INTRODUCTION
No argument is needed in concluding that during the last 2 years the pandemic drew deep tracks in all domains of our small community: humanitarian, professionally, commercially, labor, socially, etc. Many lost their job or substantial part of salary during the pandemic and even their relatives. Consequently, our public finances also got a big blow thru which the national debt will amount to approx. AWG 6 billion in 2023.
Thanks to the Dutch financial and medical support we were able to mitigate the impact of the necessary measures adopted to combat COVID-19 and safeguard the minimum subsistence level for a large part of our community.
Since the pandemic initiated, the Government of Aruba (GOA) has been in intense negotiations with the Netherlands, to reach agreements on its management of the public finance in the following years, to release financing with conditions, and to support funding for its operations, whilst strengthening its capacity to resist future calamities These deliberations with the Dutch resulted in 7 so-called country packages (‘handakuten’) of reforms, from one of which entails a broad fiscal reform (‘FR’) which was earlier recommended by the IMF in 2018. The tax office (‘DIMP’) drafted unilaterally a grid of amendments and/or abolition of existing tax regulations and laws, of which the introduction of the added sales tax (‘BTW’) formed the main bout. Subsequently DIMP organized informational presentations to which the private sector representatives were invited and explained orally the main changes proposed.
Even before the COVID pandemic started, several of our business trade associations (‘Commerce’) and Labor Unions (‘Unions’) requested real participation during these deliberations and decisions of national interest. Opinions were voiced through letters and/or the media, in which it was imperative that GOA has the obligation to first cut their expenses before increasing the income burden on the Aruban community.
Whilst a written draft of the FR was never published nor distributed, and the unions were not invited to this roadshow, borderless discussions started about the number of tariffs in the BTW and some other proposed amendments, some of which were announced and rejected again after 2 weeks. Consequently, the private sector and the unions started fearing the consequences of this FR for our economy, particularly because of the present post pandemic global double-digit inflation and rising interest rates in both USA and Europe. As these continents form our main markets for tourism and imports, and our community already started to experience the rising costs for utilities and food, the need for a discussion on the possible impacts on our purchasing power and business opportunities grew rapidly.
Commerce & Unions1 considering the lack of a national support legitimating the proposed changes, took the collective initiative to establish a small group of experts (“the Committee”) to project the possible impact of the proposed changes on our economy and cost of living and to explore feasible options to increase GOA’s revenues and income-base. With the pandemic phasing out, our GDP is increasing because of the fast-recovering tourism This fragile growth should benefit all domains of our community: the subsistence minimums, medical care, housing, 1 See attachment
profitability of business, education, the public treasury, and the elderly retirement benefits, among others.
The committee organized meetings and consultations with the representatives of the 17 signatories, experts, and association authorities and with related GOA departments on legal, statistical, and other informative matters. These deliberations were organized and supported logistically by the Secretariat of the Chamber of Commerce and held at the premises of the Chamber of Commerce.
The committee hereby expresses his thanks to the Chamber of Commerce for her work and support and to all whom have contributed with their time and contributions to complete this common initiative, resulting in this report with which we would like to contribute proactively to the deliberations regarding the FR and to bring concrete proposals to assist GOA in its efforts to manage its structural public finance and budget deficits, whilst at same time safeguarding the economy and community of Aruba from a fatal collision of the present global developments and local measures.
October 25th, 2022
Randall Croes Angel R. Bermudez1. Scope and methodology of the Committee
The committee started her work by mid-August with the premises and Secretariat of the Chamber of Commerce as its headquarters. Strictly confidential meetings were held with authorities of trade or labor organizations, in debates and exchanges of ideas and proposals on site. This was further supported by conversations between Committee members and individual tax experts, business and labor leaders, captains of industry to further find out in detail the opinions regarding specific tax and economic laws and policies. Finally, the committee also met with the departments of Customs, Tax, AZV and SVB. The Committee exchanged proposals and ideas with these parties and collected their valuable feedback.
The agenda of the meetings were focused on the following items:
• The knowledge or familiarity of the organizations about the tax reform proposals of the GOA.
• Their input and suggestions for tax and/or economic reform.
• Their opinions on the ideas of other organizations and the Committee brought to the table.
• Their opinion on or support for BTW.
• In what form or shape to fit the administrative limitations of many businesses.
The main objectives of our proposals to be presented was to have:
1. Minimum inflationary impact: keep BTW rate preferable as the BBO level today.
2. Search for alternative sources of revenue, without local inflation impact.
3. Enhance compliance largely.
4. Promote a level playing field for better market competition for goods and services.
5. Keep the tax burden and its administrative costs on time and management on those who can bear it.
6. Protect Aruba’s international competitiveness in our main industry: Tourism.
2. Aruba and the rest of the world, social and economic indicators
Our small size of territory and small population places our island in the micro-nation category among other nations and autonomous territories of the world. Oddly, the micro-nations belong also to the category of the wealthiest economies of the world, with high GDP per capital, low unemployment, and poverty levels2 .
Our economic history is marked by economical “booms” and “busts” which created wealth and accumulation of infrastructure capital for private and public use.
Since ‘Status Aparte’ and after the closing of Lago Oil and Transport Company Ltd. the efforts to grow our economy have been mostly successful and greatly surpassed the main development goal: lower the unemployment rate, increase gross fixed capital formation (private and public) and income increase by the population.
