Re: Senate Bill No. 8-41, SD1

August 6, 2009 at 1:18 pm Leave a comment

Two Letter to the Senate and the House regarding Senate Bill No. 8-41, SD1

******************************************

August 5, 2009
Serial No. 09-443

The Honorable Delegate Noah Idechong
Speaker of the House of Delegates
Eighth Olbiil Era Kelulau
P.O. Box 8
Koror, Palau PW 96940

Re:    Senate Bill No. 8-41, SD1

Dear Speaker Idechong:

Pursuant to the authority vested in me under Article IX, Section 15 of the Constitution of the Republic of Palau, I am referring Senate Bill No. 8-41, SD1 back to the Eighth Olbiil Era Kelulau for further consideration with the recommendations for amendment set forth below.

There are several glaring deficiencies and problems with this bill, not the least of which is the uncertainly of its effect on the level of local tax revenues that the National Government would collect if it were to become law.

    The bill imposes a tax on the “taxable income” of certain corporations.  The bill, however, does not define “income”.  Is the taxable income the “net income” or the “gross income” of the corporation?  The bill is vague on this issue and needs to be amended to clarify its intent.

    Perhaps most importantly, it is unclear whether the effect of this bill would be to enhance or decrease local revenues, or be revenue neutral.  The committee report accompanying this bill does not appear to have addressed this issue with the necessary due diligence.  It does not appear that any meaningful hearings were held or comments solicited and no in depth study was conducted to gauge the affect of this bill on local revenues.  What corporations doing business in Palau will be affected by this bill?  Have those corporations been indentified?  Have those corporations been asked for their comments?  The committee report simply seems to assume that changing the type of tax and increasing the tax rate will result in higher revenues, if that were the intent of this bill.  Such an assumption lacks merit and may well result in unintended consequences.

    To determine taxable “net income” a taxpayer is allowed to apply a long list of deductions to its “gross income”.  Often times the legitimate deductions that a taxpayer can apply to its gross income, even utilizing GAAP, will reduce the net income of a taxpayer to such a low level that the income tax is negligible or even zero.  The likelihood that a taxpayer will pay little or even no income tax is greater during a difficult economic period such as Palau is experiencing now.  Moreover, administering an income tax system is a complex process.  Frankly, it is difficult for the Republic to even administer the simple gross revenue tax system it has now.  Without the benefit of a great deal of lead time and training for the employees of the Ministry of Finance, the opportunities are immense for abuse by corporations using creative accounting techniques to reduce the amount of income tax they pay.

    The benefit of the gross revenue tax that Palau has now is that it is simple to understand and administer, and as long as the taxpayer is doing business and generating income, there is always a tax due and payable.  The Olbiil Era Kelulau needs to amend the findings of this bill to assure me that, at a minimum, the effect of the bill will not be to decrease the level of local revenues.  In order to make such findings, the Olbiil Era Kelulau will need to consult with experts and conduct an in depth analysis of the effect of this bill.  Local tax revenues are in serious decline already and I will not support any bill that even has the remote potential of reducing those local revenues further.

    This bill also changes the period that taxes are paid from quarterly to yearly.  Even assuming the net effect of this bill to be revenue neutral, the change in the time of payment would result in a severe cash flow problem for the Republic.  The bill needs to be amended to deal with this issue.

    Along the same lines, this bill needs to be amended to specify the allowable deductions that can be applied to gross income in order to determine the taxable net income of the taxpayer.  While GAAP may assist the Olbiil Era Kelulau in compiling such a list of deductions, what is acceptable as a deduction under GAAP may change from time to time without the benefit of any input from Palau.  I do not consider it to be wise or constitutionally permissible for the Olbiil Era Kelulau to abdicate Palau’s sovereign right to promulgate the laws under which we live in Palau by, in essence, delegating

lawmaking authority to a non-Palauan entity.  Palau needs to decide what deductions will be allowed.

    The tax created by this bill is not uniformly applied.  Article IX, Section 5 of the Palau Constitution vests the Olbiil Era Kelulau with the power to levy and collect taxes, but requires such taxes to be uniformly applied throughout the nation.  This bill exempts certain similarly situated corporations from its purview and thus does not comply with the foregoing Constitutional mandate.  To survive Constitutional scrutiny, at a minimum, the income tax created by this bill needs to be uniformly applied to all corporations that meet or exceed the minimum paid-in capital qualification.

