NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN
SEMINAR APRIL 4, 2008
Patria est, ubicumque est bene (Cicero)
NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Contents 1. Program book
Page 5
2. Speech & Presentation Roy Marlin, Commissioner of Finance
Page 19
3. Speech Louis-Constant Fleming, President of the Collectivity of Saint Martin
Page 29
4. Speech & Presentation Sherry Hazel, Island Receiver
Page 35
5. Speech & Presentation Alberto Romero, Member of the Board of Executive Directors of the Central Bank of the Netherlands Antilles
Page 51
6. Speech Victor Banks, Minister of Finance of Anquilla
Page 71
7. Speech & Presentation Foundation Tax Committee
Page 79
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
PROGRAM BOOK
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Patria est, ubicumque est bene (homeland is there, where it is good) Marcus Tulius Cicero (January 3, 106 – December 7, 43 BC) Cicero was a Roman statesman, lawyer, political theorist and philosopher and is widely considered one of Rome’s greatest orators and prose stylists. His life coincided with the decline and fall of the Roman republic. He was an important actor in many of the significant political events of his time. Cicero’s vision for the Republic was not simply the maintenance of the status quo. He envisioned a Rome ruled by a nobility of successful individuals determining the fate of the nation via consensus in the Senate.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Contents
1. Introduction
page 4
2. Presenters
page 5
3. Program
page 7
4. Presentations
page 8
5. Notes
page 10
6. Exhibit: Information Foundation Tax Committee
page 11
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
1.
INTRODUCTION The purpose of this Seminar is to pull expertise from private and public sector together to contribute to the discussion about a new tax system for the country St. Maarten. Many times we hear that the present tax system is too complicated and consequently the perception cost too high and the compliance too low. A well balanced tax system, a system of legislation, execution and collection, is crucial for the future development of the country, it on the one hand provides the means to government to properly execute its tasks, on the other hand it can be used as a tool to regulate and stimulate economic activities. Many times we hear that simplification of the tax laws would be a solution, simplification in terms of number of taxes, tax exemptions, moving from direct to indirect taxes, etc. Simplification in the tax laws is just one aspect, simplification in the execution of the levying tasks and collection is another. Through the variety in speakers this seminar should give us a broader view about the tax system that the country should put in place, be it a modification of the present system or a magical system that brings us prosperity at the lowest possible tax burden. When looking at a tax system, we should place the social security obligations within the spectrum; in fact it should be an integral part of it. At this moment, plans are in the making for a National Health Care Insurance and a National Pension Plan. It looks like burdens are mounting up, but that is not the case, the economy presently generates more than enough money to adequately cover all areas of care. What we have to monitor properly is the future development, the cost of living, the cost of care and the aging of the population. Issues that need to be taken into account today, yesterday. Hassink & Roos Accounting and Financial Advisory Services is celebrating its first lustrum. We would like to thank the Bureau of Constitutional Affairs, Commissioner Sarah Wescot-Williams, the Foundation Tax Committee, the moderator Mr. Denis Richardson, all presenters, Commissioner Roy Marlin, the Island Receiver Mrs. Sherry Hazel, Minister of Finance Mr. Victor Banks, President of the Collectivity Saint Martin Mr. Louis Constant Fleming, Member of the Board of executive Directors of the Central Bank of the Netherlands Antilles Drs. Alberto Romero, , the Members of the Foundation Tax Committee and all persons who have helped to organize this seminar. Special thanks to Mr. Marcel Gumbs who enthusiastically helped making the contacts and has been supportive as from the beginning. Again thank you all for your input.
Martin J. Hassink
St. Maarten, April 4 2008
Cees Jan Roos
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2.
PRESENTERS The presentations this afternoon are prepared by persons from the public sector (the Commissioner of Finance Mr. Roy Marlin and the Island Receiver Mrs. Sherry Hazel), the semi government sector (Executive Director of the Central Bank of the Netherlands Antilles Drs. Alberto Romero), the private sector (Foundation Tax Committee) and by our neighbors (President of the Collectivity of Saint Martin Mr. Louis Constant Fleming and the Minister of Finance of Anguilla Mr. Victor Banks). With this impressive mix of presenters the seminar will provide information, facts, opinions from a wide perspective. Mrs. Sherry Hazel has and Associates Degree in Business Administration, a Bachelors Degree in Business Management and has specialized herself at the BCPO (Centre of Personnel Development of the Belastingdienst in Holland), and is currently enrolled at the "Open University" in the Masters Degree Program - Public Service Management. Sherry has extensive experience in tax collection, working at the Island Receiver office of Sint Maarten starting as a tax collector and presently taking the function of Island Receiver. Sherry is involved in various committees like the workgroup New Tax Office and the workgroup New Tax System. Drs. Alberto Romero graduated with honors in economics at the University of Tilburg in 1987. Presently Mr. Romero is member of the Board of Executive Directors of the Central Bank of the Netherlands Antilles and has and is involved in numerous committees, functions projects of which we mention just a view: • • • • • • • • •
Member of tax committee of Sales Tax and Turn over-Tax Member of the Social Economic Council (SER) of the Netherlands Antilles Member Committee Monitoring IMF program for the Netherlands Antilles Alternate member of the Debt Commission (Commission Van Lennep) Director Caribbean Area of the Association of Banking Supervisors for Latin-America and Caribbean Region Chairman of the Foundation for Research and Training of the Financial Sector.(Financial Institute) Secretary of the Commission National Recovery Plan (Commission of the Wise Men) Member of the Advisory Committee of the Dutch parliament (2e kamer) on the legal and economic implications of the adoption of an Ultra Peripheral Region (UPR) for the Netherlands Antilles and Aruba. Member of the Committee on the Financial Supervision of the BES islands.
Presently Mr. Romero is the chairman of the Committee Division of Net Assets in the dismantling process of the Netherlands Antilles. Mr. Victor Banks did his studies in the Social Sciences with emphasis on Political Science and Economics. He graduated from the University of the Virgin Islands in 1972 with a Bachelor of Arts Degree, Summa Cum Laude in Social Sciences. After a short period of teaching in the Virgin Islands he went on to the New School for Social Research (Graduate Faculty) in New York where he obtained a Master of Arts Degree in Political Science in 1975. In 1980, Mr. Banks returned to Anguilla as the Political Adviser, to the Government lead by the Honorable James Ronald Webster in 1980 and in 1981 entered active
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ politics. He has now been elected for twenty-four years, twenty-one of which he served consecutively. Mr. Banks has held the positions of Minister of Social Services 1981 -1984, Minster of Finance, Economic Development Investment & Commerce 1994 -2005, Minister of Finance, Economic Development, Investment, Commerce & Tourism from 2005 to the present. The Board of the Foundation Tax committee consists of economists, tax advisors, consultants and accountants working in the private sector. In the exhibit to this program more details are presented about the members and the work of the Foundation Tax Committee. Our moderator for the afternoon is Mr.Denis Richardson, Project Director Constitutional Reconstruction Sint Maarten. In 1962 he traveled to Holland to further his studies at the “Bestuurs Academie” where he studied Gemeente Administatie I and II (the equivalent of a Bachelors and Masters degree in Public Administration). He acquired a Masters degree in Business Administration and Information Technology a joint program of the Erasmus University in Rotterdam and the University of Michigan’s Business School in the USA. While still in Holland, Mr. Richardson worked in Zandvoort and Haarlem training in the various departments of Government. Subsequently he worked for the Province of North Holland as a member of the managing team for the provincial service of Physical Planning & Rural Areas. Later he became the director of the Bureau of Coordination for the Development of new towns in the Northern Part of the Randstad. In 1994, while still in Holland, Mr. Richardson was appointed Lt. Governor for St. Maarten. He then moved to St. Maarten to serve his tenure as Lt. Governor. Presently Mr. Richardson is the Project Director Constitutional Reconstruction Sint Maarten, heavenly involved in the process towards country status.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
3.
