The Cook Islands Tax Review

Transcription

1 The Cook Islands Tax Review Explanatory Paper The Cook Islands Ministry of Finance and Economic Management February 2013

2 Contents 1. What is the Tax Review about The Role of the Tax System What Makes a Good Tax System What are the taxes that apply in the Cook Islands... 5 Import Levies... 5 Value Added Tax... 5 Income Tax... 6 Company Tax... 8 Withholding Tax... 8 Trust Income Tax... 8 Departure Tax How much do these taxes raise Some facts on taxes Tax Compliance in the Cook Islands Why is there a need for compliance? What are the consequences for non compliance? International Comparisons Comparative Rates of Income Tax Comparative rates of Consumption Taxes (VAT/GST) Comparative rates of Company Taxes Comparative rates of Departure Taxes and equivalent References

3 1. What is the Tax Review about At the time of announcing the 2012/13 Budget, the Honourable Mark Brown, Minister for Finance outlined the desire of the Government to undertake a review the current taxation system and rates prevailing in the Cook Islands. In a recent press statement the Minister outlined that the exercise is aimed to be revenue neutral, we are not about raising the overall taxation burden but ensuring that the burden is shared equitably Additionally, the Minister personally requested that the IMF team review the current processes around compliance management. I and other Ministers often get correspondence and representations in relation to the compliance regime, and these seem to be getting more frequent. People are obliged to pay their taxes, I fully agree with that, but there is a significant compliance issue which MFEM does have to overcome. At the time of producing the 2012/13 Budget there was approximately $24 million in outstanding taxes and additional taxes owing to the Crown, much of it dating back many years. The Minister added As the Minister for Finance I recognise that we do have to recoup monies but I am also concerned that we don t overwhelm businesses with a massive burden that they are just unable to meet. I would like to have an independent body to come and look at the current legislative and administrative approach and the associated recovery measures and ascertain whether they are appropriate The review will be conducted by staff from the International Monetary Fund s Pacific Finance Technical Assistance Centre, supported by a local practitioner and the Ministry of Finance and Economic Management, it will: Review macro and micro economic data to assess the changes in revenue collection over the past five years, including those that can be attributable to changes in tax bases, changes in tax rates and changes in compliance. Compare Cook Islands revenue performance and policies, including tax rates, coverage of economic sectors and exemptions, with similar economies to contribute to a realistic assessment of the revenue potential of the Cooks Islands tax system. Review the policy framework to identify options for: strengthening the revenue base; removing exemptions and concessions (or improving the transparency of concessions and exemptions); or altering rates and thresholds. Review the allocative effects/distortions caused by the tax system, including (but not limited to) the incentives facing individuals or companies and make recommendations on potential improvements. Review and assess the business processes, strategic planning and core operations of the tax administration and identify weaknesses in tax administration procedures, particularly in connection with compliance management and its linkage with strategic planning. Review and assess stakeholder relations management and identify areas for improving the strategy with a view of strengthening compliance. Review and assess the general adequacy of the main support functions, including information technology and human resource capacity, to support an effective and efficient administration of the tax system. Provide an implementation timeline for the recommended policy and administration reforms. The timeline will identify the actions which the Government of Cook Islands will need to undertake without further assistance, and which actions will need external assistance to help to implement. Finally, in identifying future technical assistance needs, the review would consider the effectiveness of prior technical assistance and how TA can be better applied to achieve the desired outcomes. 2

