Tonga’s Foreign Currency Levy Goes Into Affect

Revenue from levy to fund 2019 Pacific Games

By Mary Lyn Fonua

NUKU‘ALOFA, Tonga (Matangi Tonga, June 1, 2016) – Tonga’s bankers, who fought to stop the imposition of a new Foreign Exchange Levy that came into effect today June 1, say the legislation is poorly drafted and imposes an unfair tax on the financial sector, which will be passed on to the community – particularly affecting remittances.

Some are calling it a “Remittance Tax”.

The new levy, which was introduced to raise funds for Tonga’s hosting of the 2019 Pacific Games will collect millions of pa’anga for the Tonga Government, through a fixed levy on any transaction that requires the purchase or sale of a foreign currency.

It is estimated that the new levy will collect over TOP$2 million from the financial sector annually. All banks and money transfer operators are included in the compliance.

“It is clearly a tax on all remittances and aid funding, which is counter intuitive to rational economic wisdom,” the chairman of the Association of Banks Tonga (ABT), Mr Bernie Poort told Matangi Tonga Online, in answering questions given to the association.

“The ABT have fought vigorously over the last 15 months to stop this poorly drafted piece of legislation. Our belief remains that the legislation is a clear breach of the Constitution in that it unfairly taxes a select part of the community,” he said.

“The Banks have no choice but to pass this tax burden on to end users.”

Tonga’s foreign currency trading amounts to over $395 million a year, according to official Reserve Bank figures (2014-15) with purchases of $T$202.6 million and sales of T$192.4 million.


The Association believes the impact of the levy will be a lot more than was supposed when legislation was drafted last year to introduce it.

“The government has been deliberately misleading in quoting that it is only half a seniti – it’s not and, in fact, equates to 0.50% of the face value of the transaction in Tongan Pa’anga,” said the ABTchairman, adding that it was wrong to assume that banks will simply increase their spreads to cover the cost of the levy.

“Completely wrong, and one of the issues we have been challenging government on. The banks ‘spreads’ on the major trading currencies are predetermined daily by the regulator – the National Reserve Bank of Tonga for USD, NZD and AUD.

“The Levy applied at the widest possible spread on USD/TOP would equate to 20% of the gross revenue made by a financial institution. With market forces dictating discounting in foreign exchange rates, the levy remains constant and quickly increases to 100% of the gross revenue made,” he said.

Market reaction

The levy comes on top of a devalued pa’anga.

“Currencies move everyday and for most smaller currencies are made up of a basket of larger globally traded currencies such as the USD. For Tonga, we have seen a strengthening of the US economy over the last 12 months and conversely that has meant our currency has slightly devalued,” he said.

“We did see a large outflow of funds back in October 2015 when the government first tried to implement this legislation at 1%… but trading this week has been pretty much the normal pattern for end of month.”

“I think markets react differently to new taxes so we will wait and see what the impacts are with this new levy. Inevitably, market forces will move trade to avoid taxation so we anticipate this will occur here also. There are some gaping holes in the legislation, which we have informed government of on several occasions, so we anticipate businesses will figure out how to trade to minimise the levy’s impact on their bottom lines.”

Critics believe that this, potentially, leaves the other cornerstone of the economy – remittances, likely to carry the full burden of this new tax.

Others are saying that no consideration has been given to the impact of the new levy on receipts of aid funding, using the new domestic ferry terminal as an example, costing an estimatedUSD$30+miliion, they estimate the levy will add an additional TOP$350,000 to the cost of the project.


Meanwhile, in a statement, the CEO for the Ministry of Finance and National Planning, Tatafu Moeaki, said that consultation meetings with all five banks and 10 licensed foreign exchange dealers since 2015 had contributed to the legislation, and they had been given examples of foreign exchange transactions to show how the levy is applied. Along with an Excel spreadsheet template the ministry provided to financial institutions for their monthly return, this would “ensure effective implementation, compliance and accurate reporting,” he stated.

But the banker’s association believes that the compliance will also add a significant cost to their businesses, particularly in introducing the computer programming required to collect it.

“No assistance has been provided or appreciation by government of the time needed to implement these changes. In a modern world, Financial Institutions cannot and will not operate on manual spreadsheets. All our members will comply, we have to as this is the law and will of government. - Will we be ready to trade on June 1? – Unlikely,” said the ABT chairman, who later today confirmed that everyone mananged to trade although trading was unusually light.

He declined to comment on whether foreign owned banks in Tonga, following Westpac’s departure last year, might also want to leave if the compliance burden and political interference in profitability becomes too great, in what remains a small financial marketplace.

Matangi Tonga Magazine
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