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Tonga

Country Name: Kingdom of Tonga
Currency: Tongan Paʻanga (TOP)
Primary Tax Authority: Ministry of Revenue and Customs
Key Legislation:

  • Income Tax Act
  • Consumption Tax Act
  • Customs and Excise Act
  • Companies Act

Fiscal Authority Allocation

Centralized Fiscal System:
Tonga operates a centralized tax system, with the Ministry of Revenue and Customs responsible for administering and collecting taxes, including corporate income tax (CIT), personal income tax (PIT), and consumption tax (CT). Local governments do not have independent taxing authority.

Corporate Income Tax (CIT)

Standard Rate: 25%
Tonga imposes a corporate income tax rate of 25% on resident companies’ net taxable income. Non-resident companies are taxed on Tonga-sourced income at a higher rate.

Reduced Rate for Small Businesses:
A reduced rate of 20% applies to companies with an annual turnover of less than TOP 100,000.

Corporate Forms and Taxation:

  1. Corporation (Company): The standard form of business organization, subject to the 25% CIT rate.
  2. Foreign Branches: Branches of foreign companies operating in Tonga are taxed at 30% on Tonga-sourced income.

Exemptions and Incentives:

  • Investment Incentives: The government offers tax holidays and customs duty exemptions for businesses in key sectors, such as agriculture, fisheries, tourism, and manufacturing.
  • Special Development Zones: Businesses operating in designated development zones may benefit from CIT exemptions and other incentives to encourage regional economic growth.

Goods and Services Tax (GST) / Consumption Tax (CT)

Standard Rate: 15%
Tonga applies a consumption tax (CT) of 15% on most goods and services. CT is levied on the sale of goods, provision of services, and imports.

Exemptions:
Certain goods and services, including healthcare, education, and basic food items, are exempt from consumption tax. Exports are zero-rated, allowing businesses to reclaim CT paid on inputs used to produce exported goods.

Personal Income Tax (PIT)

Progressive Rates:
Tonga applies progressive personal income tax rates as follows:

  • Up to TOP 10,000: 0%
  • TOP 10,001 to TOP 30,000: 10%
  • Above TOP 30,000: 20%

Dividends:
Dividends paid to residents are subject to a 10% withholding tax, while dividends paid to non-residents are subject to a 15% withholding tax.

Additional Mandatory Contributions

Retirement Fund Contributions:
Employers and employees are required to contribute to Tonga’s retirement fund, which provides pensions and other social benefits.

  • Employer Contribution: 10% of gross salary.
  • Employee Contribution: 5% of gross salary.

Withholding Taxes

  • Dividends: 10% for residents, 15% for non-residents.
  • Interest: 15%
  • Royalties: 15%
    Withholding tax rates may be reduced under Tonga’s double taxation agreements (DTAs).

Transfer Pricing Rules

Tonga does not have formal transfer pricing rules. However, related-party transactions are expected to follow the arm’s-length principle in accordance with international standards.

Special Tax Regimes

  • Tourism and Agriculture: Tonga promotes investment in tourism and agriculture by offering tax holidays, customs duty exemptions, and reduced CIT rates for businesses in these sectors.
  • Special Economic Zones (SEZs): Businesses operating in SEZs may benefit from reduced CIT rates, customs duty exemptions, and simplified tax reporting procedures to encourage investment in these regions.

Other Taxes

  • Customs Duties: Import duties are levied on goods brought into Tonga, with rates ranging from 5% to 30%, depending on the type of goods. Basic commodities like food and essential goods are often exempt or subject to lower rates.
  • Excise Taxes: Excise duties are applied to specific goods, including alcohol, tobacco, and fuel.
  • Property Tax: There is no nationwide property tax in Tonga, though nominal fees may apply for land leases.

Double Taxation Agreements (DTAs)

Tonga has signed a few double taxation agreements (DTAs) with countries in the Pacific region to reduce withholding taxes on dividends, interest, and royalties, and prevent double taxation of cross-border income.

Local Taxes

Local governments in Tonga do not have the authority to impose taxes. All major taxes, including CIT, PIT, and CT, are managed by the Ministry of Revenue and Customs.

Compliance and Reporting

Annual Filing:
Corporate tax returns must be filed by March 31st of the following tax year. Personal income tax returns are also due by the same date. The tax year in Tonga 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 1.5% per month, with additional penalties for significant delays.

Recent Developments

Tourism Sector Development:
The government has prioritized tourism as a key driver of economic growth. Tax incentives, including CIT reductions and customs duty exemptions, are available for developers and operators in the tourism sector, particularly for hotel and resort projects.

Agriculture and Fisheries Expansion:
The agricultural and fisheries sectors are crucial to Tonga’s economy, and the government offers incentives for investments in modernizing these industries. Tax holidays and customs duty reductions are available for businesses involved in export-driven agriculture and sustainable fisheries.

Climate Resilience and Renewable Energy:
Tonga is promoting investment in renewable energy and climate resilience infrastructure as part of its efforts to address the impacts of climate change. Tax breaks, customs duty exemptions, and VAT reductions are available for companies investing in solar, wind, and other renewable energy projects.

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