|
EAC considers the current tax structure as the largest single
deterrent to foreign investment
The Economic Advisory Council has submitted its policy reform report to Governor Togiola Tulafono in which recommendations were made for corporate and personal tax policies.
Under “corporate tax policy,” the EAC noted that serious investors will consider the tax environment they will operate under and will quickly identify that “American Samoa tax rates are some of the highest in the world and by far the highest tax rates in the South Pacific.”
This, to the investor, means they will be faced with high and inconsistent levels of Import Excise Tax on all fixed assets and raw materials sourced from off-shore, thus adding up to an effective tax rate in excess of 65%. The EAC says that while investors may be told that they can apply for a tax exemption from the Tax Exemption Board, this provides little comfort as it is not guaranteed and could change depending on the whim of politicians and/or a change of government.
As for “personal tax,” the EAC says this can be an issue for all taxpayers. But as all workers are subject to local tax policy, it will appear unusual that the tax policy for employees was frozen in December 2000, therefore representing an older tax scale than that which currently applies in the USA.
“This may not be an issue, except when you consider the benefits that US taxpayers have enjoyed subsequently, none of which have been passed on to the American Samoan taxpayer,” said the report. “This is a major concern when attempting to employ mainland Americans.”
The Council says that tax reform, and all its connotations, is the largest and most complex of the issues dealt with in its report. The EAC considers the current tax structure to be “the largest single deterrent to foreign investment and for that reason alone, it deserves to be addressed immediately.” Whether the canneries stay or go, the Council believes foreign investment is vital to the economic future of American Samoa and all efforts should be directed towards welcoming them.
According to the report, the taxation issues faced by theoretical foreign investors are complex, cumbersome, and negative. They include:
Corporate Tax Rate
The current tax rates are:
Up to and including $50,000 15%
$50,001 - $75,000 25%
$75,001 - $650,000 34%
Greater than $650,000 44%
These are among the highest corporate tax rates in the world and are well in excess of tax rates that apply to neighboring countries like Samoa (29%), Asia Pacific region average (30%), Guam (35%), New Zealand (33%), and the Commonwealth of the Northern Mariana Islands (18%).
The EAC says that while it may be seen as a necessary evil by the government, as corporate taxes are a substantial contributor to local revenue (19%), in countries where taxes are lower, corporate taxes contribute much more than this, as corporations are less worried about minimizing tax and more concerned about making money.
The following lists the current contentious withholding tax rates:
•Dividend Withholding Tax – payable on all dividends paid to non-US parent companies |
30% |
•Interest Withholding Tax – payable on all interest payments to non – US financiers (e.g. parent) |
30% |
•Management Fee Withholding Tax – payable on all management fees, royalties etc. paid to either parent entities or franchisees or similar.
•Service Fee Withholding Tax – payable whenever non-US service providers provide services in American Samoa (e.g. off-island auditors) |
30%
30% |
While sympathy was held for the plight of the foreign investor in regard to withholding tax, the Council says this does not extend to the recipients of the cash economy, particularly as it relates to non-American Samoa corporations that are contracted to provide a service to American Samoa (e.g. a construction project). The payments for this project are made either direct to the country of origin of the contractor or in cash. As a result, no local tax is often paid on revenue earned in the Territory.
The EAC says that this problem is enforced in other countries by either a robust and well policed Goods & Service Tax (GST), or by a requirement for only locally registered contractors to contract for such jobs, requiring also that being a locally registered entity, they must file a tax return and pay appropriate taxes.
For “Personal Tax Rates,” the EAC says it is expected that an investor will need employees and while it is expected most would be local, often foreign labor is required for specialized roles. These employees will no doubt need to compare taxation rates with those currently paid to ensure they are earning an equivalent or better salary. As a result of the freezing of the American Samoa tax code to mirror the US tax code of December 31, 2000, benefits that have subsequently been enjoyed within the USA, such as reduced tax rates and family allowances, have not been passed on locally.
In addition, a more attractive personal tax code would benefit S-Corporations and sole/joint proprietors that all pay effective tax at the personal rates.
Frustrations were raised regarding the lack of resources available to the Tax Office to police non-filers and detailed statistics are not available. Based on known numbers of registered corporations as advised by the DOC, less than 40% are actually lodging tax returns and the Council believes all businesses should pay their correct tax by filing a tax return and supports any efforts in policing non-filers.
“This can be a further deterrent to new investment if it is deemed un-penalized common practice not to file, as investors like to operate in level playing fields,” the report says.
For withholding tax payments, the EAC says that despite the negativity that this tax causes potential investors, the reality is that many companies are not paying it, either out of: a lack of understanding of the tax act, a willful avoidance of the tax or, in the case of the dividend withholding tax, by not striking a dividend.
Based on estimates only for the 2007 tax year, approximately $7 million was raised from withholding tax, although it was stressed that the vast majority of this was paid by very few corporations and mainly related to tax on royalties, which is potentially more acceptable as these are tax deductible expenses and therefore not taxed by other means.
Based on this rough analysis, the EAC believes that the removal of the withholding tax on dividends and off-shore interest only will have minimal negative impact on tax revenue and a very positive impact on foreign investment.
|
