\ PARTNERSHIP IN DRIVING ECONOMIC GROWTH Government of Tonga Investment Incentives 2014/2015 BULLETIN REVENUE POLICY COMMITTEE Ministry of Finance and National Planning Ministry of Revenue and Customs Ministry of Commerce, Tourism and Labour August 2014 1
Investment Incentives in Tonga Bulletin (August 2014) Introduction Government is committed to work with the private sector to help improve the business environment in Tonga. Government seeks to make Tonga an attractive destination for both domestic and foreign investment by enacting investor friendly policies, introducing new incentives to key growth areas and facilitating ease of doing in business. The Investment Incentives Bulletin outlines the range of support provided through enhanced regulatory environment, special tax incentives, additional access to finance, and other special initiatives 1. Contact websites are provided for further information on all of these incentives and how to apply for support. Government continues to work with the private sector through the Chambers of Commerce, and the six Sector Growth Committees covering Agriculture, Fisheries, Tourism, Manufacturing, Construction, and Wholesale & Retail Trades. The Government has launched several new initiatives, set out in this bulletin, to support investment and the development of businesses. Summary of investment incentives in priority economic sectors The regulatory costs of setting up and operating businesses have been streamlined through a variety of reforms to mitigate cost of doing business, see Table 1. Further reforms are under consideration. Table 1: Ease of Doing Business streamlined business registration processes business licence issued by enterprise and no longer by activity perpetual licensing system with an annual notice of continued activity, low fees with provision for more reduced fees when electronic system go live provision for a fully online business registration system for companies, business licence and business names provision of business advisory services as well as providing investor care services monitoring ease of doing business, dialogue with business on further improvements currency convertibility and remittance of profits for foreign investors generic business training Ministry of Commerce, Tourism and Labour: Dedicated Business Service Centre Ministry of Revenue and Customs: Client Services Team transparent appeal processes (tax tribunal, business registry Ministry Finance and National Planning: Sector Growth Committees Government open door policy and business support services (conditions apply) The tax system is relatively simple with business friendly rates and conditions see Table 2. Government has also established a Small Business Tax Regime to make tax even simpler for small business with a turn over under $100,000. The cost of 1 This Bulletin outlines the essential conditions, relevant legislation and Orders. The identified web sites should be consulted for full details. 2
starting and running a business is further reduced with all priority sectors benefiting from import duty and consumption tax exemptions on certain items that are important inputs to their business, and low duty rates of 3% on capital items. In addition to this, exports of goods are zero rated for consumption tax purposes, ensuring no tax are incurred, and any tax paid on inputs is reclaimable. To assist business in accessing credit to invest and grow, Government has launched new low interest loan windows for businesses operating in priority sectors through the Tonga Development Bank; see Table 3 for Other Priority Sectors. For more details on the specific incentives available in you sector, refer to the relevant section below. No additional incentives beyond those already offered will be available, except under the Special Incentive Scheme, for which all conditions specified, in Annex 1, must be satisfied and all applications vetted by the Revenue and Policy Committee before being considered. Table 2: Tax Rates for all sectors Consumption Tax (VAT): 15% Income and Corporate Tax: unlimited carry forward losses amortization of preliminary expenditure 25% per year dividends paid to residents are tax free corporate tax rate is 25% of net profits non corporate tax rate: first $7,400 is tax free $7,400 $30,000 @10% and above $30,000 @ 20%, Small business turn over tax: $0 $10,000 rate $100 $10,001 $30,000 rate $250 $30,001 to $50,000 rate $500 Over $50,000 to $100,000 2% payment by instalment allowed Agricultural Sector Duty and consumption tax free Agricultural tools, live animals, stock feed, packaging materials etc including timber milling equipment, insecticides, pesticides, fungicides, agricultural equipment and implements including hand tools, seeds, fertilizer, packaging materials. Basic building materials are duty free, capital items are 3%, payment by instalment allowed. Special exemptions after a national emergency are available (Table 14). Exports are also zero rated for CT and therefore businesses registered for CT get a refund for any CT paid in making their products for export. Table 3: Other Priority Sector s Repayme nt $500.000 4% On request Fund Objectives: Other areas, such as making use of the internet cable, and innovative ideas Table 4: Agricultural Marketing & Production Fund s $1 1% 9 months 100K million $4 4% On Reques t million Funds Objective: boost exporter s confidence by providing a facility to allow the early payment to primary producers for their exports. 3