2 See attachment # 2
Excess growth of the tourism stay-over capacity and its direct and indirect labor needs generated a massive migration flow that almost doubled the population in just 30 years. For a limited territory and one of the most densely populated islands of the world, this population-expanding development model cannot continue as before. The economy and population are growing, but the island territory does not! Waste and zoning problems just get worse over time, unless drastic changes of waste management, land use and building policies change. Unfortunately, public expenditure has structurally outpaced the revenue created by the dynamic development of the private sector. Large scale public projects of high quality of life impact were financed with debt service, increasing the interest burden and offsetting much of the gains, in financial sense.
This heavier burden of the public sector has been passed on the consumer and business with successive tax hikes and social premium adjustments. Basic services to the community, such as education, land management, public security, public health, trash collection, which we still paid from ordinary taxes and very low deficits in the first half of the twentieth century were increasingly difficult to pay for after 1986 due to higher expenditure compared to revenues.
Operational cost control and simplification of labor intensive but nonvalue-added procedures in the administration (that increase the cost of doing business) added to slowed down permit issuances etc. This need to be curbed and where possible, noncollective services privatized to the competitive market. The community copes with an inefficient and costly government organization, which in many tasks that it has a monopoly on, needs to adapt to the demands of a much larger, sophisticated, and faster moving economy and larger population.
Enhancement of the product value of our tourism industry and generating more income from existing productive business units (hotels, restaurants, and tourism related industries), whilst keeping the tourism product carefully developing and improving over time is the economic formula that can lead to higher GDP per capita and finance the public services to support it. A higher tax burden on the population, tourists and companies could endanger the chances of sustained success and is a delicate balance to maintain.
Union and Commerce are of the strong opinion that there is almost no more space for substantial tax increases to the consumers and tourists.
This report is an effort to provide viable alternatives to diversify and spread the sources of revenue of the public sector, to increase the share of the lower contributing sectors, and create a level playing field for the participants in the economy, both for business and consumers. It also mentions reductions of tariffs and rates where they are found to be excessive or creating undesired distortions in the economy and making compliance controls very difficult for the public sector. All with a goal of limiting the imminent impact on the cost of living for inhabitants and visitors.
The control and decrease of public expenditures are urgent and need to complement this last reform effort, to reach the before mentioned goals. Commerce & Unions now expect the GOA to bring forward concrete and irrevocable cost control measures, legal and policy changes for bureaucracy/red tape mitigation, service improvements and technical innovation to offer better, faster, and lower cost services to our community. In this endeavor, time is of essence as the global economic growth looks very vulnerable because of the roaring inflation with scarcity of raw materials and chips, increasing transport costs, exploding utilities costs, and rising interest rates. Meanwhile our CBS pronounces that almost 40% of our community is living presently at minimum subsistence level.
3. First, we would like to observe that in all meetings with Commerce & Unions 3 main subjects were raised:
A. There was no complete picture of the FR but fear for purchasing power decrease
B. Compliance could be improved in several domains increasing revenue for GOA
C. Viscousness in most procedures for requesting permits with GOA
Ad A.
Through our conversations we were able to recompose the main parts of the FR:
• Imposing a BTW with 3 rates.
• Cancellation of the IPC regime.
• Limitation on deductible expenses.
• Cancellation of investment credit.
• Cancellation of inhouse pension plan.
• Cancellation of accelerated depreciation properties.
• Limitation residual value properties.
• Limitation current account shareholders.
• Imposing fictitious wage managing directors.
• Reduction profit tax rate to 22%.
• Increase threshold income tax.
• Levy on tips.
• Reduction wage and income tax rates.
• Increase repair surcharge.
• Increase social minima.
• Levy transfer tax on transferring economical title of property.
• Increase tourist levy with 3%.
• Imposing insurance tax of 6%.
• Shrinking tariffs house of import duties to 5 categories.
Note: because of this lack of knowledge with Commerce & Unions, NO technical discussion was held regarding the taxation techniques of the FR across the board.
Ad B.
Commerce & Unions indicated that enhancement of compliance within their domain could subsequently lead to more revenues for GOA.
Ad C.
Commerce in several domains experience the process for obtaining requested permits for building, lease land issuance, work permits, business activities etc. as vicious. This bureaucracy is time consuming and costly and hampers economic growth, leading to less revenue for GOA.
4. GOA meanwhile drafted and sent the budget 2023 to Parliament, based on an increased BBO rate of 7%; consequently, we will not focus here on the BTW but BBO at the border.
A. BBO WITH A LEVY AT THE BORDER!
Commerce & Unions all reiterated on the accumulative effect of the BBO in present system and its increase.
Commerce & Unions this levy to be done at the border on qualifying imports and deductible from BBO charged to next cycle of buyers, is for the creation of a more compliant indirect tax system and a level playing field for trade and industry.
After the pandemic a large portion of the population kept regular habits of online purchasing. According to the Central Bank’s ‘CONSUMER CONFIDENCE RESULTS (PURCHASING HABITS’) just recently published, the following results of fluctuations of frequency of online purchases by locals have been between January 2020 and July 2022:
A very significant part of the large private companies in our economy, such as supermarkets and hotels, regularly purchase directly from suppliers abroad. This is an economic handicap for local importers/ distributors holding products in stock subject to BBO. Finally, retailers and wholesalers do not have a level playing field with respectively online purchasing and direct imports by companies and individuals.
