For more information on directors' duties, especially for multi-jurisdictional companies operating in the Pacific, or for more in-depth sessions on duties and fees for directors in your organisations, feel free to contact us.
Export industry brings a lot of opportunities in entering a new overseas market especially for businesses in the Pacific as they strive to achieve economies of scale. Along with the opportunities comes the need for comprehensive strategies to address all challenges, risks and logistics that export businesses require.
In a recent Export Survey, Pacific Trade and Invest (PT&I) has outlined some findings on export dynamics from the standpoint of Pacific Islands exporters in 2016. The survey was carried out as a follow through from their 2014 survey, providing a more clear picture of the challenges and outlook for the exporters in the Pacific and the changes over the last two years.
The survey looked at 200 export companies from 12 countries with export markets extending to over 30 international markets. The participants represented a diverse range of industry sectors, business size, maturity and annual turnover. While collating information from such a wide range of companies can be challenging, PT&I noted the invaluable assistance received from chambers of commerce and other regional as well as national agencies in obtaining relevant data.
Key Findings of the Survey
In comparing the survey results with the 2014 survey, there was clearly an increase in new exporters that had started exporting within the last three years and those exporting agricultural products.
The importance of trans-Pacific trade was evident in half of the exporters that targeted at least one Pacific Islands country as their export destination. These were generally bigger economies such as Fiji, Vanuatu, PNG and Solomon Islands but also included Samoa and Marshall Islands. While Australia and New Zealand remained the main export destinations beyond the pacific islands, majority of exporters were aiming to enter newer markets such as Asia and North America over the next three years. Interestingly, a decline was noted in the percentage of exports to most regions across all industry sectors except for Asia and North America.
The survey showed that new businesses that had been exporting for three years or less were smaller in size with younger proprietors. Women proprietors were the most common in this group (32% vs 27% in total) showing a higher participation of women in the sector in the more recent years.
The region continued to have a varied range of exporting businesses across all industry sectors (including agriculture, manufactured goods, tourism and services) and across various business sizes, maturity and annual turnover. Although the total volume of exports grew from the 2014 survey, the number of countries exported to decreased.
Export confidence remained very positive with three in four businesses predicting that their export orders will increase over the next 12 months. While there was an increase in the businesses benefiting from Free Trade Agreements and Closer Economic Partnerships since 2014, the survey also noted the need to enhance these partnerships in order to better harness the potential of such trade agreements by the export industry.
Challenges and Risks
Such surveys are useful not only in identifying opportunities that can be properly enhanced for the export industry in the region but also to determine the challenges faced by the exporters that would require attention.
According to the Report, exporters raised a number of issues which posed as impediments to growth of their export businesses, access to finance/capital ranking as one of the most common one. This was worse for smaller businesses and new entrants in the export arena. Attracting foreign investment is proving to be more difficult for such export businesses not only because of high cost of doing business, but also due to lack of scale, proper infrastructure and in some cases political instability.
Apart from financing issues, key concerns were also around rising fuel prices, capacity constraints, labour issues, changes in government policies and as seen in recent cases with Vanuatu and Fiji, effects of natural disasters.
Exporters also highlighted the need for assistance in the marketing, market research, trade finance, market access, e-commerce and further training in export related areas.
In trying to reduce some of these barriers to exporting, areas of focus now include mechanisms or policies of reducing transport costs, facilitating export grants and introducing exporters to overseas agents/distributors.
Becoming Export Ready
Through market surveys such as this, organisations like PT&I are able to identify issues which in turn helps direct assistance and support for exporting business in a more effective way. Governments are also able to use such information to better assess their priority areas and policy reforms to help boost the export industries.
For an export business owner, there are a few more measures to consider as your business grows. These include biosecurity risks, freight and logistics, negotiating supplier/distributor contracts, licensing and other regulatory approvals required. PLN Advisory can assist your business address some of these issues so feel free to contact us for any further information.
Fiji's National Budget for 2017/18 which was delivered last month set out the Government’s intentions, priorities and new policy initiatives for the coming year. The theme followed from previous budgets – to empower Fijians in order to unlock Fiji’s economic potential. Overall, the budget was celebrated, as it delivered pay increases for civil servants of up to 79% as well as an increase in the tax threshold to F$30,000, meaning a bigger take home pay for many.
