86 Tables Table 2 Status of Pacific Island Countries’ Revenue Policy and Administration - 2012 17 Table 4 Donor financial support for taxation reform in the Pacific 29... 1 For the pur
Background
Background and use for topography 7
Commissioned by the Ministry of Foreign Affairs and Trade (MFAT), this overview documents tax reforms undertaken by Pacific Island countries (PICs) over the ten-year period from 2002 to 2012 It highlights the main policy and administrative reforms, outlining their implications for revenue mobilization, governance, and development across the PICs.
This background paper informs the design of a broader project to evaluate the lessons learned from a decade of government taxation collection reforms in the Pacific The evaluation will guide future work in the region and inform improvements to the design and delivery of taxation reform, helping to strengthen policy effectiveness and revenue administration across Pacific countries.
This topography serves as a versatile framework for evaluating tax policy and reform, helping to identify similarities and differences across policies These patterns guide the selection of relevant case studies, ensuring a structured comparative analysis The data analyzed in this paper reveal overall revenue trends and key macroeconomic indicators, which inform the assessment of reform effectiveness.
Objective of topography 7
• What tax revenue reform has been undertaken in the Pacific in the past ten years, and who has undertaken, funded and been a party to this work?
• What has been the nature of the reforms and what outcomes could have been intended?
• To what extent have these reforms led to tax systems that align with orthodox (or best principles) for an efficient and effective tax system?
• Where do gaps exist in reform work and how could they be addressed going forward?
Approach 7
To prepare this paper we conducted the following research:
• Statistical research from databases held by the Asia Development Bank (specifically, the Statistical Database System Online), United Nations (specifically, United Nations
Statistics Division National Accounts), and Central Intelligence Agency (specifically, the World Fact Book) and from the RA-FIT data collected by the IMF
• Interviews with the Centre Coordinator, present Revenue Advisor and former revenue advisors for the Pacific Financial Technical Advisory Centre (PFTAC)
In this work, 'The Pacific' refers to the PFTAC member countries: Cook Islands, Fiji, Kiribati, Federated States of Micronesia, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste, Tokelau, Tonga, Tuvalu, and Vanuatu This definition sets the geographic scope for analysis and guides comparisons and discussions across these economies.
• Web search for relevant literature on taxation reform
An email was sent to relevant personnel at MFAT (Ministry of Foreign Affairs and Trade) and the Australian Department of Foreign Affairs and Trade (DFAT) to identify relevant aid programmes and request information on the programmes identified.
• Direct approaches were made to New Zealand IRD and Customs for information on their programmes of assistance to Pacific Island countries (PICs).
Overview of contents 8 2 Overview of reforms
This paper is organised into the following chapters:
• Chapter 2 provides an overview of the reforms and some big picture analysis
• Chapter 3 provides an overview of the donor support provided for taxation reforms
• Chapter 4 provides a statistical overview of the economic position of all of the countries in 2002 and in 2012
• Chapters 5 to 8 provide a more in-depth analysis of each of the countries, including the reforms that have occurred in the period 2002-2012 and a summary of donor support for the reforms
Tax policy reform follows a standard package 9
Policy guidance at the time followed a standard package of reforms designed to cushion the anticipated drop in revenues from customs duties and to improve tax administration This ‘package,’ documented by the Sapere Research Group (Interview with Margaret Cotton, March 2013) and cited in Grandcolas (2004) and Cotton (2010), comprises a five-pronged approach aimed at strengthening fiscal sustainability and enhancing operational efficiency and effectiveness in revenue administration.
1 the introduction of a broad-based, low rate income tax, with few exemptions and discretions;
PICTA, the Pacific Island Countries Trade Agreement, came into force in April 2003 and governs trade in goods among its member countries, with services explicitly excluded The agreement states that exports from any member country will not be subjected to trade barriers when imported by another member It aimed to reduce tariffs to zero for all FICs by 2012, promoting freer intra-regional trade in goods.
“negative list” protection tariffs reduced to zero by 2016
2 the introduction of a broad-based value-added tax with few exemptions and discretions;
3 a reduction in reliance on trade tariffs and sales taxes; and
4 the introduction of comprehensive revenue administration legislation establishing and standardizing the rights and obligations of the revenue administration office, taxpayers, importers, and exporters
5 The development of systems and processes for tax administration that make proper and efficient use of withholding and third-party information and encourage maximum voluntary compliance with the tax regime
Improvements in tax administration and compliance are seen as integral to achieving reform
Efforts to modernise revenue IT systems are at the core of tax administration reform, alongside a move toward risk-based compliance strategies and an increased focus on large taxpayers, albeit with a shift away from dedicated large taxpayer units The reforms also introduce self‑assessment and allow for cash‑based assessment, all designed to strengthen administration These changes are supported by capacity-building initiatives within the tax authority to sustain and implement the reforms.
