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
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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
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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

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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