Phase 2), except proposed changes to personal income tax thresholds and rates, which should apply from April 2025. ### VAT introduction: rationale, design, and revenue estimates - Recommendation: introduce a broad-based consumption tax in the form of a VAT to replace extensive import duties and the GRT; adoption of VAT should be accompanied by implementation of a tax on business profits. - VAT features and design guidance: - Destination-based, credit-invoice VAT; registered taxpayers claim input tax credits; exports zero-rated. - Base: as broad as possible; limited exemptions/reduced rates; include goods subject to excise duties, supplies of electricity and passenger transport. - Residential rent excluded; property resales excluded; sales of new constructions subject to VAT. - Drafted Marshall Islands Consumption Tax Act, 2012 (MICT Act) features remain relevant. - Registration threshold and rate guidance: - MICT Act set rate: 10 percent. - Proposed registration threshold: $100,000 (sample: would require 94.1 percent of taxable sales to register); Palau outlier $300,000. - Voluntary registration: allow for businesses below threshold subject to bookkeeping and admin safeguards; recommended voluntary registration floor: $10,000 with conditions. - Revenue estimates: - Mission estimate: a broad-based VAT at 10 percent could raise tax revenue of 4.34 percent of GDP ($12.14 million in 2024). - Abolishing general import duties would cost revenue of 2.43 percent of GDP. - Removing local sales taxes may cost around 1.58 percent of GDP. - A 10 percent VAT yield of 4.34 percent of GDP would be sufficient to replace abolished import duties and the sales taxes imposed in Majuro and Kwajalein, subject to revenue-sharing arrangements. - Mission estimates for a 15 percent broad-based VAT: tax revenue of 6.26 percent of GDP, compared to the 6.86 percent of GDP loss from removing general import duties, local sales taxes, and the GRT. - Distributional and price effects: - VAT would be mildly progressive among poorer households, distributionally neutral in the top half. - Richest tenth would pay nearly 12 times more per capita than the poorest tenth. - Overall inflation impact limited for a revenue-neutral package. ### VAT scope: imports, digital services, and exemptions - Recommendation: eliminate the per-consignment import exemption that exempts consignments with total duties of $20 or less (implies exemption up to $250 at 8 percent general rate) under VAT; maintain exemption for small imports carried by travelers. - Digital services by foreign sellers: - Simplified VAT registration for foreign sellers; charge VAT at standard rate for sales to consumers. - For sales to domestic businesses: either require foreign suppliers to charge VAT (domestic businesses claim input credits) or implement a reverse charge on domestic businesses. - VAT rate/threshold policy: - MICT Act proposed 10 percent and $100,000 threshold. - Table 3.1 (FY22): $100,000 threshold would cover 94.1 percent of taxable sales; $300,000 threshold would cover 90.1 percent. ### VAT administration: capacity, timelines, and key administrative recommendations - Current DCTRT capacity: - DCTRT has limited consumption tax administration experience; local governments administer sales taxes. - Procedures largely manual; DCTRT staff around seven with two vacancies; ITAS acquisition project underway. - Typical VAT introduction timeline: 24 - 36 months; administrative phase can take 18 months or more. - Major implementation challenges: - Reform project management, organization, taxpayer registration, procedures and manuals, staffing and training, taxpayer education, IT systems, compliance and post-implementation monitoring. - VAT introduction prerequisites: experience with broad-based indirect taxes; self-assessment and tax credit mechanisms; modern IT system; political commitment; high-quality personnel; financial resources; manageable VAT legislation complexity; availability of TA. - Project management and organizational recommendations: - 4.1 Seek external technical assistance support, including long-term advisor or temporary supplementation. - 4.2 Establish Tax Reform Project section comprising RTU and customs unit staff within the DCTRT; develop comprehensive project document. - 4.3 Recruit additional staff and provide extensive training, include communications experts. - 4.4 Launch taxpayer registration campaign 6-12 months prior to VAT launch; ensure controls against bogus registrations. - 4.5 Conduct publicity campaigns and business/public engagement 6-12 months prior to launch. - 4.6 Develop compliance programs supported by IT systems, design simple VAT return forms, provide taxpayer support, develop audit programs, and facilitate Customs information exchange (2-6 months prior to launch). - 4.7 Progress ITAS acquisition; if not operational, consider manual administration for a limited period (Short to medium term). - Staffing recommendations: - RTU understaffed; recruitment of two additional staff plus filling two vacancies, and estimate of 90–100 VAT registrants underpin staffing needs. - Consider recruiting experienced staff from local governments. - Forms and procedures: - VAT return: keep simple (one page) with minimal required information. - Customs forms: amend to include lines for VAT on imports. - Publicity and outreach: - Start publicity campaigns well ahead; focus on education (distinct from consultation); involve MFBPS and political leaders; address threshold adoption and household budget impacts. - Implementation timing examples: - GST and Excise could be implemented around August or September 2026. - BPT business record-keeping requirements finalized before start of FY2025-2026, forms ready by September 2026. - Other taxes progressively transitioned through 2027. ### Personal income tax reform: current structure, problems, and reform proposals - Current PIT structure: - Labor income taxed at progressive rates of 0, 8 and 12 percent. - Reform passed in October 2024, effective April 2025: - Raises tax-free threshold from $1560 to $8320. - Raises other thresholds and adds a new top rate at 16 percent. - Amendment currently foreseen for January 2025 to remove the new top rate, but keep other changes. - Prior to reform, thresholds stable since 1989. - Taxpayers lose entitlement to the tax-free band if they earn more than $5200 (prior rule); under legislated reform threshold for losing entitlement will coincide with upper threshold of zero band. - Problems identified: - Notch effect at $5200: withdrawal of tax-free allowance creates extremely high marginal tax rate; under October 2024 reform, earning one extra dollar at the notch raises tax liability by $666. - Narrow tax base: housing allowance exemption up to $9,000 per year is regressive and incentivizes allowances over base salary; in-kind benefits not clearly taxed. - Inflation and bracket creep: thresholds set in 1989; dollar lost just over 60 percent of purchasing power since then. - Social security interactions: combined taxes and contributions create regressive marginal tax wedge; pension scheme solvency risks. - Mission reform principle: - Avoid notch by granting tax-free allowance to every taxpayer and finance via higher marginal rates. - Mission proposals: - Proposal A: - Removes withdrawal of tax-free threshold. - Reduces tax-free allowance by $1000. - Raises tax rates to 12, 16, and 20 percent. - Justification: new Universal Basic Income foreseen at $1,000 per person. - Proposal B: - Reduces all thresholds by $1,000 each. - Abolishes the 8 percent rate and begins immediately with the 12 percent rate. - Revenue and distributional comparisons (Table 6.2, preserved values): - Revenue ($, millions): Oct 2024 law 13.3; Jan 2025 Amendment 12.4; Mission A 13.2; Mission B 11.4. - Change in tax revenue ($, millions): 0.00; -0.9; -0.1; -1.9. - Share outside of tax net: 46.2; 46.2; 41.0; 41.0. - Average tax rate: 8.8; 8.3; 8.8; 7.6. - Average tax rate, above threshold: 10.1; 9.4; 9.7; 8.4. - Post-tax income share of top 1 percent: 8.68; 8.92; 8.38; 8.60. - Post-tax Gini coefficient: 55.72; 56.12; 55.06; 55.62. - Redistributive capacity: 2.02; 1.61; 2.67; 2.12. - Progressive capacity: 19.75; 17.82; 24.88; 23.66. - Specific recommendations: - Abolish the housing allowance exemption and use revenue to increase the tax-free threshold. - 2019 HIES estimate: cash housing allowance $890,000 for 288 people; uprated to 2024 estimated $1.1 million. In-kind housing $2.6 million uprated to $2.9 million; total housing allowance estimated at $4 million in 2024. At 12 percent top rate, tax expenditure about $0.5 million. - Review and tax in-kind benefits (2019 amounts preserved): Electricity 495275; Food 505276; Telephone 93615; Fuel 82341; Vehicle 2461096; Other 19246. - Introduce initial flat capital income tax of 10 percent covering interest, rents, and capital gains (dividends exempt). - Automatically adjust annually all thresholds for inflation (Recommendation 6.5). ### Business taxation: replace GRT with profit tax and related measures - Problems with GRT: - Turnover-based tax can exceed 100 percent of profit for low-profit firms; can cause bankruptcy; cascades through production chain; discriminates across sectors; origin-based; potential international non-creditability. - Recommendation: replace GRT by a profit tax and align with VAT: - 6.6 Replace the GRT by a profit tax at a rate of 20 percent for firms with turnover exceeding the VAT threshold from October 2026. - 6.7 Allow voluntary adoption of the profit tax in line with VAT for firms with necessary accounting; no switching back to GRT for at least five years. - 6.8 Allow loss carry forward, either unlimited or for up to 5 years. - 6.9 Abolish the tax holiday for new firms, grandfather existing beneficiaries remaining in GRT; refrain from adopting incentives other than accelerated depreciation. - Profit tax rate rationale: - Recommendation: 20 percent starting point; avoid going below 15 percent given global minimum tax context. - Medium-term revenue potential: around 2 percent of GDP; prudent immediate assumption: 1 percent of GDP. ### Tax administration of income taxes — recommendations and capacity - Current administration facts: - At end of FY2022-2023: 642 businesses registered for GRT; 1,294 for labor taxes. - Filing non-compliance (FY2022-2023): 14.7 percent of GRT taxpayers did not file on time; 18,7 percent of labor taxpayers did not file on time. - DCTRT: seven employees and two current vacancies; audit section of four; filing compliance by segment (FY2022 – 2023): Large businesses 98.6 percent; Medium 89 percent; Small 56 percent. - Administration recommendations (selected): - 7.1 Plan careful implementation with detailed plan, staff training, rollout timeline. - 7.2 Establish and enforce mandatory accounting standards aligned with Compact of Free Association (CoFA) requirements (First year of Profit tax implementation). - 7.3 Digitally transform tax administration and implement ITAS; if ITAS not operational, consider manual administration for