Summary of new tax law

La’o Hamutuk analyzes significant changes in the tax regime in Timor-Leste, known colloquially as the Tax Policy Reform, and published material when it becomes available.

The simplification of tax administration and collection has been in process for some time and was initially proposed to create a more efficient system of tax administration and collection. This would benefit clients (less red tape), officials (less complications), and government (better oversight). Later, more and more focus was put on the overhaul of the tax regime with the hope of attracting foreign investment to stimulate economic growth. For example, the 2007 Economic and Social Development Brief by the ADB, WB and IFC states: “In light of the comfortable fiscal position and prospects, reducing and simplifying import tariffs and income taxes for the non-oil economy (but not user and utility charges) may be warranted as part of an overall effort to improve the attractiveness of Timor-Leste as a destination for private investment.” The same sentiments are reflected in the current move to revise the tax laws.

Early 2007 a Tax Policy Committee considered tax plans from then Prime Minister Ramos-Horta and recommendations from IMF and proposed a reform of non-oil taxation aiming to “facilitate investment and job creation; Reduce the tax burden on wage earners and consumers, especially the poorest; Lower compliance costs and minimize evasion; Maintain systems so that additional revenue can be raised if required in the future.” The Council of Ministers revised parts of this proposal to be even more foreign-investment friendly, approving the Taxes and Duties Act 2008 (English or Portuguese) on 20 February 2008.

La’o Hamutuk and other organizations campaigned against many parts of this Act, arguing that it makes Timor-Leste almost solely dependent on petroleum revenues but, in a country in which most people live by subsistence farming, it does not actually help the poor. In a Public Meeting held by La’o Hamutuk on 21 April, even members of the original Tax Policy Committee distanced themselves from the current radical reform. Furthermore, creating a healthy business-enabling climate in a country like Timor-Leste is much more dependent on security, stability, and transparency, in combination with a service-oriented business climate, rather than on reduction of taxes. Probably the best argument given was the business woman who spoke at the presentation of the draft State of the Nation report on Private Sector Development on 24 April, saying she did not care if her taxes were lowered if it still meant she had to spend days trying to pay them. Nevertheless, Parliament passed the law in early June 2008 without making any significant changes besides not making taxes (other than annual taxes) retroactive to the beginning of 2008.

On 14 July, the Timor-Leste Revenue Service published in national newspapers a page filling summary, in four languages, of significant changes resulting from this Act. The TLRS has also updated the tax system information brochures on its website.

Wage Income Tax	1 July 2008
Residents
$0 to $500	no tax
$501 and over	10%
Non Residents	10%
Services Tax	1 July 2008
Hotel, bar, restaurant, telecommunication	5%
Designated services now exclude transport rental services
Withholding Tax	1 July 2008
Prizes, lotteries, royalties (reduced from 15%)	10%
Land or house rent	10%
Payments to non-residents (reduced from 20%)	10%
Services: building and construction	2%
Services: construction consulting	4%
Services: air and sea transportation	2.64%
Services: mining or mining support	4.5%
Interests and dividends no longer subject to withholding tax
Income Tax	1 January 2008
Resident natural person
$0 to $6000	0%
Over $6000	10%
Non-resident natural person	10%
Legal person	10%
Minimum income tax has been abolished
Both monthly and quarterly payment requirements are lowered to 0.5% of total turnover (was 1%)	1 July 2008
Other
Trading stock inventory: immediate and full deduction is now allowed regardless whether goods have been sold or not in that year	1 January 2008
Depreciation: immediate and full deduction is allowed by way of depreciation rate of 100%. Business is allowed depreciation deduction for undeducted amount as at December 2007 (first year new law only). Applies to amortization of intangible assets and expenditure too.	1 January 2008
Interest: no longer deductable, unless by financial institution	1 January 2008
Losses: deductable in following year and can be carried forward indefinitely	1 January 2008
Import Duty	1 July 2008
Duties based on “customs value”, meaning fair value in Timor-Leste (reduced from 6%)	2.5%
Sales Tax	1 July 2008
Value used for tax is equal to: customs value + import duty + excise tax payable (reduced from 6%)	2.5%
Excise Tax Import: Value used for tax is equal to: customs value + import duty Local: fair market value at time of removal from warehouse	1 July 2008
List of excisable goods: Beer Wine etc. Other alcohol Gasoline, diesel, etc. Tobacco etc. Cigarette lighters, smoking pipes Arms and ammo Vehicles (on value in excess of $75,000) Boats and planes (private)	$1.90/L $2.50/L 8.90/L $0.06/L $19/kg 12% 200% 35% 20%