Standard package consistent with best practice 10
The “standard package” has long been recognized as consistent with orthodox or best-practice tax policy and continues to be viewed as such at the start of the evaluation period and beyond Tax-policy thinking has remained largely stable since 2002, but in recent years taxation reform has increasingly been seen as a catalyst for more responsive and accountable government and for expanding state capacity Concepts like sustainability are increasingly reflected in tax policy documents Over the past few decades the treatment of the family unit for taxation has attracted much more attention in tax policy design Recent policy literature underscores the difficulty and delicacy of achieving a suitable and coherent set of tax policies For a full articulation of the advances in taxation theory over the past decades, see Auerbach (2010).
Recent international reviews highlight core tax principles: broad revenue bases and minimal distortion to individuals’ choices, with a focus on not undermining resource allocation The Mirrlees review (UK), the Henry review (Australia), and New Zealand’s Tax Working Group emphasize coherence, sustainability, and intuitive sensibility, and advocate concentrating revenue-raising on four tax bases—personal income, business income, private consumption, and economic rents from natural resources and land—while allowing other taxes only when precisely targeted to correct market failures (for example, smoking) A common thread across these analyses is tax simplification, such as reducing the number of income tax brackets and streamlining deductions and offsets.
Table 1 The objectives behind the ‘standard package’
Taxation and government charges finance public goods and services and enable income redistribution, but most taxes distort production and consumption decisions, creating inefficiencies in resource allocation that exceed the revenue they raise The excess burden of taxation, also called the distortionary cost or deadweight loss, is the economic loss to society that arises from a tax beyond the revenue collected When a tax targets a good, higher prices reduce demand and lower the price received by producers, leading to a smaller quantity supplied; the resulting loss in welfare for consumers and producers—not captured by government revenue—embodies the excess burden.
Taxes and charges affect the distribution of income and wealth, acting as policy instruments for redistribution in line with government value judgments The resulting impacts have driven economists and social philosophers to develop principles and criteria for the design and assessment of taxation systems Since Adam Smith introduced the maxims of taxation, economists and policymakers have refined these canons into a core set of taxation principles that are widely accepted by professionals and governments alike For example, the New Zealand Inland Revenue Department (IRD), in its briefing to the incoming Minister after the Victoria University Tax Working Group report, articulated a series of criteria for tax design—recognizing that these criteria can be conflicting.
• Efficiency and growth: Taxes should be efficient and minimise impediments to economic growth
Equity and fairness are central to a well-designed tax system Horizontal equity ensures that taxpayers in similar circumstances are treated alike, while vertical equity requires that those with greater ability to pay contribute proportionally more By aligning tax rules with these principles, policy-makers create a system that is fair across income levels and transparent, balancing revenue needs with the burden placed on different taxpayers.
• Revenue integrity: The tax system should minimise opportunities for tax avoidance and arbitrage and provide a sustainable revenue base for the Government
• Fiscal adequacy: The Government should raise sufficient revenue to meet its requirements
• Compliance and administration costs: These should be kept to a minimum
• Coherence: Individual reform options should make sense in the context of the entire tax system While a particular measure may seem sensible when viewed in isolation, implementing the proposal may not be desirable given the tax system as a whole
Efficiency and growth are central concerns because economists focus on how resources are allocated; misallocation can dampen aggregate income growth and welfare When resources are diverted from more profitable and sustainable activities to less viable ones, overall economic growth declines In the imperfect real world, perfect efficiency is unattainable, so the aim is to minimize aggregate inefficiencies within the constraints that exist Practically, this means weighing alternative scenarios and choosing the option with the better economic outcome The field that studies designing tax systems under these imperfect conditions is known as optimal taxation theory.