a limited period (Short to medium term). - 7.4 Implement taxpayer education and extensive support 6-12 months prior to Profit tax launch. - 7.5 Enhance compliance monitoring using data analytics (Medium – term). - Cross-cutting admin reforms: - 8.1 Add dedicated RTU sections for taxpayer services and reform project management. - 8.2 Recruit three or four additional personnel with project management and taxpayer service expertise. - 8.3 Implement e-filing, electronic signatures, online payments, automated refund processing (Medium - term). - 8.4 Develop KPIs and regular review mechanisms (Short - term). ### Key contextual facts and statistics - Fiscal composition: - Fiscal revenue ratio exceeds 60 percent of GDP in most years; in 2020 exceeded 70 percent of GDP. - Grant revenue: over 30 percent of GDP (almost reached 40 percent in 2020). - Other revenue (mostly nontax such as fishing licenses): risen toward 20 percent of GDP over the last two decades. - Tax revenues: around 13-15 percent of GDP and have slightly declined over last 2 decades. - Taxpayer registrations as of September 30, 2023: - 642 taxpayers registered for the GRT - 844 for the Marshallese wages and salaries tax - 450 for the expat wages and salaries tax - Examples of tax administration staffing (FY2022): - Fiji: 695 - Kiribati: 28 - Marshall: 11 - Micronesia: 53 - Nauru: 16 - Niue: 6 - Palau: 22 - Samoa: 230 _Imf Technical Assistance Report | Excerpts from the chapter contained in tarea2025022-print-pdf_ ### Preface ____________________________________________________________________________ 7 ### Preface ### Mission purpose and timing - A capacity development mission of the Fiscal Affairs Department (FAD) of the IMF visited Majuro during the period December 4-13, 2024, in response to a request from the Marshallese authorities. - The mission's objective was to provide advice on tax policy and administration reforms to modernize and improve the income and consumption tax system. ### Mission team - The mission comprised Messrs. Alexander Klemm (mission chief), Vincent de Paul Koukpaizan, Ross Warwick (all FAD), and John McAlister (PFTAC). ### Principal meetings and stakeholders engaged - The mission met with Minister David Paul and many leading staff of the Ministry of Finance. - Meetings were held with: - Mr. Frederick De Brum, Director of the Economic Policy Planning and Statistical Office - Mr. Bryan Edejer, CEO of the Marshall Islands Social Security Administration - Ms. Ryana Kumar, Chief Financial Controller of the Majuro Atoll Local Government - Mr. Randel Silvester, head of the Tax Reform and Modernization Commission, and other commission members - Representatives from the donor community: Graduate School USA, Asian Development Bank, and Embassy of Japan - Representatives from the private sector: Marshall Islands Chamber of Commerce, Pacific International Inc. ### Acknowledgements - The mission expressed its sincere appreciation for the excellent support and cooperation received from Mr. Niuatui Niuatui, Resident Economist, in the Ministry of Finance. *IMF Technical Assistance Report | Preface* ### 3.4 Introduce automatic indexing of all specific duty rates, with annual ### 3.4 Introduce automatic indexing of all specific duty rates, with annual adjustments at the start of each fiscal year to alter specific duty rates in line with the change in the CPI in the preceding year. ### Excise, customs, and import duty policy recommendations and estimated revenue impacts - 3.4 Introduce automatic indexing of all specific duty rates, with annual adjustments at the start of each fiscal year to alter specific duty rates in line with the change in the CPI in the preceding year. - Compared to baseline of no indexation: +0.04 (1-year) +0.17 (5-year) - 3.5 Introduce fuel excise tax rates of $0.50 per gallon for gasoline, $0.31 per gallon for diesel and jet fuel, and $0.12 per pound for LPG. In the medium-term, raise rates for diesel and jet fuel to be at least in line with gasoline. - +0.17 - 3.6 Abolish exemptions for fuel imports by energy utilities (or start by reducing them). - +0.32 (apply current fuel duty rates) - +1.54 (apply fuel duty rates in 3.5) - 3.7 Introduce a tobacco excise tax of $2 per pack of 20 cigarettes and $5 per 1.2oz pack of tobacco, maintaining the 151 percent rate on cigars. - +0.11 - 3.8 Introduce alcohol excise taxes of $0.375 per 12oz can of beer, $13 per gallon of wine, and $40 per gallon of spirits. In the medium-term, seek to apply a fixed rate per unit of alcohol of $100 per gallon, adjusted for inflation. - +0.24 - 3.9 Consider national harmonization of tobacco and alcohol taxation in collaboration with the governments of Majuro and Kwajalein, including through revenue-sharing agreements. - - - 3.10 Consider lowering purchase taxes on vehicles and increasing ownership fees or taxes, with differentiation by size and fuel efficiency. - 0 ### Context on current indirect tax structure (selected details) - Import duties provided 21.6 percent of total tax revenue in FY2024. - General import tariff: 8 percent; most imported foodstuffs: 5 percent (subject to exemptions). - Imported fuel specific duty example: diesel duty is $0.08 per gallon. - Alcoholic drinks and tobacco: taxed using specific rates; cigars attract a 151 percent duty; mixed drinks receive a 26 percent tariff. - Exemptions from import duty include: milk, rice, flour, vegetables, fruit, poultry, canned fish; aviation imports (e.g., fuel, components); fuel imported by the Marshalls Energy Company (MEC) or for the Kwajalein Atoll Joint Utility Resource Inc. (KAJUR); fishing equipment; renewable energy and energy-efficient equipment; inputs imported by local manufacturing industries. - Local sales taxes: Majuro—4 percent retail sales; Kwajalein—10 percent wholesalers. Majuro also: 3 percent professional services, 35 percent tobacco and liquor products, $3 per room daily hotel room tax. Kwajalein (as of 2012): 4 percent gross rent tax, fuel taxes at $0.06 per gallon, $2 per room daily hotel room tax, specific tax rates on alcohol. ### Rationale and priorities - Replace special import duties and local government taxes on alcohol, tobacco, motor vehicles, and fuel with excises as part of broader reform. - Aim to broaden the consumption tax base and modernize indirect taxation while targeting revenue and administrative feasibility. ### Implementation timing note - All policy recommendations are for implementation from October 2026 (Phase 2), except the proposed changes to personal income tax thresholds and rates, which should apply from April 2025. The time frames for the administration recommendations are indicated in the Table. --- ### Tax Administration of Consumption Taxes — recommended actions and time frames - 4.1 Seek external technical assistance support, including the appointment of a long-term advisor or temporary supplementation to help with the development and implementation of the VAT project. - Short-term - 4.2 Strengthen project management by establishing a dedicated Tax Reform Project section comprising RTU and customs unit staff within the DCTRT to oversee the VAT reform efforts. This section should develop a comprehensive project document outlining critical outcomes, resource availability, and project management methodologies. - urgent - 4.3 Enhance administrative capacity by recruiting additional staff and providing extensive training on VAT administration, including communications experts in the Tax Reform Project section. - Short-term - 4.4 Improve taxpayer registration by launching a robust taxpayer registration campaign well in advance of the VAT implementation. Ensure that only registered VAT taxpayers can issue VAT invoices, claim refunds, and implement controls to prevent the registration of bogus businesses. - 6-12 months prior to the launch of the VAT - 4.5 Conduct publicity campaigns and engage with the business community and the public to inform and educate them about the VAT. - 6-12 months prior to the launch of the VAT - 4.6 Develop effective compliance programs supported by IT systems and risk management techniques, design simple VAT return forms, provide taxpayer support, develop audit programs, and facilitate information exchanges with Customs. - 2-6 months prior to the launch of the VAT - 4.7 Progress with the ITAS acquisition project to leverage IT to support the VAT administration. If ITAS is not operational, consider manual administration for a limited period while ensuring the system development is aligned with policy. - Short to medium term --- ### Tax Policy Aspects of Income Taxes — recommendations and estimated revenue impacts (Percent of GDP) - 6.1 Abolish the withdrawal of the tax-free allowance, financed by an increase in tax rates to 12, 16, and 20 percent and a reduction in the tax-free allowance by $1000. - 0 - 6.2 Abolish the tax exemption for the housing allowance and use the revenue gain to increase the tax-free threshold. - 0 - 6.3 Review employer-provided in-kind benefits for inclusion in the tax base, starting with the private use of company vehicles. - + - 6.4 Introduce a 10 percent flat capital income tax covering interest, rents, and capital gains, exempting dividends. - + - 6.5 Automatically adjust annually all thresholds for inflation. - 0 - 6.6 Replace the GRT by a profit tax at a rate of 20 percent for firms with turnover exceeding the VAT threshold from October 2026. - GRT included above. profit tax: + 1 - 6.7 Allow voluntary adoption of the profit tax in line with VAT, for firms that have the necessary accounting in place. Do not allow switching back to the GRT for at least five years. - - - 6.8 Allow loss carry forward, either unlimited or for up to 5 years. - - - 6.9 Abolish the tax holiday for new firms, grandfathering existing beneficiaries if they remain in the GRT. Refrain from adopting tax incentives other than accelerated depreciation. Review exemptions for potential removal, starting with the exemption for air transportation. - + ### Tax Administration of Income Taxes — recommended actions and time frames - 7.1 Plan for careful implementation including development of a detailed plan for tax reforms, including staff training and a timeline for rollout. - Short-term - 7.2 Establish and enforce mandatory accounting standards aligned with Compact of Free Association (CoFA) requirements, for businesses to ensure the maintenance of accurate financial records. - First year of Profit tax implementation - 7.3 Digitally transform the tax administration and implement ITAS, moving from a paper-based system to a digital platform; if ITAS is not operational, consider manual administration for a limited period while ensuring system development aligns with policy. - Short to medium term - 7.4 Implement taxpayer education and provide extensive support and training programs to help taxpayers understand new tax obligations and processes. - 6-12 months prior to the launch of the Profit tax - 7.5 Enhance compliance monitoring including strengthening compliance risk management using data analytics to risk assess and