PROGRAM Starting time
13:30
Welcome
Martin Hassink/Cees Jan Roos
Opening
Commissioner of Constitutional Affairs, Mrs. Sarah WescotWilliams
Introduction
Commissioner of Finance, Mr. Roy Marlin
Session I
Tax System with the Collectivity Saint Martin Presenter: Mr. Louis Constant Fleming, President of the Collectivity of Saint Martin Subjects: Tax system Saint Martin, possibilities of harmonization and the consequences of dis-harmony
Session II
Present Tax System, Tax Revenues and Operating Cost Presenter: Mrs. Sherry Hazel, Island Receiver Subjects: overview present tax laws, development tax revenue last 5 years, cost of maintaining the present system, compliance and control.
Session III
Core tasks of Government, Presenter: Drs. Alberto Romero, Member of the Board of Executive Directors of the Central Bank of the Netherlands Antilles Subjects: Government core tasks, government and market mechanism, public-private sector initiatives.
Session IV
Tax Systems Small Communities Presenter: Guest speaker from Anguilla, Mr. Victor Banks, Minister of Finance of Anguilla Subjects: overview of the system on Anguilla, the advantages and bottlenecks.
Session V
Tax Burden, Social Security Premiums, Flat Tax, Tax Incentive, International tax treaties Presenter: Foundation Tax Committee Subjects: economic issues.
Panel Discussion Moderator
Mr. Dennis Richardson, Project Director Constitutional Reconstruction Sint Maarten
Drinks and snacks
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
4.
PRESENTATIONS Welcome One of the partners of Hassink & Roos Accounting and Financials Advisory Services addresses the participants, the presenters, the moderator and the government officials to the seminar “New Tax System for the Country Sint Maarten”. The partnership Hassink & Roos is established on April 1, 2003 and celebrates its first lustrum this year. It is not the first time that we organize a seminar. In 2005 we organized a seminar about the International Financial Reporting Standards. For this year we thought it would be appropriate to choose a topic within the development process towards country status. The choice was fairly simple made. A New Tax System for the Country Sint Maarten a subject that requires the input of all of us in the private and public sector. In collaboration with the Bureau of Constitutional Affairs and the Foundation Tax Committee, we have carefully selected our subjects and presenters/speakers. The mix of subjects and speakers guarantees a lively seminar and we are sure that with this seminar we deliver a valuable contribution to the development of the country Sint Maarten. Introduction The steps that are being taken in the process to obtain country status are manifold. The discussion about the new tax system is just one of them but a very important one. The tax system of a country can grow over the years to a complicated web of laws, amendments, reparation legislation, exemptions, exemptions over exemptions, ordinances etc. A tax system finds itself in a continuous “conflict” between the needs of the government and the needs of a sustainable development of the economy. It is a balancing act. Unfortunately, we are not sufficiently equipped to properly calculate the consequences of changes in tax laws, tax rates, new taxes etc. One of the steps we have to take on a short term is the establishment of an adequately equipped central plan bureau, that has available a wide range of statistical information and economic models, a national accounting system and sufficient analytical power to make reliable projection and predictions. Discussions about a new tax system have to take place in a broad perspective of a vision in which this country has to develop, measures that need to be taken to repair existing miss-situations, to pave the roads towards a healthy community, financially, socially, physically and economically. In this context it makes sense to split the subject new tax system in two area’s: • •
Tax legislation Execution of the tax laws
One will focus on vision, policies, economic sustainability, the other at operational issues. The floor is open to all of us. Tax System with the Collectivity Saint Martin Never were two countries so close to each other, with open borders, extensive family ties, economic activities and yet so far apart in terms of government systems and tax systems. There does not even exist a tax treaty between the two countries. Saint Martin obtained its so-called “separate status” before Sint Maarten and measures have to be taken to balance its budget and to provide the government with sufficient means to maintain an adequate public service level. It is obvious that, in order to keep the
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ cost at an acceptable level, harmonization and cooperation in many areas is needed. Harmonizing tax systems is just one such area. Mr. Fleming will present information about the present tax system on the Collectivity of Saint Martin. Present Tax System, Tax revenue and operating cost The present tax system is in fact not that complicated. The complicity lays not so much in the legislation but in the execution of the tax laws and the collection of the taxes. As far back as in the year 2000, preparations started to integrate the Tax-office, Island Receiver and Federal Receiver into one Tax-office. This process stranded a couple of years later, mainly due to complications and lack of commitment from parties involved. In 2005 the process to establish one Tax-office in which the levying authority and the collection authority are combined has resulted in a business plan New Tax Office. Mrs. Hazel will give information about the present taxes collected, the cost of levying and collecting taxes, and other issues like compliance, control etc. Core Tasks of Government To define the core tasks of a government is a big decision to be made and it is essential for determining the amount of taxes to be levied. A lot of decisions can be made about what to include in the core tasks. This will need to be done carefully and the informal economy should be taken into account. Mr. Romero will address this issue and will compare the situation of St. Maarten with that of other islands in the Caribbean. Tax Systems Small Communities Anguilla is about 102 km (39.4 square miles) large and has a population of about 14,000 people. Gross Domestic Product for the year 2006 amounted to NAf 285 million, Government revenue, mostly from indirect taxes in 2006 amounted to about Naf 100 million. The tax system of Anguilla is based on consumption, not on income; there is no pay as you earn tax, no profit tax as we know it. The main source of income for Government is the import duties, license fees and room tax. As our tax system punishes productivity (the harder you work, the more income you earn, the higher the taxation) the tax system of Anguilla rewards productivity. It seems that Anguilla found a system that perfectly balances economic growth, public service level and quality of life. Mr. Victor Banks will present information about the tax system on Anguilla. Tax burden, Social Security premiums, Flat Tax, Tax Incentives The tax burden is the amount of taxes imposed on one person. Government income on St. Maarten is about 30% of the Gross Domestic Product (Sweden 51%, Holland 38%, Mexico 20%). When comparing this percentage with other countries we should take in account the core tasks executed by the respective governments. The Foundation will address various issues that should be taken into account when designing a new tax system. Recently the term “flat tax� can be heard frequently. Is it an option for the new tax system of St. Maarten? We will discuss the pros and cons of this tax system. Panel discussion The results from the panel discussion together with the presentations of this afternoon will be compiled into an information booklet and presented to the workgroup that is presently studying this subject to come to a new tax system for the country Sint Maarten. The information will also be made available digitally.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
5.
