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East Timor

Country Name: Democratic Republic of Timor-Leste (East Timor)
Currency: US Dollar (USD)
Primary Tax Authority: National Directorate of Domestic Revenue (NDDR)
Key Legislation:

  • Taxes and Duties Act
  • Investment Law
  • Petroleum Fund Law
  • Customs Law

Fiscal Authority Allocation

Centralized Fiscal System:
East Timor operates a centralized tax system, with the National Directorate of Domestic Revenue (NDDR) responsible for collecting taxes, including corporate income tax (CIT), personal income tax (PIT), and customs duties. Local governments have limited taxing authority.

Corporate Income Tax (CIT)

Standard Rate: 10%
East Timor imposes a corporate income tax rate of 10% on the net taxable income of resident companies. Non-resident companies are taxed on Timor-Leste-sourced income.

Corporate Forms and Taxation:

  1. Corporation (Company): The most common corporate form, subject to the 10% CIT rate.
  2. International Companies: Subject to the same CIT rate for income derived from Timor-Leste sources.
  3. Branches of Foreign Companies: Taxed at the same CIT rate on Timor-Leste-sourced income.

Exemptions and Incentives:

  • Investment Incentives: The Investment Law provides tax exemptions and reduced CIT rates for companies investing in key sectors such as tourism, agriculture, and infrastructure.
  • Free Trade Zones: Companies operating in free trade zones may benefit from customs duty exemptions and tax holidays.

Goods and Services Tax (GST) / Value-Added Tax (VAT)

No VAT or GST:
East Timor does not currently impose a VAT or GST on goods and services. The country generates significant revenue from its oil and gas sector and does not rely heavily on consumption taxes.

Personal Income Tax (PIT)

Progressive Rates:
East Timor applies progressive personal income tax rates as follows:

  • Up to USD 6,000: 0%
  • USD 6,001 to USD 15,000: 10%
  • Above USD 15,000: 15%

Dividends:
Dividends paid to residents and non-residents are subject to a 10% withholding tax.

Additional Mandatory Contributions

Social Security Contributions:
East Timor does not have a formal social security system in place for private sector employees. However, employers in the public sector contribute to a pension fund for civil servants.

  • Employer Contribution: None for private companies.
  • Employee Contribution: None for private companies.

Withholding Taxes

  • Dividends: 10%
  • Interest: 10%
  • Royalties: 10%
    Withholding tax rates may be reduced under East Timor’s double taxation agreements (DTAs).

Transfer Pricing Rules

East Timor does not have formal transfer pricing legislation. However, companies engaging in cross-border related-party transactions are expected to follow the arm’s-length principle.

Special Tax Regimes

  • Petroleum Sector: East Timor’s economy is highly dependent on oil and gas revenues. Companies operating in the petroleum sector are subject to the Petroleum Tax Law, which imposes a 30% petroleum profits tax on income from petroleum activities.
  • Investment Incentives: The government offers tax holidays, customs duty exemptions, and reduced CIT rates for companies investing in key sectors such as agriculture, tourism, and renewable energy.

Other Taxes

  • Customs Duties: Import duties are levied on goods brought into the country, with rates generally ranging from 2.5% to 10%, depending on the type of goods.
  • Excise Taxes: Excise taxes are applied to specific goods, including alcohol, tobacco, and petroleum products.
  • Property Tax: Property taxes are levied on land and buildings, though the system is not fully developed. Rates are generally low and vary depending on the property’s value and location.

Double Taxation Agreements (DTAs)

East Timor has a limited number of double taxation agreements (DTAs), primarily with countries that have significant economic interests in the region. These agreements help reduce withholding taxes on dividends, interest, and royalties, and prevent the double taxation of cross-border income.

Local Taxes

Local governments in East Timor do not collect taxes. All revenue collection, including corporate income tax, personal income tax, and customs duties, is managed by the National Directorate of Domestic Revenue (NDDR).

Compliance and Reporting

Annual Filing:
Corporate tax returns must be filed by March 31st of the following year. Personal income tax returns are also due by the same date. The tax year in East Timor follows the calendar year.

Penalties for Late Filing:
Penalties for non-compliance or late filing include interest on overdue taxes and fines. Interest on unpaid taxes is generally set at 1% per month, with additional penalties for significant delays.

Recent Developments

Petroleum Fund and Revenue Management:
East Timor’s Petroleum Fund, established under the Petroleum Fund Law, is a sovereign wealth fund designed to manage the country’s significant oil and gas revenues. The government is working to improve transparency and sustainability in the management of these revenues to ensure long-term financial stability.

Economic Diversification Efforts:
The government is actively seeking to diversify the economy beyond the oil and gas sector by promoting investment in tourism, agriculture, and renewable energy. Tax incentives and relaxed regulations are being introduced to attract foreign investors and foster local entrepreneurship.

Infrastructure Development:
East Timor is investing in infrastructure development, including roads, ports, and renewable energy projects, to support economic growth and improve the living conditions of its citizens. The government offers tax breaks and incentives for companies involved in infrastructure and energy projects.

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