4 2. The Role of the Tax System What Makes a Good Tax System The often quoted proverb that there is nothing more certain in life than death and taxes is attributed to many people, the most famous of whom is Benjamin Franklin who in a letter to a close friend Jean Baptiste Leroy (whom he had made whilst being the US ambassador in France) was commenting on his hopes that the newly adopted constitution of the United States would be a durable document, he wrote Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes. i The point of Benjamin Franklin was that taxes were not bad, but it was inherent that they would always be around when there was an organised form of Government. Any civilised society with an organised system of Government requires a tax base from which it can draw on to fund the services, investments and provide the regulatory environment which is required of them by the community that elects them. There is often a negative reaction to tax, most particularly from those that have to pay it. Governments have the unenviable task of deciding where they impose the taxation burden. If there was no tax system, or a minimalist one, then either the Government would not provide the service (or make the capital investment) at all, or, impose a charge on the consumer of the service or good. Whilst user charging is an acceptable form of managing service delivery there are limits to how far user charging can go. This is particularly where the provision of a public good is involved, for example legal processes or policing services where a specific consumer cannot be reliably identified. Public goods could also be assume to take in service areas such as health and education where there is an expected universal standard but for which not everyone has the capacity to pay. On the other hand it also needs to be recognised that taxes can, and do impose economic costs across an economy. Firstly, there is the obvious direct cost of actually paying the tax by the taxpayer who may believe they are able to spend, save or invest the money that has been taxed in a better way then the Government does. Secondly, the imposition of a tax will encourage individuals or firms to make decisions that they may not have made in the absence of the tax. Such costs could include the cost of misallocating resources and the administrative costs of the Government who collects the tax and the compliance costs of those paying the tax. There is no optimal tax system, they are all different across the world and across different tiers of Government. The tax system which is applied in one country cannot just be adopted into another, it must take into account local circumstances. The Cook Islands taxes a narrow base which is essentially on the income of individuals and companies, imports and consumption. Other countries have adopted a broader tax base, imposing taxes on capital gains, property, payroll and the workforce, financial and capital transactions and inheritances and gifts. In other countries where there are different tiers of government there may also be a division of how these taxes are imposed and collected amongst the tiers of government. The Cook Islands needs to have a system which suits its economic circumstances, culture, and it s own values of what comprises an equitable, efficient and effective tax system. Nevertheless, the Cook Islands operates in a global economy, the Cook Islands is a small economy with a reliance on foreign capital for investment and a need for labour to service its service industries such as tourism. In this sense the Cook Islands cannot simply establish taxes and rates in total ignorance of what happens in other jurisdictions, particularly those with which it has strong economic links such as New Zealand and Australia. 3

5 It is critical that the tax system takes into account the overall tax environment in both those countries and other major trading partners such as Fiji which is a major source of labour for the Cook Islands major industry of tourism. The fact that both labour and capital can move easily and quickly between the Cook Islands, New Zealand and Australia means that the tax rates may not be able to significantly deviate with the rates which apply in those jurisdictions. There are some basic principles which apply to a good tax system. The recent Report of the Victoria University of Wellington Tax Working Group listed these as follows: ii Efficiency and growth: Taxes should be efficient minimising as far as possible impediments to economic growth. That is, the tax system should avoid unnecessarily distorting the use of resources (e.g. causing biases toward one form of investment versus another) and imposing heavy costs on individuals and firms. An important question is how various taxes affect key economic and social variables such as employment, investment, savings, productivity growth and international competitiveness. Equity and fairness: The tax system should be fair. The burden of taxes differs across individuals and businesses depending on which bases and rates are adopted. Assessment of both vertical equity (the relative position of those on different income levels or in different circumstances) and horizontal equity (the consistent treatment of those at similar income levels, or similar circumstances) is important. The time frame is also important, including how equity compares over peoples life times. Revenue integrity: The tax system should be sustainable over time, minimise opportunities for tax avoidance and arbitrage, and provide a sustainable revenue base for government. Fiscal cost: Tax reforms need to be affordable given fiscal constraints. Compliance and administration cost: The tax system should be as simple and low cost as possible for taxpayers to comply with and for the Inland Revenue Department to administer. 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. The determination of what the appropriate rates of tax which should apply in the Cook Islands Government needs to factor these principles into account. 4