NOTES (this page is intentionally kept blanc to make notes during the presentations)
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
EXHIBIT Information Foundation Tax Committee The Foundation Tax Committee is an organization that started in 1993 as a fiscal working group of the St. Maarten Chamber of Commerce. The main objectives of the Foundation are: 1. To encourage the proper application of the tax laws in the Netherlands Antilles, to act as a tax ombudsman, to assist in legal tax procedures, and to act as an advisory body in social, economical, financial and fiscal matters, 2. To do all and everything else in connection with the aforementioned that might be useful or conducive to attaining the goals of the foundation, one and the other in the widest sense of the word. The board of the Foundation consists of the following persons: Mr. M. Soons, Economist and local developer Mr. M. Hassink, partner Hassink & Roos Mr. G. Bergman, partner Bergman, Bloem, Bergman Mr. P. v. Vliet, partner PriceWaterhouseCoopers Mr. H. Pfennings, director St. Maarten International Trust Company
Chairman Secretary, treasurer Member Vice chairman
Mr. M. Pandt, director Fairplay Trust Company
Honorary member
Member
The Foundation has over the years issued several reports, has organized several seminars and provides on a continued basis advice to the local and federal government. See the following overview Date
Report/advice
Contents
September 23, 1993
Speech during seminar of the St. Maarten Chamber of Commerce: “Issues that affect businesses on St. Maarten”
The Chamber of Commerce installed a Tax Committee to address the sudden actions taken by technical assistants at the Tax Office
January 18, 1994
Informative evening in collaboration with the Tax Office about the employers’ obligations concerning wage tax and AOV/AWW premiums.
Informative session.
August 12, 1994
Letter to the Federal Government about the possibility to form a reserve own risk insurance.
The Federal Government declined a change in the law.
March 19, 1996
Report “Maatregelen op korte termijn en een kijk op een nieuwe aanpak op lange termijn”
Report on proposed sales tax.
March 26, 1996
Meeting with the Senators of St. Maarten about the “sales-tax” and proposed alternatives.
Discussion meeting about the projected sales tax implementation.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ Date
Report/advice
Contents
July 17, 1996
“Taxes that will turn us over instead of turning us on”
Presentation to Rotary Club
November 19, 1996
Turnover Tax and its impact on the Economy of the Windward Islands
Report about turnover tax.
February 18, 1997
Letter to the Federal Government requesting to engage a study of the economic processes on St. Maarten/St. Martin.
December 14, 1997
Proposals changes in Profit tax, Income tax, Turnover tax laws.
This idea was brought forward in the report by the Committee “Turnover Tax and its impact on the Economy of the Windward Islands” Comments on proposed changes.
December 4, 1998
Letter to Minister of Finance reference proposed changes in Profit tax and Income tax laws
Comments.
1999
Various letters to the Inspectorate of Taxes to discuss matters of concern about the operations of the tax office
Expressing concerns about the functioning of the tax office.
September 9, 1999
Letter to Minister of Finance
Requesting meeting
2002
Meeting with French Saint Martin about possible tax harmonization.
2002
Meeting Executive Council
June 25, 2003
Seminar “Simplification System, a must to survive”
tax
Well attended seminar in Great Bay Beach Hotel
October 15, 2003
Proposal to executive Council concerning own risk reserve
This subject has beer brought forward several times.
February 14, 2004
Information to the Senators pertaining to the proposed changes in the AOV/AWW law.
Subject was followed-up several times
2005
Information session about the rights and obligations of the tax payer in case of an audit.
Well attended session in Divi Little Bay
2005
Various correspondence with the Directorate of Taxes and the BAB reference tax audits.
June 2, 2006
Report on Tax Holidays
August 7, 2006
Letter to the Executive Council informing about the consequences of the changes in the AOV/AWW laws.
St. Maarten, April 4 2008
the
proposed
Various issues
Report prepared by intern engaged by the Foundation.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ Date
Report/advice
Contents
November 25, 2006
Letter to the Inspectorate of Taxes requesting meeting to discuss various issues.
Meeting was held.
November 28, 2007
Letter to the Executive Council pertaining to proposed increase Turnover Tax rate.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN Speech & Presentation Mr. Roy Marlin Commissioner of Finance Introduction
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ Introduction SLIDE 1 Good afternoon, ladies and gentlemen, guests, participants, • Leader of Government Mrs. Sarah Wescot-Williams • Commissioner Maria Buncamper Molanus • Mr. Louis Constant Fleming, President of the Collectivity Saint Martin • Mr. Victor Banks, Minister of Finance of Anguilla • Mr. Alberto Romero, Vice President of the Central Bank • Members of the Foundation Tax Committee • Island receiver, (etcetera etcetera) First of all I would like to express my appreciation for the initiative taken by de firm Hassink & Roos, to organize this seminar in collaboration with the Bureau of Constitutional Affairs and the Foundation Tax Committee.
SLIDE 2 The steps that are being taken in the process to obtain country status, are manifold. The discussion about the new tax system is just one of them but in fact a very important one. The tax system of a country besides providing government with the means to execute its tasks, determines economic growth, social welfare and quality of life of the population of the country.
SLIDE 3 The tax system of a country however can grow over the years to a complicated web of laws, amendments, reparation legislation, exemptions and exemptions over exemptions, ordinances etcetera etcetera. We frequently hear that the present system is too complicated and that it needs a serious overhaul in order to become fair, compliance stimulating and efficient. Many times we discussed ways to simplify the system but never really succeeded to do so. Changes made in the past improved in some cases the fairness of the system but were in general aimed at increasing revenues for government. Simplifications were always made in the context of at least budget neutrality shifting complications between tax laws and shifting the burden from direct to indirect taxes.
SLIDE 4 With the dismantling of the Netherlands Antilles and the formation of the Country Sint Maarten, we have the choice to 1. just take over all existing tax legislation in the same form or, 2. take over the system as is and make adjustments where deemed necessary or, 3. think about a complete new tax system. The choice is ours.
SLIDE 5 It will be clear that the implementation of such a new system will be preceded by a long process of extensive private-public sector discussions and technical studies. That is one of the reasons why seminars like this are important, to get the information from various angles to broaden our vision and to ultimately come to an optimum tax system. St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ Although my presentation is of an introductory nature, I would like to take the opportunity to bring two points to the table for discussions about the new tax system for Sint Maarten The first is the following:
SLIDE 6 A tax system often finds itself in a continuous fight between the needs of government and the needs of a sustainable economy. It is a balancing act. Unfortunately, we are not sufficiently equipped to properly calculate the consequences of changes in tax laws, tax rates, new taxes etc. The economic models in use do not give us sufficient confidence that the outcome will -within acceptable margins- materialize. One of the steps we have to take on a short term is the establishment of an adequately equipped central plan bureau.
SLIDE 7 This central plan bureau should: • Collect historical data presently available at the various institutions like the Central Bank of the Netherlands Antilles, the Central Bureau of Statistics, Economic Affairs, St. Maarten Hotel and Tourism Association, the Sint Maarten Chamber of Commerce etc., • Review and analyze the collected information, • Develop a simple but adequate National Accounting Model • Organize itself to become a reliable source to prepare projections and results of various measures taken and to predict the impact of external uncontrollable shocks.
SLIDE 8 With a well organized and equipped central pan bureau, we will be able to properly calculate the consequences of measures planned to be taken which is a tool a country can not do without. The second point is:
SLIDE 9 Discussions about a new tax system have to take place in a broad perspective of a vision in which this country has to develop, measures that need to be taken to repair existing miss-situations, to pave the roads towards a healthy community, financially, socially, physically and economically. In this context, it makes sense to split the subject new tax system in two areas: • •
Tax legislation Execution of the tax laws
One will focus on vision, policies, economic sustainability, the other at operational issues.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ SLIDE 10 Recently a business plan has been presented to the Executive Council of an integrated tax office in which the present three entities, Tax Office, Island Receiver and Federal Receiver have been merged into one organization. It is obvious that the present tax system requires a high level organization to ensure proper enforcement of the tax laws, to reduce the informal economy, to bring income of government to a level that is high enough to properly execute her tasks. This organization should be able to operate at reasonable cost. Presently the cost of levying and collecting the taxes generated on St. Maarten is calculated at about 4.5 cents per guilder collected.