BBO at the border creates a more level playing field and additional revenues of retail purchasing will have the same compliance as retailers and distributors of products in stock with the implementation of BBO levied at the border and immediately deductible from BBO charged on invoices of sales.
The Committee found unanimous support for this model of BBO, with only one level of deduction of BBO levied by Customs at the border. It would be a simpler learning curve for all towards a complete BBO model, where BBO paid to local providers could be deductible. Consequently, the BBO to be deducted is provided by DIMP and/or Customs Department in its network when doing an online filing, just like the current BBO. The amount paid at the border is recorded in the ASYCUDA filing system of Customs. We understand that the legislation for this levy is ready to pick up by the parliament!
B. IMPORT DUTIES ON VEHICLES, FISCAL INCENTIVES FOR ELECTRIC CAR USE BY COMPANIES
In the case of vehicles, the current quite punitive rates of 30%, 40% and 50% have pushed a big portion of the population to the purchasing of second hand cheap right hand drive vehicles. Those obscenely high Import duties hampered the local market for pre-owned cars, whilst new cars cannot be paid anymore by a large income segment, even with a bank loan to finance 1/4th to 1/3rd of the car.
Local dealers have been greatly affected and of course the quality of life of the population, having to buy 2nd hand highly polluting cars with eventual complicated mechanical and repair expenses commonly higher than when buying a new car. We understand the customs department (‘DAA’) recently evaluated the reduction of Import duties on cars to 28%. Commerce & Unions strongly support this development and encourage it to be implemented the soonest. Suggested for other models is 2% for full electric versions and 5% on hybrid.
Lower taxes will promote more sales of new cars by authorized dealers and people would now finally be able to afford.
C. ZERO IMPORT DUTIES FOR AGRICULTURE SECTOR
Commerce and Union are of the opinion that this sector is confronted with considerable risks of the climate changes, pests that kill whole swathes of plant types or animals. And tough competition from subsidized US and EU and Regional producers (Colombia, Brazil, Peru, Chile etc.) that have access to local supplies of animal feed, fertilizer, fencing, irrigation materials etc. No import duties are paid on these supplies. Levying import duties for retail or wholesale import of animal feed is not a level playing field for the small local producer. The meat or eggs sent to Aruba do not pay for import duties for the feed bought locally and it this final product is imported duty free to Aruba (nul-tarief). No discrimination for small or large quantities of the same product.
It is recommended that the agriculture sector, considering the high risks and costs involved and the benefit of saving imports and generating employment and income should be free of tariffs and BBO until it reaches the supermarket shelve for sale to the consumer or the restaurant. There the BBO is paid at the end of the commercialization and production chain and the tax revenue is generated, with a level playing field for all in the cost structure.
D. REDUCE PROFIT TAX TO 23 % AND PHASING OUT OF IPC REGIME BUT KEEPING INVESTMENT CREDIT FOR INVESTMENTS IN FIXTURES & FURNITURE FOR HOTEL SECTOR
The IPC regime, embedded in the profit tax legislation was implemented to promote the increase in room rates and investments in plant and equipment of mainly the hotel sector. We understand that multinational operators declaring global income are taxed in homeland to the extend what Aruba does not tax. Therefore, GOA considers phasing out the IPC regime and simplifying with a one rate profit tax regime phased in the short term to generate more profit taxes locally. The facility in the regime related to reduced import duty rates of 12% when investing large amounts in plant and equipment is strongly recommended to remain in place, however subject to BBO at the border. Consequently, all hotels to be subject to the BBO tax.
E. RESIDUAL VALUE OF BUILDINGS
Instead of a complicated system of land value as limit for depreciations, just simply increase the residual value to 15% of the historical price. On a side note: introduce a property tax
(‘vastgoedbelasting’) with a notional % for all dwellings / condo’s owned by non-residents and deregister them from the income tax!
F. INVESTMENT CREDIT POLICY TO REMAIN PROMOTING GROSS FIXED CAPITAL FORMATION
For the enterprises not qualifying for the IPC regime, small and medium sized enterprises, it is recommended to maintain the investment allowance to promote capital investment in transportation fleets, machinery, fixtures, property development (for residential or business) and in the hotel sector, the important segment of landscaping. The import duties and BBO on the acquisition of these items will provide tax revenue whilst the investment allowance will reduce profit taxes, but in a smaller proportion.
G. INCREASING TOURISM LEVY TO ENHANCE REVENUE WITH 3% (FROM 9.5% TO 12.5%)
Discussions are quite advanced regarding the restructuring of Tourism Levy and increasing the rate with 3 points to 12.5%. We have been informed that at least 40 million florins can be raised with this change at current levels of room numbers and occupancy and including complete sector of the vacation rentals registered and licensed. Besides, we have expanding rooms with new hotels, which will be realized on the short and medium term.
