Dear Weekender,
As mentioned last month, this issue will be dedicated to entrepreneurs. Therefore, I will tackle, in my opinion, the most important tax hurdle for entrepreneurs’ doing business in St. Maarten: Turnover Tax (In Dutch: ‘Belasting op Bedrijfsomzetten’), commonly known as ToT.
In general, local businesses and entrepreneurs assume that they are in compliance with their turnover tax obligations, as long as they declare the turnover realized with the supply of goods or services provided in St. Maarten and pay the turnover tax due accordingly. However, local businesses and entrepreneurs may be held liable whilst being a customerof foreign suppliers or services providers. Yes, you read it correctly, a customer! This is referred to as the reverse charge mechanism (In Dutch: ‘verleggingsregeling’) and in essence entails a taxation on imported services, i.e. services obtained from overseas suppliers, including St. Martin (French part of our island).
In the following, I will provide you with some background information on this matter and discuss possible solutions to mitigate any unforeseen turnover tax liability resulting from transactions concerning imported services. Let’s start with the taxable transactions:
Turnover tax is in principle levied from (resident) entrepreneurs in regard to their business turnover realized with the supply of goods or services rendered in St. Maarten in their business or profession. Foreign companies or service providers (i.e. non-resident entrepreneurs) that engage in transactions with companies established in St. Maarten may become subject to St. Maarten turnover tax, if turnover is realized on the supply of goods or services provided within the country of St. Maarten. The turnover tax rate is 5%.
In principle, the tax base for turnover tax purposes is the total amount of remuneration received from transactions related to (i) the supply of goods and/or (ii) the services rendered, except for the transactions for which an exemption applies. In this respect, it should be noted that in the applicable ToT legislation more than 20 turnover tax exemptions can be found. For your reference a selection of the most common ToT tax exemptions is summarized below:
ToT exemption on real property transfer transactions subject to real estate transfer tax;
ToT exemption on rental income derived from real property intended for permanent residency;
ToT exemption on services rendered in the restricted areas of the ports of entry;
ToT exemption on services rendered to sea-going vessels and planes;
ToT exemption on healthcare services offered by registered institutions.
And now we continue with the taxable persons:
Generally, any individual or legal entity that carries out an enterprise or profession independently as well as any individual or legal entity that exploits assets for the purpose of obtaining durable income is considered a taxable entrepreneur for ToT purposes in St. Maarten.
Under the term ‘non-resident entrepreneur’ is understood an entrepreneur who is not established (or residing), neither has its place of effective management nor a permanent establishment (or permanent representative) in St. Maarten. Whether an entrepreneur is considered a resident of St. Maarten for turnover tax purposes is determined by the actual facts and circumstances on a case-by-case basis.
Even the non-resident entrepreneur who does not have any presence in St. Maarten is deemed to have chosen domicile at the local Tax Administration Office, provided that services rendered by the non-resident entrepreneur are enjoyed in St. Maarten.
These non-resident entrepreneurs are in principle liable for the turnover tax due on the cross-border transactions with customers in St. Maarten. Only in case the foreign services provider is in default, the law appoints the customer (at the receiving-end of the transaction) in St. Maarten was liable for the turnover tax due. The latter only applies to resident customers that are also registered entrepreneurs established in St. Maarten.
To mitigate this unforeseen ToT liability, the law provides the possibility for both parties (the foreign service provider and the resident customer) to submit a joint declaration informing the tax authorities that the customer will be responsible for the turnover tax filing and the amounts due on the transaction. By doing so both parties obtain certainty in advance and will, likely, not be confronted in the future with unexpected and unforeseen ToT liabilities, including possible penalties.
Equipped with this knowledge business owners in St. Maarten who rely on imported services to conduct their business, should be able to make arrangements with their overseas counterparts to be in control of their TOT liabilities and avoid surprises, especially during tax audits. #knowyourtaxes
Sincerely,
Nicole Echobardo | HBN Law & Tax