address non-compliance effectively. - Medium – term --- ### Cross-cutting tax administration recommendations and time frames - 8.1 Enhance RTU organizational structure by adding dedicated sections for taxpayer services and assistance, as well as for managing ongoing reform projects. - Short-term - 8.2 Recruit three or four additional personnel with project management and taxpayer service expertise to ensure effective cross-functional development and implementation of compliance strategies. - Short – term - 8.3 Implement e-filing systems, electronic signatures, online payment systems, and automated refund processing to streamline processes, reduce errors, and improve compliance. - Medium - term - 8.4 Develop key performance indicators (KPIs) to measure success along with regular reviews mechanisms to track progress and make necessary adjustments. - Short - term --- ### Key contextual facts and statistics from the report - The Marshall Islands’ fiscal revenue ratio exceeds 60 percent of GDP in most years; in 2020 it exceeded 70 percent of GDP. - Grant revenue stands at over 30 percent of GDP (and almost reached 40 percent in 2020). - Other revenue (mostly nontax such as fishing licenses) has risen toward 20 percent of GDP over the last two decades. - Tax revenues raise only around 13-15 percent of GDP and have slightly declined over the last 2 decades. - As of September 30, 2023: - 642 taxpayers were registered for the GRT - 844 for the Marshallese wages and salaries tax - 450 for the expat wages and salaries tax - Examples of number of staff in SIDS’ tax administrations (FY2022): - Fiji: 695 - Kiribati: 28 - Marshall: 11 - Micronesia: 53 - Nauru: 16 - Niue: 6 - Palau: 22 - Samoa: 230 *IMF Technical Assistance Report | Excerpts from relevant sections of the chapter* ### 21. Import duties are an economically inefficient source of tax revenue. They apply to all types ### tarea2025022-print-pdf - 21. Import duties are an economically inefficient source of tax revenue. They apply to all types ### Economic effects of import duties - Import duties apply to all types of purchases, including imported capital goods and intermediate inputs, raising the cost of investment and production and reducing economic activity and growth. - These economic costs may be particularly large in a small, open, and import-dependent economy like the Marshall Islands. - Terms-of-trade gains are unlikely and domestic substitutes for most capital goods and intermediate inputs are not available. - Import duties on goods imported for consumption only partially tax resulting final consumption because any domestic value-added embedded in final consumption is untaxed, narrowing the overall tax base. - Differential effects across domestic producers: producers with high rates of domestic value-added face lower effective tax rates, disadvantaging new businesses making investments or building inventories using foreign inputs. - Protection for some domestic producers (for example, local agricultural producers) comes at the cost of higher prices for consumers and reduced competitive pressure to increase efficiency. - Unequal effects across consumers: those preferring or needing imported products are disproportionately taxed. - International implications: the Marshall Islands is not a WTO member and has not signed or ratified the PICTA/PACER regional trade agreements. Under the Compact of Free Association (CoFA), most categories of exports to the United States are not subject to duty, but this is not reciprocal. Most Favored Nation rules in the CoFA imply that participation in regional trade agreements would require extending similar treatment to imports from the United States, implying significant revenue implications under the current tax structure. ### Differentiated import duty rates and specific goods - Differentiated rates are applied to goods that carry notable social costs or negative externalities; the principle is appropriate but current calibration leaves much room for improvement. - Preferable instrument: excise duties (which apply to both domestic and imported varieties of dutiable products) are preferable to import duties alone; locally produced spirits and liquors should be subject to taxation. - Specific (unit-based) import duties are not indexed to inflation and have been eroded in real terms over time; the inflation-adjusted value of these duties has fallen by more than a third in the last 20 years. - Fuel, alcohol and tobacco specific import duties have largely remained the same in nominal terms; periods of stronger price growth quickly erode the price signal and real revenue returned by specific duties. - Taxation of vehicles and motor fuel: - The enhanced import duty for vehicles, proportional to vehicle value, does not effectively incentivize choosing cleaner, smaller, or safer vehicles. - Taxing vehicle purchases does not affect incentives to use vehicles once bought; usage creates social costs (local air pollution, congestion, accidents). - Fuel taxes better target usage incentives; fuel taxes in the Marshall Islands are very low and have fallen in real terms due to lack of inflation adjustment. - In 2018, among 21 Pacific nations covered, the Marshall Islands had the fourth lowest taxes on unleaded motor gasoline, and the second lowest on diesel—though retail prices are comparatively high (Pacific Fuel Price Monitor, 2019). - Annual vehicle registration fees: $10 for motorcycles, $25 for passenger vehicles, and a schedule rising with weight for larger vehicles like trucks and pickups. - Fossil fuel exemptions: - Exempting fossil fuel used in energy generation is inconsistent with the Marshall Islands’ climate ambitions (NDC commits to reducing greenhouse gas emissions by at least 32 percent below 2010 levels by 2025, and a 45 percent decrease by 2030; Tile Til Eo 2050 Climate Strategy set goal to reach net zero emissions by mid-century). - According to the Global Carbon Budget, CO2 emissions from fossil fuels and industry rose by 13 percent between 2010 and 2023, and more than half of national emissions are due to electricity generation. - Duty exemption provided for fuel imported by MEC and KAJUR prevents price signals that would encourage reduced fossil fuel use. - Tobacco taxes: - WHO recommends excise taxes account for at least 70 percent of the retail price of tobacco products, and total taxes at least 75 percent. - As of 2018, the Marshall Islands was assessed to have an excise tax share of between 30 and 40 percent; only 3 countries in the world were given a lower “cigarette tax score” by Economics for Health. - Nearly 30 percent of the population uses tobacco. - Local governments (Majuro and Kwajalein) impose their own tobacco taxes, leading to uneven pattern and potential intra-country cross-border shopping. - Alcohol taxes: - National alcohol taxes are low by international standards and uneven between and within types of alcohol. - Alcohol taxes in the Marshall Islands are the lowest as a share of retail prices among Western Pacific countries with available data. - Non-indexation of specific alcohol duties has led to erosion in real terms over time. - Current design of alcohol import duties results in wide variation in duty per unit of alcohol across drinks: beer faces the highest taxes relative to alcohol content, while wine is taxed lightly. Within each type, lower strength varieties are subject to much higher taxes per unit of alcohol. - Any domestic alcohol production (some spirits are produced locally) remains untaxed. - Effective duty rates: - Diesel and fuels imported for energy generation are taxed more lightly than most imported foodstuffs, encouraging fossil fuel use rather than discouraging it. - Goods with social costs should be subject to excise duties in addition to broad-based indirect taxes. ### Local sales taxes and the GRT - Local general sales taxes are Retail Sales Taxes (RST) intended to tax consumption only; they avoid many efficiency costs of import tariffs by not taxing capital goods and intermediate inputs. - Disadvantages of retail sales taxes compared to VAT: - Challenging to determine which transactions are taxable, leading to taxation of intermediate transactions and tax cascading. - Sales tax collected only on retail sales lacks self-enforcement properties of a VAT; high noncompliance risk because neither seller nor buyer wishes to pay and collect the tax. - VAT multi-stage collection and input tax credit mechanism limits revenue loss from evasion on final retail sales. - Differentiated sales taxes across municipalities incentivize purchasing in lower-taxed municipalities, undermining local tax bases and implying efficiency costs from additional acquisition costs; the prevalence of this in practice is unclear due to potentially large transaction costs in moving commodities between municipalities. - The Gross Revenue Tax (GRT): - Taxes local sales and consumption inefficiently. - It is origin-based (taxes sales where they are made, not where consumed), causing local exporters to pay GRT as well as destination-based taxes in export markets. - Local consumers that import goods do not pay GRT unless routed via a local wholesaler or retailer. - GRT is charged by sellers throughout the supply chain, leading to tax cascading and incentives for vertical integration and self-supply inputs. ### Reform options — Introducing VAT - Recommendation: introduce a broad-based consumption tax in the form of a VAT to replace extensive import duties and the GRT; adoption of VAT should be accompanied by implementation of a tax on business profits. - Context: - VAT is a centerpiece of most modern fiscal systems; 175 of 193 countries with UN membership had adopted VAT as of 2023. - VAT is destination-based: charged on taxable imports and domestic taxable supplies, exports are zero-rated. - Registered VAT taxpayers may claim back VAT paid on intermediate and capital inputs as input tax credits offset against VAT charged on sales. - Advantages of VAT over current system: - Capital investments and intermediate goods would not be taxed since VAT on capital purchases is deductible, supporting domestic investment and production. - Exporters would face lower input costs due to lower import tariffs and VAT input credits and would not face domestic sales taxes on their sales overseas with removal of the GRT. - System would be more neutral and equitable across businesses with differing profitability and cash flows. - Consumption tax base would be broadened and different types of consumption treated more equally. - Marshall Islands would be on firmer ground in international trade negotiations and fora, as VAT is neutral over imports and domestic production. - Applicability to SIDS: - With the right registration threshold, VAT advantages apply in SIDS without creating excessive compliance/administration costs. - Imports provide a first point of VAT withholding, facilitating high collection and encouraging domestic VAT registration. - Many small firms will fall under registration threshold and not be obliged to adopt VAT. - A