Foreign investment in the Maldives has been key to the creation of a successful tourism industry, which contributes to one-third of Maldives’ GDP. An important reason for the positive attitude of international investors towards investing in the Maldives has been its tax system, which is relatively favorable to foreign investors.

The existing tax system in the Maldives is very simple and easy to administer. There is no income tax, corporate tax or property tax. Most of the revenue (three fourths of the total revenue) come from import duties, tourism tax, state owned enterprises and resort lease rents. Other taxes include bank profits tax, land rent, royalties, administrative fees and charges, work permit and interest receipts.

Out of these, the most relevant tax to investors, tourism tax is levied at a flat rate of USD 8 per night per bed, regardless of the tariff rate for the bed. For this reason, a bed which costs USD 10,000 per night will pay the same amount of tax as a bed which charges USD 200 per night. Even though, this reduces the administrative burden of tax collection and compliance, it is highly distortionary in terms of tax burden on the payers. The disappointing fact is that, the highest burden will be borne by the lower end resorts with lower tariff rates, as a relatively huge percentage of their profits go towards Tourism Bed Tax, while the luxury resorts will pocket a higher margin of profit.

The current political environment in the Maldives has been extremely exciting as we are going towards our very first multi-party elections in a month or so. Many candidates in their party manifestos have been proposing ambitious tax systems with huge figures as expected government revenue.

Now, it is indeed necessary for the Maldives to do away with the existing tax system and go towards comprehensive tax reforms, especially in the case of the aforementioned tourism tax. At the same time, we must be careful to not get carried away with big numbers and expected revenue figures.

It is important to realize the complications and intricacy involved in deciding an appropriate tax rate for the tourism tax, as well the possibility of broadening the tax base to include a corporate tax. Simultaneously capacity building in the area of tax collection and auditing is of utmost importance. It is very clear that the existing tax collecting authorities (Department of Inland Revenue or MMA) with total staff less than 100, will not be properly equipped to handle the variety of issues a reform implementation will bring in.

Still… the mere fact that such issues are on the agenda for the presidential candidates and the fact that they are giving considerable thought to bringing about positive change, is paving way for productive change, towards a better economy for us! Hooray to the Multi party elections!

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  3. Maldives, a paradise in trouble.
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