Tonga's Income Tax Bill puts more pressure on tight cashflows [1]
Monday, October 23, 2006 - 17:30. Updated on Friday, October 3, 2014 - 16:31.
By Mary Fonua
Revisions will be needed to Tonga's Income Tax Bill 2006 if it is to win acceptance in the House this year and in order to avoid a hostile reception from the public. This need is clear as public consultations on the Bill are winding up this week.
The Income Tax Bill, which government would like to see go through the House this year and become a law in force by 1 July 2007, proposes to increase business taxes for most companies. Among other things, it proposes a new turnover tax on companies, regardless of whether they make a profit or a loss. Farmers, fishermen and small traders who currently slip through the tax net, will all be required to pay taxes. It will simplify tax collection by removing personal tax exemptions, while Tonga's few savers will find a withholding tax on interests has an extended reach.
Hon. Afu'alo Matoto, the chairman of an independent Committee on Income Tax Consultation, set up to canvas the public's views on the bill and to make recommendations to the Minister of Finance, agrees that revisions will be needed.
"Yes, it needs revision, firstly, if it is to go through parliament, and secondly, to have it accepted by the workers and the business community," he said.
"If they do it well a lot of objections will be removed. If you have strong objections, then that can coerce people to be disruptive. You have to collect money in a way that people are not hostile to."
Poor turnout
Commenting at the Moulton Hall, following the cancellation of the public consultation for Nuku'alofa due to a lack of turnout - less than half a dozen people turned up on October 18 - Hon. Afu'alo said that he would have liked to see more time for the consultations that had been hurried through this month.
"The bill was drafted in 2002 and some consultation started but then stopped. The consultation for only two weeks now, has been to Ha'apai and then to Vava'u. People have conflicting priorities and need more time to look at this - if you have to choose between your previously planned activity and a tax meeting - the tax meeting is not going to take priority."
However, he said that individual taxpayers and business people had raised concerns at the meetings that had been so far held throughout Tonga.
Exemptions gone
"The main concern is the removal of personal exemptions and that the threshold for tax free income will be set at $5,000. Many say the threshold is too low."
The bill introduces a higher tax rate of 20% to all incomes above $20,000.
"All exemptions have gone so the PAYE should be the final amount of tax an individual pays," said Hon. Afu'alo. "By doing that the revenue collectors no longer have to review tax returns and it saves time and manpower," he explained. "They reckon that this takes up 50% to 70% of staff time leaving little time for staff to follow up on taxes that should be paid and are not. They would become a lot more productive. The only thing that will not be taxed is reimbursements and everything else is taxable."
Flat rate
For companies he said the main concern is the introduction of a new taxation rate of 25% for all business, including small companies.
"Businesses with less than $100,000 turnover pay 15% at the moment and income over that at 30%. It also removes discrimination for resident and non-resident companies. Having one new rate of 25% is good for big companies but small businesses are concerned," said Hon. Afu'alo.
It was pointed out at one consultation that businesses would have to hit $300,000 to come out with the same tax rate as before and anyone under that would be paying more tax.
Meanwhile, non-resident companies will pay less tax going down from 42% for companies over $50,000 to the new flat rate of 25%.
"Fairly harsh"
Hon. Afu'alo, a former General Manager of the Tonga Development Bank, said there were also strong objections to a new minimum income tax for businesses, and a presumptive tax for micro-business, while there is a concern that withholding tax on interests will discourage savings.
"The new Minimum Income Tax on businesses with a turnover of over $100,000 will have to be paid quarterly, and then at the end of year which ever is higher is the final tax.
"It is set at 1% of turnover and there are strong objections to that, not only because companies will pay regardless of whether there is a profit or loss, but it is fairly harsh on any business and particularly where the business is making a loss and it is the shareholders who are propping up the company," he said.
"It also means that four times a year when the turnover tax is due companies will have to pay two lots of taxes [including consumption tax] and for businesses to take this out of their cash flow is really hard. Most businesses are tight on cash flow and this will further strain weak cash flows," he said.
On top of this were complaints from business people over the time allowed for consumption tax payments. "Fifteen days is too short and people have to pay the tax before they have recovered the money from debtors," he said.
3% tax on turnover
Meanwhile, companies with turnovers of under $100,000 will be subject to a Presumptive Income Tax, "a 3% tax on turnover of the business, but it is going to be difficult to establish because small traders don...t keep records and so are currently not taxed. If you are having difficulty taxing them now how is this going to be enforced under the new regime?" he said.
He was sympathetic to the situation of farmers and fishermen who had been exempt from tax for quite some time but will now be taxed. "Both are actually high risk and susceptible to high profits and losses. It needs to be looked at very carefully. I think discipline is good for all these people but there is the question of how far can it be enforced."
He was also concerned with the doing away of the $900 limit on interest earning. "Tonga is a country of very low savings and 10% withholding tax on interest could be a disincentive to savings," he said.
Tongatapu
The Independent Committee chaired by Hon. Afu'alo and with members 'Uhila Liava'a and Tapu Panuve will listen to further submissions and concerns this week in Tongatapu, with another meeting at the Moulton Hall scheduled for Friday evening, October 27. At the end of the Consultation this Committee will submit a report to the Minister of Finance before the Bill goes to parliament.
Hon. Afu'alo has recently been appointed as the new Minister of Public Enterprises.