Cook Islands Finance Minister defends possible increase in VAT

Transcript

The Finance Minister of the Cook Islands is defending proposed tax changes, saying reforms are needed to lessen the tax burden on locals.

The Government is considering a raft of changes, including increasing the Value Added Tax, or VAT, by two point five percent.

Mark Brown says since the last tax reforms in 1996, the local population has significantly declined while the tourism market has continued to grow.

He talked to Amelia Langford about the tax review.

MARK BROWN: It's looking basically at the current tax rates that we have and the current thresholds that are in place for a wide range of taxes, and these include income tax, VAT and so forth. The government last year made an announcement that it wanted to have a look at the current tax rates and tax thresholds, because it sort of came to our attention that when these rates and reforms were put in place in 1996 the economy was a lot different to what it is now, nearly 20 years later. Essentially, back then, we had a tourism industry with around 50,000 tourists a year visiting the country back in 1996. Today we're up to around 127,000 tourists. On top of that there has been a significant decline in the domestic population. So what we've found is the burden of tax over time has shifted on to the local workers and what we wanted to do was look at a readjustment. So the tax exercise we're looking at is basically tax-neutral. It doesn't increase the amount of tax that the government will be bringing in, but it's shifting the burden off the workers who are paying a significant proportion through PAYE and shifting it on to consumption. So the idea is that proposal is to increase the VAT from 12.5% currently up to 15%, which is a standard VAT now across the region, and also look at significant PAYE income tax reductions to offset these particular increases from VAT.

AMELIA LANGFORD: Now, some people might say 'Well, the Cook Islands government had an operation surplus of US$6.5 million last financial year, so why do they need to increase this tax?'

MB: Well, like I said, this doesn't increase the overall government tax. This year we will take in around $100 million in tax and that won't change, even with the adjustments. What we're doing is basically shifting the burden off the local workers here because the concern we're getting is the increased costs associated with living here. And as their wages and salaries have increased over the years, the burden of taxation has shifted unfairly on to local workers here. So what we're saying is let's share the burden across the increasing tourism population that has come to our shores by passing on some of that tax burden to consumption through VAT. So the more you consume the more, as a proportion, will be collected through tax.

AL: What about local businesses? What's their reaction to the possibility of this VAT increasing?

MB: They basically collect VAT on behalf of the consumer so it shouldn't make any difference unless they choose to absorb some of the increase of the VAT. Their main concern has been in the proposed timing of when we want to put this through. They'd like more lead-in time, 'cause a lot of the accommodation businesses, for example, have already put out their costings, or their prices for the next 12 months for a lot of their packages and so forth. They would like to see the introduction of any increase in VAT be brought in a little bit later down the track, rather than the proposed 1 January, which was in the recommendations.

Mark Brown says income tax cuts will more than offset an increase in Value Added Tax.