The lawmakers said the measure was based on the findings of the bipartisan 2007 Tax Review Task Force.
As pointed out by the task force, the senators said, the current tax system is a vertical tax that harms small and new businesses as it requires tax payments at numerous stages in the retail and service process.
This is unfriendly to small businesses, new businesses and foreign businesses, the senators said.
According to their bill, the current taxation system makes it difficult for a foreign company to operate both in Palau and in their home country because the gross revenue tax system is often incompatible to foreign net profit tax systems — this sometimes precludes foreign businesses from taking advantage of tax breaks in their own country.
In order for Palau to be more business friendly, its gross revenue tax system should be replaced by the VAT, the senators said.
They said the VAT will eliminate the double taxation system, is simple for business owners, will eliminate incentives to manipulate the double taxation system, will foster small business growth as well as encourage new businesses and attract foreign investors to Palau.
The bill states that the Ministry of Finance will be responsible for promulgating the necessary rules within 90 days of the effectivity of the measure.
Finance is responsible for prescribing forms for use by taxpayers.
The Bureau of Finance and Taxation will administer the new system.
The VAT is a form of consumption tax. Instead of placing a gross revenue tax at every transaction level, as the current gross revenue tax does, the VAT will instead impose a tax only at one level — at the point of purchase by the consumer.
The bill pegged the VAT at 7 percent.