    Since this bill imposes an income tax, I also think that in order to meet the Constitutional requirement of uniformity, and perhaps also to comply with the equal protection provisions of Palau’s Constitution, the tax should be applied across the board to all taxpayers, corporate or not, whose businesses are of a similar size and value.  As a matter of fair tax policy, persons who decide to do business as a corporation should not be penalized or treated differently for making that choice.

    As an example of how this bill would treat similar Palauan taxpayers differently, I would point out that there are two principal Palauan-owned wholesalers and retailers in Palau.  The size of their respective businesses is roughly similar and both obviously have assets of a value well in excess of the qualifications set forth in this bill.  One of these Palauan-owned entities does business in the form of a corporation, the other does business as a sole proprietorship.  The corporation is owned by a large number of Palauan citizens and pays yearly dividends to those shareholders based on its retained income after taxes.  The sole proprietorship is family owned and the distribution of its profits limited in that regard.  Assuming the intent and effect of this bill is to increase the amount of taxes paid by the corporate entity, this bill is essentially handing the family owned entity a competitive advantage.  Assuming the effect of the bill is to actually decrease the amount of taxes paid by the corporate entity, then it gives the corporate entity a competitive advantage.  Either way, the result is unacceptable as a matter of uniform tax policy.  This bill needs to be amended to provide uniformity and equal protection to similarly situated taxpayers in Palau.

    Finally, this bill does not provide for a thoughtful transition from the current gross revenue tax system to the proposed income tax system.  Does the payment of the proposed income tax start immediately?  Does a corporation get a credit against the income tax for its payments of the current gross revenue tax?  This bill needs to be amended to provide a clear and well thought out transition.

I am referring Senate Bill No. 8-41, SD1 to the Eighth Olbiil Era Kelulau.  I would respectfully request and suggest it be thoroughly reconsidered with due diligence taking into account the concerns set forth above.

Thank you for your continuing cooperation and courtesy.  I am willing to meet with you or any of your colleagues to discuss my foregoing concerns and to answer any questions there may be.

Until then, I remain

Sincerely yours,

Johnson Toribiong

******************************************

August 5, 2009
Serial No. 09-442

The Honorable Senator Mlib Tmetuchl
President of the Senate
Eighth Olbiil Era Kelulau
P.O. Box 8
Koror, Palau PW 96940

Re:    Senate Bill No. 8-41, SD1

Dear Senate President Tmetuchl:

Pursuant to the authority vested in me under Article IX, Section 15 of the Constitution of the Republic of Palau, I am referring Senate Bill No. 8-41, SD1 back to the Eighth Olbiil Era Kelulau for further consideration with the recommendations for amendment set forth below.

There are several glaring deficiencies and problems with this bill, not the least of which is the uncertainly of its effect on the level of local tax revenues that the National Government would collect if it were to become law.

    The bill imposes a tax on the “taxable income” of certain corporations.  The bill, however, does not define “income”.  Is the taxable income the “net income” or the “gross income” of the corporation?  The bill is vague on this issue and needs to be amended to clarify its intent.

    Perhaps most importantly, it is unclear whether the effect of this bill would be to enhance or decrease local revenues, or be revenue neutral.  The committee report accompanying this bill does not appear to have addressed this issue with the necessary due diligence.  It does not appear that any meaningful hearings were held or comments solicited and no in depth study was conducted to gauge the affect of this bill on local revenues.  What corporations doing business in Palau will be affected by this bill?  Have those corporations been indentified?  Have those corporations been asked for their comments?  The committee report simply seems to assume that changing the type of tax and increasing the tax rate will result in higher revenues, if that were the intent of this bill.  Such an assumption lacks merit and may well result in unintended consequences.

    To determine taxable “net income” a taxpayer is allowed to apply a long list of deductions to its “gross income”.  Often times the legitimate deductions that a taxpayer can apply to its gross income, even utilizing GAAP, will reduce the net income of a taxpayer to such a low level that the income tax is negligible or even zero.  The likelihood that a taxpayer will pay little or even no income tax is greater during a difficult economic period such as Palau is experiencing now.  Moreover, administering an income tax system is a complex process.  Frankly, it is difficult for the Republic to even administer the simple gross revenue tax system it has now.  Without the benefit of a great deal of lead time and training for the employees of the Ministry of Finance, the opportunities are immense for abuse by corporations using creative accounting techniques to reduce the amount of income tax they pay.