system based on tariffs and cascading sales taxes is less efficient and an obstacle to expanding domestic production, especially for exports. - Efficient tax administration to minimize any fixed component of tax collection costs is important in SIDS. - Revenue potential and enforcement: - A broad-based VAT provides a platform for robust revenue collection, supports self-enforcement through supply chain, and VAT invoices provide a strong basis for enforcement activities. - Empirical evidence for the Asia-Pacific region suggests general goods and services tax revenues are substantially more buoyant than trade tax revenues, especially over the long run (Jalles, 2021). - Legislative basis: - Drafted Marshall Islands Consumption Tax Act, 2012 (MICT Act) proposed the MICT to replace national import duties and local government sales and services taxes; its main features remain highly relevant. - Design recommendations: - VAT base should be as broad as possible, with only very limited exemptions or reduced rates (examples: margin-based financial services; fee-based financial services should be subject to VAT). - Residential rent should be excluded from VAT to ensure equal treatment with owner-occupied housing; property resales should be excluded, but sales of new constructions should be subject to VAT. - Broad base means smaller rate adjustments are required to achieve revenue goals. - Exemptions and reduced rates are a poorly targeted way to support poor households and are often not progressive; distributional concerns are better addressed by using VAT revenue to redistribute resources (example: the Universal Basic Income (UBI) policy known as the “Enra” plan). - Unlike the MICT Act, goods subject to excise duties (currently differentiated import duties) should be subject to VAT, as should supplies of electricity and passenger transport. - Many countries exempt health and education services, though this is not always necessary. *IMF Technical Assistance Report* ### 45. There should be no exemption for small imports under the VAT (except for travelers). ### 45. There should be no exemption for small imports under the VAT (except for travelers). ### Import exemption and VAT scope - Under the import duty regime, consignments that would otherwise attract total duties of $20 or less are exempt from tax; under the 8 percent general rate this implies an exemption for consignments up to $250. - This is a per-consignment provision that is not limited at the individual level. - Recommendation: eliminate this exemption under the VAT to ensure domestic purchases are on a level playing field with those from abroad. - Maintain an exemption for small imports carried by travelers in recognition of administrative constraints. - Foreign suppliers can be required to register and charge VAT to reduce the administrative burden. ### VAT on digital services by foreign sellers - Digital services (e.g., digital entertainment) should be brought into the VAT system. - For sales of digital services by foreign sellers to domestic consumers: - Provide simplified VAT registration for foreign sellers and charge VAT at the standard rate. - VAT collected would be remitted to the revenue authority. - Registration should be made very simple because no input tax credits arise for foreign businesses. - For sales to domestic businesses, two options: - Foreign suppliers could be required to charge VAT, with domestic businesses claiming input tax credits; or - Implement a “reverse charge” where foreign suppliers do not charge VAT, but Marshallese businesses file both an output tax liability and an equivalent input tax credit. - The choice between these approaches has technical implications for tax administration. ### VAT rate, base, and registration threshold - The rate of VAT should be set according to revenue needs; a broader base allows a lower rate for a given revenue requirement. - The MICT Act set a tax rate of 10 percent. - Sample of 19 Pacific and Small Island states: 15 have VAT or GST rates above 10 percent; 15 percent is the modal choice. - The MICT Act proposed a registration threshold of $100,000 (fairly typical among peer countries); Palau is an outlier with $300,000. - Distribution of taxable sales suggests a higher registration threshold would not have large revenue implications. - Table 3.1 (FY22): a $100,000 threshold would have required VAT registration from taxpayers responsible for 94.1 percent of taxable sales, while a $300,000 threshold would have covered 90.1 percent of sales. - Voluntary VAT registration for businesses below the sales threshold should be allowed subject to restrictions: - Adequate books must be maintained; - Taxpayers must be verified as genuine businesses to prevent refund abuse; - Businesses should not be able to switch in and out of the VAT system. ### Revenue estimates and fiscal interactions - Mission estimate: a broad-based VAT set at a rate of 10 percent could raise tax revenue of 4.34 percent of GDP ($12.14 million in 2024). - Scenario assumptions: all consumption is subject to VAT aside (actual and imputed) rents, and health and education services; accounts for businesses unregistered and consumption from home production or barter trade; excludes VAT on government purchases. - Abolishing general import duties would cost revenue of 2.43 percent of GDP. - Removing local sales taxes may cost around 1.58 percent of GDP. - A 10 percent VAT yield of 4.34 percent of GDP would be sufficient to replace abolished import duties and the sales taxes imposed in Majuro and Kwajalein, subject to revenue-sharing arrangements with local governments. - Mission estimates for a 15 percent broad-based VAT: tax revenue of 6.26 percent of GDP, compared to the 6.86 percent of GDP loss from removing general import duties, local sales taxes, and the GRT. - Other revenue-raising measures (e.g., business profits tax, other indirect tax reforms) may be needed to cover lost revenue from the GRT. ### Distributional and price effects - Mission estimates: the VAT would be mildly progressive among poorer households, and distributionally neutral in the top half of the distribution. - Drivers of mild progressivity: greater dependence on home-produced goods among poorer households and limited exemptions for health and education services. - In cash terms, richer households would pay substantially more VAT: - The richest tenth of the population would pay nearly 12 times more per capita than the poorest tenth, and more than all of the poorest half of the population combined. - Overall impact on inflation should be limited for a revenue-neutral package, though relative prices may change depending on the tax structure. ### Excise taxes and replacement of import duties - Recommendation: convert import duties applying at differentiated rates to fuels, vehicles, alcohol, tobacco, and soft drinks into excise duties to tax domestically produced varieties and support trade integration. - Specific excise duties should be indexed to inflation and automatically updated annually (e.g., by year-on-year CPI change). - Mission estimates: non-indexation leads to tax revenue losses of 0.04 percent of GDP in the first year and up to 0.17 percent of GDP after five years. - Fuel taxes: - Marshall Islands Excise Tax Act 2012 proposed per gallon tax rates of $0.45 for gasoline and $0.28 for diesel and aviation; accounting for inflation up to 2024, these equate to $0.50 and $0.31, respectively. - Implementing these updated fuel tax rates could raise revenue of 0.17 percent of GDP. - Applying rates of $0.50 per gallon for gasoline, $0.31 per gallon for diesel, plus $0.12 per pound of LPG for MEC and KAJUR fuel imports could yield 1.54 percent of GDP in additional tax revenue. - Starting by applying the fuel duty rates currently in place would raise revenue of 0.32 percent of GDP as an initial step. - Tax exemptions for domestic energy generation (fuel imported by MEC and KAJUR) warrant review given MEC accounted for 72 percent of total fuel import volume into the RMI between FY18 and FY23. - Tobacco taxes: - An excise duty per pack of 20 cigarettes of $2 is recommended to move toward the WHO target (taxes to make up 75 percent of retail price). - Duty for other tobacco suggested at $5 per 1.2oz. - Estimated revenue gain: 0.11 percent of GDP. - Alcohol taxes: - Short-term increases recommended: $40 per gallon for spirits, $13 per gallon for wine, and $4 per gallon ($0.375 per 12oz can) for beer — equating to $100 per gallon of alcohol for typical beverage strengths. - Estimated revenue gain: 0.24 percent of GDP. - Longer-term: consider unit-of-alcohol taxation to equalize treatment within and across categories; apply to ethyl alcohol imports with refund provisions for domestic producers. - Preferential policy: align taxes on alcohol and tobacco across municipalities to reduce cross-border shopping; consider folding local taxes into national policy with compensation via revenue-sharing. ### Vehicle taxation and transport policy - Consider shifting tax burden from purchasing cars to using cars: - Increase annual ownership fees or taxes to discourage holding surplus or marginally used vehicles. - Calibrate ownership fees by vehicle type, including emissions-based differentiation and vehicle size. - Design reforms to be revenue-neutral where desirable and include transition provisions to protect those who previously paid higher import duties. - Complement fiscal measures with non-tax policies (e.g., public transport investment). ### Key policy recommendations (selected) - 3.1 Remove import duties and local sales taxes, plus the GRT for businesses that register for VAT. - 3.2 Introduce a broad-based VAT using the destination-based, credit-invoice design for commencement in October 2026, with a standard rate of 10 percent and compulsory registration for businesses with turnover of $100,000 or above (aligned with the profit tax). *IMF Technical Assistance Report | pages 27–33.