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The Prime Minister, Dr José Ramos-Horta has issued
the following statement regarding his proposed new tax system
for Timor-Leste, 14 March 2007
"When I took office as Prime Minister of the second Constitutional
Government I requested UNDP and IMF a review on the possibility
of a complete overhaul of the tax system.
After extensive consultation, debate and though, I am proposing
a new tax system to Timor-Leste that is simple, pro-poor and encourages
the business sector, foreign investment and job creation. My proposal
goes beyond the FMI recommendations.
When I was sworn-in on July 10 as PM I said that the Government
I was going to lead would try to serve the best interests of the
poor, was going to be the government for the poor, which would
be at the forefront in the fight against poverty.
I promised to use existing money to dignify the human being,
give them hope, give them food, clothing and give them a roof.
Non oil revenues in general represent less than 5% of the oil
revenues with excise duties being 1,19%, sales taxes 0,64%, corporate
taxes 0,63%, import duties 0,59%, personal income taxation 0,49%,
withholding taxes 0,46% and services taxes only 0,36%.
Why then bother collecting so little revenue? Perhaps we are
spending more trying to collect taxes and duties than the amount
we actually collect!
With oil and gas revenues over US$1 billion I thought that one
way to help stimulate the economy was to put some money in the
pockets of the people by the way of a new tax system better suited
to meet Timor-Leste development objectives and at the same time
more compatible with a global business environment, in the years
ahead.
I had my own ideas on how a new tax system for the country should
look like, basically advocating a drastic reduction and/or abolition
of most taxes and duties.
Having held private and official discussions with a wide range
of experts from the World Bank, UNDP and academics, and commissioned
the IMF to review and recommend a new tax system to Timor-Leste,
I've now crystallized my thoughts and I am proposing a new tax
system to Timor-Leste that is bold, rational, and forward looking.
It is pro-poor, pro-business development and simple.
1. Pro-poor because Timor-Leste has significant oil revenue,
so should not be collecting any tax from the poor or from small
businesses;
2. Pro-business development because Timor-Leste needs to encourage
the development of a strong private sector. This involves encouraging
the creation of new domestic businesses and encouraging foreign
businesses to set up in our country; and
3. Simple because Timor-Leste should not tie up its own human
resources in tax collection or tax compliance. Both the government
and the private sector should have the burden of complex taxation
systems removed from them."
Under these principles I am requesting the Minister for Planning
and Finances to instruct her officials to draft a new tax system
or make the necessary changes to other relevant legislation based
on my recommendations below, for debate in the Council of Ministers
for subsequent presentation to the National Parliament that has
the law-making powers regarding tax policy.
Recommendation 1: Cut tariffs, sales tax, and excise to become
a 'Free Trade' state
I advocate this because Timor-Leste does not receive much revenue
from tariffs levied on imports, but these taxes are an administrative
burden and
discourage trade. In my view Timor-Leste should become a 'Free
Trade State' by eliminating tariffs on all imports.
As well, there should be an exception for 'undesirable' imports
such as those goods which are damaging to the environment or to
the health of the people of Timor-Leste. These undesirable goods
should be transparently listed and made subject to a high fixed
tariff.
As tariffs are reduced, Timorese producers should not be disadvantaged
by the lower costs of imports which compete with domestically
produced goods - and some local producers may need to be compensated.
Recommendation 2: Persons and businesses with incomes lower than
$1,000 per month should not be taxed.
This would create a tax free threshold for low income people.
This is very sensible - there is no reason for poor Timorese to
be paying any tax.
Recommendation 3: Set income and corporate tax at a low flat
rate of 5-10%
Well-respected experts tell me that for any income earned over
$1,000 Timor-Leste should impose a very low rate of tax of 5-10%.
I do agree with this.
While IMF proposes quite a high rate of 15-20%, I believe that
this is because they are reluctant to be seen to be encouraging
the creation of 'tax havens'. However Timor-Leste could and should
consider going lower than 15-20%. It could in principle go to
0% without constraining government expenditure, since there will
be more than enough revenue from oil. But there are also reasons
to establish a tax rate above zero for the future when Timor-Leste
may require further revenue. So, I think a flat rate of 5 to 10%
is reasonable in these circumstances.
The reason to advocate the same corporate and income tax rate,
it is not only because it is sensible but it is simple and stops
people trying to avoid tax by shifting it between persons and
corporations.
Recommendation 4: Remove the 1% tax on business turnover
This tax does not raise much revenue, but it is an administrative
burden. It should be removed.
Recommendation 5: Simplify the incentives offered to foreign
investors
By significantly reducing the level of tax, the necessity for
additional incentives for foreign investors is reduced, i.e. a
very low rate of tax should be enough.
Existing discretionary incentives are complex and unnecessary.
But if you bring tax down below 15% then there would not be much
need for further incentives for corporations.
Recommendation 6: Minimize the use of indirect and temporary
measures
There have been several proposals to introduce temporary measures
of various types. These measures are designed to either discourage
undesirable activities (e.g. tariffs to reduce the import of used
cars and computers), or to encourage desirable activities (e.g.
to encourage the employment of local Timorese workers), or to
compensate particular groups (e.g. introducing reduced electricity
prices for institutions sheltering IDPs).
After listening to the experts it is now my view that these objectives
should be achieved through policies which are 'permanent' and
'direct', rather than temporary and indirect.
Perhaps Timor-Leste should use direct measures such as one-off
cash payments to IDP shelters, rather than indirect measures such
as delivering compensation through the reduced cost of utilities.
And we should use permanent measures such as permanent low tax
rates, instead of 3 year periods of zero tax. Permanent measures
create stability and certainty which fosters business confidence.
Direct and permanent policies are preferred because they are
clear, focused on the objective they are designed for, and less
susceptible to waste and corruption.
These ideas on tax reform have been discussed with President Xanana
Gusmão and former Prime Minister Mari Alkatiri. Both agree
in general with such ideas. Actually, Dr Mari Alkatiri told me
in one recent conversation that he had wanted such a tax policy
review two years ago.
I believe that my proposed new tax system is the right one for
Timor-Leste.
It is an initiative of mine that I think it is much needed for
the good of our nation.
If we are to maintain any taxes or financial imposts it should
only be on goods or industries that cause any environmental and
health harm.
My short time in office as Prime Minister, unfortunately does
not allow me to see this new tax system that is simple, pro-poor
and that encourages the business sector, the foreign investment
and job creation, implemented. But I vow that I will be fighting
for these changes as a private citizen or from whatever official
position I may be holding in the future because I believe they
are the right ones for Timor-Leste at this time of our evolution
as a nation."
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