Income and Corporate tax: as for all sectors (Table 2). Special s from Tonga Development Bank: eligible for soft loans, for various types of agriculture and forestry (Tables 4, 5 and 6). Special Conditions under the Foreign Investment Act: egg production, farming of a number of crops (including root crops, squash and some others) and export of coconuts are restricted to Tongan National or a company/partnership with 75% owned by a Tongan ; while the selling of certain agricultural supplies are subject to the Pesticide Act (see Tables 10 and 11). Table 5: Development of Forestry s $500,000 4% On request Fund Objective: support social and community oriented livestock projects that improve living conditions in rural areas with potential for positive impacts on environment nurseries specifically for sandal wood seedlings; also fruit trees, vegetable seedlings. Table 6: Development of Livestock s $500,000 4% On request Fund Objective: support social and communityoriented livestock projects that improve living conditions in rural areas with potential for positive impacts on environment Fishing Sector Duty and consumption tax free fishing inputs, fuel (as certified by MAFFF), any fishing vessel; navigation equipment to be used on fishing vessels; sea safety equipment to be used on fishing vessels; outboard and inboard engines to be used on fishing vessels and its spare parts; fishing gear; fishing bait; fish Aggregating Devices; Vessel Monitoring System to be used on fishing vessels; equipment and material to be used by an authorized observer under section 78 of the Fisheries Management Act 2002; Hydraulic drop line fishing reel; pearl oyster farm equipment and materials; aquaculture farm equipment and materials ;fuel; and fish fence wire. Basic building materials are duty free, capital items are 3%, payment by instalment allowed with conditions. Special exemptions after a national emergency are also available (Table 14). Consumption Tax on Exports: are also zero rated and therefore businesses registered for CT get a refund for any CT paid in making their products for export. Income and Corporate tax: as for all sectors (Table 2). Table 7: Fisheries Development & Export Fund s $300,000 $750,000 1% 4% 9 months On 30 K request Fund Objective: assist fishermen, vessel owner and exporters to generate increased exports, income and employment in the fisheries sector Special s from Tonga Development Bank: eligible for soft loans for Fisheries Development and Export Fund (Table 7). 4
Special Conditions under the Foreign Investment Act: fishing on the reef, and shallower waters closer to shore are restricted to Tongan National or company/partnership with 75% owned by a Tongan; while commercial fishing are subject to the respective resource management plans (see Annex 2). Tourism Sector Duty exempt and reduced basic building materials are duty free: timber, roofing iron, cement, guttering, plumbing pipes (PVC); capital items are 3% duty; payment by instalment allowed with conditions. Special duty and Consumption Tax exemption: see special Order for tourism and manufacturing (Table 9). Income and Corporate tax: as for all sectors (Table 2). Special s from Tonga Development Bank: eligible for soft loans for tourism development (Table 8). Special Conditions under the Foreign Investment Act: taxis, hire of passenger vehicles, security Table 8: Tourism Fund s $500,000 1% 1 year 25 $1 4% On request K million Fund Objectives: promote the development of new tourism products and events improve the quality of small medium accommodations develop a clean and beautiful tourist environment support and encourage community participation in development of heritage sites promote and encourage cooperation and coordination within the tourism sector businesses, a range of Tonga cultural activities and general wholesale and retail activities are restricted to Tonga business (see Table 10). Manufacturing Sector Duty free: compound alcoholic preparations, bottles, malt, yeast and sugar imported for the manufacture of beer, egg trays, packaging, bottles, bottle caps, resins, dyes, pigments, benzoic acids etc for paint making, sugar, powdered milk for ice cream, carbonates, materials for the manufacture of roofing iron, capital items are 3% & basic building materials are duty free, payment by instalment allowed with conditions. Special exemptions after a national emergency are also available (Table 14). Table 9: Special Order for Duty & Consumption Tax exemption Tourism & Manufacturing until 16 July 2016 Business: licensed tourist or manufacturing businesses not granted an exclusive exemptions Order last 12 months prior approval of Chief Executive Officers of the Ministries of Commerce, Tourism & Labour, and of Revenue & Customs for a period within 2 years from the 16 th of July 2014. may receive exemptions on excisable imports (excluding tobacco and liquor) as follows: duty exemption on goods CIF up to $20,000 consumption tax exemption goods CIF up to $20,000 excise tax exemption on goods CIF value up to $10,000 5
