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MAJURO – The Republic of the Marshall Islands is gearing up for a transformative overhaul of its tax system, following a February 2025 IMF Technical Assistance Report that outlines a comprehensive roadmap for modernizing both consumption and income tax structures.
The key recommendation: scrap the existing patchwork of import tariffs, turnover taxes, and local sales taxes in favor of a more efficient, transparent, and revenue-stable system grounded in international best practices.
What the IMF Proposes
- Consumption Tax Reform
- Replace the current fragmented regime with a broad-based Value-Added Tax (VAT).
- Introduce targeted excises to price in externalities (e.g., sugary drinks, fossil fuels).
- Use a profit tax to supplement consumption-based revenue.
- Income Tax Reform
- Simplify rate structures for both personal and corporate income.
- Broaden the tax base by eliminating exemptions and improving compliance.
- Revenue Administration
- Overhaul tax administration core functions to ensure efficient collection.
- Leverage digital tools and capacity development to improve transparency and taxpayer services.
Why It Matters
The Marshall Islands currently relies heavily on import duties and a turnover tax, which are distortionary and regressive. The tax base is narrow, enforcement is inconsistent, and the system is ill-equipped to fund growing public needs, particularly as the country braces for Compact of Free Association (COFA) transitions with the U.S.
By introducing a VAT and streamlining income taxes, the country can:
- Boost revenue predictability,
- Improve equity,
- Attract investment,
- And align with Pacific peers like Fiji and Vanuatu, which have already implemented VAT.
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