Education was one of the top priority areas, alongside significant increases in health, infrastructure, civil service reform and a notable allocation towards climate change adaptation and mitigation projects following Fiji's presidency over the upcoming 23rd Conference of the Parties to the United Nations Framework Convention on Climate Change (COP 23).
Net deficit will more than double from F$208.9m in 2016/2017 to F$499.5m in the coming year. This was, however, mainly attributed to the rollover of some capital expenditure from the previous year.
Growth forecasts were revised indicating a growth of 2.0% in 2016 going on to 3.8% in 2017 and 3.0% in 2018. Operating budget to capital expenditure ratio has remained around the same levels as budgeted for the previous years.
Some concerns were expressed around the growing national debt and increasing net deficit, particularly in light of forecasted revenue not being met if the projected sale of assets fails to materialise in the coming year.
Direct and Indirect Changes
Other tax incentives and amendments
Government Assisted Projects
All cooperatives that receive assistance from the Government for any project will be granted an income tax exemption for five years, in line with existing renewable energy incentives.
Electric Vehicle Charging Station Incentive
The minimum investment requirements in place have been reduced from $3 million to $500,000. The subsidy structure under the package will be amended to just a one-tier subsidy rate of 5% of the investment level.
Film-making and Audio-Visual Incentives
Amendments have been made in relation to Qualifying Fiji Production Expenditure on a film.
Residential Housing Development Package Regulations 2016
This will be amended to provide clarification on ceiling on the sale price of residential housing so that it becomes affordable to potential average Fijian home buyers. There will be an introduction of an additional incentive to include investors who may partner with the Government to provide affordable housing.
Hotel investment incentives
This will be amended to give CEO FRCA the powers to grant Provisional Approvals.
Section 102 of Income Tax Act will be amended to strengthen Anti-Avoidance Provisions by removing the requirement for a "main" or "dominant" tax avoidance purposes. This section will be invoked as long as one of the purposes of the scheme is tax avoidance.
Tax Free Regions and Commercial Agriculture and Agro-Processing Incentives
Extended for another ten years from 2018 to 2028 with the bio-fuel incentives and investment requirement restructured.
Other changes that might interest you
Summary of movements in Duty
If you wish to find out more about how some of the changes announced in the National Budget affects your business, feel free to contact us.
Jinita Prasad and Jyoti Singh
Starting a company is risky, but expanding a business to another jurisdiction can be even riskier. However, for entrepreneurs and business leaders the world over they realise that there are significant rewards for successfully expanding into new markets. When expanding to new markets business people can minimise their risk by giving particular attention to that country’s investment policies, permits required for starting a business in that country as well as any other legal steps an entrepreneur must obtain to incorporate and register a business in that particular country.
Fiji, like any other country, has a comprehensive set of rules and guidelines governing the area of foreign investment, including:
With the recent addition of the Foreign Investment (Budget Amendment) Act 2016 to the suite of laws affecting foreign investment in Fiji, it is a better time than any to get on board and up-to-date with your current obligations as a foreign investor or your future requirements as you take the leap into a rapidly growing economy.
A foreign investor is prohibited from carrying on business in Fiji unless he or she has been granted a Foreign Investment Registration Certificate (‘FIRC’) by Investment Fiji. A comprehensive checklist of documents is required to be submitted with the application form available from Investment Fiji. The FIRC is granted except for where:
The Act previously provided for a foreign investor who had been granted the FIRC to notify the Chief Executive of Investment Fiji of any change in its ownership or shareholder details within 15 working days of the change. Since this was only a notification process, it did not allow the Chief Executive of Investment Fiji to approve or refuse any changes or ensure that the new owners/shareholders complied with the FIA.
The 2016 Budget Amendment Act now changes s 11 of FIA 1999 to state:
"if a foreign investor that has been granted a certificate (other than a foreign investor that is a public company and is listed on a securities exchange) proposes to change its ownership or shareholding particulars, the foreign investor must make an application to the Chief Executive seeking an approval for a change in its ownership or shareholding particulars before the change is effected."
This change is significant in bringing Fiji in line with many other more developed economies, requiring better transparency and government oversight. This transparency ensures Fiji has quality investors providing stable investment opportunities. Effectively this will reduce the amount of risk present in the market from dodgy investment proposals making Fiji a better environment for fostering economic growth.