* ### 3.3 Make VAT registration voluntary for all other businesses with turnover of at least $10,000, an ### Make VAT registration voluntary for all other businesses with turnover of at least $10,000, an established place of business, and sufficient bookkeeping ### Policy measures and specific excise proposals - 3.3 Make VAT registration voluntary for all other businesses with turnover of at least $10,000, an established place of business, and sufficient bookkeeping. Maintain the GRT for businesses that opt to not enter the VAT system. - 3.4 Introduce automatic indexing of all specific duty rates, with annual adjustments at the start of each fiscal year to alter specific duty rates in line with the change in the CPI in the preceding year. - 3.5 Introduce fuel excise tax rates of $0.50 per gallon for gasoline, $0.31 per gallon for diesel and jet fuel, and $0.12 per pound for LPG. In the medium-term, raise rates for diesel and jet fuel to be at least in line with gasoline. - 3.6 Abolish exemptions for fuel imports by energy utilities (or start by reducing them). - 3.7 Introduce a tobacco excise tax of $2 per pack of 20 cigarettes and $5 per 1.2oz pack of tobacco, maintaining the 151 percent rate on cigars. - 3.8 Introduce alcohol excise taxes of $0.375 per 12oz can of beer, $13 per gallon of wine, and $40 per gallon of spirits. In the medium-term, seek to apply a fixed rate per unit of alcohol of $100 per gallon, adjusted for inflation. - 3.9 Consider national harmonization of tobacco and alcohol taxation in collaboration with the governments of Majuro and Kwajalein, including through revenue-sharing agreements. - 3.10 Consider lowering purchase taxes on vehicles and increasing ownership fees or taxes, with differentiation by size and fuel efficiency. ### Current administrative capacity and constraints - The DCTRT has limited experience with the administration of consumption taxes; no consumption tax is currently administered at the national government level while local governments (Majuro and Kwajalein) impose sales taxes at the local level. - Existing DCTRT procedures are largely manual but include self-assessment, registration of foreign businesses, integration of Employer Identification Numbers (EINs) from MISSA into the taxpayer register, and follow-up on non/late filing and payment. - An ITAS acquisition project to support tax administration reform is underway; initial plans to add revenue administration modules to the Financial Management Information System were abandoned and discussions with an ITAS provider are ongoing. - Key challenge: ensuring business continuity and preparing for new taxes in a short period given a staff of only seven working in a manual environment. - Typical VAT introduction timeline: 24 - 36 months; administrative phase can take 18 months or more depending on factors listed in the report. ### Major implementation challenges - Administrative challenges include reform project management, organization, taxpayer registration, procedures and manuals, staffing and training, taxpayer education and publicity, IT systems, taxpayer compliance and post-implementation monitoring. - Given limited experience, resources, and institutional capacity, the DCTRT will likely face significant challenges and requires good, early preparation. Annex 3 proposes an indicative timeline for implementation. - VAT introduction prerequisites identified: (1) experience with broad-based indirect taxes; (2) experience with self-assessment and a tax credit mechanism; (3) existence of a modern tax administration IT system; (4) political commitment; (5) experience with large-scale tax changes; (6) availability of high-quality personnel; (7) availability of financial resources; (8) complexity of VAT legislation; (9) availability of technical assistance support. ### Project management and organizational recommendations - 71: Institute strong project management mechanisms; establish a small Reform Project team within the DCTRT comprising staff from both the RTU and customs unit. - First task for the project team: develop a comprehensive project document reflecting critical outcomes, absorptive capacity, and resource availability (financing, staff, technical assistance, infrastructure). - Once policy design is decided (rates, registration threshold, exemptions, refund system), administrative preparations should focus on registering potential consumption taxpayers, designing procedures and forms, developing compliance programs and IT systems, recruiting and training staff, and implementing taxpayer education and registration programs. - External technical assistance, including a long-term expert, may be needed during implementation. ### Taxpayer registration design and thresholds - Robust taxpayer registration is crucial; registration is the basis for self-assessment, compliance management, third party reporting, matching, and refund management. - Improvements needed to existing MISSA-administered registration system: ensure only registered VAT taxpayers can issue VAT invoices and claim refunds; include sufficient controls to prevent registration of bogus businesses; enhance quality, adequacy, and accuracy of information captured. - Timely registration: VAT registration campaigns should commence 6-9 months prior to the start date. - Given staff constraints, adoption of a high threshold is recommended to limit number of VAT registrants: - An annual turnover threshold of $100,000 would have required 89 taxpayers (94.1 percent of total taxable sales) to register for VAT in FY2022. - A lower threshold (e.g., $50,000) could disperse RTU resources and increase administrative burden on small businesses. - Voluntary registration considerations: - Voluntary registration for businesses with annual turnover below the set threshold could increase the number of VAT taxpayers due to large businesses’ incentive to source from registered suppliers. - Limiting voluntary registration to businesses with an annual turnover above $10,000 will help mitigate this risk. - Voluntary registrations should be subject to tax administration approval with criteria including: commitment to remain in the VAT system for at least three years; good tax compliance history; book and record-keeping capacity; commitment to issue invoices. ### Organization, staffing, and training needs - 77: VAT should be administered within the RTU. - Additional staffing required: - The RTU is understaffed; in addition to filling two currently vacant positions, recruitment of two additional staff will be necessary to support VAT implementation. - The additional staffing estimate is based on an expected VAT register comprising 90 – 100 businesses. - Consider recruiting experienced staff from local governments with sales tax experience. - Training priorities: - Two levels of training: (1) initial training of new recruits and staff transferred to VAT duties (RTU and Customs unit); (2) ongoing training for staff. - Customs must be ready to collect VAT on goods at import. - Extensive training for DCTRT staff on legislation, compliance requirements, and technology. Training and experience sharing with local governments and external technical assistance are recommended. ### Compliance programs, forms, and procedures - Strong compliance programs needed from the outset: education and services strategies, well-designed audit programs supported by IT systems, and risk management for audit selection. - Effective refund system requires IT support and enhanced information exchange with Customs on imports and exports. - VAT return form recommendation: relatively simple (one page) with information limited to what is needed for processing returns and risk assessment. - Customs forms should be amended to provide lines for calculation of VAT on imports. - Initial focus: support taxpayers to ensure accurate filings and payments, with gradual transition to audit and penalty regimes. ### Publicity, outreach, and system development - Publicity campaign: - Develop an effective campaign to prepare the public and business community; prior failures attributed in part to lack of understanding of concepts and benefits. - Publicity should inform and educate (distinct from public consultation). - DCTRT to engage with business community; MFBPS and political leaders to be involved for consumer-facing messaging. - Campaign should address threshold adoption to simplify compliance costs of small businesses and possible impact of VAT on household budgets. - Lessons can be drawn from Palau’s experience with VAT implementation. - System development: - IT is fundamental to VAT introduction; ITAS and tax system reform ideally implemented concurrently. - If ITAS is not yet operational, manual administration is feasible for a limited period given the taxpayer base size. - System development should commence well in advance of finalizing legislation; business process reengineering critical, using selected COTS ITAS as foundation. ### Key recommendations (numbered) - 4.1 Seek external technical assistance support, including the appointment of a long-term advisor or temporary supplementation to help with the development and implementation of the VAT project. - 4.2 Strengthen project management by establishing a dedicated Tax Reform Project section comprising RTU and customs unit staff within the DCTRT to oversee the VAT reform efforts. This section should develop a comprehensive project document outlining critical outcomes, resource availability, and project management methodologies. - 4.3 Enhance administrative capacity to address the current staffing limitations by recruiting additional staff and providing extensive training on VAT administration. This includes initial training for new recruits and ongoing training for existing staff. Include communications experts in the Tax Reform Project section. - 4.4 Improve taxpayer registration by launching a robust taxpayer registration campaign well in advance of the VAT implementation. Ensure that only registered VAT taxpayers can issue VAT invoices, claim refunds, and implement controls to prevent the registration of bogus businesses. - 4.5 Conduct publicity campaigns and engage with the business community and the public to inform and educate them about the VAT. Address concerns, provide necessary information, and highlight the benefits of the VAT reform. *IMF Technical Assistance Report — Tax Administration of Indirect Taxes (selected excerpts).* ### 4.6 Develop effective compliance programs supported by IT systems and risk management ### 4.6 Develop effective compliance programs supported by IT systems and risk management ### IT and Compliance Programs - Design simple VAT return forms, provide support to taxpayers to them comply, develop audit programs, and facilitate information exchanges with Customs. - Progress with the ITAS acquisition project to leverage IT to support the VAT administration. - If ITAS is not operational, consider manual administration for a limited period while ensuring the system development is aligned with policy. ### Personal Income: Current Structure and Recent Reform - Labor income taxed at progressive rates of 0, 8 and 12 percent. - Reform passed in October 2024 and coming into effect from April 2025: - Raises the tax-free threshold from $1560 to $8320. - Raises other thresholds and adds a new top rate at 16 percent. - An amendment is currently foreseen to be passed in January 2025, removing the new top rate, but keeping all other changes. - Prior to the reform, thresholds had been stable since 1989. - Taxpayers lose entitlement to the tax-free band if they earn more than $5200; under the legislated reform the threshold for losing entitlement will coincide with the upper threshold of the zero band. - Exemptions: - Rental allowance or value of provided housing up to $9,000 per year is exempt. - Pensions and annuities funded in whole or part by taxable wages are exempt. - Payments for medical expenses or any sick pay that exceed normal wages are exempt. - Domestic services provided in a home and wages of certain religious workers are exempt. - Non-resident workers: - Subject to a gross withholding tax of 10 percent. - Expats working in US military