6 3. What are the taxes that apply in the Cook Islands The Cook Islands has a simple tax system governed by the following Acts: Income Tax Act 1997; Value Added Tax Act 1997; Customs Revenue and Border Protection Act 2012; Customs Tariff Act 2012; and Departure Tax Act 2012 The following information provides a brief description of each tax in the Cook Islands, and the exemptions that are given under each particular tax type. There is also a comparison where it can be usefully made against other nations (where appropriate), but it should be noted that other countries may also have a differing tax base to the Cook Islands which should be taken into account when making such comparisons. Additionally the Cook Islands only has one tier of government which actively taxes, other countries have other tiers such as state/province and local/municipal who may also impose taxes. Import Levies Import levies are imposed on certain imported goods. They consist of two main Import taxes which are Import Levies and Import VAT (Value Added Tax) at 12.5 per cent. Import levies are imposed on the following goods at the rates listed: Alcohol (various rates depending on type of product and alcohol strength); Cigarettes/tobacco ($ per 1,000 cigarettes / $464 per kg of tobacco); Motor vehicles (various rates depending on the age of the vehicle); Motor spirits (28 cents per litre of petrol, 22 cents per litre of diesel (Rarotonga)); Pork products (50 per cent duty); Eggs (50 per cent seafreighted); Seasonal vegetables (25 per cent from 1 September to 30 November); and Drinks with sugar added (75 per cent). It should be noted that the Government took a number of policy measures in the 2012/13 budget to increase these levies, into the future. These included increases to the levies on tobacco, alcohol and sweetened drinks. Import levies on tobacco products were increased on 1 August They will then be progressively increased at 33 per cent per annum until they are at least double the value of the then current levy. The import levy will then be increased at 2 per cent per annum to maintain the real value of the levy. Most alcohol levies were increased by 15 per cent from 1 August 2012, low alcohol beers were only increased by 5 per cent to encourage drinkers to drink lower alcohol beers. All alcohol import levies will then be increased by 2 per cent per annum from 1 July 2013 to maintain the real value of the levies. Levies on sweetened drinks were increased by 15 per cent from 1 August 2012 and increased by 2 per cent per annum from 1 July 2013 to maintain the real value of the levy. Value Added Tax Broad based consumption taxes such as the Cook Islands VAT are a common tax in many jurisdictions. Broad based consumption taxes are a simple tax to administer and are efficient and very effective at capturing a share of economic activity. Consumption taxes are imposed in Australia, New Zealand, Fiji and Samoa. The Cook Islands Value Added Tax (VAT) is a 12.5 per cent tax on consumption and is only charged on taxable supplies. In its simplest terms a taxable supply is a transaction which occurs in the supply of a commercial activity involving a good or a service. In the Cook Islands, a number of activities are not taxable supplies. These include: 5

7 salaries and wages; private sales of personal or domestic items; financial services; and exempt supplies. Any person that is carrying on a taxable activity and whose current or projected annual turnover in New Zealand is or more must be registered for GST purposes. If you trade below the registration threshold, you can voluntarily register for GST. In the Cook Islands the following supplies are exempt from VAT. Concession Type Financial services provided by the Banking industry. Departure tax. Attendance dues paid to private schools. Zero rated supplies. Goods imported by non profit and religious organisations, schools and for disaster relief. Goods imported by the Queen Representative and the New Zealand High Commission. Description Financial services provided by domestic trading banks are exempt of VAT. Departure tax is exempt of VAT. Attendance dues paid to private schools are exempt of VAT. Goods entered for export from the Cook Islands are subject to VAT at the rate of 0 per cent. Services performed in the transportation of goods and passengers into and out of the Cook Islands are subject to VAT at the rate of 0 per cent. Goods imported by non profit and religious organisations, schools and for disaster relief are exempt of VAT upon importation. Goods imported by the Queen Representative and the New Zealand High Commission are exempt of VAT upon importation. Income Tax Income tax is probably the most widely recognised tax and the one which affects many individuals directly. Income tax is paid on all income earned in the Cook Islands and all worldwide income received by Cook Island tax residents. A person is tax resident if their home is in the Cook Islands. Businesses not legally incorporated, such as many shops, must declare their profits as personal income, either as a sole proprietor or in a partnership, whatever the case may be. The Cook Islands have what is known as a progressive tax rate, which means that those that earn higher levels of income pay progressively more tax as their income increases, individual income tax brackets are as follows: 0 $10,000 exempt $10,001 $30, per cent $30,001 and above 30 per cent Note: the $10,000 exemption is for a full year of residence in the Cook Islands. The exemption is apportioned to the number of days resident. 6

8 Non residents cannot access the exemption; their rates of tax on earnings derived in the Cook Islands are 20 cents in the dollar for the first $4,000, 25 cents in the dollar between $4,001 and $24,000 and 30 cents in the dollar for every dollar over $24,000. In the Cook Islands there are some concessions provided to income tax payers and they are below. Concession Type A reduced secondary rate of tax for individuals working two or more jobs. Deductions allowed in respect of donations to charitable organisations. Income derived by non resident airlines operating in the Cook Islands. Income of Queen s Representative. Income of the Crown. Pensions arising from disability or from services provided to the forces. Pensions and allowances paid out under the Welfare Act Income from approved superannuation funds. Income derived by charitable organisations Income derived by promoters of amateur sports. Income derived under a government approved supplementary scheme. Income derived by consular and diplomatic personnel. Income derived from a foreign source in the context of international foreign aid. 95 per cent of incomes derived upon retirement. Description Where an individual has more than one employment, that income may be subject to a reduced rate of tax of 20 cents in the dollar. This applies to incomes not exceeding $30,000 per annum, which would otherwise be taxable at 25 cents in the dollar. Charitable donations are deductible from taxable incomes at the marginal rate of one s income. The minimum donation is $200. The maximum donation is $5,000. All income derived by an international airline is exempt of tax. The income of the Queen s Representative is exempt. All Crown Ministries are exempt of income tax. All overseas pensions and annuities paid to persons who served in the armed forces are exempt of income tax. Old age pensions and allowances paid under the Welfare Act 1989 are exempt of tax. Incomes derived by either the New Zealand Government Superannuation Fund or by a superannuation fund approved by the Collector are exempt from tax. All income derived by charitable organisations is exempt of tax. All income derived in the promotion of amateur sport is exempt of tax. Incomes derived by teachers and other employees approved by government under a supplementary scheme are exempt of tax. This applies only to the supplementary income received, not the income paid by the Crown. Income derived by consular and diplomatic personnel as is exempted under the Diplomatic Privileges and Immunities Act Income derived in the context of foreign aid, paid by a non resident to a non resident employer is exempt of tax. Where an individual retires from employment, only 5 per cent of the retirement payment shall be subject to tax. 7

