The Ministry of Finance of the Maldives has recently published a Medium Term Revenue Strategy for the period 2024- 2028, aimed at strengthening current revenue policies, enhancing domestic revenue mobilization, and reducing dependence on external borrowings. This comes at a critical time when Fitch Ratings has downgraded the Maldives’ long-term IDR rating from ‘B-‘to ‘CCC+’ due to increased risks associated with the worsening external financing and liquidity metrics. This article evaluates the measures outlined in the MMTRS and their potential impact on businesses in the Maldives, providing insights for CFOs on how to navigate these changes.
Overview of the Medium Term Revenue Strategy
The MMTRS, launched by the Ministry of Finance, aims to overtime modernize the revenue system, enhance tax compliance, and ensure long-term financial stability for the Maldives. The strategy sets ambitious targets to improve the revenue-to- Nominal GDP ratio from the current 32.5% to at least 35.5% by 2028. Key reforms include probable formulation of new taxes and fees, reviews of existing tax laws, and the strengthening of the compliance risk management framework.
Key Revenue Measures
Tax Review and New Fees:
- The government plans to review airport taxes and fees and duty-exempt items during 2024.
- The government plans to review the current Goods and Services Tax (GST), green tax and import duties starting next year (2025).
- Post 2025, further increase or changes in green tax, GST, corporate income tax on telecom operators, and tourism land rent are expected.
- Review of Personal Income Tax and Corporate Income Tax rates and brackets are expected in 2026.
- Furthermore, formulation of an infrastructure fee mechanism, a property tax framework and regulations for monetizing carbon credits are expected by 2028.
Broadening the Tax Base:
- Amendments are expected to the GST Act which will broaden the tax base, ensuring more comprehensive tax coverage
- The strengthening of compliance risk management framework aims to enhance tax compliance and collection
Administrative Measures:
- The strategy emphasizes the need for substantial investment in technology and human resources to streamline tax administration
- A robust performance monitoring framework to ensure coordinated policy implementation and timely performance management.
Our analysis of Impact on businesses
Increased Tax Burden
Businesses in the Maldives are likely to face a higher tax burden directly or indirectly due to the planned review potentially leading in increases in import duties, GST, green tax, and corporate income and personal income tax.
This could lead to increased costs for the business, which may be passed on to consumers in the form of higher prices. CFOs need to prepare for these changes by reassessing their pricing strategies and cost structures.
Compliance and Administrative Costs
The introduction of new taxes and amendments to existing tax laws will require businesses to update their systems and compliance processes to cater for the changes. This could result in increased administrative costs and the need for additional resources to ensure compliance with the new regulations.
CFOs should assess the capabilities of existing systems and processes to ensure that the changes can be implemented smoothly. Furthermore, investing in the right technology, consultancy and training are key to streamlining tax administration and reducing compliance risks.
Impact on Tourism Sector
The tourism sector, a significant contributor to the Maldivian economy, may be affected by the new revenue measures. Increased taxes and fees especially on airport services and tourism-related activities could impact the cost of travel and accommodation, potentially affecting tourist arrivals.
In this context, it’s imperative for CFOs and business leaders to critically evaluate the possible impact of these new measures on the demand for their businesses and should work closely with regulators to ensure that the changes do not have a detrimental impact on the tourism industry.
New investors in the tourism sector should consider these factors when planning their investments and marketing strategies.
Navigating Economic Uncertainty
The downgrade by Fitch Ratings highlights the economic challenges facing the Maldives, including high debt levels and external financing pressures. Businesses must navigate this uncertain economic environment by adopting prudent financial management practices. CFOs and business leaders should focus on liquidity management, cost control, and diversifying revenue streams to mitigate risks associated with economic volatility.
Recommendations for CFOs
- Understand the New Revenue Measures: For strategic planning and decision making, it’s essential for CFOs to familiarize themselves with the new revenue measures, including the specifics of the possible new taxes and fees.
- Evaluate the Impact: CFOs should conduct a thorough evaluation of how these new measures will impact their company's finances. This includes assessing the potential effects on costs, revenues, profitability and cashflows.
- Engage with Regulators: Maintaining open lines of communication with regulators wherever possible can help ensure that CFOs are able to provide input on potential impacts on the business sector.
- Strategic Planning: Based on their understanding and evaluation, CFOs should update their financial strategies. This might involve adjusting pricing, exploring new revenue streams, or finding ways to mitigate the impact of increased costs and taxes.
- Communicate with Stakeholders: As leaders of finance, CFOs should clearly communicate the potential impacts of these new measures to stakeholders, including investors, employees, and customers.
- Monitor and Adapt: The effects of these new measures may change over time. CFOs should regularly review their strategies and be ready to adapt as necessary.
Conclusion
These recommendations aim to help CFOs navigate the changes brought about by the new revenue measures, ensuring that their companies remain financially stable and profitable, while concurrently contributing to the long-term financial stability of their organizations and the Maldives as a whole.