bases taxed at a flat rate of 5 percent (part of the compact with the United States). - Capital income mostly untaxed; exceptions: - Business income taxed under the GRT or as mixed income of self-employed managers. - Dividends, interest, and capital gains are not taxed. - Land rents taxed at 3 percent on a gross basis; rents for buildings and improvements are not taxed. - Social security contributions total 23 percent (subject to upper limits): - Retirement fund: employer and employee each contribute 8 percent of wages of up to $10,000 per quarter; self-employed contribute full 16 percent on their presumed wage. - Health fund: both employer and employee contribute 3.5 percent of wages up to $5,000 per quarter. - Upper earning limits are not indexed to inflation. ### Business Income and Incentives - Businesses taxed under the Gross Revenue Tax (GRT) at a rate of 3 percent (turnover-based). - For businesses with turnover below $10,000, flat tax of $80. - Hotels and resorts: additional tax set at 8 percent of the room rate. - Significant tax incentive and exemptions: - New business with investment of at least $1 million or domestic payroll of at least $150,000 entitled to a GRT holiday for first five years. - Offshore/deep-sea fishing, export-oriented manufacturing, agriculture, and hotels receive the tax holiday without minimum investment or payroll. - Exempt: public utilities (water, electricity, telecommunications); domestic air transportation and government-owned air transport; government-owned copra processing; charities, religious, scientific, and educational non-profit organizations. - Deep seabed mining subject to a separate royalties/production charges/profit-sharing regime (beyond scope). ### Problems with Personal Income Taxation - Large threshold effects (tax notch): - At $5200, withdrawal of tax-free allowance creates an extremely high marginal tax rate (MTR); earning one more dollar increases tax liability by $125 (8 percent of $1560). - Under the October 2024 reform, with the tax-free allowance aligned to the upper limit of the tax-free threshold, earning one additional dollar at the notch raises tax liability by $666. - High MTRs (exceeding 100 percent) are inefficient and inequitable; they discourage work and incentivize evasion. - Narrow tax base: - Housing allowance exemption up to $9,000 per year creates incentives to remunerate staff with allowances rather than base salaries and is regressive. - No clear rules on taxation of in-kind benefits (e.g., company cars); taxing these benefits would raise revenue and reduce regressive avoidance. - Nontaxation of most capital income weakens progressivity and creates avoidance opportunities; lack of data on capital flows complicates revenue estimation. - Ambiguities in withholding rules for multiple jobs and periodic earnings may lead to over- or under-taxation. - Inflation and bracket creep: - Tax thresholds set in 1989; since then the dollar has lost just over 60 percent of its purchasing power. - Non-adjustment of thresholds results in an opaque increase in effective tax rates and brings more poor people into the tax net. - Social security interactions: - Combined personal income taxes and social security create a marginal tax wedge with an erratic shape and regressive parts due to upper earnings limits. - Pension contributions partly represent compulsory savings; health contributions resemble taxes because contribution amounts do not determine quality of care. ### Reform Options for Personal Income Taxes - General principle: - To avoid the notch, grant the tax-free allowance to every taxpayer and finance it by higher marginal tax rates. - Alternative of phasing out the allowance creates odd marginal rate schedules; preferable to raise the top tax rate instead. - Mission proposals (based on October 2024 legislated reform): - Proposal A: - Removes withdrawal of the tax-free threshold. - Reduces the tax-free allowance by $1000. - Raises tax rates to 12, 16, and 20 percent. - Justification: new Universal Basic Income foreseen at $1,000 per person. - Proposal B: - Avoids increases in top tax rates. - Reduces all thresholds by $1,000 each. - Abolishes the 8 percent rate and begins immediately with the 12 percent rate. - Table 6.1 (tax schedule reform options) preserved income ranges and marginal tax rates exactly as presented in the source. - Revenue and distributional comparisons (Table 6.2, percent unless indicated): - Tax system characteristics: - Revenue ($, millions): Oct 2024 law 13.3; Jan 2025 Amendment 12.4; Mission A 13.2; Mission B 11.4. - Change in tax revenue ($, millions): 0.00; -0.9; -0.1; -1.9. - Share outside of tax net: 46.2; 46.2; 41.0; 41.0. - Average tax rate: 8.8; 8.3; 8.8; 7.6. - Average tax rate, above threshold: 10.1; 9.4; 9.7; 8.4. - Redistribution: - Post-tax income share of top 1 percent: 8.68; 8.92; 8.38; 8.60. - Post-tax Gini coefficient: 55.72; 56.12; 55.06; 55.62. - Redistributive capacity: 2.02; 1.61; 2.67; 2.12. - Progressive capacity: 19.75; 17.82; 24.88; 23.66. - Notes: - Proposal A is revenue neutral relative to the October 2024 law; Proposal B implies a small revenue loss. - Revenue estimates based on gross income data for fiscal year 2022, uprated to fiscal year 2025; current-system revenue estimated at $14.4 million vs fiscal year 2024 outturn $15.2 million (implying slight under-estimate). - Proposal B loses almost $2 million in revenue—$1 million more than the amendment considered by authorities for January—and should be adopted only with other revenue-raising measures if used. ### Specific Policy Recommendations - Abolish the housing allowance to broaden the labor tax base: - 2019 Household Income and Expenditure Survey estimates: - Cash housing allowance: $890,000 for 288 people (weighted; reliability doubtful). - Uprated to 2024: estimated $1.1 million. - In-kind housing (30 responses): $2.6 million; uprated to 2024 and capped at $9,000 yields $2.9 million. - Total housing allowance estimated at $4 million in 2024. - Assuming taxed under the top rate of 12 percent, represents a tax expenditure of about $0.5 million. - Removal could finance an increase in the general tax-free allowance and would partly compensate affected taxpayers when combined with abolishing withdrawal of the tax-free allowance. - Review and tax in-kind benefits broadly: - Employer-provided in-kind benefits from 2019 (dollar amounts): - Electricity 495275 - Food 505276 - Telephone 93615 - Fuel 82341 - Vehicle 2461096 - Other 19246 - Priority is to address company-provided vehicles; some items (e.g., food) may raise little revenue and could fall under the new higher tax-free threshold. - Tax capital income when profit tax is implemented: - Domestic capital income should be taxed urgently because interest is deductible under profit tax. - Initially implement simple flat capital income tax rates; consider final withholding for ease of collection. - Suggested initial low flat rate of about 10 percent to tax such incomes without strong incentives for evasion. - Dividends paid out of taxed earnings can be exempt or subject to a lower rate. - Rent recipients can choose between documenting exact rental profits or taking an allowance for costs of 30 percent of the rent. - Increase capital income tax rate over time to align with top labor rate and profit tax as data and compliance improve. *IMF Technical Assistance Report — Chapter: 4.6 Develop effective compliance programs supported by IT systems and risk management* ### 111. To increase neutrality of the tax system with respect to inflation, the thresholds should be ### 111. To increase neutrality of the tax system with respect to inflation, the thresholds should be ### Indexation of thresholds and excises - Update thresholds regularly, ideally through an automatic annual process, to maintain neutrality of the tax system in real terms and avoid taxpayers shifting into higher tax brackets as real incomes rise (“bracket creep”). - An automatic process is ideal because there is no policy decision involved in keeping the tax system constant in real terms. - If the government wishes not to update thresholds in a particular year to raise more revenue, this is a policy choice that can be legislated whenever needed. - Recommendation 6.5: Automatically adjust annually all thresholds for inflation. ### Social security and regressivity of the tax wedge - The social security system requires reform and will likely require further technical assistance. - The overall tax wedge is regressive; this provides an additional argument not to lower the top tax rate back to 12 percent. - The pension scheme appears to face significant medium and long-term solvency risks that would require in-depth technical assistance to determine solvency-enhancing reforms, likely involving adjustments on both the revenue side and entitlements (amounts and minimum ages). ### Key tax policy recommendations (from section) - 6.1 Abolish the withdrawal of the tax-free allowance, financed by an increase in tax rates to 12, 16, and 20 percent and a reduction in the tax-free allowance by $1000. - 6.2 Abolish the tax exemption for the housing allowance and use the revenue gain to increase the tax-free threshold. - 6.3 Review employer-provided in-kind benefits for inclusion in the tax base, starting with the private use of company vehicles. - 6.4 Introduce a 10 percent flat capital income tax covering interest, rents, and capital gains, exempting dividends. - 6.5 Automatically adjust annually all thresholds for inflation. ### Problems with the current General Revenue Turnover (GRT) approach - The GRT favors successful and established firms and can be exceedingly high for struggling firms, increasing the risk of firm bankruptcies because it is based on turnover rather than profits. - For businesses with very small profits, payment of the tax can create a post-tax loss (shown by tax rates exceeding 100 percent of profit) and thus lead to bankruptcy. - In the extreme case of a pre-tax loss, the tax still applies, further increasing post-tax losses. - The GRT is distortive across sectors: - High-margin businesses (e.g., law or consulting firms) face low effective taxation. - Low-margin businesses (e.g., retailers) face a very large share of profits extracted by the tax. - The GRT discourages specialization and favors vertically integrated businesses because it cascades through the production chain. - International problems: - Creditability is not assured for foreign investors from countries with worldwide taxation; the GRT may not be recognized as corporate income tax creditable against home-country tax liabilities. - The GRT will likely not be creditable under the new global minimum tax (2023 Inclusive Framework): large multinationals (global turnover > €750 million) should face an effective tax rate of at least 15 percent in each country they operate. - Mission estimate: large multinationals operating in the Marshall Islands may face additional taxes of around $3.5 million abroad as a result of their profits not being taxed in the Marshall