H. APPLY ACROSS THE BOARD TOURISM LEVY (TOERISTENHEFFING) COLLECTION FROM BOOKING PORTALS!
Negotiations have been ongoing since 2016 for tax collection directly from the local online booking portals and AirB&B (individual properties) selling the rooms on the web. With an agreement (MOU’s)between GOA and the booking portals, local owners selling their rooms online would have these intermediaries charging and collecting the tax to the client and paying DIMP directly. As outlined in Article 7 of the ‘Landsverordening Toeristenheffing’ Commerce & Unions strongly recommend having ALL major booking portals enrolled, as soon as possible, to start the collection of these taxes directly from the online retailers saving the local affiliated properties from this burden and paying the Income or profit tax on the income of commissions on the use of the room and BBO on the sales on site. These are low hanging fruits which increase revenue but at a much lower cost of collection. There are approx. 4,200 vacation rental rooms affiliated with online booking portals and they are good for an estimated: 4,200 rooms at 50% occupancy = 2,100 rooms x 350 days x US$ 150 rate = US$ 110,250,000 of room sales.
Subsequently a 12.5% Tourism Levy would generate approx. $13 million or AFL. 24 million per year for that segment in a conservative scenario. Many – mostly the big players – are already paying Tourism Levy directly to DIMP but a portion too large is still not enrolled. There are several condo’s being completed in 2023 along the Eagle Beach, of which many will be offered for rent on booking portals, again enhancing tourist levy, if charged on booking portals or local vacation rental companies.
a) Increase generated by hotel room expansion on short and medium term
There is a property with 290 rooms opening in early 2023. Following past trends in new hotels, occupancy will increase gradually. Room rates of properties of this nature are at about 200 to 300 US dollars. Using the same equation as above, this property could generate, at 50% occupancy a tourism levy of about AFL. 2,600,000.
Another project now under construction and projected to open within 2 years would add 200 rooms at top, five-star, rates. Using this same calculation procedure at a conservative room rate of $500, the tourism levy would be total AFL. 4,300,000 annually after 2 seasons.
b) Increase of ATA Passenger Charge of ($10.00 to US$11.00; Afl. 17.90 to 19.69)
This one US dollar increase per passenger would generate at least one million dollars to go into the ATA Budget, reducing their need of funding from tourist levies, which could go the general budget for maintenance of general tourism infrastructure (boardwalks etc.).
I. ATTEND AND ISSUE HOTEL LICENSES FOR THE VACATION RENTAL SECTOR
The regulation of the Vacation rental industry requires urgent attention i.e., register, screen and catalogue all participants in the business. As mentioned in paragraph “e” the collection via the booking portals will be efficient and cost effective. Cross the board compliance is very important to reach the targets of revenue. The properties need to be given the proper rental, F&B licenses as a matter of urgency to reach these goals, as part of that registration is to update on the booking portals selling their rooms. The associations of this sector expressed their serious concerns on the situation of not getting adequate responses to permit and licenses requested.
The regulation and registration will enhance compliance of Income Tax and indirect taxes and will bring a much-needed tranquility in this sector regarding their legal status and establish a level playing field among participants in the business.
The Booking Engine is the hotel room taxpayer, and the property owner gets the net commission after the sale and already have embedded the systems of collections and payments and with a formal agreement the TL payments are assured on a regular basis.
J. CONSERVE INHOUSE PENSION PLAN BUT OUTSOURCED TO AN INSURER
It is recommended to maintain a regime of ‘Pensioen in Eigen beheer’ to be finalized at reaching pension age thru a policy with a local insurer, with the final goal of having a lifetime annuity policy for the entrepreneur when reaching retirement age. The annuitant becomes the payer of taxes and premiums as any in another ordinary pension plan.
K. INCREASE PREMIUM OF AZV AND AOV ON HORECA EMPLOYEES EARNING TIPS
At least 8,000 employees in the Hotel, Restaurant, and recreation sectors (tours, watersports etc.) are enrolled in the AZV to enjoy medical services paid by all employed citizens. Likewise, our pension system AOV will be paying retirement benefits. However, because of tips not being accounted for in the taxable income, wage tax and/or social premiums, a disproportionate large part of the labor force (approx.13%!) receiving same benefits are paying considerably less contribution compared to other employees paying 100% of the premiums from their salaries. It is common knowledge that thousands of “tip earners” taking home hundreds of dollars a week, amounting sometimes to 4 times or more their basic wage, without any withholdings. To have contributions made by citizens as much as possible in an equitable manner, Commerce & Unions recommend considering collection of AZV and AOV premiums on tips. Although the employers consider this a lack of solidarity within the community, they do not wish to be in charge of this levy but have it as a remittance of each employee.
There are 2 methods of collection suggested:
1. Application of Article 38 of the LV AZV, 38b, par. 4 implementing a notional amount (fixed) via a LB - H.A.M. to be paid monthly by the employee with tip earning rights (administered daily or weekly by the owner/manager from the tips paid in cash, by credit card or debit card) on payroll as an additional withholding for AZV.
2. Second option is to have tip earners declaring the tips voluntarily in their Income tax filing. On the disadvantage side, this will generate about 8,000 additional IB forms (!). As most of these workers have wage tax as final levy, raising the cost of administering these 8,000 more IB forms and complicate matters for DIMP instead of reforming towards simplicity, one of the main goals of this report.
For example, with a monthly 50-florins flat fee for AOV and 50 florins for the AZV, 8,000 HORECA tip earners would contribute AFL. 4,800,000 every year for each of the funds.