Most governments recognize that any efficiency gains from tax changes must be weighed against the equity outcomes of altering the tax mix Tax and social policy shifts can modify who bears the tax burden and the effective marginal tax rates facing different groups, which in turn affects labor supply decisions These equity issues should be considered in policy design, but objectively assessing fairness is not possible, because judging the detriment to income-redistributed groups against the benefits to others is a subjective value judgement outside economics Governments operate a tax-transfer system that redistributes income, often justifying this intervention as a way to reduce poverty and alleviate suffering among the poor.
Keeping compliance costs to a minimum is beneficial because resources spent on compliance are diverted from productive uses, imposing costs on the productive system Low-compliance-cost systems tend to be flexible and simple, with flexibility enabling durable structural features that withstand a changing policy context while allowing governments to respond as needed Simplicity in tax policy means internal consistency, ensuring rules in one part of the system do not contradict rules in another, which helps maintain a coherent and efficient overall framework.
Coherence is a means to satisfy the broader objectives outlined above, rather than an end in itself The importance of the coherence criterion is emphasised by the Mirrlees Review, which highlights its role as a key tool for achieving those objectives.
An effective tax and benefits system should rest on a coherent structure shaped by clearly defined economic principles, ensuring consistency and predictability for individuals and businesses It should articulate a compelling vision of the ideal framework in which all elements fit together seamlessly and distortions are minimized or eliminated, creating a fair, efficient, and transparent policy environment.
A coherent tax system fits its components together Globally, governments commonly tax personal income using a graduated schedule of marginal rates, and for this system to remain coherent the statutory personal income tax rates must be designed in harmony with the broader tax framework, ensuring transparency, consistency, and fiscal sustainability while minimizing distortions and preserving fairness across income levels.
A progressive tax system loses coherence when it can be undermined by loopholes that let individuals shelter income in trusts or corporate structures It also loses coherence when the tax treatment of savings and investments varies arbitrarily across different forms, leading to unequal outcomes and weakening tax equity and efficiency.
Revenue stability is often proposed as an additional assessment criterion alongside the core principles, but it has not been endorsed in public economics literature because it lacks a solid analytical foundation There can be trade-offs between revenue stability and economic efficiency; for example, a government may sacrifice efficiency to achieve revenue stability by choosing revenue- and production-based royalty systems instead of regimes based on economic profits or resource rents.
Particularly strong push for VAT 12
There has been a pronounced push among Pacific Island Countries (PICs) to implement a value-added tax (VAT) as a way to counteract the revenue impact of countries phasing out import tariffs and duties Proponents argue that VAT broadens the tax base and helps stabilize public finances as tariff revenues decline, while concerns about administrative capacity and living costs are acknowledged This trend signals a broader shift toward consumption-based taxation in small island economies seeking fiscal resilience amid trade liberalization.
The “push” to reform tax policy began in the early 2000s and was a clear feature of IMF communications, and by extension PFTAC These sources show that raising revenue from the tax base was not the principal motive behind the changes Preliminary studies suggested that replacing import tariffs and duties with a value-added tax (VAT) would have only a minimal net effect on revenue Instead, the main objective was administrative improvement, with VAT regarded as a lever to help Pacific Island Countries (PICs) achieve substantial structural adjustments (Grandcolas, 2004) Those seeking reform saw VAT as a tool to modernize tax administration and advance broader economic restructuring.
(including PFTAC) felt that a VAT would be the best possible catalyst to modernize the tax administration and therefore to improve its efficiency (Grandcolas, 2004)
Value-added tax (VAT) provides the essential framework to systematically address weaknesses in tax administration As a result, VAT implementation takes time, reflecting the period needed to train the personnel who will administer the system and, where needed, to introduce a culture of bookkeeping in the private sector.
Several other arguments were given in favour of VAT (Grandcolas, 2004):
At that time, five Pacific Island Countries—Papua New Guinea, Fiji, Samoa, Vanuatu, and the Cook Islands—had implemented a single-rate value-added tax, and VAT had become a major source of revenue in the region.
International experience from roughly 120 countries that have adopted value-added tax shows that most countries have implemented VAT successfully, though the experience is inevitably mixed VAT has played a central role in generating tax revenue.
120 countries that had implemented a VAT by 2001, it formed an average of 27% of total tax revenue or of 5% of GDP (Ebrill et al, 2001);
Small island economies were seen as likely to realize strong VAT performance in both revenue and administration because international trade dominates their economies The scale of import activity enables VAT collection at the border, while geographical remoteness helps to insulate the tax base from smuggling to a degree Using the border as the starting point for VAT withholding provides a practical mechanism to secure import VAT, a crucial step for effective collection throughout the production and distribution chain and for the overall success of the VAT system.