SLIDE 11 This afternoon the floor is open to all of us. It is just one of a range of steps already taken and to be taken to ensure that the country Sint Maarten will function properly to the benefit of all involved. Once again I would like to thank the organizers of this seminar. I’m sure that at the end of the day, the information received and the conclusions drawn will contribute to the design of a well structured tax system.
SLIDE 12 Thanks for your attention Commissioner of Finance Mr. R. Marlin
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
New Tax System for the Country Sint Maarten INTRODUCTION R. Marlin Commissioner of Finance April 4 2008
PROCESS Organizational structure
National security Employment
Currency
Tax system Social security system
Housing
Badly functioning systems
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
TAX SYSTEM THE TAX SYSTEM OF A COUNTRY IS ONE OF THE DETERMINING FACTORS OF ECONOMIC GROWTH, SOCIAL WELFARE, QUALITY OF LIFE, IT CAN GROW OVER THE YEARS TO A COMPLICATED UNMANAGABLE WEB OF LAWS AND REGULATIONS, CHANGES, CHANGES OVER CHANGES, ADAPTATIONS ETC.
COUNTRY SINT MAARTEN WITH THE DISMANTLING OF THE NETHERLANDS ANTILLES AND THE FORMATION OF THE COUNTRY SINT MAARTEN, WE HAVE THE OPTION TO: 1. JUST TAKE OVER ALL EXISTING TAX LAWS IN THE SAME FORM OR 2. TO TAKE OVER THE SYSTEM AS IS AND MAKE ADJUSTMENTS WHERE DEEMED NECESSARY OR 3. THINK ABOUT A COMPLETE NEW TAX SYSTEM
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
NEW TAX SYSTEM
(1)
It will be clear that the implementation of such a new system will be preceded by a long process of extensive discussions within the public-private sector and technical studies. That is one of the reasons why seminars like this are important, to get the information from various angles to broaden our vision and to ultimately come to an optimum tax system.
NEW TAX SYSTEM
(2)
A tax system often finds itself in a continuous fight between the needs of government and the needs of a sustainable economy. It is a balancing act. Unfortunately, we are not sufficiently equipped to properly calculate the consequences of changes in tax laws, tax rates, new taxes etc. The economic models in use do not give us sufficient confidence that the outcome will -within acceptable margins- materialize. One of the steps we have to take on a short term is the establishment of an adequately equipped central plan bureau
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
CENTRAL PLAN BURO (1) • Collect
historical data presently available at the various institutions like the Central Bank of the Netherlands Antilles, the Central Bureau of Statistics, Economic Affairs, St. Maarten Hotel and Tourism Association, the Sint Maarten Chamber of Commerce etc., • Review and analyze the information collected, • Develop a simple but adequate National Accounting Model • Organize itself to become a reliable source to prepare projections and results of various measures taken and to predict the impact of external uncontrollable shocks.
CENTRAL PLAN BUREAU (2) With a well organized and equipped central plan bureau, we will be able to properly calculate the financial consequences of measures planned to be taken which is a tool a country can not do without
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
NEW TAX SYSTEM (3) Discussions about a new tax system have to take place in a broad perspective of a vision in which this country has to develop, measures that need to be taken to repair existing miss-situations, to pave the roads towards a healthy community, financially, socially, physically and economically. In this context, it makes sense to split the subject new tax system in two areas: • Tax legislation • Execution of the tax laws
NEW TAX SYSTEM (4) Recently a business plan has been presented to the Executive Council of an integrated tax office in which the present three entities, Tax Office, Island Receiver and Federal Receiver have been merged into one organization. It is obvious that the present tax system requires a high level organization to ensure proper enforcement of the tax laws, to reduce the informal economy, to bring income of government to a level that is high enough to properly execute her tasks. This organization should be able to operate at reasonable cost.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
CLOSING REMARK This afternoon the floor is open to all of us. It is just one of a range of steps already taken and to be taken to ensure that the country Sint Maarten will function properly to the benefit of all involved. Once again I would like to thank the organizers of this seminar. I’m sure that at the end of the day, the information received and the conclusions drawn will contribute to the design of a well structured tax system.
THANK YOU FOR YOUR ATTENTION
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN Speech Mr. Louis-Constant Fleming President of the Territorial Council Tax System with the Collectivity Saint Martin
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ Tax System of the Collectivité of Saint Martin
Louis-Constant FLEMING President of the Territorial Council Introduction As you are aware, French Saint Martin, after being a colony of the Kingdom and the Republic of France, was integrated into the Overseas Department of Guadeloupe in 1946, as a Municipality and recently after a Constitutional change it became an Autonomous Overseas Collectivité under article 74 of the Constitution by Organic Law n° 2007-223 of February 21, 2007 and Ordinary Law n° 2007-224 of February 21, 2007. Elections were held on July 1st and 8th, 2007 to elect a Territorial Council of 23 members from which an Executive Council of 7 members was elected on July 15, 2007. An Economic, Social and Cultural Council was established in December 2007, and six Community Councils will be put into place in the coming weeks. A Senator will be elected to the Senate in Paris in September 2008. A Deputy will be elected when the members of the National Assembly are due for reelection in 2012. As part of the Overseas Department of Guadeloupe, Saint Martin shared various competences with the General Council and the Regional Council of Guadeloupe in addition to competences exercised by the State. Being integrated into the Region of Guadeloupe gave Saint Martin an Ultra Peripheral Territory (UPT) status within the European Union. The new Overseas Collectivité Status (COM) can be summarized as follows: -
-
All the competences of the Municipality (Municipal Council), the Department (General Council), the Region (Regional Council) and certain State competences have been transferred to the Overseas Collectivité of Saint Martin. The State competences that have been transferred to Saint Martin are taxes and fiscal affairs, tourism, maritime and terrestrial transportation, and work permits for foreigners.
As you can see, we are at the beginning of a new relationship with France as of July 15, 2007. We are building a new territorial administration on French Saint Martin without any references as this new status is all new and has not existed before within the French Republic. It is very important to note that the “Municipal level” of administration which is the base of the administrative organization of France (36,000 municipalities) has disappeared in Saint Martin. For your information, the Territorial Council of Saint Martin voted its first budget, the 2008 budget which is a transitional budget, on Monday March 31, 2007 (€102 Million / US$150 Million). The evaluation commission which has to examine the transfers of means and compensations will only render its conclusions in September 2008.
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ 1 – SAINT MARTIN FISCAL SYSTEM BEFORE 2008 The fiscal system that was in place since 1946 was based on the principle of franchises. In the beginning the fiscal laws of the Overseas Department were not applicable to Saint Martin within context at that time: small population, no real revenues, and the necessity to take into account what was being done on the Dutch side. In 1852, the Government of France pulled out all the administration from Saint Martin making the French Side “Administration Free” thus creating the “Free Port” status that we still enjoy. Our “Free Port” status is recognized by the European Union in their Customs Code of 1992. What we see is basically a system of tolerance whereby many taxes that were implemented on mainland Guadeloupe were never implemented in Saint Martin but there was never a law or a ruling governing the non-implementation of these taxes such as: TVA, Octroi de Mer, Vignette, Gasoline Tax, Income Tax, etc. However, as the population of Saint Martin increased and the necessity to build infrastructural projects such as schools, high schools, water, electricity, sewage, roads, etc. the State began progressively implementing the fiscal system as it existed in Guadeloupe by trying to normalize Saint Martin with the rest of Guadeloupe. This met with some resistance from the population and especially from the new population that had come to Saint Martin and had invested into this system of tolerance. By the turn of the century, the fiscal system of French Saint Martin could be outlined as follows: a) Taxes paid to the State: Income Tax, Corporate Tax (Profit Tax), ISF (Wealth Tax), CSG/CRDS (Social Taxes), TV tax b) Taxes paid to the Municipality, the Department, the Region: House Tax, Property (Building) Tax, Land Tax Professional Tax (Business Tax) (1) Electricity Tax. (1) Chamber of Commerce, Agriculture, Métiers. (2) The Municipality got 40% of the proceeds of these taxes. c) Taxes paid to the Municipality: Hotel room tax 5%, Car Rental tax 5% (1988), Gasoline tax ( as of 2000). Garbage collection tax
The fiscal system was based on a Direct Taxation Policy whereby 90% of the taxes were direct and thus led to a very unjust system as only a few bore the burden of the entire population.
