MINISTER OUTLINES NEW DIRECTION FOR THE COOK ISLANDS TAX SYSTEM

Today the Minister for Finance , the Honourable Mark Brown announced a raft of proposed changes to the Cook Islands tax system.

In releasing documentation for public consultation the Minister outlined his strong belief that the Cook Islands tax system needed changes that would make the system fairer for the people of the Cook Islands.

Minister Brown commented that “The Government has put in a considerable effort to implement changes which are aimed at simplifying the system and to ensure that our taxation regime is simple and equitable.  Equity is important, the Government particularly wanted to shift the burden of taxation towards those who could afford it.”

The major change are an increase in the VAT to 15 per cent from 1 January 2014, and significant decreases in personal income tax rates.  Minister Brown pointed out the need to help the most vulnerable in the community.

“The Government recognises that the increase in VAT to pay for these changes will affect the more vulnerable in our community which is why we have made a significant increase to a number of welfare payments which are aimed at helping those who need it most in our community.  I believe that almost all households will be made better off, with significant cuts to personal income taxes, a 10 per cent increase in ongoing social welfare payments, and a 25 per cent increase in the Cook Islands pension, people over 70 will from 1 January receive a monthly pension of $625, the current pension for people below 70 will rise to $500.”

A process of consultation will commence over the next couple of weeks.  Financial Secretary Richard Neves pointed out that MFEM will meet with each individual and group that put in a submission to the review.  “If people go to the effort of commenting and suggesting changes, then we in turn should be respectful and discuss the changes with them, particularly to any points they may make.

A final public meeting will be held before the Government finalises the package which it aims to introduce into Parliament in December 2013.  Major recommendations are as follows.

Import Taxes

1.       Eliminate the reservation in Part 9 of the Customs Revenue and Border Protection Act to allow Customs to charge levies on all production sources from 1 January 2014 (effectively moving from an import-levy system to an excise system);

2.       Exempt pearl production from the excise regime, with the aim of removing the exemption after a comprehensive review of the pearl industry is undertaken;

3.       Maintain the planned increases to health related excises as outlined in the 2012/13 Budget;

4.       Commit to further refinements of the alcohol and sugary drinks excise regime to allow for greater simplicity, with the changes being effective as of 1 July 2014;

5.       Switch the current ad valorem (price-based) levy on sugary drinks to a specific (quantity-based) levy from 1 January 2014;

6.       Increase the annual indexation of specific (quantity based) levies to 5 per cent per annum after the initial increase periods for the respective products from 1 July 2014;

7.       Eliminate the import levies on pork, sea freighted eggs, ice cream, and seasonal vegetables from 1 January 2014; and

8.       As a part of public health policy, introduce compliance measures on sea freighted eggs to protect and inform consumers from 1 January 2014; and 

9.       Replace the $65 gift exemption allowance on imported packages with a universal $100 de minimis rule, except on goods that attract specific excise taxes (which will receive no exemption). 

Value Added Tax

10.   Increase the VAT rate to 15 per cent;

11.   Increase the threshold for mandatory VAT registration from $30,000 to $40,000 in gross turnover a year;

12.   Increase the threshold for voluntary VAT registration from $15,000 to $20,000 in gross turnover a year.

Personal Income Tax

13.   Decrease the personal income tax rates and adjust the tax income bands to the following schedule from 1 January 2014:

2013 personal income tax rates

2014 personal income tax rates

Threshold / Income band

Marginal tax rates

Threshold / Income band

Marginal tax rates

Up to $10,000

Nil

Up to $11,000

Nil

$10,000 to $30,000

25 per cent

$11,000 to $30,000

18.5 per cent

$30,000 upwards

30 per cent

$30,000 to $80,000

27.5 per cent

 

$80,000 upwards

30 per cent

 

14.   Increase the minimum wage by at least 12 cents an hour to fully compensate low wage earners from 1 January 2014;

15.   Remove the differential tax rate on secondary employment from 1 January 2014;

16.   Remove the differential rates of non-residents to ensure an equal treatment of income with resident taxpayers from 1 January 2014, with incomes assessed by the number of days spent in country;

17.   Add a 183 day rule to the determination of tax resident status;

18.   Increase both pensions by 25 per cent, and increase all other ongoing social welfare payments by 10 per cent;

19.   Remove the exemption on the taxation of the pensions and allowances paid under the Welfare Act 1989 (or revised Act) from 1 January 2014; and

20.   The tax treatment of superannuation be considered as a stand-alone review.

Company Income Tax

21.   Leave the current company tax rates unchanged, but review the company tax arrangements in 2014/15 as part of a broader investment and business development strategy, with the aim of unifying the local and international company tax rates at somewhere between 20 to 28 per cent;

22.   Do not implement a general capital gains tax, noting that currently proposed legislation for seabed mining activities includes provisions for the transfer of ownership; and

23.   Eliminate the tax exemption afforded to international airlines from 1 January 2014, with airlines being charge the same company tax rates as other companies carrying on business in the Cook Islands.

Local Trusts

24.   Amend the current schedule of taxation on local trusts from 1 January 2014 to reflect a single flat tax on all trust income equivalent to the highest personal income tax (currently 30 per cent).

Withholding Tax (on domestic holdings)

25.   Removal of the withholding tax on the interest earned on domestic deposits from 1 January 2014;

26.   Include interest earnings as part of personal income from 1 January 2014 by removing the exemption on interest earnings in the Income Tax Act 1997;

27.   Retain the treatment of interest earned on bank deposits as business income; and

28.   From 1 January 2015, bank accounts without a linked RMD number attract the highest personal tax rate until such time as an RMD number is obtained.

Other Administrative Changes

39.   Establish a Financial Outreach Office to provide tax and financial literacy assistance to local businesses and the general public from 1 January 2014; and

30.   E-filing of tax personal tax returns to be made available from 1 January 2015;

31.   Strengthen the requirement of employers to charge the non-declaration rate for employees who do not present an RMD number from 1 January 2015.

Documents:

1. Cook Islands Government Tax review 2013 (Full report) (PDF, 999kb)

2. Cook Islands Government Tax review 2013 (Main report only) (PDF, 415kb)

3. Appendix 1 - Cook Islands Tax review Explanatory paper (PDF, 345kb)

4. Appendix 2 - Summary of recommendations (PDF, 127kb)

5. Appendix 3 - Welfare analysis of VAT changes and personal tax cuts on taxpayers (full table and graphs) (PDF, 149kb)

6. Appendix 4a - Personal Tax Information Sheets (English) (PDF, 204kb)

7. Appendix 4b - Personal Tax Information Sheets (Maori) (PDF, 193kb)

8. Appendix 5a - Example Tax Scenarios (English) (PDF, 135kb)

9.Appendix 6 - Summary Information for Business (PDF, 116kb)