Overall, proponents argued that introducing value-added tax (VAT) would create a major opportunity to reform tax administration in the Pacific Island Countries (PICs) VAT was seen as a catalyst for change: first, within tax collection agencies by driving the adoption of information technology, modernizing organizational structures, and updating audit methods; and second, among taxpayers by fostering a culture of meticulous record-keeping, implementing self-assessment, and boosting voluntary compliance.
Broadening the tax base and lowering rates 13
Several PICs have adopted a package approach to broaden the tax base and lower income tax rates, with the aim of stimulating investment or simplifying the regime Between 2002 and 2012, many of these countries lowered personal income taxes by increasing the tax-free threshold and reducing marginal rates Corporate tax rates for both domestic and non-resident companies have been reduced across Polynesian countries (Samoa, Cook Islands, Tonga), as well as in Fiji and Timor Leste For example, Samoa reduced its corporate tax rate from 29% to 27% in 2007, and in 2008 Tonga introduced a corporate tax rate of 25% for both domestic and foreign companies, replacing differential rates of 37–40% for foreign companies and 15–30% for domestic ones.
2012 Fiji cut the corporate tax rate from 28% to 20% In 2008 Timor-Leste reduced the corporate income tax rate from 30% to 10%
The income tax base in these regions is inherently small, since a sizable portion of the population works in the informal economy, relies on subsistence agriculture, or remains unemployed Consequently, there is limited corporate and personal income available to tax, which complicates revenue collection and tax policy design.
Adoption of the ‘standard package’ complete in some regions,
complete in some regions, minimal in others
The adoption of this ‘package’ varies by region, according to PFTAC’s former revenue advisor (Sapere Research Group, Interview with Margaret Cotton, March 2013) In
Polynesia has largely adopted the policy reform package, but tax administration quality varies, with current efforts focused on strengthening administration across Polynesian countries Melanesia shows limited substantive policy reform due to its larger size, fragmentation, and political instability, so the emphasis has shifted to feasible administrative improvements Micronesia presents a mixed picture: the reform package is accepted and the FSM, RMI, and Kiribati have well-advanced policy agendas, but turning those into substantive reforms remains challenging and substantial work is needed to improve administrative practices Palau has not pursued broad policy reforms, instead prioritising the modernisation of tax administration.
According to PFTAC’s FY2012 annual report, its revenue policy and administration technical assistance priorities center on VAT implementation, strengthening compliance strategies, and advancing IT strategies The report also notes that, given fiscal adjustment pressures facing many Pacific Island Countries (PICs), tax policy assistance—including in the natural resources sector—has been given high priority.
Taxes targeting tourists not part of the package 14
Some PICs have introduced levies on foreign tourists, including hotel accommodation taxes and departure taxes observed in Fiji and Vanuatu over the past decade While such taxes may be politically popular because they shift the tax burden to non‑voting foreigners, PFTAC and IMF do not support these levies, arguing that they raise compliance costs, complicate revenue administration, and dilute the focus of revenue departments (PFTAC & IMF, 2010, p 20) They also flag that tourism taxes can erode a destination’s competitiveness.
Many countries looking to mining and resource taxes 14
Over the past decade several PICs have put in place regimes for mining and resource extraction, largely in anticipation of such activities In 2003 only Papua New Guinea and
Fiji 3 , with established mining industries, had regimes in place to specifically tax mining Since then, Palau has implemented a petroleum tax, Nauru is considering changes to capture the extraction phases for phosphates, and the Cook Islands is currently in process of implementing an underwater mineral resources tax legislative regime, on advice from
PFTAC Samoa and Tonga are in the process of preparing for resource exploration and extraction
Changes to resource tax policy and administration pose challenges for revenue departments, as corporate players in mining and extraction are often more sophisticated than local tax officials To address this gap, PFTAC has recently supported moves to establish horizontal skills transfer among the revenue departments of PICs, with a focus on resource taxes to strengthen policy implementation and tax administration.
