HARBOUR VIEW--The Social Economic Council SER has advised government not to raise the turnover tax (TOT) rate to meet future budget demands on the revenue side. That advice was made public in the recent edition of National Gazette (Landscourant).
The TOT was raised by two per cent (from three to five per cent) in 2011, an increase of 66.6 per cent) and this resulted in 19.3 per cent less TOT revenue than should have been achieved according to the gross domestic product (GDP) in 2013.
Raising the TOT further will have the same outcome – another raise in the TOT will decrease the relative revenue, said the advisory body.
SER noted that independent of the precise explanation behind this, it means that fewer businesses pay more TOT than before 2011. More tax is levied over a shrinking TOT tax base and this is an unsustainable situation in the long as well as the short run. It also shows that both consumers and businesses have found ways to avoid (in)directly paying TOT.
Further, consumers want less expensive products and therefore bypass the local economy and import products themselves, observed SER.
Also, compliant businesses already are under strain because of the raise and they avoid TOT by changing their economic behaviour.
“Any further raise of TOT will deepen those unwanted outcomes, and each time the TOT rate is raised the relative revenue of TOT will decrease,” said SER.
An increase in the TOT not only raises the cost of doing business when a product or service is sold to the consumer, but it raises the cost of doing business each time a product changes owner, while a product moves through the supply chain, said SER. This is especially true for businesses with a relatively small added value compared to their revenue, because they depend on moving a large number of products with a small profit margin. TOT taxes revenues and not the added value of businesses.
“Businesses under strain tend to compensate their employees less or simply hire less employees,” said SER.
TOT drives consumers to import products privately or via a business under their own name. The consumer thereby either avoids a supplier, or avoids that their supplier, when acting as a middleman, needs to pay TOT over the value of the product, because there is no transfer of ownership, explained SER.
That means there is no delivery of products over which TOT is levied. TOT is usually calculated into the price of products and in the absence thereof the consumer saves money, the supplier acting as a middleman is more competitive in comparison to other suppliers that deliver the same product and pay TOT over the value of the product, and country St. Maarten has less revenue from TOT.
SER would like to add that such adaptions in economic behaviour are an expected outcome when the rate of TOT is raised substantially as it was in 2011.
SER recognised that efforts of the Tax Office influenced the amount of collected taxes between 2005 and 2014, but SER has treated these efforts as a constant, although they cannot be considered that. “Furthermore, the continuing discrepancy between GDP and TOT revenue since 2011 cannot sufficiently be explained by a possible lack of efforts to collect TOT.”
SER is aware that the Customs Department is in the initial phase of introducing “ASYCUDA 5,” an automated system for Customs data. This system would require not only a description of the quantity and type of imported and exported goods, but also would require registering the value of the goods as defined by the invoice. The value of the imported and exported goods is currently not registered (sufficiently).
SER encourages government to continue the implementation of ASYCUDA, because border control would substantially improve compliance with TOT if the Tax Office has access to this data.
“Moreover, the registration of the value of imported goods will probably increase the revenue from profit tax. The expected increase in tax revenue would make the return on this investment worthwhile,” said SER. “The cost of implementing ASYCUDA is a small fraction of the extra expected revenues from TOT levied over goods if the Tax Office would have access to the data of ASYCUDA.”
SER stated in the advice that it understands the social economic consequences for the country in case of a continuing skeleton budget in the coming years.
SER recognises the important role taxation plays regarding the budget, as well as economic development. Taxing to promote sustainable development is a delicate task to which SER wants to contribute with a comprehensive advice on taxation this calendar year.
