Finance Minister Ardwell Irion in Parliament on Monday.
PHILIPSBURG--A number of recommendations from the International Monetary Fund’s (IMF’s) Fiscal Affairs Department (FAD) for new tax areas that can be introduced in St. Maarten are currently under discussion.
The recommended new tax areas include introducing an excise duty on diesel fuel and unhealthy products such as tobacco and/or alcohol and soft drinks as well as introducing a gaming tax and a real estate tax.
Finance Minister Ardwell Irion outlined the recommendations during a meeting of Parliament’s Central Committee on the topic “tax reform” on Monday.
It was recommended to introduce excise duties on products such as diesel fuel, tobacco, alcohol and soft drinks provided the competitive position is not affected. It was also recommended to increase special import duties on gasoline.
“FAD recommends to undertake a study of excise taxes on alcohol and tobacco in neighbouring jurisdictions to gauge the possibilities for expanded revenue from excise taxation of these goods,” Irion told MPs during the meeting.
It was also proposed to withhold a 12.5 per cent tax on all gambling prizes. FAD also recommends a 12.5 per cent tax on casino gambling winnings, but it has no objections if tax is levied on all gambling winnings.
FAD also recommended a property tax, but Irion made clear that government would instead like to look at a real estate tax – a topic which his cabinet is discussing with the IMF/CARTAC FAD and which has also been raised with St. Maarten’s counterparts in the Temporary Work Organisation (TWO).
On the issue of real estate tax, Irion explained that making a distinction between resident and non-resident, corporate and personal is essential and is a principal aspect of this discussion. “The goal is to capture lost/missed revenue from non-residents and companies who do not already fall within another tax regime, but are currently not making any contribution to the country’s treasury while benefiting from the profits made in St. Maarten,” he explained.
He made it clear that there is no intention to tax the property of the people of St Maarten. “The intentions are to look for means and ways to ensure that people who are not registered in St. Maarten or registered companies that earn money from renting their properties, short- or long-term, pay their fair share just as we, the residents do currently by means of the current tax regime, such as wage tax, income tax, etc.”
Irion said he is cognisant that this particular tax will raise concern and stimulate fierce discussions, but said, “Let it be clear that there is no intention to increase the burden of the people of St. Maarten with a real estate or property tax, but those who are currently not making a contribution – you will have to start. We have tried for years to make an agreement with AirBnB. That won’t be necessary anymore, if we are able to tax the same group by means of a real estate tax.”
“Land and buildings cannot be moved. So, recurrent real estate tax is particularly appropriate in St Maarten where most other tax bases can easily move across the border to [French – Ed.] St. Martin.”
IMF’s FAD also recommends, if necessary, implementing tax incentives based on carefully constructed accelerated depreciation deductions or investment tax credits within the profit tax.
Abolish special regimes, taxes
Ceasing the issuing of any future tax holidays was another recommendation. FAD suggests that the provision of tax holidays in exchange for investment is generally regarded as an ineffective mechanism to encourage economic growth.
It also recommended the abolition of the E-Zone regime, which de facto has not entered into force.
Also recommended was the abolishing of land tax (which is not being levied, but is still formally established by law); inheritance tax (low income); dividend tax (never entered into force); transfer tax (in future via TurnOver Tax Ordinance); surtax (on profit tax and income tax); and room tax (in future via TurnOver Tax Ordinance).
Irion said that based on a request from St. Maarten, prior to the start of the Caribbean Entity for Reform and Development (COHO) or the Temporary Work Organisation (TWO), the Fiscal Affairs Department of the Caribbean Regional Technical Assistance Centre (CARTAC), one of 10 IMF Regional Technical Assistance Centers, had been requested to review St. Maarten’s tax system in its entirety.
The initial request was to assist in making projections based on the country’s own tax reform initiatives. This was not possible because of a lack of categorised data.