Islands. This figure is highly uncertain. ### Revenue potential and global minimum tax estimates (Table 6.4, 2021; mission estimates based on OECD CBCRs) - Table total row (as reported): - "Total 39 3,327,626,541 309,203,989 1,678,854 42,297 360,754,801 22,990,171 3,448,526 1.3%" - Selected country rows reported (as presented): - Germany: "3 n.a. 22,518,000 17,155,000 0 0.0 15.0 0 0 17,155,000 2,573,250 1.0%" - Bermuda: "7 3 3,067,540,518 259,987,142 0 0.0 15.0 0 257,063,441 2,923,701 438,555 0.2%" - United Arab Emirates: "3 3 62,607,321 3,832,946 1,678,854 43.8 0.0 0 56,393,844 0 0 0.0%" - Notes and caveats stated in the source: - CBCR data used in estimation are not fully reliable; some figures do not appear plausible. - Not all countries may implement the global minimum tax; under the agreement they are not obliged to do so, they only must accept implementation by others. - The highest revenue at stake relates to German firms (1 percent of GDP), and given Germany has legislated the IIR, this provides a strong case for reacting. - Calculations made simplifying assumptions; the minimum tax foresees a substance-based income exclusion allowance for tangible capital and payroll, but data on payroll were estimated from per capita GDP and the number of employees. ### Reform options for business taxation - Rationale for moving from GRT to profit tax and VAT: - The GRT fulfils neither a consumption nor a profit tax role; consumption can be taxed much more efficiently under a VAT. - Introduce a profit tax (corporate income tax) to ensure incomes from businesses are taxed similarly to labor income; important where dividends and interest are not taxed. - Advantages of a well-designed profit tax: - Neutral across sectors because costs are deductible. - Automatically rises with profitability; firms breaking even or making losses do not pay tax, avoiding bankruptcy caused by tax. - Allows specialization and production chains as profits are taxed once. - Is creditable against other countries’ profit taxes (including under the IIR). - Design principles and rules for a profit tax: - Allow loss carry forward; can be unlimited or limited (example limit: 5 years) for revenue purposes. - Start from company accounts, with specified tax adjustments (e.g., statutory depreciation allowances versus accounting depreciation). - Disallow deduction of costs of personal consumption and entertainment. - Include capital income (rents, interest, capital gains) in the tax base, except inter-company dividends. - Write broad principles into law: general anti-avoidance rule; related-party transactions to follow the arm’s length principle. - Decide whether tax is territorial or worldwide; a relatively simple solution is to exempt foreign profits subject to anti-avoidance rules such as CFC rules. - Practical considerations and transitional arrangements: - A profit tax is more complex; requires firms to keep full accounts and track depreciation and losses. - Restrict profit tax to firms that are large; align profit tax threshold with the VAT threshold to keep the system simple. - Aggregate turnover of firms with the same owner to determine whether the profit tax applies to prevent splitting avoidance. - Allow voluntary adoption of the profit tax for small enterprises able to prepare reliable books; voluntary adopters should not be allowed to return to the GRT for at least five years. - Voluntary adoption of either profit tax or VAT implies adoption of both, since the GRT covers both. - Abolish the 5-year tax holiday and some exemptions (e.g., air transport, public copra production) if a profit tax is introduced, since a profit tax naturally exempts unprofitable firms. - On tax incentives: - Pressure to introduce tax incentives should be resisted; impacts are often limited and revenue costs are significant. - Maintain a broad tax base and a low rate; if incentives are used, prefer those that directly encourage investment without discriminating across sectors, e.g., accelerated depreciation or expensing of investment. - Determining the profit tax rate (three approaches and implications): - Macroeconomic data: rate of private operating surplus to turnover averages 31.4 percent between FY2017 and FY2022 (range: 27.5 percent in FY2018 to 38.1 percent in FY2021). A lower bound for the revenue-neutral profit tax rate is about 10 percent. - Company data: Orbis accounting data for 38 to 49 Marshallese companies per year show much variation in the ratio of profits before taxes to sales; profit revenues will be more volatile. - International comparators: globally, profits before taxes but after all operating expenses and depreciation average around 10.6 percent of turnover. If that ratio applies, the 3 percent turnover tax is on average equivalent to a profit tax of 28 percent. - Suggested strategy: set the VAT to recover most GRT revenues while being cautious about revenue expectations from the profit tax. *IMF Technical Assistance Report | 49–56* ### 129. Another consideration is the international competitiveness of the rate. A comparison with ### 129. Another consideration is the international competitiveness of the rate. ### International competitiveness and recommended corporate rate - Majority of small island developing economies apply tax rates in the range of 20 to 30 percent (Figure 6.7). - A few countries apply much lower or no tax on profits, but—with the exception of Vanuatu—they are not in the Asia-Pacific region. - Recommendation: a tax of 20 percent would be a good starting point. - Going below 15 percent would not be advisable in a global environment where an effective minimum rate of 15 percent applies. - With a rate of 20 percent, the Marshall Islands would still be among the lowest in the region. - A higher rate could be feasible but risks triggering calls for tax incentives; preferable to maintain a broad base and low rates. - Integration with the personal income tax is important to minimize tax avoidance through incorporation or by paying oneself a salary as an owner. - The profit tax could be aligned with the 16 or 20 percent personal income tax rate. - If the top rate cut back to 12 percent—which is not in line with mission recommendations—then this would be too low for a profit tax rate. ### Revenue expectations and evidence from peers - Country-specific estimates are difficult due to lack of data, but international comparisons suggest a medium-term potential of around 2 percent of GDP. - Other Asia-Pacific SIDS with a profit tax raise between 2.5 and 4 percent of GDP in revenue (Figure 6.8). - Rates cited: Kiribati 35 percent; Papua New Guinea and Tuvalu: 30 percent; Samoa: 27 percent. - Maldives: low rate of 15 percent and the highest revenue among peers. - Projection caveat: domestic tax base matters; international comparisons may reflect different circumstances. - Implementation prudence: assume an immediate revenue impact of 1 percent of GDP as a prudent choice, with upward potential. ### Policy recommendations (profit tax and transition) - 6.6 Replace the GRT by a profit tax at a rate of 20 percent for firms with turnover exceeding the VAT threshold from October 2026. - 6.7 Allow voluntary adoption of the profit tax in line with VAT, for firms that have the necessary accounting in place. Do not allow switching back to the GRT for at least five years. - 6.8 Allow loss carry forward, either unlimited or for up to 5 years. - 6.9 Abolish the tax holiday for new firms, grandfathering existing beneficiaries if they remain in the GRT. Refrain from adopting tax incentives other than accelerated depreciation. Review exemptions for potential removal, starting with the exemption for air transportation. ### Administration of income taxes — Current situation (summary of key facts) - The GRT and wages and salaries taxes are administered by the RTU of the DCTRT. - At the end of FY2022-2023, 642 businesses were registered for the GRT and 1,294 for the labor taxes. - DCTRT administration: - Procedures exist to monitor filing, reporting and payment obligations. - An audit section of four conducts tax audit activities. - A basic segmentation program exists for compliance risk management. - Administration is predominantly paper based; taxpayers must physically attend the tax office. - Filing non-compliance (FY2022-2023): - 14.7 percent of registered GRT taxpayers did not file their tax returns on time. - 18,7 percent of registered labor taxpayers did not file their tax returns on time. - Accounting standards and reporting: - Law requires businesses to maintain accurate and up-to-date accounting records, but there are no mandatory specific accounting standards or filing of financial statements with the government. - MISSA administers social security contributions and has an MoU-based collaboration with the revenue administration for information exchange. ### Key administrative issues and challenges - Income tax reform administrative implications: - Phase 1 (passed in October 2024) has little impact on current administration. - Personal income tax reform proposals (elimination of threshold effect, broadening labor tax base, expansion of tax-free allowance, taxation of capital income) will require changes to calculation methods, forms, and procedures but are not expected to be administratively prohibitive. - Replacing the GRT with a profit tax for large taxpayers is a major reform requiring careful implementation planning and sequencing with other reforms, especially VAT introduction. - Compliance challenges: - Progressivity depends on taxpayer compliance; taxpayers subject to high marginal rates tend to evade taxes. - Critical measures: (1) training taxpayers to understand changes; (2) adjusting taxpayer systems to integrate new calculations. - Simplification: - Recommendation to keep withholding systems and eliminate the need for PIT taxpayers to file returns when withholding obligations are accurately complied with by employers. - Individuals with income from several sources should be required to file personal income tax returns. - Profit tax specific challenges: - Profit tax rules are more complex than GRT; implementation requires new procedures, forms, staff training on income tax base determination, accounting principles, assets and liabilities, and taxpayer compliance programs. - Timely implementation of the ITAS will be needed to support effective administration of the profit tax. - Profit tax likely to trigger obligation to file financial statements with the tax administration; accounting standards should align to CoFA reporting and bookkeeping standards will need to be determined by regulations. - Taxpayer education: - Extensive education programs needed for businesses on record keeping, withholding calculation, compliance with filing, accurate reporting, and payment. - Compliance performance by segment (FY2022 – 2023): - Large business taxpayers filing compliance rate: 98.6 percent. - Small businesses: 56 percent. - Medium-size businesses: 89 percent. - Organizational capacity and staffing: - DCTRT has seven employees and two current vacancies. - Median