Dear Weekender,
As can be noticed, the rebuilding of our Friendly Island is a process that is still evolving. Various companies and individuals (sole proprietorship) are seeking collaboration with third parties and are little aware of the risk of chain liability (in Dutch: ‘ketenaansprakelijkheid’) for wage tax and social security contributions, altogether also referred to as payroll taxes. This is due to the perception that no employment contract equals no payroll taxes. Well, let’s dive into this fundamental flaw.
First and foremost, it should be noted that an employment contract (written or oral) is not the decisive factor – the factual circumstances are of vital importance.
According to the applicable wage tax and social security premiums legislation in Sint Maarten, payroll taxes are due if a worker receives wages out of an employment relationship. The key factors in determining whether the relationship with a worker can be deemed an employment relationship for tax purposes can be summarized as follows:
i. The obligation to pay a remuneration.
ii. The obligation to perform the work personally.
iii. The principal’s authority over the worker.
Especially within the construction industry, chain liability should be kept in mind from a risk perspective. Chain liability makes a contractor liable for the payroll taxes that his subcontractor must pay in connection with executing (part of) the work. In turn, the subcontractor can outsource to someone else (part of) the work that has been outsourced to him. This can create a chain of (sub)contractors involved in the execution of one project. The chain liability scheme makes each link in the chain liable for payments for all links.
The worst-case scenario would be that the main contractor would be held liable for payroll taxes due on payments made through the whole (supply) chain of individuals engaged by subcontractors and other professional service providers that joined forces to realize that one project. However, the law also includes a few conditions that can limit this chain liability for payroll taxes.
Also, please bear in mind that in case a contractor hires subcontractors for their specific (construction) services or employees, said contractor would have besides the labour law related obligations also the following tax related obligation. Based on our tax legislation and case law, a contractor (or any party that outsources work) would have the obligation to investigate the tax position of the person to whom work is being outsourced, in order to apply the proper payroll tax withholdings and contributions.
Non-compliance with the aforementioned obligation, could lead to the shift of the burden of proof from the Tax Inspector to the taxpayer, making it harder for the taxpayer to ascertain that he is not to be held liable for all the unpaid taxes in the (supply) chain.
Given the above, it is highly recommended to seek advice from a tax professional when engaging in collaborations and/or outsourcing of work. Whether the employment relationship with your workers, your subcontractor(s) and the workers of your subcontractors can be deemed an employment relationship for tax purposes should be determined on a case-by-case basis, and to furthermore take the appropriate measures to comply with the applicable legislation and reduce your risks to acceptable levels. #knowyourtaxes
Sincerely,
Nicole Echobardo | HBN Law & Tax