It was consequently decided that the FAD would review the tax system and the existing proposals and make recommendations. This resulted in the report “Kingdom of the Netherlands – St. Maarten, Sustainable Tax Reforms.” The report has been discussed with representatives of the St. Maarten Ministry of Finance. The advice “Reforming the Tax System St. Maarten,” approved by the Council of Ministers, will be adjusted to reflect the agreed-on changes.
Irion made clear that the proposal made by St. Maarten’s Fiscal Affairs Department was to a large extent in line with the findings and recommendations of IMF’s FAD. The recommendations for the new and improved Tax Reform and Tax Organisation as it is being discussed as part of the Country Packages are based on this report as well as the previously made Plans of Approach.
Irion said there will be no further integral review of the tax system of St Maarten. The review carried out by FAD is sufficient.
The general principle of tax reform, he noted, is to lower rates of direct taxation (such as the profit tax and the income tax) and thereby increase tax morale; introduce new taxes that generate a steady stream of tax revenue (distribution of the tax mix); abolish disruptive or insufficient-generating taxes (such as the succession tax and the land tax); increase practical enforcement and controllability (less deductions or incentives); attract foreign investors without disrupting local entrepreneurs; and not having any tax havens (in conformity to international rules).
TOT
As it relates to turnover tax (TOT) specifically, it is proposed to broaden the tax base and make it practical and easy to control by eliminating exemptions. The ToT rate is to remain at five per cent.
It was suggested to introduce a 7.5 per cent retail sales tax on purchases from foreign suppliers direct to St. Maarten consumers (both residents and non-residents). The tax would not apply to any sales by a St Maarten business that are subject to the TOT. This is in line with the recommendation of the FAD. Inclusion of casino turnover in the TOT base is also proposed, which is also in line with the FAD recommendation.
In an effort to simplify the tax system, it is proposed to abolish transfer tax and include transfer of real estate, etc., in turnover tax at one per cent. This is in line with the FAD recommendation.
On the issue of wage and income tax, it was proposed to broaden the tax base; simplify execution and control by eliminating as many deductions as possible.
The FAD recommends undertaking a study to determine how best to implement a comprehensive capital gains tax as part of the wage and income tax, and consideration of possible solutions to promote purchasing power of low income groups, including persons with low pension.
IMF’s FAD recommends making “the Penshonado regime” less generous, but has no objections if the regime is abolished. The latter will be done based on the fiscal policy of St. Maarten to broaden the tax base as much as possible by abolishing, amongst others, special regimes.
Also recommended were introducing “customary salary” for employee-shareholders; introducing legislation to facilitate share splits and mergers and conversion of legal persons in other legal forms. Irion said he would like to reduce the wage and income tax rate below the maximum of 35 per cent if feasible.
Based on the existing plans, the maximum wage and income tax is suggested to be established at 35 per cent. It is currently 47.5 per cent. “My initial reaction to this, when presented with it, is that 35 per cent is still too high. So, as we look at bringing this down, we must ensure that we have a source of revenue to compensate for the loss of income, as wage tax is currently a significant source of government revenue,” Irion said.
“It is this effort that led us to the Fiscal Affairs Department CARTAC, referred as FAD, with a request for assistance with revenue modelling/revenue performance tracking. It became evident from the onset that FAD would not be able to assist nor carry out this request because we do not have our tax data sorted and are not able to sort in the manner in which FAD would need it, to be able to make the calculations.
“So, instead of revenue modelling or revenue performance tracking, the assignment was adjusted into proposed sustainable tax reform.”
The subject of tax reform has been included in the Country Packages Curaçao, Aruba and St. Maarten to increase income and have an integral review of the tax system, including income tax. Proposals that will be considered include broadening the tax base, shifting from direct to indirect taxes and introducing value-added tax (VAT) of 12.5 per cent, in accordance with proposals from IMF’s FAD or ABB in accordance with the tax system of the Caribbean Netherlands.