Consumption Tax on Exports: are also zero rated and therefore businesses registered for CT get a refund for any CT paid in making their products for export. Special duty and Consumption Tax exemption: see special Order for manufacturing and tourism (Table 9). Income and Corporate tax: as for all sectors (Table 2). Special s from Tonga Development Bank: eligible for soft loans for manufacturing development (Table 10). Table 10: Manufacturing Fund s $250,000 1% 1 year 25 $250,000 4% On request K Fund Objectives: support export ready manufacturers stimulate innovation promote development of competitive valueadded products promote and encourage cooperation and coordination in manufacturing sector Special grants for handicrafts: (Table 11). Special Conditions under the Foreign Investment Act: a baking of white bread, and production of various Tonga artefacts are reserved to Tongan National or registered company/partnerships with 75% owned by a Tongan. (see Annex 2). Construction Sector Duty exempt and reduced basic building materials are duty free: timber, roofing iron, cement, guttering, plumbing pipes (PVC); capital items are 3% duty; payment by instalment allowed. Special exemptions after a national emergency are also available (Table 14). Income and Corporate tax: as for all sectors (Table 2). Special s from Tonga Development Bank: eligible for Economic Growth Facilitation loans (Table 12). Table 11: Pure Grants : Handicrafts Funds $250,000. Fund Objective: increase demand and production of Tongan handicrafts, and apply existing conditions being used by MCTL Table 12: Support for Construction s $1 4% On request million Fund Objective: capital equipment, tools, safety gears (max $50,000) capacity building in specialized field (max $10,000) Special Conditions under the Foreign Investment Act: wiring and installation of smaller buildings are restricted to Tonga business (see Annex 2). 6
Transportation Sector Duty free life saving equipment, equipment for use within confines of airport, communication and signal equipment, basic building materials are duty free, capital items are 3%, payment by instalment allowed with conditions. Special exemptions after a national emergency are also available (Table 14). Excise and consumption tax free fuel for use by domestic airlines and ferries, spare parts. Income and Corporate tax: as for all sectors (Table 2). Special s from Tonga Development Bank: eligible for Economic Growth Facilitation loans (Table 2). Retail and Wholesale Sector Income and Corporate tax: as for all sectors (Table 2). Special s from Tonga Development Bank: eligible for Retail and Wholesale loans (Table 13). Social Sector Duty free basic building materials are duty free ie timber, roofing iron, cement, guttering, plumbing pipes (PVC), diapers, returning mats/tapa, returning residents, cups/medals/shields, meat, medicines, medical equipment, educational materials (imported by educational institutions), charitable donations, project materials (funded by Donor Partners), payment by instalment allowed. Special exemptions after a national emergency are also available (Table 14). CT free medicines, medical equipment, educational materials (imported by educational institutions), charitable donations, project materials (funded by Donor Partners), payment by instalment allowed, sale of leases for residential purposes are exempt from CT if sold by a business registered for CT. Income and Corporate tax: as for all sectors (Table 2). Table 13: Retail and Wholesale s Repayme nt $500.000 4% On request Fund Objectives: promote small scale retail and wholesale Special Conditions under the Foreign Investment Act: education facilities are subject to the Education Act, and medical and health activities to a number of Acts covering such activities (see Annex 2). 7
Community Organizations Once a Community Organisation is registered as a Charitable Organisations, it can benefit from specific tax exemptions. Registrations is at the Ministry of Commerce, Tourism and Labour (MCTL), through completion of the appropriate application forms, to be submitted together with copy of the Organization s Constitutions and payment of the related application fees. Table 14: Special Support after a National Emergency After an emergency (as defined in the Emergency Management Act 2007) the exemption of duty, consumption tax (CT) and excise tax is permitted: on a reasonable amount of clothing, tools, food imported by or on behalf of affected persons, within 6 months from the date of the emergency, and replacement tools, equipment, building materials, furniture and furnishings, vehicle, boats, machinery by or on behalf of affected persons, within 2 years of the emergency. Contacts For more information, please refer to: Ministry of Finance and National Planning Treasury Building, Vuna Road, Nuku alofa Phone number: (676) 23066, Fax number: (676) 28145 Email: secretary@finance.gov.to Website: www.finance.gov.to Ministry of Revenue and Customs QSC Ex students Building, Railway Road, Kolofo ou, Nuku alofa Phone number: (676) 23444, Fax number: (676) 25018 Email cst@revenue.gov.to or adminrev@kalianet.to Website: www.revenue.gov.to Ministry of Commerce, Tourism and Labour Api ko Latai, Fasi moe Afi, Nuku alofa. Phone number: (676) 23688 Email: secretary@mctl.gov.to Website: www.mctl.gov.to and www.companies.gov.to 8
