Tax
National gross revenue and wages taxes, plus separate state taxes
The national government taxes gross revenue and wages rather than profit, and each state levies its own taxes as well. There is no VAT and no capital gains tax.
Key rules
- Jurisdiction — Both levels tax. National gross revenue and wages taxes apply federation-wide; states impose additional sales, gross revenue or business taxes that vary by state.
Governing law
- FSM Code, title 54taxation and customs
- State revenue and tax legislation
- Import duties under title 54
- Compact of Free Association, financial provisions
In practice
Taxation is on turnover and wages, not profit: businesses pay gross revenue tax on receipts, so a loss-making business still pays, and there is no deduction regime. Wages and salaries tax is withheld at flat rates. Import duties are significant given import dependence. States levy their own taxes on top, which produces genuine double layering and differing effective burdens between states. There is no value added tax, no capital gains tax and no inheritance tax. A long-running reform programme to introduce a value added tax and a unified revenue authority has been debated and repeatedly not enacted, so advisers should be careful with secondary sources that describe the reform as though it were in force. Compact funding remains a substantial share of public revenue, which is why the 2023 renewal mattered fiscally as much as diplomatically.