It is strongly recommended to the sectors involved, to initiate a discussion to create this funding which is missing from beneficiaries of the funds whilst contributing less that other citizens. The latter considered broadly as a solidarity lack within our community.
L. INCREASE PARTICIPATION OF LEGAL MIGRANT LABOR IN FINANCING OF THE AOV, AZV FUNDS AND INCOME TAX
There is an increasing labor shortage in growing sectors of our economy. This trend will not abate with 550 rooms opening within the next 3 years. The higher occupancy rates in the existing hotels have post-pandemic increased employment in the tourism support services (restaurants, tours, car rentals, recreation). Companies experience sales being affected by lack of kitchen and line workers to produce the products and services sold to visitors. We have reached the limit of labor force available locally whom are motivated to work in the Hotel and Restaurant sector. There are disproportionally high number of job openings in this sector. Our economy is mono-productive, so we have to supply this excess size of the vacancies in this sector with imported labor. GOA should plan this well and stimulate the migration of younger people and those more interested to work in the sector from other economies having a smaller size of their Horeca sector compared to Aruba.
Commerce & Unions recommend the following:
a) Issue a ONE-TIME ONLY “firma liber” to all permit holders of 7 or more years in Aruba. With this one-time procedure, thousands of permits of already integrated citizens, the vast majority with command of Papiamento and basic English, with children born here and mortgage loans for their homes could continue their lives without having to burden DIMAS with work permits every year.
b) Issue fast track work permits to key positions with increasing labor shortage. The level of service in our HORECA depends on adequate staffing. Thousands of migrant workers are economically active in the grey economy without contributing to AOV/AWW and AZV funding because they are undocumented. Integrating available labor recruited by the employers to where they are needed, will generate millions for the social premium funds AZV and AOV. Every 1,000 legalized migrant permits with AFL. 2,000 of basic income = 2,000,000 of salaries generating 13.5% AZV and 9.5% AOV/AWW premiums, amounting to respectively: AFL. 270,000 and AFL. 190,000 monthly or AFL. 3,240,000 resp. AFL. 2,280,000 annually.
Estimates from Commerce & Unions varies between 5,000 – 10,000 undocumented foreign workers residing in Aruba merely in Horeca and construction sector………Bingo!
M. ABSTAIN FROM INTRODUCING THE FICTITIOUS SALARY REGULATION
There are several considerations to strongly abstain from introducing this regulation which is a totally unknown concept for our business community, and which will create several difficulties which are hard to resolve. For example, there is a number of companies inactive in the Chamber register. Owners keep them for eventual business opportunities that may require a speedy need for a limited liability company. There must be a period of adaptation and legislation to allow rapid liquidation of inactive companies or a regime of exemption and a census before any implementation of such a legislation and not after.
There is a high number of small companies with owners earning modest salaries, or even no salary at all, for long periods of time, to help their company´s cash flow while paying social premiums and tax and not collecting net salary when in need of cash. Companies are started to last and thrive over time. Modest cost burden of the owner to the company’s resources is a behavior to be applauded and not penalized. It is important to assure survival of SME’s in bad times and crisis. Implementing this rather foreign (Dutch) regulation and copy pasting to Aruba’s small economy without a proper campaign for allowing the rapid and less costly liquidation of dormant companies and culture changes by entrepreneurs will assure a most difficult and costly implementation. Tax reform is meant for simplifying the tax administration for the citizen and entrepreneur and this fictitious salary taxation is the reverse process. Simply limit the average balance of current account of managers/shareholders, and qualify the excess as disguised dividend.
N. CHANGE IN TAXATION FOR THE SECTOR OF JEWELRY
This sector expressed their serious concerns about her options to absorb any increase in sales tax, as their retail price is fixed by the brands, maintaining the same retail prices in all destinations in the Caribbean as one market without insular competition. Recent market analysis by ATA place shopping at a high position of attractiveness of Aruba for affluent visitors. The sector provides stable employment and salaries, forex charges and transaction charge revenue to local banks on credit card transactions, whilst the properties that these stores rent or own are located on prime locations, in order to be easily accessible for our visitors. Thy have a considerably large multiplying effect in other sectors and in tax revenue in these sectors. A kind of an administrative free zone like in BES legislation could be considered, enabling this sector to remain competitive but contributing their share.
O. COMPLIANCE WITH CUSTOMS
Commerce & Unions propose a smoother time-effective procedure when importing. First of all, it is proposed to mitigate the number of categories in the nomenclature from 12 to 5. This would enhance the compliance and audit import documentation and efficiency of physical enforcement on site by the Customs department. Charging a fee for the filing of the Asycuda form at import is also considered to promote a better quality of filing. Commerce and Union recommend having integral tariffs related to items which are traded together. For example, furniture and fixtures imported by hotels, furniture stores and office furniture manufacturers
should have as similar as possible rates, of Lamps, furniture, appliances, artwork, carpets etc. These suggestions are for facilitating administration and compliance of imports to improve collection. Both SADA and Customs Department claim of skilled labor shortage in the department and any process to simplify procedures and ease compliance work will benefit of optimal tax revenues. Therefor modernization of the legislation by replacing the archaic LUID 1908 into ALDA, will also offer better authorities to the Customs to work efficient and effective, moreover when a levy at the border is introduced! Customs is confident that with an actual legislation and the compliance tool TTP they will be fit, willing and able to combat fraudulent invoices better and generate more revenue for GOA.