Other significant amendments also include the Chief Executive of Investment Fiji being able to refer certain applications, new as well as those submitted for change in ownership, to the Board for recommendation to the Minister. These will be for cases that fall within the exceptions listed above.
The Need for Approval Process
The need for an additional layer of approval by Investment Fiji had been subject to some debate in Fiji as it was seen as an added step which was already being submitted to Reserve Bank of Fiji and the Registrar of Companies. However, similar approvals and re-certifications are required in a number of other jurisdictions when changes to ownership of the foreign investment company occurs. For example, the approvals sought under the Foreign Acquisitions and Takeovers Act 1975 (FATA) in Australia or the application to Vary an Existing Foreign Investment Approval Certificate with VIPA in Vanuatu.
The turnaround time for processing of applications has also been amended where the Chief Executive of Investment Fiji must notify the foreign investor within 5 working days from the date of application whether it has been approved, refused or referred to the Board. In the event where the Board is making a recommendation to the Minister, this should be done within 15 days of the referral being made and the Minister has another 15 days to make a decision to either approve or deny the application or change. This will streamline the process of foreign investing, making the process quicker and ensuring costs are reduced so more of the cash flow coming to Fiji can be utilised on actual investment than bureaucratic red tape.
As Fiji’s government continues to promote a policy of attracting outside investment, it will make changes to the laws regarding investing and carrying on business in Fiji. It is important as an investor to be aware of your obligations and keep up-to-date as this will enable you to take advantage of the best investing conditions for your business.
If you require any assistance in compliance with the recent amendments to the Foreign Investment Act or are looking at establishing business in Fiji or the Pacific, please feel free to contact us.
Tax reform in Vanuatu
Vanuatu has no form of income tax for either businesses or individuals. Rather, the Customs and Inland Revenue Department (CIR) (the body responsible for the collection of duties and taxes) generates a majority of the government’s income via value added tax (VAT), custom duties and licencing fees.
The Government has recently proposed introducing income tax due to a lack of funds for vital government services. An empirical analysis of revenue reform options carried out by the Revenue Review Committee (RRC) has highlighted the failings of VAT as an effective tax rate, compounded by the fact that a large number of enterprises operating in Vanuatu are not VAT registered.
What is being canvassed?
The RRC released a consultation paper in September last year (Paper) which canvassed a range of options for reform and modernisation of taxation policy, focussing on three main areas: tax revenue, non-tax revenue and modernisation of Vanuatu's tax and customs administration.
The review by the RCC has highlighted the inefficiencies of the current revenue system where huge reliance is placed on VAT and import duties. These taxes have a direct impact on cost of goods and services, which affects lower income earners. The review also noted the bureaucratic processes of administering the fees payable at various levels to numerous agencies, which further adds to the cost of doing business in Vanuatu.
The introduction of an income tax will create a more equitable tax system – it takes into account the person's ability to pay, thus shifting the burden of providing for infrastructure, education and health services. However, revenue reforms will be futile if other fees and costs such as business license fees and rent tax are not removed or at least reduced to improve the ease and cost of doing business at other levels.
A variety of government bodies, politicians and other interest groups have proposed various tax schemes to fill this gap in government policy. For example, in September 2016 the Prime Minister Charlot Salwai proposed a new tax policy – taxing the richest 8 per cent of the population; those making 500,000 Vatu. However, Finance Minister John Sala has proposed that a flat tax of 17% apply to residents making 750,000 Vatu or more, thereby only applying to the richest 3 per cent of the country. Opposition leader, Ishmael Kalsakau, has slammed the proposals, instead arguing that Vanuatu should explore more indirect forms of taxation, such as an overhaul of the VAT.
What are the options?
Personal Tax Rate:
The RRC does not support a flat tax; rather it supports tax brackets similar to other countries in the Pacific. The empirical evidence supports the introduction of three tax brackets for personal tax rate:
The RRC took these rates and applied them to the 6,000 employees in the public service and found that the effect would be minimal, on average creating a 4% tax on total salaries, while those in the top tax bracket would only effectively be paying 11.2% in tax. This proposed tax rate would mean 85% of the working population will not pay any income tax.
This tax rate was compared with two scenarios introducing even lower tax thresholds and lower tax rates. These proposals the committee found would be hard to enforce and affect people who could not even afford subsistence lifestyles.