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ 2 – THE INSTITUTIONAL CHANGE AND THE NEW FISCAL SYSTEM . A) The New Status and it’s consequences on our fiscal system. The fiscal competence of the COM is a competence designed to fix the rules for all taxes, impositions and rights. The individual application of taxes, collection and control is done by the State services with whom an agreement has been negotiated and signed for a four year period. The taxes that are applied are those that have been defined by Saint Martin for Saint Martin. The Territorial Council of Saint Martin defines the rules of the fiscal system. These rules will ultimately when the process is completed, be assembled in what will be known as the Tax Code of Saint Martin distinct from the Tax Code of France. The relationship between the State Fiscal System and Saint Martin’s Fiscal System remains complex for various reasons: -
The TRANSITION from the old system to the new system according to the Organic Law states that the old system will remain in force as long as it is not changed or modified. This is the first task that the Territorial Council undertook in 2007.
-
The RULE OF FIVE YEARS that states that to be considered fiscally a resident of Saint Martin, one has to reside for FIVE YEARS. This rule has been the object of many interpretations. The State Council was called in to give an opinion which is as follows: NON RESIDENTS residing in Metropolitan France and the 4 DOM will pay income tax on income generated in SAINT MARTIN to FRANCE. PERSONS originating from Metropolitan FRANCE and the 4 DOM who choose to come to SAINT MARTIN after July 15, 2007, will pay taxes (business or income tax) to FRANCE. Example of the Collectivité recruiting someone from FRANCE or 4 DOM!
It is important to note that that the rules applicable to residents of SINT MAARTEN (Dutch Side), ANGUILLA, SAINT BARTHS, The USA or any country with the exception of METROPOLITAN FRANCE and the 4 DOM are the rules that are decided by the Collectivité of Saint Martin. Also, someone who is actually residing on SINT MAARTEN and who chooses to establish residence on French Saint Martin is not faced with the FIVE YEAR RULE. There is an anti-abuse clause regarding French Metropolitan and 4 DOM residents who would transfer their residence to SINT MAARTEN before retransferring to the French Side. B) Fiscal Objectives and First Measures of the Collectivité The fiscal project of the Collectivity of Saint Martin COM is to establish on our territory, in matters of fiscal affairs, a state of law, clear rules, universal policies and simplicity in order to get out of the ambiguous situation that has existed over the years. We need to establish a system which will be just and not overburden on only a few. It has to be simple compared to the actual French system, attractive enough to encourage economic development but also capable of producing the financial resources needed by the Collectivité to meet it’s financial obligations. From the very beginning we targeted our reflections into establishing a coherent and harmonious fiscal system vis a vis the fiscal system of the Dutch Side. St. Maarten, April 4 2008
page 29
NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ To satisfy those objectives, a first series of measures were voted by the Territorial Council on November 21, 2007: -
Income Tax was lowered as the reduction rate of 30% for the DOM was augmented to 40%. Corporate Tax was lowered by 1/3 from 33.33% to 22.22%. Small business Tax was lowered from 15% to 10%. ISF Wealth Tax was abolished (tax on value of €760,000.00 or more). Salary taxes were suppressed. Adoption of a simplified tax break for individuals and companies residing in Saint Martin. A Road Tax to finance new roads and road repairs was instituted.
A second series of measures were recently adopted or will be shortly: -
House Tax, Property Tax, Land Tax and Professional Tax were lowered 6.5% for 2008. Registration taxes will be reformed and TVA (including real estate TVA) will be suppressed.
A Tax Treaty is presently being negotiated with France. Changes will continue in 2009 because as planned the “Professional Tax” will be suppressed and replaced with a License System inspired from the Dutch side’s system and based on a flat fee. We are presently studying the various ways to create a balanced system between Direct Taxation and Indirect Taxation which in the medium term could result in the establishment of a TOT similar to that of the Dutch Side.
3 – The Fiscal Relations between both parts of the Island of Saint Martin. The Collectivity of Saint Martin does not ignore the fiscal system of the Dutch Side and the need to harmonize both systems on this little island of 90 kms². Already in 1988, the hotel room tax of 5% and the car rental tax of 5% were created as a beginning of that harmonization. Recently the car tax has been created and is presently being implemented. In 2009, our Professional Tax will be suppressed and a License system will be instituted. The Dutch Side obtained their autonomy in 1954 and have built their fiscal system over the past 50 years. The French Side obtained it’s autonomy on July 15, 2007, and we are in the process of building our new system. In our system, the social taxes such as the CSG/CRDS are still very high and the proceeds go to the state (FRANCE) who continues to finance all the social benefits and welfare. We are in two different monetary systems, the Netherlands Antillean Florin/US Dollar and the Euro. However, we believe that it is important now for us to communicate more in the area of fiscal affairs, especially since the Dutch side is in the process of an institutional change.
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ As such, we see three major projects that we would propose to work on together with the Dutch Side: A) The necessity to facilitate and normalize our exchanges: The perspective of negotiating and establishing a Tax Treaty between both parts of the island would guarantee the suppression of any risk of double taxation for the residents of both sides. This tax treaty would insure a clear separation of the fiscal powers of both collectivities with regard to their residents. B) The necessity of cooperation between both fiscal services: It is important for both fiscal services of the island to cooperate especially in the exchange of information. C) The exclusion of damageable fiscal competition: We have to be vigilant in the conception of our fiscal systems in order to avoid penalizing the free enterprise system.
CONCLUSION At this time, I would like to thank the Accounting and Financial Advisory Services of Hassink & Roos for organizing this Seminar and inviting me to present the tax system of the CollectivitĂŠ of Saint Martin. I also would like to congratulate them on the celebration of their first lustrum. Finally, as a Saint Martiner who has always been committed to the cooperation between both sides of this island and presently in my functions as President of the Territorial and Executive Council of Saint Martin, and on behalf of the Members of the Territorial Council and the people of French Saint Martin, we pledge our commitment to genuine cooperation and friendship between Sint Maarten and Saint Martin in the spirit that whatever affects one side affects the whole of Saint Martin and whatever benefits one side, benefits the whole of Saint Martin. Thank you and have a most enjoyable afternoon. Belair Community Center St. Maarten, April 4, 2008
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN Speech & Presentation Mrs. Sherry Hazel Island Receiver Present Tax System,Tax Revenues and Operating Cost.