Improvements sought to tax administration and compliance 15
Improvements in tax administration and compliance have been sought in most of the PICs over the past decade In particular, there has been a focus on:
• moves to modernise revenue IT systems across the region;
• moves towards risk-based compliance strategies;
• increased emphasis on large tax payers (but a shift away from large taxpayer ‘units’);
• introduction of self-assessment capability; and
• capacity building for tax authority
Revenue departments in the PICs continue to face capacity constraints, as many high-value taxpayers are corporate entities that rely on computer-based accounting systems This shift places pressure on Revenue Office staff who often lack experience with such systems As a result, administrative strengthening is frequently paired with capacity-building initiatives for the tax authority to improve efficiency, compliance, and revenue collection.
Modern tax systems impose substantial requirements on the private sector for registering for tax, filing returns, and self-assessing, so tax design must reflect the private sector’s capacity to meet these tasks In many regions, subsistence agriculture remains significant, making it unrealistic to expect compliance patterns typical of developed economies Consequently, tax reforms have introduced relatively high GST (or its equivalent) registration thresholds so only a small share of businesses face the compliance burden Some countries, such as Tonga, are moving toward further simplification to accommodate capacity constraints.
Under the Vatukoula agreement, in force since 1983, concessions granted to the mine owner shape a tax regime that many observers consider effectively tax-free for Emperor Gold Mines’ large-scale mining operations in Fiji By contrast, the tax framework for micro-enterprises is shifting toward presumptive taxation, with options such as lump-sum taxes or taxes based on turnover.
Pressure to meet international standards on tax transparency 16
In 2000, the OECD's Harmful Tax Practices project identified six Pacific Island jurisdictions—Cook Islands, Marshall Islands, Nauru, Niue, Samoa, and Vanuatu—as tax havens The initiative shifted in 2001 to emphasize transparency and the exchange of information By 2003, New Zealand and Australia had established a partnering arrangement to negotiate tax information exchange agreements (TIEAs), with New Zealand taking the lead for the Cook Islands, Niue, and Samoa, and Australia taking the lead for the Marshall Islands, Nauru, and Vanuatu A central objective was to secure Pacific participation in TIEAs and to help these jurisdictions meet international transparency obligations by building a regional TIEA network.
New Zealand was the first country to conclude TIEAs with the Cook Islands (in 2009), Samoa (in 2010), and Niue (last year) New Zealand also concluded TIEAs with the
New Zealand, with the Cook Islands, the Marshall Islands and Samoa, also concluded Supplementary Agreements that included a limited number of DTA-style Articles (covering Government Service, Pensions and Students) and established a mutual agreement procedure for transfer pricing adjustments In 2010, the Marshall Islands and Vanuatu joined these efforts While some negotiations were conducted by correspondence, in addition to the goodwill visits referred to above, face-to-face negotiations were required in the Marshall Islands (2008) and Samoa (2009).
Long term advisors recruited 16
Over the past two to three years, there has been a shift toward recruiting long-term revenue administration advisors from outside the PIC, filling in-line roles within revenue departments to strengthen capacity in tax administration and compliance These advisors provide sustained support for reform efforts by embedding expertise directly within government revenue offices Long-term advisors are now active in Samoa, Nauru, Kiribati, FSM, RMI, Tuvalu, Timor Leste, Solomon Islands, PNG, and Vanuatu Before this shift, reforms to policy and administration were staffed by intermittent technical advisors (TAs), delivering episodic guidance rather than ongoing implementation support.
Donor funding makes it possible for resident revenue advisors to operate in multiple countries, delivering essential day-to-day support to revenue administrations and underpinning fundamental tax reform in small economies PFTAC supports this process by identifying opportunities, drafting terms of reference, helping to select revenue advisors, and serving as a strategic resource once advisors are in place (PFTAC 2012, p.13).
4 Kiribati, Tuvalu, Tonga, Vanuatu, RMI and FSM had resident advisors appointed in 2012.
Tax policy remains highly diverse across the region 17
Tax policy features across the Pacific Island Countries (PICs) have converged since 2002, reflecting a seemingly uniform package of reforms Yet a substantial degree of diversity remains, making the overall picture hard to grasp at first glance This diversity can be understood more clearly by broadly grouping the PICs geographically, which reveals shared directions alongside country-specific variations within the reform framework.
Generally speaking, the American-influenced Micronesian countries (the RMI, the FSM, and
Palau’s tax framework remains rudimentary, leaning on a mix of gross revenue tax and presumptive tax in place of a conventional business income tax, while import duties and payroll taxes sustain a large share of public revenue The more Anglo-Australian influenced Micronesian countries, Kiribati and Nauru, share this reliance on payroll taxes and trade tariffs, though Kiribati retains a simple business income tax and has recently introduced a VAT into legislation.
