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Tax reform addressed by EAC in report submitted to Governor Togiola
The issue of tax reform is being addressed by the Economic Advisory Council in its report on policy reform submitted to Governor Togiola Tulafono. The report was prepared following meetings held with Tax Office representatives and the ASG Treasurer.
The report says that the Tax Office supports tax reform but it also expressed concerns regarding the change process and the ability of the existing Tax Office employees’ structure to police any changes. These concerns stem in part from the frustrations experienced with policing the existing tax code.
“There is little doubt that any tax reform that is beneficial to foreign investment will result in reduced taxation revenue,” the report says. The EAC believes that such a reduction will be temporary in nature, as it will be off-set in due course by increased investment resulting in increased tax revenue, even though there will no doubt be a dip in revenue that will need to be managed or financed.
According to the report, the tax revenue for 2007 was stronger than recent years and the Tax Office is doing all it can to maximize tax collection in the future to help fund a struggling government. Therefore, the Council believes that any proposed reduction in revenue will not be welcome and would need to be carefully managed.
“This should also be considered in light of the current economic climate,” the EAC wrote. As minimum wage hikes move forward, canneries continue to struggle to recruit employees and threaten to leave the territory, and the US economy enters a recession.
“The likelihood that tax revenues will reduce over the ensuing years as businesses struggle to maintain previous levels of profitability is real,” the report says.
According to the EAC, there was reasonable support from Tax Office for a gradual reduction in the top corporate tax rate and at the moment, only a handful of companies are paying the top corporate tax rate of 44%; however, the tax paid by these companies is approximately $10 million, compared to approximately $20 million from other forms of taxation including IET.
As a result, these corporations are paying a disproportionate contribution. The $10 million paid by the few includes tax paid at the lower scales and it is estimated that a reduction in the top corporate tax rate from 44% to 35% for example, may only result in a reduction in tax paid of $1.5-$2.5million.
(Specific details of the sources of tax revenue were sought from the Tax Office but were not provided due to disclosure issues. Furthermore, a discussion was held around privatization as a way to fund any potential shortfall in tax collection but the Tax Office was not comfortable with discussing the issue).
In addition, they did not want to see tax treaties form part of the report as the USA has spent years negotiating its existing treaties, and they were not comfortable with the territory being in a position to unilaterally adopt similar treaties.
The EAC has issued some recommendations for tax reform, one of which is an initial reduction in the corporate tax rates from 44% to perhaps 35%, with a subsequent review to progressively reduce them further in possibly 3–4 years when the impact of the initial reduction is known.
The Council believes that the corporate tax rate should more closely mirror that of personal taxpayers as well as being competitive within the South Pacific region. This should entail a reduction in the corporate tax rate to below 30% with the EAC recommending 25% as a reasonable target. “This would ensure competitiveness as well as a reasonable rate by taxpayers in turn leading to improved tax ethics,” the report says.
The report also recommends the removal of the unpopular dividend withholding tax as it is a double taxation being paid after payment of corporate taxes and it is not providing much revenue but is a major negative for foreign investment.
The Council also recommends the removal of the interest withholding tax, saying that it is not providing much revenue (if any) but it restricts the ability of non-US based corporations to raise money in a cost effective manner for the purposes of foreign investment here.
In addition, the EAC is also recommending the removal of the Tax Exemption Board. This includes cancellation of all existing exemptions provided, or a substantial revision of the tax exemption process. The Council acknowledges that exemption removals may need to be progressively introduced as some corporations are only able to remain competitive as a result of incentives currently in place; however, the Council finds that for this reason alone, the board should be disbanded as level playing fields should be encouraged at all times.
But should a revision of the tax exemption process be considered, the EAC says it should include extremely clear guidelines that must be met before an exemption is provided, such as:
• Required levels of investment or equity
• Required local employment levels
• A clearly defined and non-competitive market. This is essential to ensure that existing market players are not suddenly disadvantaged due to a new entrant with an attractive tax exemption.
• Clear evidence of economic benefit, or
• Clear evidence of an uneven playing field with the tax exemption request designed to rectify the anomaly.
Lastly, the Council believes that personal tax rates should be aligned to US tax rates at a maximum, possibly even lower. The Council understands the difficulty with this, as the US tax code is very complex and difficult to administer, which is probably the reason why the code was frozen in December 2000. Nevertheless, the American Samoan taxpayer is paying a rate higher than mainland USA as well as neighboring countries.
According to the EAC, traditionally lower salary levels relate to lower taxation but this is not occurring in American Samoa at present. Ideally, a simplified tax code is adopted, similar to other Pacific Island countries; however, this has not been researched in any great detail in the preparation of this report, as it is deemed out of scope.
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