Project Case Study
Reforming Tuvalu’s legal tax system
Promoting growth and free trade through the review and amendment of Tuvalu's tax laws
Tuvalu’s growth strategy for 2005-15 is set out in its National Strategy for Sustainable Development (Te Kakeega), which recognises that strengthening public sector management and improving the private sector are key drivers for change in Tuvalu, which is heavily dependent on tax revenue.
The country has however experienced a trend of fiscal deficits since 2003 which have forced the government to consider the inefficiencies in revenue flows.
Tuvalu’s taxation reforms aim to address these deficits, creating equal opportunities in the area of business tax, supporting low-income earners through exclusion from personal income tax obligations, and allowing the shift to a broad-based consumption tax from the current reliance on duties and charges on imports.
Improved management of stronger revenue flows will also support the Tuvalu government’s aim to deliver public services more efficiently and receive greater pro-growth public investment.
As such, in 2007, the Asian Development Bank asked Adam Smith International to assist Tuvalu’s Inland Revenue Department by introducing a package of tax and customs reform measures, culminating in the IRC submitting to Parliament three draft laws. These changes enabled Tuvalu to meet its regional free trade agreement obligations, while at the same time providing alternative revenues through an updated tax system, which included the planned introduction of a VAT accompanied by income tax reductions. The package also included the abolition of sales tax and the introduction of excise duties.
Reform of these areas had a significant impact on preserving Tuvalu’s wealth, and the IMF suggests that continued reform of taxes is the country’s best chance of continuing to compete in the international market.