core taxpayers to FTE ratio in 2017 was 434. - Experience shows increasing tax administration staffing up to a threshold of 0.25 percent of the labor force improves revenue performance. - Recommendation: consider recruiting three or four additional personnel with project management and taxpayer service expertise. ### Administration recommendations (income tax) - 7.1 Plan for careful implementation including development of a detailed plan for tax reforms, including staff training and a timeline for rollout. - 7.2 Establish and enforce mandatory accounting standards aligned with Compact of Free Association (CoFA) requirements, for businesses to ensure the maintenance of accurate financial records. - 7.3 Digitally transform the tax administration and implement ITAS, moving from a paper-based system to a digital platform and ensure timely implementation of the ITAS to manage profit tax complexities and improve efficiency. If ITAS is not operational, consider manual administration for a limited period while ensuring the system development is aligned with policy. - 7.4 Implement taxpayer education and provide extensive support and training programs to help taxpayers understand new tax obligations and processes. - 7.5 Enhance compliance monitoring including strengthening compliance risk management using data analytics to risk assess and address non-compliance effectively. ### Cross-cutting tax administration issues — Governance and core functions - Organizational structure: - Current RTU structure (Compliance and Audit sections only) lacks dedicated taxpayer services and reform project management functions; these should be added. - Box 1 lists key roles of a taxpayer service section, including providing information and assistance, taxpayer education and outreach, processing tax returns and payments, managing taxpayer accounts, resolving taxpayer issues, and promoting compliance. - Staffing and project management: - Adequate staffing and strong project management and communication skills are crucial. - Consider recruiting three or four additional personnel to support cross-functional development and implementation of compliance strategies. - Focus on large taxpayers: - Continue focus on large taxpayer segment as priority for achieving higher compliance; large taxpayers provide the bulk of tax revenue. - Core functional improvements: - Enhance collaboration with MISSA for tax registration database integrity. - Streamline filing management with e-filing, electronic signatures, and integration across systems. - Facilitate payment with online payment systems and electronic funds transfer, including mobile money for large taxpayers. - Improve refund processing through automated verification and timely electronic disbursement. - Strengthen audit capacity with a risk-based approach and third-party data integration. - Develop dispute resolution procedures; though important, they may be developed later. - Monitoring and evaluation: - Establish a robust monitoring and evaluation framework with KPIs to track reform progress and conduct regular reviews. - Create mechanisms for taxpayer and staff feedback to inform adjustments. _Imf Technical Assistance Report | excerpts (sections 129–155)_ ### 8.1 Enhance the RTU organizational structure by adding dedicated sections for taxpayer services ### 8.1 Enhance the RTU organizational structure by adding dedicated sections for taxpayer services ### Key recommendations for RTU structure and staffing - 8.1 Enhance the RTU organizational structure by adding dedicated sections for taxpayer services and assistance, as well as for managing ongoing reform projects. - 8.2 Recruit three or four additional personnel with project management and taxpayer service expertise to ensure effective cross-functional development and implementation of compliance strategies. - 8.3 Implement e-filing systems, electronic signatures, online payment systems, and automated refund processing to streamline processes, reduce errors, and improve compliance. - 8.4 Develop key performance indicators (KPIs) to measure success along with regular reviews mechanisms to track progress and make necessary adjustments. ### Governance and reform management guidance (VITARA highlights) - Key Concepts: - Use a structured, systematic approach to reform management covering program development and governance arrangements. - Governance Infrastructure (recommended elements): - Steering Committee: strategic direction and oversight; include representatives from key government ministries, the tax authority, and the private sector. - Project Management Office (PMO): coordinate and manage the reform program; align projects with reform objectives. - Working Groups: specialized teams (legislative changes, IT systems development, capacity building) reporting to the PMO. - Roles and Responsibilities (selected): - Steering Committee: set strategic direction, approve major decisions, monitor overall progress. - Project Manager: oversee the reform program, coordinate teams, manage resources, resolve implementation issues. - Tax Policy Advisor: advise on tax policy and legislation to align reforms with international good practices. - IT Systems Manager: manage development and implementation of tax administration system, ensure system security and technical support. - Training and Capacity Building Coordinator: manage training for tax staff and taxpayers. - Public Awareness and Education Officer: manage public awareness campaigns and taxpayer education. - Compliance and Enforcement Manager: ensure compliance and manage enforcement activities. - Finance and Budget Officer; Legal Advisor; Stakeholder Engagement Coordinator; Risk Management Officer. ### Proposed implementation team roles (VAT implementation example) - Project Manager / Assistant Secretary Reform Office: - Role: oversee VAT implementation project; ensure tasks completed on time and within budget. - Responsibilities: coordinate teams, manage resources, monitor progress, address issues. - Tax Policy and Legal Advisor: - Role: provide VAT policy and legal advice. - Responsibilities: draft VAT legislation, review legal documents, ensure alignment with international good practices. - IT System Manager: - Role: manage development and implementation of VAT administration system. - Responsibilities: oversee design, development, integration, ensure system security, provide technical support. - Development Partner, Training and Capacity Building Coordinator: - Role: coordinate development partner activities; manage training for staff and taxpayers. - Responsibilities: coordinate partner engagement, develop training programs, organize workshops and seminars. - Stakeholder Engagement, Public Awareness and Education Officer: - Role: manage engagement with government, businesses, and the public; manage awareness campaigns. - Responsibilities: organize stakeholder meetings, gather feedback, develop communication strategies and educational materials. - Risk, Compliance and Enforcement Manager: - Role: identify and mitigate risks; ensure compliance and manage enforcement. - Responsibilities: conduct risk assessments, develop mitigation strategies, develop compliance strategies, conduct audits. - Finance and Budget Officer: - Role: manage financial aspects of implementation. - Responsibilities: prepare budgets, monitor expenditures. ### Draft implementation plan (high-level phases and outcomes) - Phase 1: Preparation - Establish Project Team: form dedicated VAT/GST implementation team, confirm approach with stakeholders, recruit long-term advisors, set up governance. - Develop Tax Reform Principles: focus on simplicity and reduced compliance costs. - Technical Assistance: identify and secure TA requirements, including training for project staff. - Communication Strategy: develop comprehensive internal and external communication. - Phase 2: Policy Design - Cross-Government Discussions: confirm VAT/GST policy design with government departments. - Legislative Drafting: begin drafting necessary legislation for VAT/GST. - Phase 3: Capacity Building - Training and Capacity Building: conduct extensive training for tax administration staff and stakeholders. - IT System Upgrades: implement necessary IT system upgrades for VAT/GST administration. - Phase 4: Implementation - Pilot Testing: conduct pilot testing of systems and processes. - Full Implementation: roll out VAT/GST nationwide with continuous support and monitoring. - Phase 5: Monitoring and Evaluation - Continuous Monitoring: regularly monitor and evaluate implementation and adjust as needed. - Compliance Improvement: develop and implement strategies to improve compliance and address challenges. - Timing and sequencing (as specified): - The GST and Excise could be implemented around August or September 2026. - BPT business record-keeping requirements need to be finalized and available to BPT businesses before the start of the FY2025-2026 year, with return forms and system readiness by September 2026. - Other taxes could be progressively transitioned through 2027. ### Implementation risks and mitigation (selected items from Draft Implementation Risk Register) - Political Instability - Likelihood: High - Consequence: High - Mitigation: secure strong political commitment and continuous dialogue with political leaders. - Limited Administrative Capacity - Likelihood: High - Consequence: High - Mitigation: provide extensive training and capacity building; seek technical assistance from international organizations. - Public Resistance - Likelihood: Medium - Consequence: High - Mitigation: launch comprehensive public awareness campaign; engage community leaders and influencers. - Compliance Risks - Likelihood: Medium - Consequence: High - Mitigation: provide clear information on compliance; establish robust enforcement mechanisms and penalties. - Technical Challenges - Likelihood: Medium - Consequence: High - Mitigation: conduct needs assessment and pilot testing; ensure integration with existing systems and provide technical support. - Economic Impact - Likelihood: Medium - Consequence: Medium - Mitigation: implement transitional provisions and phased implementation; provide support and guidance to businesses. - Fraud and Evasion - Likelihood: Medium - Consequence: High - Mitigation: develop robust audit and compliance processes; utilize technology and data analytics. - Legislative Delays - Likelihood: Medium - Consequence: High - Mitigation: engage legislators early; provide clear draft legislation for review. - Resource Constraints - Likelihood: High - Consequence: High - Mitigation: secure adequate funding and resources; seek support from international organizations and regional partners. - System Integration - Likelihood: Medium - Consequence: High - Mitigation: ensure thorough planning and coordination with IT teams; conduct pilot testing and provide ongoing technical support. *IMF Technical Assistance Report | section 8.1 and related annexes* --- _Source: https://www.imf.org/-/media/files/publications/tar/2025/english/tarea2025022-print-pdf.pdf_