Another comparison was conducted against a higher tax rate and higher threshold. However, this was found to discourage investment in Vanuatu.
The RRC also recommended the introduction of a 17% corporate tax rate. Following an analysis of New Zealand corporate tax, the RRC extrapolated that this would only eventuate in an effective tax rate of 6.8%
Adopting a corporate tax rate would ensure that Vanuatu remained competitive within the region as a place to invest, and would ensure an effective tax rate that would genuinely benefit Vanuatu’s revenue.
Risk of introducing tax to businesses:
The following assumptions were made to demonstrate the risk that introducing a corporate tax would have on the local economy:
The RRC was strongly averse to the introduction of a higher VAT as this would increase the cost of living in Vanuatu. Currently, 80% of Vanuatu households spend the entirety of their income on subsistence consumption – any increase to VAT could have a devastating impact on the low income portion of the population.
It’s unclear whether Vanuatu will introduce income tax; however, the Government appears resolute in its attempts to amend the tax regime – it now looks as though change in some shape or form is inevitable.
PLN Advisory regularly advises clients on their taxation obligations. Contact Jinita Prasad to find out how these changes may affect your business.
 https://customsinlandrevenue.gov.vu/index.php/en/inland-revenue; https://customsinlandrevenue.gov.vu/index.php/en/inland-revenue/rates-taxes
As the second biggest importer and exporter in the Pacific region, Fiji already represents exciting opportunities to foreign investors. The Fiji Governments’ approval of the TFA represents yet another advance in Fiji’s free trade policy as it now takes steps to accession of the agreement. The TFA is also in line with Fiji's Trade Policy Framework, recognising the importance of its small and medium businesses. It promises to increase trade effectiveness and reduce costs by:
The most significant trade agreement since the GATS in 1995
While Fiji has entered into several key bilateral and regional trade agreements, the TFA may be the most significant trade agreement since its entry into the first set of multilateral rules for international trade, the General Agreement on Trade and Services (GATS) in 1995. GATS set the scene for the negotiations that ultimately lead to the TFA – this has certainly been a long time coming!
Although Fiji has not ratified the TFA, its Parliament’s approval in early February begins the process towards full acceptance into Fijian domestic law. The TFA is said to result in an average 5% reduction in trade costs under a partial implementation, improving trade most significantly in Least Developed Countries (LDCs) and Developing Countries (DCs), such as Fiji.
Time Frame for Implementation
The WTO has been criticised for applying uniform standards to countries that vary markedly in resources. The TFA addresses this issue by giving time flexibility to LDCs and DCs in fulfilling their respective obligations under the TFA. Fiji has been required to classify each article of the TFA into category A, B or C, with each category stipulating a timeframe within which it will meet the requirement.
By the time the agreement enters into force
31st December 2017
31st December 2019
This scheme not only allows flexibility and the opportunity for self-determination to Member states, it also grants certainty to investors. Investors in Fiji or those considering Fiji for investment can now project the evolution of the legislation according to the timeline imposed.
Key Aspects of the TFA
The TFA seeks to ease the bureaucratic hurdle of firstly knowing and then adhering to those formal requirements such as tariffs, duties, certification, labelling and packaging. By ensuring that information is readily available, it aims to provide a more effective collaboration between the customs and other relevant authorities on trade facilitation and customs compliance issues.
The TFA also directs Members to make information easily and non-discriminatorily accessible to all traders, with specific information required to also be available online. These measures will help improve transparency and enhance Fiji’s capacity to participate in global value chains while also reducing any scope for corruption.
The TFA seeks to expedite trade processes through provisions that work towards a reduction in the time and costs of facilitating the clearance of goods at borders and ports. This will be achieved through improving existing systems and processes and making them more efficient and effective; for example, streamlining the documents required and physical inspections for specific shipments.
In addition to these short-term and specific requirements, the TFA will be harmonised into Fiji's Trade Policy Framework, with reform initiatives extending to overall improvement of customer service, short turn-around times and reduction in cost of doing business in Fiji.
Fiji’s adherence to the TFA is a strong indicator of Fiji’s continued intention to be seen as a central hub in the region for investment and international trade, both within the WTO guidelines and beyond. The recently held National Trade Facilitation Workshop for the private sector was aimed at increasing awareness of the TFA and its potential benefits amongst private sector businesses.