Annex 1: Special Incentives Scheme Table 15: Special Incentives Options for Business Businesses seeking specific incentives beyond the standard ones provide, must meet all of the Criteria Check List, and some of the Guiding Principles. Criteria Check List for businesss submitting applications seeking tax exemption or investment incentives during the interim policy: Applications from Businesses will only be considered, though not necessarily approved, if all of the following conditions are met: a) the application for tax exemption or incentives for business investments are submitted to the chair of the RPC (currently the CEO Ministry of Finance and National Planning), in electronic form, so that they can be considered by the Revenue Policy Committee before any recommendation to CEDC and Cabinet. b) the application (without exception) is lodged with the MFNP 3 months before any goods are shipped to Tonga; late applications will not be considered. c) the business has not received any exemption, by Order, during the last 12 months d) copy of the business licence and Tax Identification Number (TIN #) are provided e) tax clearance from the Ministry of Revenue and Customs for all existing businesses under this licence is provided f) a Business plan provided with clear justification and linkage to the Tonga Strategic Development Framework and development priorities, and explaining why the exemptions are required; taking account of the additional guiding principles listed below. g) financial statements provided for the last financial year and for the quarters leading up to the date of application (bank statements), for existing business or in the case of new business, proof of capital. h) confirmation of compliance with other Government agency requirements as relevant, e.g. MAFFF, Immigration, MCTL, Ministries covering Lands, Environment and Natural Resource issues. i) letters of support from relevant Ministry of Government j) loan requests/approvals for activity if any Additional Guiding Principles desirable for business exemption applications that passed the checklist: a) the business should not cover a highly serviced sector, e.g. retail, taxis, bus services, bakeries, tailors, banking services unless they are establishing in a part of the country under supplied by such goods and services. b) major renovations of existing facilities ($1 million or above) to allow a significant improvement in the goods and services provided. c) major expansion of facilities ($2 million or above) to expand the goods and services provided. d) investments that make use of new initiatives such as the internet cable, introduce new business activities, address major infrastructure needs, increase value added in the process of local goods for domestic sale or export, and promote an expansion in exports or other foreign exchange earnings. e) any proposal that provides a significant increase in income and employment and expands the range of economic activities in the country, including introducing new and innovative approaches. 9
Annex 2: Sectors Reserved and Restricted to Foreign Investors Table 16: Reserved List Under the Foreign Investment Act Taxis Passenger vehicles for hire Used motor vehicle dealers Retailing activity which consist of the distribution of grocery products (food & household provisions) for final consumption Wholesaling activity Baking of white loaf bread Tongan cultural activities, including: o folktales, folk poetry, and folk riddles o folk songs and instrumental folk music o o folk dances, and folk plays production of folk arts in particular, drawings, paintings, carvings, sculptures, woodwork, jewellery, handicrafts, costumes, and indigenous textile Raising of chicken for the production of eggs Security business Export of green and mature coconuts Wiring and installation of residential and commercial buildings with capital investment of less than $500,000 Production / Farming of: o root crops (yams, taro, sweet potato, cassava) o squash o paper mulberry o pandanus o kava Fishing activities comprising: o reef fishing o inshore fishing within 12 nm (Zone C) in water less than 1000 meters o bottom fishing in water depth less than 500 m Table 17: Restricted List Under the Foreign Investment Act Commercial fishing comprising: Subject to their respective Resource Management Plan Tuna fishing (administered by the Ministry of Fisheries) Bottom fishing in water deeper than 500m Other deep water fishing not less than 100 m Subject to the requirements of the Pesticide Act 2002 Aquaculture Subject to requirements of the Education Act (Cap.86) Agricultural supply store distributing seeds, fertilizers, chemicals. Education facility Medical or Health activity Subject to the requirements of the Public Health Act 1992; Therapeutic Goods Act 2001; Nursing Act 2001; Medical and Dental Practices Act 2001; Pharmacy Act 2001;Health Practitioners Review Act 2001. 10
Annex 3 Important legislation relevant to Investors Legislation available at www.crownlaw.gov.to Table 18: Important Legislation Relevant to Investors Foreign Investment Act (2002)/Regulations (2006) Business License Act (2002)/ Regulations (2012)/ Amendment (2012) Business Names (Amendment) Act (2013)/ Regulation 2014 Income Tax Act 2007 Consumption Tax Act 2003 Revenue Services Administration Act 2002 Customs Management Act 2007 Customs Act 2007 and Customs Tariff Excise Tax Act 2007 Company Act 1995/ Regulation 2009 11