P. IMPOSING AN INSURANCE TAX
The delegates of the insurance tax consider positively the imposing of an insurance levy of 6%, instead of the BBO/BTW. This levy on all policies but life, annuity and motor WA.
Q.
RECOMMENDED REFORMS TO REDUCE THE COST OF DOING BUSINESS AND REDUCE RED TAPE
a) Collection of Serlimar tariff through the Electricity bill
Outsource the collection of Serlimar invoices thru ELMAR bill, same as Curacao is doing for 25 years now. For a level playing field, Commerce & Unions (with today’s technology) indicate trash collector companies transfer their collection to Elmar, which then transfers these payments to the chosen company.
b) Implementation of deposits on bottles, tires, vehicles, and other large items.
The cost of processing trash is closely related to the nature of the items imported. For example, a motor vehicle, or a tractor tire are products that have a high cost of transport and removal from their location of final use. Other items of massive consumption, such as beverage bottles are easily thrown away and pollute the island dependent on cleanliness to survive in the tourism industry. If deposit is applied to each unit at import, private pickup companies can organize systems of collecting and transporting these items to the designated processing plants, saving the costs of transport. The deposit fund returns the money to the trash collector from the location of last use. The item must be physical modified or dismantled.
c) Non-compliance with the vehicle tax
Considering the latest numbers of non-compliance with this levy from the tax department, Commerce & Unions recommend including this tax in the excises on fuel and gasoil, avoiding to renew license plates and enforcement controls by police. At same, have the gasoil subject to the excises same as fuel. The polluter and the mileage riders pay for the maintenance of the roads. At same, this can be an incentive for carpooling of employees working in the hotel sector, but living in the eastern part of Aruba.
d) Collection of sewage processing through the water bill
The Sewage plant is emitting an unbearable stench in the Eagle Beach area. It affects neighboring properties and the image and perception of the tourism product and quality of life of the inhabitants. The partially processed waters are a threat, in times of heavy rains, to the surrounding beaches of world fame. It has become a high-risk situation for our entire economy, and needs urgent solution. There are 550 rooms in pipeline at less than 100 meters away from Bubali plas.
To assure long term and stable financing for any future investment, to maintain and upgrade the plant, it is recommended to outsource management to a professional company and charge, through the water bill and based on the volume of water used, the costs of expanding and operating the water sewage plant, starting from the premise of a plant with the full capacity to handle the existing and future volumes, up to 50 years in the future.
The principle: “the polluter pays” applies for the high users, except agriculture and manufacturing performing their own water purification. The entities with full water recycling systems can obtain an exemption. Recycled water can be sold for landscaping, golf course, and agriculture.
e) Cease to describe detailed activities to be performed on a long lease land
Increasingly, commercial lease land with detailed description of economic activities is affected by the archaic legal handicaps which reduce property value and affect their financing possibilities in the credit market.
For example, land issued in the past, with the objectives for a “telex center”; a “book and magazine store”; “a record music record store”; a “video rental store” a “radio store”, or a “call center”, or “Internet Café” are obsolete today by technology. Changes in the economy and market in the location can also make some types of businesses to become uncompetitive because of road changes, encroaching population and need to change in their activity type to survive. For example, a farm, supermarket or a factory with noise and emissions can be slowly surrounded by population and it cannot continue over time without conflict with neighbors. Or the value of the land increases so much that other uses are more feasible. Of the previously mentioned examples, other activities can be done on the same place, without nuisance to the surrounding neighbors. For example, barber shops, professional offices, pharmacy etc...
A 60 yearlong lease cannot be tied to the nature or description of a specific type of business activity, which will surely change with technology and markets over time. Changing the objectives of a long lease contract takes years and it reduces the re-sale value of the property in the eyes of the banks and would-be buyers. It is a financial loss to the owner because this change in objective and its procedures is discounted from the price. The establishment permission based on the ROP (V) options of land use is adaptable over time and does not disturb the property value. It is recommended to have simplified denominations for commercial long lease land use like: “A commercial building for business activities permitted by ROP, public nuisance act and the establishment permission act.” This delegates the choice of activities allowed to the Department of Economic Affairs and DOW who will test the changes in the building to the existing law, the impact on surroundings and policy of the time, by definition dynamic and changing over time. This change can be made with a simple one-time law amendment.
5. Summary of estimated financial impact of the reforms proposed in this report:
The amounts mentioned herein have been either brought forward by the organizations participating in the deliberations, others are sourced and extrapolated from existing reports and others estimated by the appointed experts.
4a. A deductible BBO charged at the border FuelsimportBBOnotapplicable.
Apply a first stage of BBO, with charge at the border, except Gasoline, HFO, by RDA should charge at sale to local companies (Gas Stations, Airport, and WEB)
justliketradedgoods(itcutsone inflationarycycle).
4b/c/d Reduction of punitive tax rates that limit quality of life and negatively impact sectors of the economy.
4b. REDUCE IMPORT DUTIES ON VEHICLES
from their port installations in RefineryDutyFreezone. Enhanced compliance. One way importpayswithout deductions.
