Frequently Asked Questions - Q&A

FAQs - Q&A

Income tax rules will be aligned as much as possible with accounting and financial reporting systems.  Moreover, small businesses and companies with total sales of less than 10 million vatu or some other appropriate amount will have special rules to minimise compliance costs.  These could include cash accounting, and simplified accounting requirements, simplified depreciation rules, easier lodgement and payment rules.  Small businesses and companies will have simplified rules is because they do not have the same complicated transactions as large corporates.

Foreign investors consider a range of factors before investing in a county including the legal system, the development of the financial system, the quality of institutions, regulations, access to markets (within the country and internationally), personal and property security, skills and education of the workforce.  The introduction of a modest corporate income tax is not expected to result in significant loss of foreign investment.  The corporate income tax is internationally competitive and the increased tax cost is at least partly offset by reductions in import duties and a range of other nuisance and costly to administer and comply with fees and charges.

A corporate income tax will have some advantages for foreign investors.  The home country of foreign investors generally allows them credits for income tax paid in Vanuatu.  But foreign investors do not get credits in their home countries for business license fees or turnover taxes paid in Vanuatu.

A tax on sales, or so-called turnover tax, taxes businesses regardless of whether or not they make a profit.  They discourage new start-ups.  When businesses first start operations, they typically make a loss in the first few years.  Taxing businesses that make a loss would discourage start-ups and private sector development.  Turnover or sales taxes also discourage employment growth because businesses do not get a deduction for expenses.  The largest expense for many businesses is salaries and wages.

No.  The costs of implementing an income tax, i.e. a new information technology system, additional staff and staff training for the Department of Customs and Inland Revenue (DCIR), and losses due to some foreign businesses and professionals leaving Vanuatu, have been incorporated into the estimates.  An income tax will generate revenues well in excess of the costs of implementing an income tax.

Yes.  Income taxes are more volatile than revenues from VAT.  The Government has full confidence that the Ministry of Finance and Economic Management (MFEM) will be able to effectively manage volatile revenue flows.  MFEM scored highly in a recent Public Expenditure and Financial Accountability assessment (PEFA) for cash management.  Additional forecasting tools for cash management will be developed as needed.

The income tax regime is proposed to be introduced in two stages: salary and wages tax from 1 July 2017 and personal and corporate income tax from 1 January 2018.  Key fees and charges will be abolished / reduced from 1 January 2018.  Import duties will be lowered from 1 January 2018 over 5 years.  Free education to year 10 and other Government expenditure will start from 1 January 2018.

A final decision on the implementation dates will be made following consultation.

Initially, as part of the implementation of income tax a range of selected fees and charges will be either significantly reduced or abolished.  The Revenue Review is also undertaking a longer term review of the underlying policies and administration of Vanuatu’s non-tax revenues (fees and charges) to ensure they are well managed, easy to comply with and achieve their policy objectives.  This review of non-tax revenues will continue over the next 18 months to two years.

In order to implement the income tax a new Act of Parliament will be required to impose the tax and set out how it is calculated.  Supporting this new law, it is proposed to introduce a Revenue Administration Act that will streamline the operations of the Department of Customs and Inland Revenue (DCIR), improve administration and ensure effective and efficient administration and enforcement of Vanuatu’s revenue laws.

DCIR is the primary collector of Vanuatu’s revenue.  Improving service provided to business will help reduce the costs of complying with Vanuatu’s tax system.  Better provision of service, information and assistance will support ‘voluntary compliance’, meaning that people and businesses comply with tax laws and accurately report their income and deductions honestly.  Making DCIR more effective, accountable and transparent will also improve confidence in the tax system generally.

Transactions taxes, even at low rates, are harmful to economic growth for two main reasons.  First, they apply each time a transaction takes place regardless of whether the transaction generates any income or profit.  Some people or businesses would pay more taxes simply because they have more transactions.  Second, transaction taxes can be easily avoided with tax planning.  Tax planning takes away resources from productive activities.