9 Concession Type Exemptions from Withholding tax. Description Cook Islands National Superannuation Fund (CINSF) earnings of the CINSF are exempt from withholding or income tax. Where income has been exempted under the Income Tax Act 1997, withholding income will also be exempt from tax. Company Tax Company tax is taxed on resident and non resident companies. A resident company is one which is incorporated in the Cook Islands with the Ministry of Justice. A non resident company is registered with the appropriate authorities in another sovereign jurisdiction. The companies are taxed differently with the: resident company income tax being taxed on a flat rate of 20 per cent; and non resident company income being taxed on a flat rate of 28 per cent. Withholding Tax Withholding tax is due on any dividends, interest, and royalties paid to any person (including companies) who is a non resident of the Cook Islands. Withholding tax is levied at the rate of 15 per cent on the dividends, interest, or royalties paid to non residents. It is also deducted by the Cook Islands banks on the interest they pay. Any person, who makes a payment of withholding income is required, at the time of making the payment, to make a deduction of withholding tax. Trust Income Tax Trust income tax rates are as follows: $0 $4, per cent; $4,001 $24, per cent; and $24,001 and above 30 per cent Departure Tax Departure tax is currently $55 per passenger over 12 years of age departing the Cook Islands. At the time of the 2012/13 Budget the Government took the decision to increase the Departure Tax from 1 July 2013 to $65 and will to by two per cent per annum after to maintain it s real value. 8

10 4. How much do these taxes raise Revised estimates of the Cook Islands revenue base were provided in the 2012/13 Half Year Economic Update which was published shortly before Christmas, the details are as shown in Table 1. Table 1 Projections of Tax Collections 2012/13 to 2015/16 $ 2012/ / / /16 VAT 37,350,423 38,308,861 39,202,734 40,258,192 Income tax 26,200,768 27,079,000 28,026,765 29,007,702 Company tax 11,000,864 10,903,857 11,285,492 11,680,484 Import levies 13,038,251 13,607,021 14,083,266 14,576,181 Departure tax 6,481,006 8,416,533 8,717,281 8,735,227 Withholding tax 899,992 1,000,000 1,000,000 1,000,000 Total 94,971,303 99,315, ,315, ,257,785 Note: It should be noted the Government has indicated it s desire to withdraw the withholding tax on savings in the future. 9

11 5. Some facts on taxes MFEM regularly releases statistics on tax collections on its website, taxation statistics can be accessed through the following link. Table 2 Income Tax Collections by Income Bracket and Income Type 2010 and Number of Salaries People Wages and Interest Dividends Business Income Rental Income Partnership Overseas Trust Income Income Other Income Total Income Tax Paid $ $ $ $ $ $ $ $ $ $ Loss 10 14,344 62,797 4, , ,857 0 $10,000 exempt 694 4,016,256 11,673 13,446 56,150 18,807 15,436 8,078 42,534 4,177,526 31,808 $10,001 $30,000 25% 1,998 36,099,148 18,889 37, , , ,863 18,797 67,654 36,838,577 4,194,040 $30,001 and above 30% ,680,586 21, , , ,581 33,330 77, ,939 33,869,220 7,495,225 Total 3,356 71,810,334 51,621 1,017, , ,482 48, , ,127 74,698,466 11,721, Loss 8 18, ,174 18,008 24,987 8, ,691 0 $10,000 exempt 580 3,335,542 4,000 71,574 8,162 22,466 9,996 3,406,709 63,795 $10,001 $30,000 25% 1,722 31,550,968 29,543 57, , ,615 38,695 35,700 97,150 32,137,199 3,697,998 $30,001 and above 30% ,551,408 5, , , ,575 20,963 47,526 31,053,812 6,922,030 Total 2,893 64,456,068 34, , , ,359 36,174 56, ,983 66,439,029 10,683,823 Note: i. Whilst income below $10,000 is exempt there are some types of income which are taxed as a final tax which are not exempt, or income which the exemption does not apply to, this includes dividends and interest. ii. The lower number of taxpayers in 2011 can be attributed to the late filing of tax returns by some individuals. The due date for the filing of income tax returns for 2011 was 1 March Historical experience demonstrates that a significant number of returns are filed late. 10

