TEATT Minister Ludmila de Weever during her virtual presentation in Parliament on Thursday.
~ In phased approach ~
PHILIPSBURG--Abolishing income and profit taxes and the introducing “a small transaction tax” is one of several proposals to bolster the economy that Minister of Tourism, Economic Affairs, Transportation and Telecommunications (TEATT) Ludmila de Weever presented to Members of Parliament (MPs) during an urgent meeting on Wednesday.
In her lengthy and detailed presentation, De Weever said given the severity of the economic crisis gripping the country, the TEATT Ministry proposes an innovative approach to economic recovery by abolishing the profit and income taxes and replacing them with “a very small and simple tax” on all financial transactions flowing through the banking system.
She said this will provide relief and lead to automatic compliance as well as encourage both foreign and domestic investment which in turn can create jobs and lead to higher private consumption.
“The (transaction) tax would be small. It would greatly reduce the administrative cost of government and provide relief to entrepreneurs and businesses. It will also be revenue-neutral by matching current public revenue levels because its tax base will be much broader.
“It would be easy to collect and transparent, much like the existing foreign exchange licence fee, due to advances in technology, and it will be future-compatible with digital currencies and mobile banking,” she told MPs.
She made clear that this proposal can only work if other taxes are abolished in tandem. “Simply adding it to existing taxes will only worsen the economic contraction,” she warned.
According to the minister, the average value of nominal gross domestic product (GDP) in St. Maarten was more than NAf. 2 billion between 2012 and 2018, yet the average amount in profit tax collected annually during that same period was only about NAf. 28.8 million.
“By contrast, income tax often costs the country. Both taxes are far lower on average compared to the other tax types such as wage tax and turnover tax. They are expensive to administer and collect. Clearly, they do not achieve their policy intentions. To the contrary, it may be achieving its opposite by making life difficult for businesses, especially small businesses trying to grow.”
“By abolishing profit and income tax, individuals and companies are freer to pursue their economic objectives rather than cumbersome tax administration. Adopting a fiscal reform would transform St. Maarten from being one of the least attractive fiscal regimes in the Caribbean into one of the most attractive to invest in. What we envision is a phased approach to fiscal reform in order to minimise distortion from direct to indirect taxation.”
The proposal is that the first phase of the introduction would include “harmonising the tax rates” with Curaçao, St. Maarten’s partner in the monetary union. “Since 2010, it was our plan to reduce our high tax rate of 34.5 per cent to 15 per cent. While Curaçao has reduced its to 22 per cent, we still remain on that high level,”
The second phase will include a further reduction of profit and income tax rates, while Phase 3 would include abolishing profit and income taxes altogether.
“In the meantime, the small transaction tax will be introduced and adjusted, if necessary, to maintain revenue to a targeted budget level,” De Weever said. “Phasing out profit and income tax and replacing them with a small transaction tax will bring much-needed relief for all businesses in St. Maarten, especially for smaller local businesses and start-ups. This reduced administrative burden will lead to more productive economic activities.”
She said St. Maarten has experienced a decade of lack-lustre economic growth noting that the country’s business environment is bureaucratically burdensome to some entrepreneurs. “Many in the private sector have been calling for fiscal reform for years, such as the St. Maarten Hospitality and Trade Association and international institutions such as the IMF for us to unleash our true economic potential.”
To achieve a higher growth, the country needs to make adjustments to make it easier to do business and to invest. She said an attractive business climate encourages investment and promotes growth and innovation.
“Our goal for the midterm is to achieve higher sustainable growth through structural reforms that improve the investment climate. A vibrant private sector will strengthen our economy and will also have the resources needed to diversify and make us less vulnerable to external shocks.”
St. Maarten has the highest profit tax in the Caribbean along with some of the highest levels of income tax, she noted, which creates a heavy administrative burden on businesses, individuals and the government.
Using St. Barths as an example, she said this island has no profit or income tax, while Saba and St. Eustatius have no profit tax. Some economists have argued that both profit and income taxes constitute a form of double taxation for shareholders of limited liability companies such as NVs and BVs whether small or large, local or foreign-owned, she noted.
“By contrast, we adopted tax laws and regulations similar to those in developed countries which are often unnecessarily complex, expensive to administer and do not achieve their intended objectives in our context. This, to the contrary, is simple to administer. Indirect taxes are used in most economies in the Caribbean.”
A number of other proposals were also tabled during the minister’s presentation.
