Pacific Island Countries Have Untapped Tax Potential

Pacific Island Countries Have Untapped Tax Potential (

There is scope to raise more revenue to pay for vital climate and social-development spending

Sanjaya PanthTodd SchneiderMouhamadou Sy

October 20, 2022

Palau is set to introduce a value-added tax in a move next year that will provide a fillip to public finances. This will also set an example of reform that other cash-strapped governments in the Pacific could follow.

Palau’s tourism-dependent economy shrank by almost 10 percent in 2020 as the government sealed the borders to stave off COVID infections. The national budget sank into deficit equal to 11 percent of gross domestic product.

The government could raise an additional 1 percent of GDP in annual revenue when it starts to collect the new taxes, including VAT, known locally as the Palau Goods and Services Tax, approved as part of a wide-ranging reform package in September 2021.

Other Pacific nations could follow Palau’s example. A recent IMF paper shows that the average tax gap—the difference between current and potential tax revenue—is about 3 percent of GDP in the Pacific region.

Closing this gap could play a critical role in creating space for social-development and climate-related spending in a region that faces an existential threat from rising seas and tropical cyclones.

Pacific islands must on average spend an additional 6.3 percent of GDP over the next decade to meet the United Nations Sustainable Development Goals and about 3.1 percent to build new climate-resilient infrastructure, IMF staff estimate.

International support on concessional terms, such as through the IMF’s Resilience and Sustainability Trust, should play an important part in meeting these spending needs. But the region itself can do more, too.

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