12 Table 3 Income Tax Collections by Income Brackets 2010 ($) Income Bracket Number of Taxpayers (RHS) Income Earned Tax Paid Average Tax Paid Share of Total Income (LHS) Share of Tax Paid (LHS) 0 10, ,177,526 31, % 0.3% 10,001 20,000 1,237 18,435,150 1,521,100 1, % 13.0% 20,001 30, ,403,427 2,672,940 3, % 22.8% 30,001 40, ,564,861 2,079,299 6, % 17.7% 40,001 50, ,336,503 1,118,622 9, % 9.5% 50,001 60, ,221, ,523 12, % 6.2% 60,001 70, ,662, ,406 15, % 5.4% 70,001 80, ,939, ,232 18, % 4.1% 80,001 90, ,192, ,194 21, % 2.6% 90, , ,233, ,067 24, % 2.7% 100, , , ,177 28, % 1.5% 110, , ,016, ,910 29, % 2.3% 120, , ,377 30,913 30, % 0.3% 130, , , ,753 35, % 2.1% 140, , , ,394 40, % 1.0% 150, ,575,104 1,005,735 59, % 8.6% Total 3,346 74,885,323 11,721,073 3, % 100% Figure 1 Income Tax Collections by Income Brackets 2010 ($) 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Number of Taxpayers (RHS) Share of Total Income (LHS) Share of Tax Paid (LHS) 1,400 1,200 1, ,000 10,001 20,000 20,001 30,000 30,001 40,000 40,001 50,000 50,001 60,000 60,001 70,000 70,001 80,000 80,001 90,000 90, , , , , , , , , , , , ,000 11

13 Table 4 Income Tax Collections by Income Brackets 2011 ($) Income Bracket Number of Taxpayers Income Earned Tax Paid Average Tax Paid Share of Total Income Share of Tax Paid 0 10, ,406,709 63, % 0.6% 10,001 20,000 1,054 15,823,551 1,329,048 1, % 12.4% 20,001 30, ,313,648 2,368,950 3, % 22.2% 30,001 40, ,955,056 1,789,491 6, % 16.7% 40,001 50, ,169,382 1,084,089 9, % 10.1% 50,001 60, ,303, ,430 12, % 7.0% 60,001 70, ,965, ,458 15, % 4.4% 70,001 80, ,641, ,977 18, % 3.8% 80,001 90, ,351, ,880 21, % 3.2% 90, , , ,933 24, % 2.3% 100, , , ,915 27, % 1.8% 110, , , ,853 30, % 2.0% 120, , , ,468 34, % 1.0% 130, , , ,748 36, % 2.4% 140, , , ,456 40, % 1.5% 150, ,255, ,332 53, % 8.5% Total 2,893 66,597,720 10,683,823 3, % 100.0% Figure 2 Income Tax Collections by Income Brackets 2011 ($) 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Number of Taxpayers (RHS) Share of Total Income (LHS) Share of Tax Paid (LHS) 1,400 1,200 1, ,000 10,001 20,000 20,001 30,000 30,001 40,000 40,001 50,000 50,001 60,000 60,001 70,000 70,001 80,000 80,001 90,000 90, , , , , , , , , , , , ,000 12

14 Period Cook Islands Gross Turnover Change Table 4 VAT Collections 2007 to 2011 VAT Collected Change Rarotonga Gross Turnover Change VAT Collected Change ($000) (%) ($000) (%) ($000) (%) ($000) (%) Year , , , , , , , , , , , , , , , , , , , , Quarter 2007 Mar 126, , , , Jun 144, , , , Sep 161, , , , Dec 146, , , , Mar 137, , , , Jun 138, , , , Sep 152, , , , Dec 152, , , , Mar 132, , , , Jun 147, , , , Sep 167, , , , Dec 151, , , , Mar 123, , , , Jun 135, , , , Sep 155, , , , Dec 144, , , , Mar 120, , , , Jun 142, , , , Sep 162, , , , Dec 144, , , , Mar 125, , , , Jun 159, , , , Sep 181, , , ,

