General Information
Country Name: Palau
Currency: United States Dollar (USD)
Primary Tax Authority: Bureau of Revenue & Taxation, Ministry of Finance
Key Legislation:
- Palau National Code – Title 40: Taxation and Revenue
- Palau Goods and Services Tax (PGST) Act
Fiscal Authority Allocation
Centralized Fiscal System:
Palau operates under a centralized tax system, with the national government responsible for all tax collections and administration. There are no regional or municipal taxes.
Corporate Income Tax (CIT)
Standard Rate: 4%
Palau does not have a corporate income tax in the conventional sense. Instead, businesses are subject to a gross revenue tax (GRT) at a standard rate of 4% on gross revenue.
Corporate Forms and Taxation:
- Sole Proprietorship: Subject to GRT on gross revenue.
- Corporation: Domestic and foreign corporations are taxed similarly, with GRT applied to revenue generated within Palau.
- Foreign Branch: Branches of foreign companies are taxed only on Palau-sourced income through GRT.
Exemptions and Incentives:
- Tourism Sector: Some tourism-related businesses may qualify for tax incentives or reduced rates, particularly if they contribute to sustainable tourism development.
Goods and Services Tax (GST) / Value-Added Tax (VAT)
Standard Rate: 10%
As of 2023, Palau introduced the Palau Goods and Services Tax (PGST) at a standard rate of 10%. It applies to most goods and services, including imports.
Exemptions:
Certain essential goods, such as basic foodstuffs and healthcare services, may be exempt or subject to lower rates under specific conditions.
Personal Income Tax (PIT)
Flat Rate: 9.3%
Palau imposes a flat income tax rate of 9.3% on individuals’ income. Non-residents are taxed on income earned within Palau at the same rate.
Tax Credits:
A standard tax credit is available to all residents, effectively reducing their overall tax liability.
Additional Mandatory Contributions
Palau does not impose social security contributions or other mandatory employee-employer contributions. Instead, citizens participate in the Civil Service Pension Fund, but contributions to this fund are not compulsory for private sector employees.
Withholding Taxes
- Dividends: Not applicable (Palau does not levy a tax on dividends).
- Interest: Not applicable.
- Royalties: 4% (subject to GRT rules).
Transfer Pricing Rules
Palau does not have formal transfer pricing regulations. However, transactions between related parties should be conducted on a fair and reasonable basis, following general anti-avoidance rules.
Special Tax Regimes
- Tourism Incentives: Businesses in the tourism industry that contribute to sustainable tourism initiatives may receive reduced tax rates or be granted tax holidays.
- Free Trade Zones (FTZ): There are no FTZs in Palau, but certain areas may be designated for development incentives.
Other Taxes
- Gross Revenue Tax (GRT): Businesses are subject to a 4% GRT on gross revenue generated in Palau.
- Excise Taxes: Palau imposes excise taxes on specific goods, such as alcohol, tobacco, and fuel.
- Import Duties: Customs duties apply to imported goods, typically ranging between 5% and 10%.
Double Taxation Agreements (DTAs)
Palau does not have any formal double taxation agreements with other countries. However, the country maintains favorable relations with the United States, and certain tax arrangements are facilitated through their Compact of Free Association.
Local Taxes
There are no local or municipal taxes in Palau. All taxes are collected and administered at the national level.
Compliance and Reporting
Annual Filing:
All businesses and individuals must file annual tax returns. The tax year runs from January 1st to December 31st, with a typical filing deadline in the first quarter of the following year.
Penalties for Late Filing:
Failure to file or pay taxes on time results in penalties, including a fixed percentage of the overdue amount and interest on unpaid taxes.
Recent Developments
Introduction of PGST:
The recent introduction of the Palau Goods and Services Tax (PGST) represents a significant shift in the country’s tax framework. It is aimed at increasing revenue and diversifying the tax base beyond GRT.
Environmental Taxes:
Palau is considering the introduction of additional environmental taxes to further support its commitment to sustainability and conservation efforts. This includes taxes on tourism activities that impact the environment.
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