(-)AFL.3,000,000
FISCAL INCENTIVES FOR ELECTRIC CAR USE BY COMPANIES
Reduce the Invoice value for Income tax by Company car divers for Electric Vehicles only, from15%to10%
Reduce Import duties on cars to between 2.5% (electric), 5% (Hybrid)to maximum30%(or28%)
2023loss(–)AFL.3,000,000
BTWatborderandincreasednumbersandimport value per unit of cars sold to drivers to compensatetheloss
More employment at car dealers (LB/Social premiums)willaddfurthertoclosethe gap.
4c. ZERO IMPORT DUTIES FOR ALL AGRICULTURE SUPPLIES AND ANIMAL FEEDS (SMALL AND LARGEQUANTITIES)
4d. REDUCE IMPORT DUTIES ON FURNITURE, FIXTURES AND APPLIANCES OF HOMES AND HOTELROOMS
Reduction of Profits Tax from 25%to23%
Reduce the percentage of Invoice value on income tax of employee vehiclesforhybridandfullyelectric vehicles
To create a strong incentive for companies to go electric and increase the critical mass and economies of scale to local dealers for mechanical support. GDP is impacted with less imports of gasolineusingHFOelectricity,wind power and solar energy mix of Aruba
All production of vegetables, eggs, animals should have the same cost offeed,fertilizer,equipment.
Budget neutral, GDP growth with lower fuels imports,reductioninfuels excises
Estimated energy savings for the consumer Gasoline Afl. 300 p/m gas to Afl. 150 Grid electricity.
Phasing out of IPC Profits tax regime
Reduce high import duties on Furniture and fixtures to compensate impact of BTW at the border for hotels, business, and homeowners.
8% relative reduction of the rate 2%/25%
(-)Afl.1,000,000
No estimate possible, the amounts are small, but economic(importreduction)effectofreductionof animal imports and vegetables will improve product offer in the market to locals and tourists andreduceimportsofeggs,fresh vegetables
Limittheimpactto (-)AFL.2,000,000
2% rate reduction in estimated 2023 profits tax revenueofAFL.160million=impactof2%=(-)Afl. 13,000,000
Profits are to increase with the GDP growth, maybe 50% of losses could be compensated by Economic growth/expansion in 2023, expected to reach 2016 Profit tax revenue levels of AFL. 238 million in 2026 when compensation of COVID19 lossesisphasedoutfromprofitsover5years.
4f. Maintain Investment allowance rates implemented during Covid to motivate cost efficiency of capitalinvestmentsincommerce and tourist product enhancement on site, anticipating the disappearance
Eliminate in 3 years the reduced taxesanddonationschemesforIPC reduced rates and categories to simplify its administration and tax what other jurisdictions benefit fromourownreducedtaxrates
The current regime is an adequate stimulus of about AFL. One billion ofannualprivategrossfixedcapital formation, compared to 30 to 40 million of the public sector.
(Source:CBA)
2023-2027 Neutral
Grandfathering period of 5 years to lapse the facility.
2027projectedrevenueincrease: AFL.30,000,000 toAFL.40,000,000
Budget neutral, GDP sustaining, higher per capita productivity,andrevenues.
in 5 years of the IPC regime incentives.
A 5% extra deduction for insulation of buildings, green energy investments in solar panels, water recycling on site is recommended. (Sustainable energyInvestmentallowance).
4g Increase of Tourism Levy/Tax to enhance revenue and to finance capital expenditure required to improve tourism product and funding for tourist attractions maintenanceexpenses.
Increase of 3% on Tourism Levy, on existing Hotels. From 9.5% to 12.5%
Theallotmentkeyofrevenueis:
-5%forLandAruba
-7.5%forATA.
Allocation of portion of 3% increase in Tourism Levy to maintain Tourist attractions by DOW (beautification department)
4h. Apply Tourism Levy (Toeristenheffing) on Booking agents, reducing collection, and enhancing compliance (in process)
Increase the rate for hotels and timeshares
The higher cost of taxes must be compensated with investments in thetouristattractionsandthedaily maintenance and cleaning of all sites.
Enroll Vacation rental Booking/Sales portals as withholder Keep Time share values without changefornow(avoiddoublehitof increase)
Increase participation of the 4,200 existing and growing number of Vacationrentalunits
Fiscal status of Booking portals andPropertyowner If Booking agents collect Tourism Levy and the local property owner declares the net revenue from Bookingagentsthatareenrolled at DIMP as payers, property does not payTourismLevy.
If they cannot declare Booking agent revenue with Tourism levy paid,thepropertyownerthenpays TourismLevy.
Enhanced compliance will increase revenue at a lowcollectioncost.
Projected Tourism Levy paid by NEW Hotel rooms and Vacation Rentals
Atotalof290Newroomswillopen in 2023 and 200 5-star rooms in 2025.
The occupancy of more rooms will affecttooccupancyofotherhotels.
Projections
290Rooms@$200
2023(30%Occupancy)AFL.1,370,250
2024(50%Occupancy)AFL.2,283,750
2025(70%Occupancy)AFL.3,197,250
PLUS200Rooms@$750
2026(50% Occupancy)AFL.3,281,250
2027(70%Occupancy)AFL.4,593,750
4i. UrgentlyregisterandissueHotel licensesforVacationrentalunits
4j Facilitate regime of inhouse pensionplan Facilitate pension capital management to enhance value of pension capital during working age and to permit administration at pension age by an insurer or a qualified independent entity (pensionfoundation).