15 Table 4 VAT Collections by Industry Type 2007 to 2011 Period All Industries Agriculture and Fishing Mining, Manufacturing and Electricity Construction Wholesale and Retail Trade Restaurants and Bars Hotels and Motels Transport and Communication Finance and Business Services Community and Personal Services Year ($000) , ,231 1,889 25,880 2,186 10,430 7,954 4,968 2, , ,883 1,724 23,669 2,160 10,856 8,175 4,129 4, , ,946 1,878 25,986 2,302 10,014 8,165 4,618 4, , ,565 1,375 22,822 2,163 9,871 8,090 4,337 3, , ,610 3,299 22,273 2,180 11,174 7,758 4,162 3,638 Quarter 2007 Mar 14, , , ,241 1,979 1, Jun 14, , , ,840 1,965 1, Sep 16, , , ,203 2,057 1, Dec 15, , , ,146 1, Mar 16, , , ,805 1, Jun 14, , , ,206 1,825 1,028 1,115 Sep 15, , , ,638 2,334 1,064 1,413 Dec 15, , , ,206 2,028 1,080 1, Mar 13, , , ,043 1,788 1,120 1,164 Jun 15, , , ,429 1,977 1,366 1,343 Sep 19, , , ,143 2,308 1,117 1,324 Dec 15, , , ,399 2,092 1,016 1, Mar 12, , , ,862 1,

16 Period All Industries Agriculture and Fishing Mining, Manufacturing and Electricity Construction Wholesale and Retail Trade Restaurants and Bars Hotels and Motels Transport and Communication Finance and Business Services Community and Personal Services Jun 13, , , ,307 1,975 1, Sep 15, , , ,220 2,164 1, Dec 15, , , ,482 2,069 1, Mar 12, , , ,131 1, Jun 15, ,131 1,091 5, ,647 1,950 1, Sep 17, ,212 1,061 5, ,672 2,144 1, Dec 15, , , ,724 1, Mar 13, , , ,086 1, Jun 16, ,280 1,248 6, ,006 2,066 1, Sep 18, , , ,982 2,298 1,093 1,648 15

17 6. Tax Compliance in the Cook Islands Why is there a need for compliance? The primary goal of the Revenue Management Division within MFEM is collect to collect the taxes and duties payable in accordance with the law. It has to this in such manner that will sustain confidence in the tax system and its administration. Unfortunately, non compliance is an inevitability in any jurisdiction, this could be due to an unintentional e on the part of a taxpayer or intentional evasion. Strategies and structures need to be in place to minimise the occurrence of non compliance whether intentional or otherwise. This approach is ultimately in the Crown s best interests. In the Cook Islands there is a significant compliance issue which is equivalent to approximately three months worth of revenue. Outstanding taxes (original and additional tax) by level of debt and type of tax are shown below. Debt level PAYE Table 6 Income Tax Debt ($) Income and Company Tax VAT Provisional tax $0 5,000 82, ,166, , , $5,000 20, , ,516, , , $20,000 plus 2,929, ,813, ,463, , Total 3,353, ,497, ,481, , The Revenue Management Division needs to ensure that taxpayers and other parties understand their obligations under the revenue laws. Taxpayers also need to be aware of what their obligations are under the law. Basically in the Cook Islands a taxpayer is obliged to be registered in the RMD system; lodge requisite taxation information in a timely manner; report information completely and accurately; and pay taxation obligations on time. What are the consequences for non compliance? When a tax debt remains unpaid at the expiration of one month after its due date for payment it incurs additional tax of 5 per cent, and 1 per cent each month it remains unpaid thereafter [sections 166, 190 Income Tax Act 1997, section 24 Value Added Tax Act 1997]. For example Joe Citizen owes 2011 income tax of $500 which remains unpaid until 15 February

