KINGDOM OF TONGA - SPREP

Strategic Development Plan 8 2006/07-2008/09
• Facilitate private sector led growth by improving the legal and regulatory
environment for local and foreign investment and by introducing and
progressively implementing tax reform
• Mitigate the economic and social impact of the reform program by
improving the quality of socioeconomic data production and
dissemination and by establishing an Economic and Social Impact
Monitoring Unit in CPD.
EPSRP Objective 1: Achieve Sustainable Fiscal Balance
The legislative framework for achievement of the fiscal sustainability
objective was provided by passage of the Public Finance Management Act 2002,
which was promulgated in mid-2003 and provides for greater control by the
Ministry of Finance over budget execution, though in 2005 there was still a need
to develop supporting regulations. The share of wages and salaries in current
expenditure was reduced from 52.4% in 1999/2000 to 47.1% in 2004/05 through
abolition of some vacant positions and imposition of a general hiring freeze.
Supportive technical improvements were made through a transition from line
item to programme budgeting and the introduction of computerised accounting
and payroll systems, with 10 of 28 Ministries and Departments connected to the
Ministry of Finance’s automated accounting system by mid-2005. The backlog in
preparing and presenting audited Public Accounts was overcome in 2005.
On the revenue side of public financial management, a tax reform package
intended to reduce reliance on trade taxes was approved in January 2002. The
package consisted of: (i) introduction of a broad-based single-rate consumption tax
(CT) for large businesses (annual turnover above $100,000); (ii) a simplified corporate
income tax; (iii) a simplified personal income tax; (iv) a uniform customs duty rate;
and (v) the repeal of tax incentives under the Industrial Development Incentives Act
(IDIA) and their replacement by accelerated depreciation and investment
allowances. The Revenue Services Administration Act 2002 provided the
legislative framework for strengthening tax administration, several senior
positions were filled and training provided with AusAID assistance. However,
capacity constraints prevented the implementation of the full tax reform package
as originally scheduled. Parliament ratified the CT in October 2003, and in April
2005 a 15% CT was introduced in place of the domestic sales tax and the port and
services tax. The Revenue Department had been restructured in late 2004; and in
2005 tax and customs administration was strengthened through training and
advisory support from AusAID and NZAID, creation of an anti-corruption task
force and the extension of computerised systems. Drafts of the Customs Act and
Regulations and the Income Tax Bill and Regulations were still to be passed.
Looking to the Future, Building on the Past 6