FSM TREASURY DRAFTS UNIFORM REVENUE AUTHORITY LEGISLATION,

UNCLAS SECTION 01 OF 02 KOLONIA 000070 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EAID PGOV FM SUBJECT: FSM TREASURY DRAFTS UNIFORM REVENUE AUTHORITY LEGISLATION, AN ATTEMPT AT INTERSTATE COORDINATION ¶1. (U) SUMMARY: The Department of Finance and Administration of the Federated States of Micronesia (FSM) continues to draft a Uniform Revenue Authority (URA) plan for eventual submission before the national congress. Tax Reform Project Manager Evelyn Adolph states that her Department designed the URA to raise revenue and better promote private investment in light of decreasing funds from the Compact of Free Association. One of the primary stumbling blocks to implementing the URA (until an apparent compromise in mid-April) has been the four FSM States' traditional unwillingness to abdicate any authority to the national level. End Summary. The Uniform Revenue Authority -------------- ¶2. (SBU) The Tax Reform Project Manager in the FSM Department of Finance and Administration, Evelyn Adolph, states the URA has four primary goals: - Increase government revenue to replace decreasing funding levels provided through the Compact of Free Association; - Create a tax system that is more conducive to private sector development; - Improve/centralize tax administration; - Change "trade" taxes or import taxes to Value Added Taxes (VAT) to better prepare the FSM for trade agreements such as PICTA (Pacific Island Countries Trade Agreement) and PACER (Pacific Agreement on Closer Economic Relations). ¶3. (SBU) Adolph explained that although the URA would support a harmonization of tax regulations in each of the states, the focus is to create just one tax collection authority. Currently each state and the national government has its own tax collection process to cover a total population of just over 100,000. The proposed URA will grant tax collection authority to only one office, which would be at the national level. That office will maintain five separate accounts, one for each state and the national government. Each state will maintain independent legislative authority on tax regulations. Yap Agrees -------------- ¶4. (SBU) During a January meeting, Yap Governor Sebastian Anafel told EconOff that Yap could not participate in the proposed URA because it violated the state's constitution. Although each of FSM's four states had language in their state constitutions prohibiting the abdication of "taxing power" to other authorities, only Yap defined taxing power to include the legislative and administrative aspects. During discussions with national representatives, the other states agreed that as long as the states maintained legislative authority over taxing provisions, they were adhering to each of their state constitutions. ¶5. (SBU) On April 3, Adolph told Econ/Conoff that her office anticipated that Yap would finally agree in principle to the URA during an April 16 meeting in Chuuk. She stated Yap officials had voiced constitutional objections to a URA ever since the Department of Finance and Administration began work on the legislation in early 2004. Without discussing details, Adolph commented that her office had worked continuously with Yap officials and in the most recent discussions decided that if Yap did not agree to the URA they would go forward with only the other three states. ¶6. (U) The Kaselehlie Press reported on April 29 that the Tax Reform Executive Steering Committee (ESC),made up of the four governors and chaired by FSM Vice President Alik Alik, adopted the draft URA language. Yap has signaled its approval of the revised legislation. The national level technical group on the URA has 30 days from the April 16 meeting to review and make any final recommendations. The ESC is tentatively scheduled to meet again in June for final approval before the legislation goes before the national congress. Comment -------------- ¶7. (SBU) It remains unclear whether or not the FSM Congress will pass the proposed URA and if it does, whether it will be in its current form or not. Even if the URA is established, implementation will need to be carefully managed. Potential revenue will remain limited so long as the level of economic activity in the FSM is sluggish. Of more immediate and positive KOLONIA 00000070 002 OF 002 note, however, is the fact that representatives from each state are willing to cede some level of state authority to the national government. The States remain distrustful of each other and skeptical about the national government's role in areas often jealously guarded as state prerogatives. The URA legislation, even if it does not pass in the end, is at least advancing the idea of state coordination and trust in the national government. The current limits on coordination and lack of trust hamper development efforts. End Comment. HUGHES