4k. Enhance solidarity of contributions in the AZV and AOV/AWW funds by levy on tips of approximately 8,000 Tip Earners
4l. Increase of legally admitted labor force participation filling the vacancies with imported labor
Apply a one-time Firma liber admittance for all 7 years and morepermits
Implement an easy to administer flatfeeas perart38oftheAZVper person,tipamountis notcounted
AFL.50.00forAZVandAFL.50forAOV.
AFL.2,880,000andAFL.1,920,000 Peryear
AFL.60.00forAZVandAFL.40forAOV.
AFL.5,760,000andAFL.3,840,000 Peryear
Vacancies are in the thousand plus levels. Assuming monthly wage of AFL. 2,000 the estimates for AZV and AOV/AWW premium contributionsareasfollows:
Saves work on more thousands of work permits nottobeprocesses
Fill at least 1,000 vacancies and start collection of premiums. Adjust AZV and AOV premium limits with 5.59% inflation correction2009-2022
Fast track work permits for existing vacancies and those for projects in pipeline of 1,090 roomswithin3years
4m. Abstain from implementation of Fictive salary Managing Directors/owners
4n. No tax increases for the Jewelry, watches,preciousstonesmarket or the implementation of a free Zone regime with special arrangements for sales to nonresidents
40. Reduction of the number of different import duty rates, clusteringtariffsbytypeoftrade
BBO/BTW charged at the border:
Conservejobs,multiplyingeffect in wage taxes, social premiums, rent, BBOetc.
Growth in the industry will continue paying more indirect taxes and wage related wage tax and socialpremiums.
Enhancecompliance,reduceerrorsandomissions, reduce fines, reduce labor hours for processing fraudulentinvoicesandinspectiononsite.
An estimated amount of at least 100 million of direct imports from online purchasing by final consumers paying without applying for deductions
Increased sale of wine in restaurants due to lower tariffs (more sales and BBO compensating the estimated loss of excises) earmarked to be neutral but enhancing tourism product value
Increased compliance by payers at the borders in collecting BBO
6. IN CONCLUSION
Commerce and Union insist that for a long period of time, uncertainties on taxes should be avoided with a strict control of expenditures of GOA, allowing the expanding economy, based on the projected impact of projects in pipeline, to create an increasing surplus to pay off the national debt and reduce interest expense in the near future. A lower debt is the only way to make out economy resilient for the following crisis to come, and GOA should consider the non-collective services feasible to be outsourced to the local market / private sector.
The present growth numbers of tourism may show exiting, but not every glitter is gold. Many entrepreneurs in several domains still have to recuperate from the pandemic losses and much more employees from their loss of income and/or jobs. Besides, the present global economy is volatile with serious developments in Europe and USA, both monetarily, economically and financially.
Main reason for Commerce & Unions to think out of the box for alternatives, supporting the growth of economy and creating a level playing field in order to generate additional revenue for GOA, in stead of constantly increasing tax rates. Finally, Commerce & Unions may consider positively the swap from BBO into BTW, once the levy is also at the border, whilst an introduction rate at 12% will be budget neutral. Albeit a combi of 6% and 14% accommodating the primary goods may also suffice but to further analized. Together with the aforementioned options to increase revenue, this might be the broad base of support for the future reform and mitigating the imminent inflation push. The committee is grateful for the numerous proposals, both verbal and in writing received from all participators. Particularly, as all were looking into realistic alternatives increasing both revenue for GOA and at same supporting the fragile post pandemic economic growth, by reducing costs of doing business, aligning, and simplifying GOA procedures, creating level playing field for local and foreign entrepreneurs, simplifying the tax system, facilitating export of products.
EPILOGUE
On September 30th, GOA announced that the FR is on hold, and that for the budget 2023 some tax tweaks have been concluded, which entail:
• Increase of BBO levies to 7%
• Some minor adjustments in the rate of income tax and profit tax
• No levies to be charged on tips
• Increase of the tourist tax to 12,5%
• Abolishing the IPC regime
• Limitation of residual value for depreciation of real estate
• Freezing of inhouse pension plans
• Levy of transfer tax on sale of real estate companies
• Same on transfer of economic ownership of real estate
• Introduction of notional salary for shareholder managers
• Levy on excessive current accounts of shareholder managers
It’s obvious that no simplification and or modernization will occur within in our tax legislation.
- Rates and thresholds are tweaked in order to generate more revenue for GOA.
- The BBO increase will generate 40 million florins for GOA.
- The increase of tourist tax will generate 45 million florins for GOA.
- The minor adjustments will be realized merely when the annual filings are assessed.
- A notional salary for shareholder managers is definitely not a simplification, but a complication for small and medium businesses.
- Eliminating inhouse pension plans will affect the cashflow of the companies.
- Abolishment of the IPC regime should include a grandfathering period of at least 5 years.
The increase in solidarity with the payment of Social premiums (AOV, AZV) by tip earners to support the funds financially by many thousands of employees that pay much less than others, is also not addressed.
No mentioning of level playing fields in several domains as earlier observed and elimination of red tapes and inefficiencies in the services of GOA.