18 Original Due date: 1 October 2012 $500 5% additional tax 2 November 2012 $25 1% additional tax 2 December 2012 $5.25 1% additional tax 2 January 2013 $ % additional tax 2 February 2013 $ 5.35 Amount payable on 15 February 2013 $ There are provisions for remitting additional tax in circumstances where it is warranted, or serious hardship exists [sections 204 and 205 Income Tax Act 1997]. The Revenue Management Division staff endeavour to discuss how a taxpayer can meet their tax debt if there are issues the filing of late returns or a tax audit. If the returns are filed without payment or only part payment then RMD will: 1. Write to the taxpayer advising them of their tax debt and that it is overdue. If the debt is significant we offer them the option of entering into a payment arrangement (Initial letter). 2. If no response has been received from our initial letter we send a second letter with slightly stronger language which may include reference to some of our enforcement options (follow up letter). 3. If no response is received to our initial and follow up letters then we send out a final letter advising of our enforcement options and our intention to use these (final letter). After we have issued this letter we will use a range of collection options, depending on the circumstances. These may include: a. Deduction Notices (section 192, Income Tax Act 1997) being placed with the taxpayer s debtors/employer. b. Court action, which may include the lodgement of a Statement of Claim, prosecution for failure to furnish (where returns not filed), or petition to wind up a company (very last resort). c. An Overseas Travel Prohibition Notice being placed on the taxpayer with the airlines (section 201, Income Tax Act 1997). 1 In New Zealand the amount payable would be $ plus interest. In Australia the taxpayer would be charged interest plus penalties for late filing. 17

19 7. International Comparisons Comparative Rates of Income Tax Income taxes are applied at different rates across the region, the following tables try to provide a comparison across the region, it should be noted that many countries have published rates but subsequently put on additional levies, Australia has medicare, New Zealand the ACC levy and Fiji the Social Responsibility levy. Country Australia iii Fiji iv Tax Rates Resident 0 to AUD 18,200 (0 per cent) AUD 18,201 to AUD 37,000 (19 per cent) AUD 37,001 to AUD 80,000 (32.5 per cent) AUD 80,001 to AUD 180,000 (37 per cent) AUD 180,001 and over (45 per cent) A further 1.5 per cent is applied for medicare Non Resident 0 to AUD 80,000 (32.5 per cent) AUD 80,000 to AUD 180,000 (37 per cent) AUD 180,001 and over (45 per cent) No medicare levy is applied Resident FJD 0 to FJD 16,000 (0 per cent) FJD 16,001 to FJD 22,000 (7 per cent) FJD 22,001 to FJD 50,000 (18 per cent) FJD 50,001 to FJD 270,000 (20 per cent) Non Resident FJD 0 to FJD 270,000 (20 per cent) Both Resident and Non Resident FJD 270,001 to FJD 300,000 (20 per cent Social Responsibility Levy 23 per cent ) FJD 300,001 to FJD 350,000 (20 per cent Social Responsibility Levy 24 per cent ) FJD 350,001 to FJD 400,000 (20 per cent Social Responsibility Levy 25 per cent ) 18

20 Country New Zealand v vi Samoa Vanuatu Tax Rates FJD 400,001 to FJD 450,000 (20 per cent Social Responsibility Levy 26 per cent ) FJD 450,001 to FJD 500,000 (20 per cent Social Responsibility Levy 27 per cent ) FJD 500,001 to FJD 1,000,000 (20 per cent Social Responsibility Levy 28 per cent ) FJD 1,000,001 and over (20 per cent Social Responsibility Levy 29 per cent ) NZD 0 to NZD 14,000 (10.5 per cent 12.2 per cent including the ACC earners levy) NZD 14,001 to NZD 48,000 (17.5 per cent 19.2 per cent including the ACC earners levy) NZD 48,001 to NZD 70,000 (30 per cent 31.7 per cent including the ACC earners levy) NZD 70,000 and over (33 per cent 34.7 per cent including the ACC earners levy) WST 0 WST 12,000 (0 per cent) WST 12,001 WST 15,000 (10 per cent) WST 15,001 WST 20,000 (20 per cent) Over WST 20,000 (27 per cent) No income tax 19

21 Comparative rates of Consumption Taxes (VAT/GST) Country Rate Registration Points to Note Threshold Australia vii 10 AUD 75,000 GST free supplies include: AUD 150,000 most health and medical care services; (non profit most educational services; organisations) most food for human consumption (other than prepared foods, confectionery, snacks, ice cream, biscuits, alcohol, soft drinks and certain other drinks); certain activities of charities and related bodies ; international travel and transport; sales of 'going concerns'; certain dealings with land; and exports of goods or supplies of things other than goods or real property for consumption outside Australia, if certain requirements are met. Fiji 15 FJD 100,000 Can claim input tax on expenses towards making the zero rated supply. Exported goods Supplies of ship stores Supply of taxable activity as a going concern to another registered person Services in connection with goods outside Fiji. Nil output charged on a supply Nil input claimable on expenses in relation to making taxable supplies. Financial services. Accommodation in residential dwelling by way of hire. Receipts from Gambling Gambling Turnover Tax [GTT]. Supply by non profit bodies of donated goods & services. Supply of education by educational institutions New Zealand viii ix 15 NZD 60,000 The rate is reduced to 0 per cent in certain situations such as the export of goods and services, the supply of a business as a going concern, the supply of land to a registered person on or after 1 April 2011, and the supply of financial services under the "business to business" regime. Supplies of certain goods and services are exempt from GST unless the supplies can be zero rated. Exempt supplies include the supply of financial services, the supply by non profit bodies of donated goods and services, the supply of residential accommodation, and the supply of fine metals. 20

