Frequently Asked Questions - Q&A

FAQs - Q&A

Ongoing subsidies for unproductive businesses does not help the economy grow.  The Government can make investments that benefit the entire community.  The Government can also assist people to find alternative employment if needed.  The Government can work with service providers, local authorities, training providers and employers to find innovative ways to help people find gainful employment.  Ideally support is personalised based on people’s situations and local labour market characteristics.

Tax incentives very rarely deliver sustainable employment and growth.  They are expensive because the Government foregoes often substantial amounts of revenue and they are prone to abuse.  The Government will make investments that benefit the entire community.  It will spend money on investments that have been found to increase economic growth and employment.  These are investments that the private sector does not undertake but will benefit from, like building roads, ports, airports, hospitals, education.  Adequate repair and maintenance of public assets will further support private sector jobs.

A large number of working people, in particular those with home produced and consumed goods, or the so-called ‘subsistence economy’, will not be paying income tax.  Significant amounts of income tax will be raised from those in paid employment and businesses.  Countries with a substantially smaller tax bases than Vanuatu successfully implement an income tax, e.g. Cook Islands, Kiribati, Niue, Tonga, and Tuvalu.

The analysis of tax reform uses a national framework for revenue forecasting which is part of the Model Of the Vanuatu Economy (MOVE).  The MOVE is being developed by the Reserve Bank of Vanuatu and the national framework for revenue forecasting by the Ministry of Finance and Economic Management.  The MOVE is a macroeconomic and fiscal framework that captures the main economic linkages.  It produces economic and fiscal forecasts and can be used for policy analysis.

The revenue projections are the Revenue Review Committee’s best estimates.  The numbers most likely will be wrong but we do not know if they will be too high or too low.  This uncertainty has been taken into account when setting the rates and thresholds.

The revenue projections may be too low if gross domestic product (GDP), which is the output produced in Vanuatu, is underestimated.  The revenue projections may be too high if it takes longer than anticipated to build capacity—for the Department of Customs and Inland Revenue (DCIR) to collect income tax and / or for taxpayers to fully comply with their tax obligations.

Revenues are rising because the ‘real’ economy is growing, meaning that more output is being produced, and because prices and wages are rising.  The real economy is growing because of population growth and because workers are becoming more productive and skilled with more and better technology, machinery, equipment and tools to work with.

To ensure Vanuatu remains internationally competitive, the corporate income tax rate was chosen to be the lowest in the region.  To reduce tax planning the corporate and top personal income tax rates are aligned.

The tax-free threshold applies to all individuals and small changes can have a large revenue impact.  The tax-free threshold (750,000 vatu) was set to exempt low income earners in particular those in the subsistence economy and to keep the number of personal income tax filers manageable for the Department of Customs and Inland Revenue (DCIR).  For the second threshold (3,500,000 vatu) consideration was given to what proportion of personal income taxpayers may reasonably be expected to pay the top rate.  Having less than 5% of taxpayers in the top bracket was viewed as acceptable.

The final combination of thresholds and rates was chosen to ensure sufficient revenue is raised taking account the uncertainty about the estimates.  It gives a buffer if the estimates are too high.  If the estimates are too low, actual collections should not be so high that the Government can be accused of ‘stealing from the people’.

The additional revenue will be used to reduce fees, charges and import duties as an offset to the increased cost to businesses arising from income tax and to deliver quality Government expenditure for sustainable development and higher living standards.  Submissions are invited from the public on which fees, charges and import duties to eliminate or reduce.  The Government will make the final decision on offsets and expenditures.

Trying to estimate how much time businesses will spend on complying with an income tax and the associated costs is difficult.  Businesses already keep records on income and expenditure to monitor profitability.  The introduction of income tax could in fact help businesses to improve record keeping and monitoring.  Businesses will spend less time on complying with a range of other fees and charges because they will be abolished.