CRA Timor News
The Timorese Tax System
Historical Evolution
The Tax System in Timor-Leste has, since its independence, witnessed important developments, and has sought, in a gradual but sustained manner, to attract new investors and entrepreneurs.
After the independence of the country, the rules adopted by UNTAET concerning tax legislation, in particular Regulation No. 2000/18 (as subsequently amended by various UNTAET Regulations), were putin place and having been adopted an entirely new system which already aimed the protection of the interests of the new State as well as of its taxpayers.
Upon transfer of the Administration to the First Constitutional Government, the legislative production in the tax domain has continued the development it had been based on, having been approved, in 2002, the Law No. 5/2002 which amended UNTAET Regulation No. 2000/18 and giving it the imprint that still today persists where it is still in force.
Along with these changes, the first laws relating to the taxation of petroleum activities in Timor-Leste, namely through the Laws No. 3/2003, 4/2003, 8/2005 and 13/2005, among others, were enacted addressing the growing need of defining the production and exploration of these natural resources which still today represent the largest source of tax revenues for the Timorese State, being further created, in 2005 (Law No. 9/2005), a Petroleum Fund for the country.
Finally, the approval of Law No. 8/2008 has improved some points and simplified the Timorese tax system, apart from the main oil taxation, establishing clear, simple and reduced taxes, in an effort to attract new investments. This Law is still in force today, along with the administrative process procedures foreseen in the Regulation No. 2000/18 (as subsequently amended), and one estimates that it is the source of the strong flow of capital investors registered in recent years in Timor-Leste.
Tax Attractiveness
Timor-Leste is not, nor intends to be, an "Off-Shore State" or a resemblance of a tax haven, but it is definitely an attractive State in an investor’s point of view. The low tax rates and its simplified system contributes greatly to the creation of good business prospects, as noticeable in the summary of fees and tax rates in the country, as explained below:
a) Services Tax (Specified Services: Hotel services, Restaurants and Bars, and Telecommunications) – Article 5 ff. + Law no. 8/2008 Annex I
a. Monthly Turnover < USD 500 - 0%;
b. Monthly Turnover > USD 500 - 5%.
b) Excise Tax – Article 10 ff. + Law no. 8/2008 Annex II
c) Sales Tax - Article 15. ff. + Law no. 8/2008 Annex III
a. Taxable Goods Imported to East Timor – 2,5%;
b. Taxable Goods sold in East Timor and Taxable Services
rendered in East Timor – 0%.
d) Import Duty – Article 19 + Law no. 8/2008 Annex IV
a. Goods Imported to East Timor – 2,5% of the Goods
Value *
e) Wage Income Tax – Article 20 ff. + Law no. 8/2008 ** Annex V
a. Wages < USD 500 – 0%;
b. Wages > USD 500 – 10% of the amount exceeding
USD 500;
c. Wages of Non-Residents - 10%.
f) Income Tax – Article 26 ff. + Annex VI to Law no. 8/2008
a. Resident Individual with income until USD 6000 – 0%;
b. Resident Individual with income over USD 6000 – 10%;
c. Non-resident Individual – 10% ***;
d. Legal person – 10%.
* - Does not waive the consultation of the relevant goods exempt from Import Duty
** - Percentages of withholding tax
*** - Withholding Tax Legal Framework – article 55 ff. Law no. 8/2008
Effectiveness of the Tax System
Similar to what happens in other jurisdictions, in Timor-Leste the burden of organization, declaration and paying taxes also lies with the taxpayer.
This means that the taxpayer is responsible, under the law, to file and declare to the Tax Authorities its incomes, offering in addition the payment for the correspondent taxes in accordance with its accounting.
In turn the Tax Authorities are responsible for managing this system through the launch of new collectable tax amounts, should it have reasons or evidence to believe that a taxpayer has not properly filed their tax returns. Therefore it has an inspection and preventive function and, as well as in some cases, a corrective function.
Should there arise any discrepancy between the taxpayer and the Tax Authorities, the Law ensures the existence of an Appeals Office to which the taxpayer, either an individual or a company, may appeal in case of disagreement with any decision of the Tax Authorities.
Regulation No. 2000/18, in its original version, already provided for the establishment of a second judicial body for resolving disputes on tax matters: the Tax and Customs Board of Appeals (Conselho de Recursos Tributários e Alfandegários). The Constitution encompasses the existence of Administrative and Fiscal Courts, which would ultimately be responsible to deal with and resolve the issues raised by taxpayers in tax matters.
However, neither the Tax and Customs Board of Appeals nor the Administrative and Fiscal Courts have yet been established creating a mismatch of reality in relation to the letter of the Law. Nevertheless, the taxpayers' interests are safeguarded by the common Judicial Courts which have the supplementary power to deal with these tax issues.
One note to mention that there are already cases of tax matter resolutions in the Timorese Courts, thus proving the effectiveness of the tax system, although this has still much to develop. It is expected, however, that the country's sustained economic growth tends to improve the system in the sense of a greater and more effective tax control.
Gonçalo Neves Lestro