22 Country Rate Registration Threshold Points to Note New Zealand also operates a GST reverse charge for imported services. Samoa 15 SAT $78,000 There is a reduced rate of 0 per cent ("zero rated") for exported goods and certain exported services, duty free goods, goods not in Samoa at the time of supply and educational services provided by approved institutions. Medical goods and services supplied by the hospital and water supply provided by the Samoa Water Authority are also zero rated. Those supplies exempt from VAT are locally produced raw and unprocessed food, financial services, donated goods and services sold by non profit bodies, bus and taxi fares, electricity and inter island passenger fares in Samoa. Vanuatu 12.5 VT 4 million There is reduced rate of 0 per cent ("zero rated") which applies to goods which are exported, those not situated in Vanuatu at the time of supply, those sold as going concerns to registered persons and those internationally transported. Services supplied outside Vanuatu, to approved educational institutions and aid donors are also zero rated. Comparative rates of Company Taxes KPMG produce a comparative corporate tax rate table which follows. x Location 2013 Australia 30 Fiji 28 New Zealand 28 Samoa 27 Oceania average 28.6 Vanuatu 0 Global average In Australia the corporate income tax rate applies to both resident and non resident companies. A resident company is liable to corporate income tax on its worldwide income and capital gains. A non resident company is liable to corporate income tax on its Australian source income only, and on capital gains from the disposal of an asset that is taxable Australian real property (TARP). Broadly, TARP will include Australian real property and certain indirect interests in Australian real property. The Australian tax system provides taxation relief against international double taxation by granting foreign tax offsets in some circumstances and in others, by exempting the foreign income from Australian tax. In Australia the corporate income tax rate applies to companies 21

23 incorporated in Fiji and branches of non resident companies. Dividend distribution from profits which have been fully subjected to income tax shall not be further subject to tax. The repatriation of after tax branch profits (if earned in 2010 and subsequent years) shall not be subject to further tax. In New Zealand The 28% corporate tax rate applies from the 2012 income tax year. Ten per cent of general insurance premiums and film hire payments, paid to non residents, are deemed to have a New Zealand source and are therefore taxable. In Samoa a progressive regime applies to small business annual income which correlates with the rates set out in the income tax rate. Annual Income Earned Income not exceeding WST 12,000 WST12, 001 WST 15,000 WST15, 001 WST 20, 000 Over WST 20, 000 Tax Rate Nil 10 per cent 20 per cent 27 per cent Comparative rates of Departure Taxes and equivalent Country Australia Passenger Movement Charge AUD 55 Plus additional airport security charges New Zealand Airport Charges NZD 25 Fiji Departure Tax FJD 150 Samoa Departure Tax WST 65 Vanuatu Departure Tax VUV 3,000 and additional provincial tax of VUV 200 Corporate income tax is not levied within the Republic of Vanuatu. Furthermore, there are no income taxes, estate duties, gift duties, capital gains taxes, tax treaties or withholding taxes. There is, however, an extensive import duty regime which brings in a substantial percentage of Vanuatu s revenue. 22

24 References i is certain except death and.html Accessed 5 February 2013 ii A Tax System for New Zealand s Future Report of the Victoria University of Wellington Tax Working Group report website.pdf Accessed 5 February 2013 iii Australian Tax Office Accessed 5 February 2013 iv Fiji Revenue and Customs Authority Resident and Non Resident Tax Scales tax rates / Accessed 5 February 2013 v Samoa Inland Revenue Services Accessed 5 February 2013 vi New Zealand Country VAT/GST Essentials gst essentials 2012/new zealand 2011 vat gst essentials.pdf Accessed 5 February 2013 vii Australian Tax Office Accessed 5 February 2013 viii Samoan Inland Revenue Service Accessed 5 February 2013 ix New Zealand Country VAT/GST Essentials gst essentials 2012/new zealand 2011 vat gst essentials.pdf Accessed 5 February 2013 x KPMG Corporate Tax Rates Table tools and resources/pages/corporate tax rates table.aspx Accessed 5 February