New Zealand influenced Polynesian countries (the Cook Islands, Niue, Samoa, Tokelau,
Across Melanesia, Tonga and Tuvalu have moved toward more comprehensive tax systems that include business income taxes, value-added tax (VAT), and payroll taxes, reducing reliance on trade tariffs The Melanesian region is perhaps the most diverse in terms of revenue frameworks In Fiji and Papua New Guinea, there are comprehensive policy frameworks, and each country has established its revenue authority as an independent agency.
Solomon Islands has a plethora of goods and sales taxes and a rudimentary income tax, while
Vanuatu operates as an offshore investment centre and relies primarily on VAT and trade taxes for revenue Among the Pacific Island Countries (PICs), Tonga has implemented comprehensive revenue administration legislation that consolidates and standardizes the powers and obligations of taxpayers, importers and exporters, and the revenue administration office Kiribati has also recently improved its revenue administration legislation, signaling ongoing reforms in tax administration across the PICs.
The table below outlines the high level of diversity of the Pacific’s revenue policy framework
Table 2 Status of Pacific Island Countries’ Revenue Policy and Administration - 2012
Income Tax Indirect Tax Administration Import s
Legisla tion before Parlia ment
FSM stands for Federated States of Micronesia, and RMI stands for the Republic of the Marshall Islands In Tonga, the revenue agency operates independently of the Ministry of Finance, yet the chief commissioner also serves as the Minister of Finance.
Source: Cotton, 2010 with amendments to update to 2012 by Sapere Research Group
Snapshot assessment of Pacific tax systems 18
A baseline assessment by PFTAC (2011, pp 14–15) evaluated tax administrations across the region against nine core components of tax administration—legislation framework, administrative framework, governance and accountabilities, corporate strategies, core processes, support processes, operating model, automation, and human resources The study found sub-optimal performance across all core components, with the four most problematic areas being governance and accountabilities, corporate strategies, legislation Frameworks, and automation.
Figure 1 Unfortunately, no such ranking of tax administrations existed in 2003 (or indeed, prior to 2011) so no ready comparison to earlier periods can be made 5
2.13.1 About the baseline assessment tool
The baseline assessment was a self‑assessed snapshot of the state of a tax administration, designed with the Pacific Islands in mind In very small Pacific tax administrations, an element may be considered present if it is available within the wider Government administration, even if it is not housed within the tax agency itself; for example, a tax administration may rely on IT support from other parts of Government rather than having in‑house IT capability, in which case IT support is still counted as present The baseline assessment takes into account nine components, described more fully below.
• Legislation Framework: A comprehensive domestic tax base with modern (simple and clear) legislation, low tax rates and few exemptions or discretions
An administration framework for tax administration provides a comprehensive, efficient operating environment that protects taxpayers' rights and clearly defines the powers of the tax authority It uses a self-assessment system and establishes a spectrum of offences and penalties to deter non-compliance and support effective enforcement.
Governance and accountability hinge on an environment of integrity that ensures transparency of taxpayer rights and the required conduct of staff, supported by robust mechanisms to safeguard the integrity of systems, procedures, and practices, and complemented by regular public reporting of organizational goals, plans, efforts, and outcomes aligned with agreed performance outcomes.
• Corporate Strategies: A comprehensive strategy set including business plans, compliance improvement, HR and IT strategies that provide for ongoing development and performance improvement across the operations of the tax administration
Core processes are streamlined to ensure timely collection of revenue due, with rigorous verification of liabilities driven by revenue risk assessments and efficient dispute resolution This framework is supported by a broad range of public education channels that inform taxpayers, enabling voluntary compliance with tax obligations.
Interviews with current and former PFTAC staff indicate that Palau has recently achieved substantial improvements in its tax administration, driven in part by strong political leadership on the issue In 2013, Kiribati made improvements to its IT infrastructure and legislative framework, with additional enhancements anticipated.
6 Although the framework was designed with Pacific Island tax administrations in mind, it also draws on several internationally recognized reference points, including the IMF Topical Trust Fund “Tax Policy and Administration” program document (2010), the European Commission Fiscal Blueprints “A Path to a Robust, Modern and Efficient Tax Administration” (2007), the Inter‑American Centre of Tax Administrations’ 2002 Report on Tax and Customs Indicators, and relevant World Bank publications.