    The benefit of the gross revenue tax that Palau has now is that it is simple to understand and administer, and as long as the taxpayer is doing business and generating income, there is always a tax due and payable.  The Olbiil Era Kelulau needs to amend the findings of this bill to assure me that, at a minimum, the effect of the bill will not be to decrease the level of local revenues.  In order to make such findings, the Olbiil Era Kelulau will need to consult with experts and conduct an in depth analysis of the effect of this bill.  Local tax revenues are in serious decline already and I will not support any bill that even has the remote potential of reducing those local revenues further.

    This bill also changes the period that taxes are paid from quarterly to yearly.  Even assuming the net effect of this bill to be revenue neutral, the change in the time of payment would result in a severe cash flow problem for the Republic.  The bill needs to be amended to deal with this issue.

    Along the same lines, this bill needs to be amended to specify the allowable deductions that can be applied to gross income in order to determine the taxable net income of the taxpayer.  While GAAP may assist the Olbiil Era Kelulau in compiling such a list of deductions, what is acceptable as a deduction under GAAP may change from time to time without the benefit of any input from Palau.  I do not consider it to be wise or constitutionally permissible for the Olbiil Era Kelulau to abdicate Palau’s sovereign right to promulgate the laws under which we live in Palau by, in essence, delegating lawmaking authority to a non-Palauan entity.  Palau needs to decide what deductions will be allowed.

    The tax created by this bill is not uniformly applied.  Article IX, Section 5 of the Palau Constitution vests the Olbiil Era Kelulau with the power to levy and collect taxes, but requires such taxes to be uniformly applied throughout the nation.  This bill exempts certain similarly situated corporations from its purview and thus does not comply with the foregoing Constitutional mandate.  To survive Constitutional scrutiny, at a minimum, the income tax created by this bill needs to be uniformly applied to all corporations that meet or exceed the minimum paid-in capital qualification.

    Since this bill imposes an income tax, I also think that in order to meet the Constitutional requirement of uniformity, and perhaps also to comply with the equal protection provisions of Palau’s Constitution, the tax should be applied across the board to all taxpayers, corporate or not, whose businesses are of a similar size and value.  As a matter of fair tax policy, persons who decide to do business as a corporation should not be penalized or treated differently for making that choice.

    As an example of how this bill would treat similar Palauan taxpayers differently, I would point out that there are two principal Palauan-owned wholesalers and retailers in Palau.  The size of their respective businesses is roughly similar and both obviously have assets of a value well in excess of the qualifications set forth in this bill.  One of these Palauan-owned entities does business in the form of a corporation, the other does business as a sole proprietorship.  The corporation is owned by a large number of Palauan citizens and pays yearly dividends to those shareholders based on its retained income after taxes.  The sole proprietorship is family owned and the distribution of its profits limited in that regard.  Assuming the intent and effect of this bill is to increase the amount of taxes paid by the corporate entity, this bill is essentially handing the family owned entity a competitive advantage.  Assuming the effect of the bill is to actually decrease the amount of taxes paid by the corporate entity, then it gives the corporate entity a competitive advantage.  Either way, the result is unacceptable as a matter of uniform tax policy.  This bill needs to be amended to provide uniformity and equal protection to similarly situated taxpayers in Palau.

    Finally, this bill does not provide for a thoughtful transition from the current gross revenue tax system to the proposed income tax system.  Does the payment of the proposed income tax start immediately?  Does a corporation get a credit against the income tax for its
payments of the current gross revenue tax?  This bill needs to be amended to provide a clear and well thought out transition.

I am referring Senate Bill No. 8-41, SD1 to the Eighth Olbiil Era Kelulau.  I would respectfully request and suggest it be thoroughly reconsidered with due diligence taking into account the concerns set forth above.

Thank you for your continuing cooperation and courtesy.  I am willing to meet with you or any of your colleagues to discuss my foregoing concerns and to answer any questions there may be.

Until then, I remain

Sincerely yours,
Johnson Toribiong

Advertisements

Entry filed under: Informational.

Radio Australia’s Interview with President Toribiong EO No. 264 – School Opening Postponement

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


August 2009
M T W T F S S
« Jul   Sep »
 12
3456789
10111213141516
17181920212223
24252627282930
31  

Recent Posts


%d bloggers like this: