After more than 30 years of using the Gross Receipt Tax (GRT), Palau officially is adopting the Value Added Tax (VAT) system. Palau, an island nation in the Pacific, will implement GST (Dubbed as the Palau Goods and Services Tax (PGST)) on January 1, 2023.
The new indirect tax structure will be modeled after the Australian GST. President Surangel Whipps Jr. signed the bill, RPPL 11-11, into law taking the place of the current Gross Revenue Tax (GRT). The Act is one of the conditions for Palau to receive concessionary loans from the Asian Development Bank.
The debate of implementing a VAT system dates all the way back to 2007 and has been proposed many times but has never garnered enough votes to pass the OEK. This time, the measure was eventually adopted into law, owing to the continuing pandemic’s influence on the local economy.
The new tax legislation incorporates findings from ROP’s 2007 Tax Review Taskforce which concluded that the present tax system GRT, “stifles economic progress by disadvantage[ing] new and small firms.” . However, not everyone was convinced about the VAT system, and the House of Delegates had previously rejected the bill’s adaptation with certain members being sure that it would not pass. Letters to the OEK from many local businesses warned that the new tax scheme will increase the cost of items for local customers, the majority of whom can barely pay present pricing.
Despite some voiced reservations, the bill cleared the House on its second and third readings within two days, on the 28th and the 29th of September. The passage of the tax reform legislation was one of the conditions for receiving the last tranche of 15 million USD from the Asian Development Bank’s Policy-Based Loans. It is one of the income streams indicated for the fiscal year 2022 national budget. Without it, Palau’s budget would be cut by 18% from the initially filed FY 2022 budget which was already cut in half from the FY 2021 budget.
The passage of the tax reform legislation was one of the conditions for receiving the last tranche of 15 million USD from the Asian Development Bank’s Policy-Based Loans. The tax regime based on the GRT, favored large, established, vertically integrated businesses while discouraging the small start-ups, family businesses, and boutique operations. The VAT system is adopted to encourage Palau’s economic development while preventing the overwhelming tax burdens on the people.