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Good afternoon to our dignitaries, invited guests, the moderator, my fellow panelist, Mr. Hassink and Mr Roos, I would first like to extend a word of congratulations to the partners Martin Hassink and Cees-Jan Roos on the celebration of the first Lustrum of the partnership Hassink and Roos Accounting and Financial Advisory Services and wish you much success so that you may achieve and celebrate many more lustrums. I would also like congratulate you together with the Foundation Tax Committee and the Bureau of Constitutional Affairs for organizing this seminar “New tax systems for the Country St. Maarten”. I start my presentation by first explaining in layman terms what taxes are and the 4 purposes of taxations also known as the 4 R’s of taxation. A tax as defined by Wikipedia.org is a financial charge or other levy imposed on an individual or a legal entity by the government of a country. Taxes are, like is the case on St Maarten, also imposed by administrative regions within a country. Taxes can be in the form of direct or indirect taxation. A tax may be defined as a pecuniary burden laid upon individuals, businesses or properties to support the government. A tax is not a voluntary payment or donation, but an enforced contribution, exacted by legislative authority and is any contribution imposed by government whether under the name of for example a toll, duty, custom, excise, or any other name. When taxes are not fully paid, civil penalties (such as fines) or criminal penalties (such as incarceration) may be imposed on the non-paying entity or individual. This is one of the reasons that the method of taxation and the government expenditure of taxes raised are often highly debated in politics and in economics. Taxation has four main purposes or effects: The Four "R"s
1. Revenue The main purpose is revenue: taxes raise money to spend on infrastructure, education, health care, and other indirect government functions like good regulation or justice systems, etc. Revenue is the most widely known purpose of taxation.
2. Redistribution A second is redistribution. This means transferring wealth from the richer sections of society to poorer sections, and this function is widely accepted in most democracies, although the extent to which this should happen is always controversial.
3. Repricing
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ A third purpose of taxation is repricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking; alcohol is taxed to aid in the rehabilitation of alcoholics or to make it more expensive to consume and many people worldwide advocate policies such as implementing, for example, a carbon tax (a tax on emissions of carbon dioxide and other greenhouse gases).
4. Representation A fourth, consequential effect of taxation in its historical setting has been representation. The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens, and in return citizens demand accountability from their rulers. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance while indirect taxation tends to have smaller effects.
The present tax system Taxes on St. Maarten are levied by both the Government of the Netherlands Antilles (federal taxes) and the Island Government of St. Maarten (local taxes).
Federal taxes are: • • • • • • • • •
Wage Tax (progressive paye tax on salaries). Profit Tax (a 34.5% tax that companies pay on their profits). Income Tax (taxes that individual’s pay on their total income after deducting payments made via wage tax if any). Turn over Tax (a 3% indirect tax paid on goods and services). Gasoline Excise (a 29 ct per liter tax paid when purchasing gasoline). Reduced NAf 15 cent per liter Jan 1 2008. Stamp Duty (a form of tax that is levied on documents which make them legally effective). Transfer Tax (a 4% tax paid when transferring ownership of property). Succession (Inheritance) Tax (taxes for the beneficiaries of an estate). Property tax (a tax imposed on owners of property and is usually levied on the value of property)(not imposed on the island territory St. Maarten).
Local Taxes • • • •
Room tax (a 5% tax paid by non residents on a hotel room rate). Time Share Tax (a $50.00 per week charge when using your time share unit) Car Rental Tax (a 5% tax paid on a rental car rate). Motor vehicle Tax (a tax paid for the maintenance and construction of new roads).
•
Stamp duty (a form of tax that is levied on documents which make them legally effective).
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ Tax revenues generated on SXM over the last five years are as follows. WAGE TAX (x1milj. NAF) 2003
90.9
2004
96.6
2005
101.5
2006
111.2
2007
118.3
PROFIT TAX (x1 milj. NAF) 2003
9.0
2004
14.0
2005
20.3
2006
30.1
2007
46.5
TRANSFER TAX ( 1milj. NAF) 2003
5.5
2004
8.7
2005
12.1
2006
14.8
2007
16.3
TURNOVER TAX (1 milj NAF) 2003
43.6
2004
59.0
2005
72.2
2006
78.2
2007
80.8
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ X 1milj. naf ROOM TIME SHARE CAR 2003
1.8
4.3
.8
2004
2.8
4.7
1.2
2005
3.0
4.7
1.3
2006
3.6
5.0
1.2
2007
3.5
5.3
1.5
Motor vehicle tax (x1 milj Naf) 2003
4.5
2004
5.8
2005
7.3
2006
7.3
2007
7.5
Gasoline Excise (x 1 milj. Naf) 2003
7.4
2004
9.0
2005
9.1
2006
9.6 est.
2007
10.0 est.
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ The cost of levying and collecting of taxes on St. Maarten CALCULATION OF THE COST OF LEVYING AND COLLECTING BUDGET TAXES ON ST. MAARTEN 2008 DIRECTORATE OF FISCAL AFFAIRS 1,459,200
Cost on ST. MAARTEN
% 40.0
583,680
INSPECTORATE OF TAXES
3,885,000
100.0
3,885,000
FEDERAL RECEIVER IMPORT DUTIES AND EXCISES
1,204,800 1,409,000
100.0 100.0
1,204,800 1,409,000
15.0
1,861,665 447,207 9,391,352 2,000,000 2,700,000 1,400,000 305,000 6,405,000
AUDITS 12,411,100 MISCELLANEOUS TOTAL FEDERAL GOVERNMENT ISLAND RECEIVER COLLECTION BAB MISCELLANEOUS TOTAL ISLAND GOVERNMENT TOTAL COST OF LEVYING AND COLLECTING TAXES TAXES COLLECTED
15,796,352 346,308,700
COST OF LEVYING AND COLLECTION AS PERCENTAGE OF TAXES COLLECTED 4.56%
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ Compliance Issues As you can see from the operating cost breakdown, a lot of time and money is spent on compliance issues. A tax gap is created when tax payers pay less than they should actually pay. It is unknown on St. Maarten how much this figure is but just to give an indication, in the US it is estimated to be approx. $ 353 billion. The tax gap has three key components which include 1. underreporting of income 2. underpayment of taxes and 3. non-filing of tax returns. It is not possible to completely close those gaps, since there will always be those who willfully non comply or inaccurately report their income. The goal should be to find ways to increase compliance without negatively affecting businesses to the extent that they are unable to manage cost and have to eventually close their doors. Key elements of the tax gap are the underreporting of income and concern of the accuracy of cash payments on tax returns particularly amongst sole proprietors.
Recommendations (for example)
• Under current practices at the banks, checks made out to companies must be deposited and cannot be cashed. The expansion of this practice to sole proprietors will increase the documentation of revenues and lessen potential underreporting. • Currently, time and money is spent only on enforcement, time and money must also be spent on fair and balanced education. A combination of enforcement and education will increase compliance. • The necessary steps must be taken that the path that is chosen is balanced and effective, rather than detrimental. Collective focus should be on supporting efforts for survival growth and innovation of small businesses and the self employed as a foundation for long-term economic strength. • The complexity of the tax system is particularly troublesome for the self-employed business owner and is snare for unintentional noncompliance. Vague rules and poorly defined regulations understandably result in mistakes. Efforts to address the tax gap and compliance must focus on overall simplification and enhancing tax payer education and outreach. The majority of small business taxpayers want to comply with existing tax laws, so making tax regulations easier to understand is the most effective way to improve compliance and to reduce the tax gap.
• Ensuring comprehensive and effective taxpayer services will be essential to accomplish taxpayer compliance.
