INCOME TAX UNLIKELY BEFORE 2020

The Government of Vanuatu’s mid-year fiscal and financial report includes a cryptic paragraph concerning their on-again off-again romance with payroll and corporate income tax.

It begins: “The Government is still not in a position to make a decision on implementation of income tax.”

Then, calling the tax a “foregone revenue opportunity that the Government should have implemented”, it goes on to tout the potential benefits of such a tax, citing an expected VT 3 billion in annual revenues from it.

The report—not very coyly—posits that it “is just losing on more revenue that the Government could rely on in meeting its overall obligation.”

Investment advisors have told the Daily Post that, one way or the other, they need to see some sort of clear indication as to whether and when a tax might be imposed.

While nobody will commit to it on the record, it’s becoming increasingly clear that income taxes will not be imposed prior to the 2020 election. Senior government officials have told the Daily Post that existing revenues are sufficient to meet an impending cash flow crunch that resulted from taking on too much new debt too quickly.

Windfall profits from Vanuatu’s lucrative but much-maligned passport sale programmes have left the government with plump surpluses for three consecutive years. Most analysts think it’s only a matter of time before this revenue stream dries up. But for now, at least, a veritable river of cash is flowing—more than enough to meet the government’s debt service requirements.

Officials describe the political will for an income tax as mixed. One senior government figure told the Daily Post that ‘the Council of Ministers is divided’ on the issue. This is hardly news to cabinet-watchers. When a rise in the VAT was announced last year, it had all the hallmarks of a Solomonic decision: Raise the VAT now, and add an income tax later.

Given the most recent official pronouncements, it’s clear that little progress has been made in resolving this difference of opinion in the cabinet room.

Happily for the coalition, Vanuatu’s burgeoning revenue flows have reduced the immediacy of the issue. For some leaders at least, this will come as a welcome respite. Few if any wanted to enter the 2020 election campaign with an electorate still smarting from a rise in taxes and paperwork.

Regardless of how the home-team lines up, international pressures remain. The IMF has stated outright that it sees income tax as an integral element of any long-term debt management plan. Regional anti-money laundering organisations, who are still watching Vanuatu closely, see a universal Tax Information Number—necessary to any successful income tax rollout—as a valuable way to keep tabs on illicit money flows.

And while Australian officials publicly insist that any decision to impose a tax is an internal policy matter, they are perfectly content to stump up development assistance to study, plan and implement a tax.

But even with a clear run to 2020, the anti-income tax camp is likely to find itself running out of room during the next electoral cycle. Urbanisation and increasing dependence on the cash economy will only increase the need to improved and expanded government services.

Many analysts, and a number of government officials feel that salary and corporate income taxes will be a necessary lever to reduce social inequity as the cash economy expands. “This is the best way to redistribute the wealth,” said one.

While debt is not the issue it once was, the government cannot remain complacent. Significant development spending is still needed to boost and buttress not only tourism and travel, but supporting sectors as well. Construction will be going through lean times as major infrastructure projects tail off. Agricultural production will become stretched as it grows to meet increased retail demand. More domestic production will have to come online if the government wants to avoid deepening the current account deficit.

Most importantly, Vanuatu’s graduation in 2020 from Least Developed Country status will make it harder for the government to access the grants and concessional financing agreement that fund the overwhelming majority of its development projects.

In a July interview with BUZZ 96FM, Ambassador Liu Quan promised that China would treat Vanuatu no differently after its graduation. While work is underway to ease the country’s transition, there is so far no assurance that other funding bodies will follow suit, however.

Nonetheless, with continuing divisions in cabinet, an election campaign looming and a rosy mid-term revenue picture, nobody is betting on a quick decision to adopt an income tax.

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