Expenditure Financial Accountability Performance Measurement Framework 2005
• Support Processes: A wide range of support processes aimed at enabling the efficient and effective operation of the core processes of the tax administration
• Operating Model: The operating model aligns organizational activities with taxpayer needs and the revenue risks presented by taxpayer segments, balanced against the size of the organization
• Automation: Automation underpins all core processes, e-initiatives are utilized, and timely accurate reporting is available
Effective human resources management ensures optimum staffing levels and timely, efficient recruitment for the tax administration It offers incentives that reward high performance while promoting non-corrupt behavior among tax officers, reinforcing ethics across the service It also focuses on developing the skills and professionalism needed to sustain continuous improvements in tax administration, enabling the organization to adapt to evolving demands, regulations, and technologies Together, these HR practices align staffing, recruitment, performance incentives, integrity, and professional development to create a more efficient, transparent, and capable tax system.
Figure 1 Revenue Administration Regional Baseline Assessment 2010
Summary of a decade of reforms 21
The accompanying table briefly compares the status of reforms in 2002 with the present day for the Pacific Island Countries (PICs) It shows, at a high level, that by 2013 there were gaps in reform work across all PICs, and no country had achieved full reform; as with any jurisdiction, changes to taxation policy and tax administration remain ongoing A fuller description of the reforms undertaken in each country, and the likely reform agenda going forward, is provided in the chapters that follow.
Table 3 Taxation in the PICs, then and now
•The Pacific Island Countries Trade Agreement
(PICTA) agreement recently ratified and in force
The Pacific region trade agreement is designed to foster and strengthen cross-border commerce by removing tariff and non-tariff barriers to trade, thereby improving market access and regional economic integration As tariffs are reduced or eliminated, governments would need to identify alternative revenue sources to offset the loss of duties, underscoring the revenue implications of tariff liberalization.
•The OECD had recently identified seven Pacific Island countries as meeting the technical criteria for being tax havens: the Cook Islands, Marshall Islands,
Nauru, Niue, Samoa, Tonga and Vanuatu
•The IMF and the newly established regional agency
(PFTAC) were actively promoting a modernisation agenda consistent with the ‘package’ outlined above
•Papua New Guinea (PNG), Fiji, Samoa, Vanuatu and
Cook Islands had already implemented a VAT with a single rate in the 1990s By 2003 most other PICs
(namely Kiribati, Tonga, Tuvalu, the Federates States of Micronesia (FSM), the Republic of Marshall Islands
(RMI) and Niue) had requested additional information on the functioning of the VAT system
Tax administration worldwide was recognized as weak and in need of reform to meet upcoming challenges By 2002, a few countries had set a threshold to limit the tax net to a number of taxpayers compatible with their administrative capacity, but most had not Only a handful of tax administrations had automated systems, including the Cook Islands.
Samoa and Vanuatu which implemented RMS in the late 1990s Source: www.pftac.org
Across Polynesia, most countries have undertaken major policy reforms, with Tokelau and the Cook Islands as exceptions; the Cook Islands already had most of its substantive policy settings in place and focused largely on policy implementation.
‘tweaks’ and improving its tax administration) Tuvalu has simplified its Income tax regime, reduced import duties and improved its administration Tonga has introduced the Consumption Tax (VAT) and overhauled its income tax regime Substantial administrative improvements have been made Like Tonga, Niue has introduced a Consumption Tax (VAT) and made changes to its income tax arrangements Samoa (which already had a VAT in
2002) has undertaken substantial improvements to its administrative settings The focus in Polynesia now is on improving administration
•The Melanesian countries have, in general, sought less policy reform than the other countries Fiji, Vanuatu and PNG already had VAT in place in 2002 so the focus in these countries was on improving administrative capacity where feasible The Solomon Islands has targeted administrative reform Fiji is considered to be a regional leader and has focused on modernising income tax legislation, and has done preparation for the implementation of PAYE as a final tax PNG has reactivated its Additional Profits Tax for designated gas projects, has reduced its border taxes and has had support to improve its administration operations
Progress on tax reform in Micronesia is mixed Kiribati has recently passed legislation introducing a value-added tax and lowering trade taxes, and it has implemented a PAYE final regime for personal income tax while pursuing a modernization agenda Palau has not yet implemented policy reforms but is focusing on improving and modernizing tax administration Nauru has prioritized revenue collection and the establishment of a revenue office The Marshall Islands is reforming its system by replacing the gross revenue tax and import duties with a net income tax and a consumption tax or value-added tax, and income tax thresholds have been changed.