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ The informal economy Even where there is a positive relationship between tax rates and government revenue, the tax base changes when tax rates change. For example, the wealthy have enormous discretion over how, when and whether to realize income. At high tax rates, they can convert taxable income into fringe benefits or other business expenses. High tax rates cause people to work less, save less and invest less as well. High tax rates also affect the tax base for the not-so-rich. In the presence of high tax rates, people increasingly conduct their economic activities in the "underground," "black market" or "informal" sector of the economy - where they escape official scrutiny and costly government regulations as well as high taxes. Dual economic systems (formal and informal activities) can have serious side effects that discourage economic growth since credit is not allocated to the most productive investments; total investment is less; labor productivity is lower and a defective tort (punishing) system fail to make people bear the burden of costs they impose on others. In short, high taxes slow economic growth because the public sector is less productive than the private sector In general, the worst possible tax system is one which imposes very high marginal tax rates and collects very little revenue. The high marginal tax rates wreak havoc on the private sector economy, and if tax collections are low government gets very little benefit in return for the harm it causes. Recommendations to reduce the informal economy, among others: Lower tax rates Better and stricter controls Heavy fines on violators Efficiency in Bureaucracy (permits, licenses, etc.)
In closing, for Country St. Maarten, emphasis should be placed on among others, Lower tax rates Simplified tax system Measures to increase Tax Base Measures to decrease informal economy. Utmost efficiency from the New Tax Department St. Maarten.
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
St. Maarten Present Tax System, Tax Revenues and Operating Cost.
1
Present Tax Legislation
Federal Taxes Wage Tax Profit Tax Income Tax Turn over Tax Gasoline Excise Stamp Duty Transfer Tax Succession (Inheritance) Tax Property tax (not imposed on St. Maarten)
2
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Present Tax Legislation
Local Taxes Room tax Time Share Tax Car Rental Tax Motor vehicle Tax Stamp duty
3
Collected taxes - last 5 years WAGE TAX (x1milj. NAF) 2003
90.9
2004
96.6
2005
101.5
2006
111.2
2007
118.3 4
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Collected taxes - last 5 years cont’d PROFIT TAX (x1 milj. NAF) 2003
9.0
2004
14.0
2005
20.3
2006
30.1
2007
46.5 5
Collected taxes - last 5 years cont’d TRANSFER TAX ( 1milj. NAF) 2003 5.5 2004
8.7
2005
12.1
2006
14.8
2007
16.3 6
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Collected taxes - last 5 years cont’d TURNOVER TAX (1 milj NAF) 2003 43.6 2004
59.0
2005
72.2
2006
78.2
2007
80.8 7
Collected taxes - last 5 years cont’d X 1milj. naf ROOM TIME SHARE
2003
1.8
4.3
CAR .8
2004
2.8
4.7
1.2
2005
3.0
4.7
1.3
2006
3.6
5.0
1.2
2007
3.5
5.3
1.5 8
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Collected taxes - last 5 years cont’d Motor vehicle tax (x1 milj Naf) 2003 4.5 2004
5.8
2005
7.3
2006
7.3
2007
7.5 9
Collected taxes - last 5 years cont’d Gasoline Excise (x 1 milj. Naf) 2003 7.4 2004
9.0
2005
9.1
2006
9.6 est.
2007
10.0 est.
10
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Cost of Levying and Collection of Taxes CALCULATION OF THE COST OF LEVYING AND COLLECTING TAXES ON ST. MAARTEN
BUDGET 2008
%
Cost on ST. MAARTEN
DIRECTORATE OF FISCAL AFFAIRS
1,459,200
40.0
583,680
INSPECTORATE OF TAXES
3,885,000
100.0
3,885,000
FEDERAL RECEIVER
1,204,800
100.0
1,204,800
IMPORT DUTIES AND EXCISES
1,409,000
100.0
1,409,000
12,411,100
15.0
1,861,665
AUDITS MISCELLANEOUS
5.0
447,207
TOTAL FEDERAL GOVERNMENT
9,391,352
ISLAND RECEIVER
2,000,000
COLLECTION
2,700,000
BAB MISCELLANEOUS
1,400,000 5.0
TOTAL ISLAND GOVERNMENT
305,000 6,405,000
TOTAL COST OF LEVYING AND COLLECTING TAXES
15,796,352
TAXES COLLECTED
346,308,700
COST OF LEVYING AND COLLECTION AS PERCENTAGE OF TAXES COLLECTED
4.56%
11
Non-Compliance The tax gap has three key components which include 1. underreporting of income 2. underpayment of taxes and 3. non-filing of tax returns.
12
St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Measures for compliance A combination of enforcement and education will increase compliance. efforts for survival growth and innovation of small businesses and the self employed as a foundation for long-term economic strength. tax regulations easier to understand is the most effective way to improve compliance and to reduce the tax gap. comprehensive and effective taxpayer services. 13
The informal economy With high tax rates, people increasingly conduct their economic activities in the "underground," "black market" or "informal" sector of the economy - where they escape official scrutiny and costly government regulations as well as high taxes. Dual economic systems (formal and informal activities) can have serious side effects that discourage economic growth since credit is not allocated to the most productive investments; total investment is less; labor productivity is lower and a defective tort (punishment) system fail to make people bear the burden of costs they impose on others.
14
St. Maarten, April 4 2008
page 46
NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Measures to eliminate the informal economy
Lower tax rates Better and stricter controls Heavy fines for violators Efficiency in Bureaucracy (permits, licenses, etc.)
15
Country St. Maarten Lower tax rates Simplified tax system Measures to increase Tax Base Measures to decrease informal economy. Utmost efficiency from the New Tax Department 16
St. Maarten, April 4 2008
page 47
NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN Speech & Presentation Drs. A.G. Romero Member of the Board of Executive Directors of the Central Bank of the Netherlands Antilles Government core tasks, government and market mechanism, public-private sector initiatives.
St. Maarten, April 4 2008
page 48
NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Keynote speech: On core tasks and fiscal situation under the new constitutional status. With special attention to the new country of St. Maarten.
April 04, 2008 Drs. A.G.Romero Executive Director Bank van de Nederlandse Antillen
St. Maarten, April 4 2008
page 49
NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
1. Introduction. Ladies and gentlemen, I would like to take this opportunity to congratulate the office of “Hassink and Roos” on the celebration of their first lustrum on St. Maarten. In addition, it is also a great pleasure for me to be here in St.Maarten again and to participate in this seminar entitled “The New tax System for the Country Sint Maarten”. During the last three years, I have been part of many efforts being undertaken to set up and recommend alternative public organizations, structures, and processes for the new countries within the Kingdom and the BES islands. Just this morning, for example, the Committee on the Distribution of Assets and Liabilities, of which I am the chairperson, concluded a great part of the work that we have been conducting during the last 24 months. The Committee was charged with assessing, valuing, and distributing the assets and liabilities of the Netherlands Antilles as per December 2005. Actually, the first draft balance sheet is now complete. It is far from easy to synchronize all these efforts because of the many challenges and difficulties that lie ahead. It becomes almost an impossible mission when you have to deal with dismantling of the country of the Netherlands Antilles while at the same time working on the new countries and new relationships between the islands. When performing my various duties with respect to the reorganization of the Netherlands Antilles and knowing the many things that we still have to complete, a few things have crossed my mind. I consider it my duty to share these concerns with you. What will happen to the people working in the various organizations and agencies after the dismantling of the Central Government? Can they all find meaningful work in the new countries? How will the new entities function if no adequate and reliable financial control systems are in place or if the needed manpower is lacking on the various islands? Will the new entities in the future become too heavily dependent on the consultancy firms in order to comply with the heavy financial reporting burden that will be put on them? Despite all of the difficulties and concerns I am voicing here, I must admit that, as technicians, we are now passing through the most exciting and gratifying time in the public sector on our islands. The positive side of the involvement in many study groups and committees in the public sector is that there is no better time to learn quickly. I have gained great in-depth knowledge about the government operation and public administration of the various islands in a relatively short time. The dismantling process and the creation of new countries have brought many people from the various islands together to work and share the best of their knowledge and potential to complete various difficult exercises. This new momentum has given many of us the opportunity to work and discuss together the many challenges and also the threats that the new status will bring. My own experience in this entire exercise has been that we have dealt with many problems and also have shared our views on many issues that have kept us divided for so long. Up to now, we have been successful in resolving many of the difficult issues, and in the end, that is the most important purpose for our working together. Today I want to share with you some fascinating data that I have found from an international investigation on the public sector expenditure, revenue, and debt situations for “smaller” vs. “larger” countries. The conclusions of this analysis will give us a benchmark to appraise the position of the new country of St. Maarten. Consequently, we will compare the study’s conclusions with the current situation for the country of St.Maarten. What are the lessons to be drawn from this international comparison? St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ In closing, I will review some of the possible core tasks that the new country of St. Maarten will have to assume starting in 2009.