What does this mean for investors?
The TFA will substantially improve the ease of doing business while reducing the cost of trade. It is important that you plan your trade and investment strategies around the TFA in order to benefit from Fiji’s current and prospective legislative changes in the trade sector.
PLN Advisory is headquartered in Fiji and provides key corporate and strategic advice for clients that operate in the Pacific region, including Fiji. Please contact Jinita Prasad for advice on how your business can benefit from these changes.
Following the National Budget for 2016-17 coming in to effect from 1st August and with the Income Tax Act 2015 being introduced from beginning of this year, a recent tax workshop attended by PLN Advisory highlighted how all this has translated into new business tax laws and what it actually meant for businesses and investors.
Fiji ranks amongst countries with lowest corporate tax rates with companies paying 20% tax on profit since 2012 and as low as 10% if the company is listed on the South Pacific Stock Exchange, making Fiji a great destination to invest. However, as the tax revenues come under pressure with reduced corporate tax rates, over the last few years we have seen a number of other taxes creep up as a result, having an impact on not only the cost but the ease of doing business in Fiji.
Income Tax or Capital Gains Tax?
The ambiguity surrounding business income and capital gain dates back to when capital gains tax did not even exist in Fiji. The remnant of the old and much argued section 11(a) of the Income Tax Act (Cap 201) continues in the definition of business activity and business income in the new Income Tax Act. Business activity includes amongst other things, any profit making undertaking or scheme, even if it is one-off in nature and may not necessarily be regarded as income according to ordinary concepts.
The other area of contention is around the definition of capital assets, depreciable assets and structural improvements. Prior to 2016, it was clear that assets such as land and building used to derive rental income would be subject to capital gains tax upon disposal. However, capital assets now exclude depreciable assets such as structural improvements which is defined as "...any building, road, driveway, car park, pipeline, bridge, tunnel, airport runway, canal, dock, wharf, retaining wall, fence, power lines, water or sewerage pipes, drainage, landscaping or dam."
What this means is that if depreciable assets such as buildings are disposed at value in excess of their written down value, the gain is likely to be treated as income and added to the gross income of the person for that year. It is also important to be mindful of Social Responsibility Tax (SRT) which is applicable to individuals whose income is above $270,000. Individuals with income below this level could find themselves subject to SRT if the gain from disposal of properties are included in their total income for the year.
In practice, sale of depreciable assets will still attract a 10% tax on the gain on disposal in order to obtain the CGT clearance. But this will be offset against the total income tax payable by the taxpayer at the end the year.
Items such as debt forgiveness including related party loans being forgiven, which could be one-off and more capital in nature are now constituting business income, hence making the line between income tax and CGT more blurred.
The deemed dividend provisions for undistributed profits have been reintroduced for dividends in respect of 2016 and onward. Deemed dividends are subject to dividend tax of 3% for residents and 9% for non-residents on any undistributed profits not distributed by the sixth month after the end of the previous tax year. This tax doesn't apply where a company can prove that the profit has been or will be reinvested for the maintenance or development of the business of the resolution but the area of concern here what extent of proof for reinvestment will be satisfactory for FRCA. There is a need for some guidance notes or practice statement around this to clearly identify what companies can do with undistributed profits and not be subject to the deemed dividend tax.
There is also a 1% transitional tax applicable on undistributed profits for 2014 and 2015.
As announced in the last National Budget, VAT is now applicable on the business of dealing in residential accommodation rentals where the annual turnover from such rental income exceeds $100,000 per year. This was previously exempted from VAT and its imposition as a goods and sales tax means that it will effectively be passed on to the end user, being the tenants. However, the inclusion of this good and sales tax which eventually passes on to the tenants may be in conflict with the current rent freeze that the Commerce Commission has had in place for a few years now.
Other changes include non-resident withholding tax which used to be applicable on professional services and now extends to accommodation, airfares, transport and allowances - expenses which could purely be just reimbursement in nature.
Stamp duty has also now changed to an ad valorem levy which means it is payable at the Sale and Purchase Agreement stage and not upon lodgement of the transfer as previously done. A refund could be applied for if the transaction did not get fully executed. Stamp duty rates for residents is 3% and 10% for non-residents.
Some of these amendments may affect you and your business and it is very important t get proper tax advice on this.