How the tax regime in East Timor helps you to achieve success

Timor-Leste has an extremely lucrative tax regime, with the corporate tax rate, individual tax rate, service tax and custom tax significantly lower than many countries around the world. This proposes an attractive opportunity for foreign investments to expand or relocate their businesses to enjoy the tax benefits. The table below shows some key differences in tax rate between Timor-Leste and Australia.

	Australia	Timor-Leste
Corporate tax rate	30% or 27.5% for SME	Flat 10%
Goods and services tax	10%	2.5% for hotel, restaurant and bar or telecommunication services 0% for other industries
Depreciation	Immediate write-off only available to SME in the relevant years for amounts under the threshold	Immediate write-off available to all entity for any amount in any year
Transfer duty	Payable on the sale and transfer of real estate, businesses and certain shares	No transfer duty
Entertainment provided to employees	Deductible, but subject to FBT	Deductible and not subject to FBT. It is included as wage for employees
Super guarantee	9.5% on top of salary	Employer pays 6% on top of employee's salary and employee pays 4% on their salary

The low tax rate creates a perfect environment for doing business in Timor-Leste, as the potential saving from income tax expense will ensure entities have additional cash to invest in other opportunities, and achieve sustainable growth. To have a clearer understanding, below is a case study that illustrates how companies could be benefited from the tax regime in Timor.

Case study

ABC International, a private company resident that is a SME, is a manufacturer of electrical goods. The following information relates to the company’s operations for the year ended 2019.

	$
Profit from trading	750,000
Wage expense without super guarantee	300,000
New manufacturing machine	90,000

Below a simplified illustration shows how would the tax calculation differ for ABC International between two countries for the year ended 2019

Australia

	$
Profit from trading	750,000
Wage expense	300,000
Super guarantee @9.5%	28,500
Depreciation on new machine purchased (useful life 10 years)	9,000
Net profit before tax	412,500
Tax expense @ 27.5%	113,438
Add back super guarantee @9.5%	28,500
**Cash paid to the government	141,938

Timor-Leste

	$
Profit from trading	750,000
Wage expense	300,000
Social security contribution @ 3% (50% reduction for 2019)	9,000
Depreciation on new machine purchased (useful life 10 years)	90,000
Net profit before tax	351,000
Tax expense @ 10%	35,100
Add back social security payment @ 3%	9,000
**Cash paid to the government	44,100

It is evident that ABC International will save $97,838 for the year ended 2019 if it were incorporated in Timor-Leste. This is largely due to the higher tax rate, lack of instant asset write-off in Australia. If ABC International were incorporated in Timor-Leste, it would be able to re-invest the $97,838 to other high net present value projects and achieve business success.