Overview:
A new bill before the Olbiil Era Kelulau seeks to ease the tax burden on small and medium-sized businesses in Palau by allowing deductions for certain local operating expenses before gross revenue tax is applied. Supporters of Senate Bill 12-62 say the measure would reduce “tax pyramiding,” improve fairness in the system, and help smaller firms compete with larger importers and wholesalers that dominate key supply chains.
By: L.N. Reklai
A new bill in the Olbiil Era Kelulau would change how some small and medium-sized businesses in Palau are taxed, with the goal of lowering costs and helping them compete with large importers and wholesalers. The measure, Senate Bill 12-62, would let qualifying businesses subtract certain local business expenses before their gross revenue tax is calculated.
Under current law, businesses that are not registered for the Palau Goods and Services Tax, but earn more than 50,000 dollars a year, must pay a 4 percent tax on their total gross revenues. These smaller businesses buy goods and services from bigger companies that control much of the import and wholesale market for food, fuel, construction materials and other essentials. They then pay tax on every dollar they bring in, with no deduction for the cost of those local purchases.
Lawmakers say that structure leads to “tax pyramiding,” meaning the same value is taxed several times as products move from importer to wholesaler to retailer. According to the bill’s findings, this hits small and medium-sized businesses hardest and makes it harder for them to survive and grow. The bill also warns that this pattern can drive some businesses to close, concentrate market power in a few large firms and push up prices for consumers.
Senate Bill 12-62 would allow certain taxpayers subject to the gross revenue tax, whose annual gross revenues do not exceed 500,000 dollars and who are not registered under the Palau Goods and Services Tax, to deduct “qualifying local business inputs.” In simple terms, that means ordinary and necessary costs that directly help the business earn revenue, such as inventory, construction materials, fuel, utilities, transport, professional services, and maintenance supplies bought from local registered businesses.
Those expenses would be subtracted from gross revenues before the 4 percent tax is applied. The goal is to tax the value added by the small business, not the full amount that has already been taxed earlier in the supply chain. Lawmakers say this would make the system fairer and more “neutral,” so that tax rules do not give an automatic advantage to big, vertically integrated companies.
The bill is tightly drawn to prevent abuse. It bars deductions for goods directly imported by the taxpayer, purchases from unregistered or foreign suppliers, personal expenses, non-cash items like depreciation, and most capital spending unless future regulations say otherwise. Transactions between related parties that are not at arm’s length or lack real economic substance would also be denied.
To qualify for a deduction, a business would have to show that the expense benefited the business, came from another registered taxpayer in Palau, is backed by invoices or receipts, and was paid or incurred during the quarter in question. The burden of proof is on the taxpayer, and the Bureau of Revenue and Taxation would have power to audit and disallow deductions it finds improper, adding penalties and interest where needed.
The proposal does not change who must register for the Palau Goods and Services Tax, nor does it change GST rates or filing requirements. All people or entities under common ownership or control would be treated as a single taxpayer for the 500,000-dollar ceiling, a step meant to discourage businesses from splitting up on paper just to qualify. The Minister of Finance would write detailed regulations and monitor the financial impact, and could later recommend further legislative changes if needed.