No real reforms have been made in FSM yet, despite a reform agenda being in place for a long time There have been administrative changes of a relatively minor nature, however.
Emerging findings 22 3 Donor support for tax reform
In brief, this chapter contains the following findings:
Tax reform has often been driven by international pressure to reduce customs duties and tariffs and to shift toward a more domestic tax orientation, with an emphasis on improving tax transparency The motivation behind these reforms has rarely, if ever, come from equity concerns or from a natural evolution of state-building Without the influence of the international community, such reforms would be unlikely to occur.
Tax policy reform typically follows a standard package: a broad-based, low-rate income tax with few exemptions and minimal discretions; a broad-based value-added tax with limited exemptions and discretions; reduced reliance on trade tariffs and sales taxes; and comprehensive revenue administration legislation that clearly establishes and standardizes the rights and obligations of the revenue office, taxpayers, importers, and exporters It also calls for tax administration systems and processes that ensure proper and efficient use of withholding and third-party information, supporting maximum voluntary compliance with the tax regime.
• The ‘package’ is broadly consistent with orthodox or ‘best principles’ tax policy
Capacity constraints in the private sector across the Pacific Island Countries have shaped tax reforms, including relatively high GST registration thresholds to limit compliance burdens to a smaller share of businesses In addition, some PICs, such as Tonga, are moving toward presumptive tax regimes for micro-enterprises, opting for lump-sum taxes or taxes based on turnover to simplify administration and support small businesses.
Although there is broad, widely shared guidance on reforming revenue policy and administration, many Pacific countries still struggle to implement these reforms; furthermore, the adoption of the reform package varies markedly by region.
Across Pacific Island Countries (PICs), there has been convergence toward shifting the tax mix away from import tariffs and duties toward goods and services taxes, notably GSTs and VATs The push to introduce VAT was a common feature in the early-2000s recommendations from PFTAC and the IMF, seen as a pathway to achieve substantial structural adjustments and a transition to domestic taxation.
Pacific Island countries have moved away from import tariffs and duties, accompanied by broader trade liberalisation, while tax policy has shifted toward lower personal income taxes through higher tax-free thresholds and reduced marginal rates, and reduced corporate tax rates However, some PICs have introduced levies or taxes on foreign tourists, which can undermine destination competitiveness A major challenge for tax regimes across PICs is the growing activity of mining and other extractive industries, which affects revenue dynamics and policy considerations.
• There have also been improvements in tax administration and compliance in most of the PICs over the past decade, although capacity issues remain
Over the last two to three years, there has been a shift toward recruiting long-term technical advisors, typically sourced from Australia, New Zealand, or the United States, who fill in-line roles within revenue departments.
3 Donor support for tax reform
Overview 23
Considerable donor support has been provided for tax reform in the Pacific over the period
2002 – 2012 7 : we estimate that something in the vicinity of NZ $55 million was spent on reform programmes in this time by New Zealand, Australia and other donors in that period
Technical assistance for reform is provided by a range of agencies, with the Pacific Financial Technical Assistance Centre (PFTAC) as the leading source of tax-related guidance Advisors also come from Australia and New Zealand revenue agencies, the Asian Development Bank, the World Customs Organization, the Oceania Customs Organisation, and the Pacific Islands Forum Secretariat.
From 2002 to 2012, donors invested approximately NZD 8.1 million in PFTAC’s Revenue Administration activities, averaging about NZD 0.8–1.2 million per year This funding accounted for roughly 15% of the total spend on tax reform Details on how PFTAC uses this investment are provided in section 3.3.
PFTAC typically offers complementary technical assistance to supplement other support channels, a practice not codified as policy In recent years, in the Cook Islands, Nauru, Niue, and the Solomon Islands, where other advisors have been present, PFTAC technical advisors have been used less.
The following table captures the main areas of reform work, according to whether it has been led by PFTAC or through some other programme
Other donor support (2002 -2012) – Estimated at $47 million)
In 2012 and 2013 PFTAC took the lead in a comprehensive review of the Cook
Islands tax system modernization has progressed, with authorities recently receiving technical assistance to develop a draft revenue policy framework for future seabed mining operations This support is aimed at implementing the recommendations in the coming years, aligning fiscal policy with the opportunities and governance needs of offshore mining.
Support estimated at