2. What is the role of the public sector? The public sector consists of the social and economic systems within a country that are mainly focused on the delivery of goods and services by and for the government. From economic theory, we learn that goods and services provided through the government-- the socalled public goods-- cannot be provided efficiently by market intervention. Therefore, it is the obligation of the government to assure that the public is not deprived of these goods and services. Some typical examples of these public goods are national security, police services, and design of a country’s legislation and regulations.. One of the important characteristics of public goods is that the entire community enjoys the benefits of the public goods/services being provided but is not willing to pay for these goods. This is the case because these are “non-rival consumption” and “non-excludable” goods. That is, the consumption of the good by one individual does not reduce the amount of the good available for consumption by others, and no one can be excluded from the use of these goods. Therefore, governments under normal circumstances levy taxes and other charges to finance the spending on public goods and services. The classical and crucial question to answer here is: How far should the government go with the provision of public goods and services without saddling the community with an excessively high tax burden and/or other “forced” and elevated public contributions from the consumers, the producers, and the business community? The most straightforward answer to this question is : If the community prefers that the government impose the lowest possible taxes, then this can only be achieved if the community is willing to accept that the government can provide only the bare minimum of public goods and services. This view of taxation is that taxes are intended to generate revenue for the government to spend on roads, schools and hospitals, and on more indirect government functions like good regulation or justice systems. According to this view, taxation has a fiscal purpose. There are alternative views of the purpose of taxation. For example, taxation can also be used to achieve other goals such as the distribution of income, that is, the transferring of wealth from the richer sections of society to poorer sections. Another goal of taxation can be as a repricing mehcanism. That is, taxes are levied to address externalities; tobacco is taxed, for example, to discourage smoking. But these two alternative functions of taxation will not be the main focus of my analysis today. Let us now turn to the results of the international investigation that I referred to in my introduction.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ 3.What are the lessons for smaller economies with respect to public sector spending, revenue, and debt? When Martin Hassink asked me a few weeks ago if I would be willing to do one of the presentations during this workshop, I almost instantly accepted the invitation before knowing what precisely Martin was expecting from me. In the days that followed, while doing an investigation in the Bank, I came across an interesting Working Paper of the International Monetary Fund (IMF) entitled, “Big Government, High Debt, and Fiscal Adjustments in Small States.” The paper, published in February 2008, was written by Stephanie Medina Cas and Rui Ota . After reading and evaluating this working paper and after reviewing its interesting conclusions, I reflected that this would be one of the topics I could share with you today. By comparing these findings in the international market with the possible scenario for the new country of St. Maarten, I realized that I could set the stage for the benchmarking exercise of public finances for 2009 and beyond. In addition, I decided to propose a possible organizational structure for the new country of St. Maarten. Let me take a few minutes to run quickly through the most essential findings of this study and use these as an opening point or a benchmark on our journey through the process and challenges that will face the country of St. Maarten, recognizing that the exercise can also easily be translated for Curacao and the BES islands in the immediate future. The IMF working paper starts with the conclusions of other IMF studies done in the 1990s and early 2000 that point out that “small states” face higher per capita costs because they have limited economies of scale, which leads to an inverse relation between the country size and the size of the government. To say it in popular terms: smaller countries tend to have bigger governments. Why is that so? Well, according to the IMF study: “Small states are more open, have a higher reliance on international trade and capital flows and are more open to external shocks and may therefore require a bigger government to insulate their economies from these external shocks”. Recall the situation of the public finances and the state of the economy of the islands after the hurricanes stroked the islands including St. Maarten in the mid-1990s. A more recent event is the higher oil prices of over 100 dollars per barrel that are affecting spending power through higher import prices, thereby reducing the economic growth perspective for the world economy. Since the early 1990s, many small states also are incurring a growing public debt that has affected their economic potentials. Investigations have shown that a high public debt coincides with marginal economic growth rates (refer to figure 10.1).
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
I would like to sum up the three most important conclusions of the IMF working paper, which as I noted earlier, is titled “ Big Government, High Debt and Fiscal Adjustments in Small States” because I believe that St. Maarten, Curacao, and the BES islands will have to take these conclusions into consideration when moving ahead with the new constitutional changes within the Dutch Kingdom. After I list the three conclusions, I will provide more specific findings about each. Number 1: small states tend to have bigger governments and higher public expenditures and taxes. Number 2: small states are more vulnerable to external shocks. And number 3: growing public debt has had negative effects on the economic growth in these smaller economies. The IMF study was conducted during the period 1990-2004 in 42 countries (including some smaller islands in our region). The countries covered included both developing and emerging market economies. A small country is defined in the study as a country with a population of about 2 million or less. Now let us turn to some of the more specific findings of this study. Smaller countries have a tendency to have bigger governments than larger countries when measured by both total expenditures as well as other important expenditure categories such as “wages and salaries,” “goods and services,” and “grants”. According to the IMF study, the average total expenditures of smaller countries fluctuated in the range of 35-40% of GDP while in larger countries the results were in the range of 25-30% of GDP. The current expenditures as % of GDP were over 25% in smaller countries whereas in larger countries, the current expenditures ranged between 18-25% of GDP. For the expenditure category “wages and salaries,” smaller countries on average have been spending about 11% of GDP. In the category of “goods and services,” smaller countries spent about 8% of GDP. In contrast, larger countries spent an average of 8% of GDP on “wages and salaries,” and 4% of their GDP on “good and services.” The study also found that higher overall expenditures in smaller countries result in higher taxation and other revenues for the government to finance these higher expenditures. If the revenue continues to lag behind the public spending, the country will sustain growing public debt. And this study has also shown that mounting public debt in the end will result in lower or marginal economic growth. On the revenue side, smaller countries tend to have total revenues between 25-30% of their GDP while in larger countries, the revenue as % of GDP is between 22-25% of GDP.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ To set the stage for further discussions, I have analyzed the results for Aruba, which as you know, has had a country status within the Kingdom since 1986. My own comparison of the Aruba data with the results of the IMF study for smaller countries found that on most of the expenditures categories as % of GDP, the score of Aruba is comparable with those in the IMF study. For example, the labor costs in the public sector as % of GDP were on average 12.1% in Aruba ( from 2000- 2008), slightly higher than the average of 11% for the smaller countries (from 1990-2004). The current expenditures in Aruba were on average 23.8 % (from 2000-2008), slightly lower than the elevated levels of over 25% of GDP in the smaller countries in the study. The significant differences for Aruba were on the revenue side--their revenues as % of GDP were 22.7%, lower than the average of the smaller countries in the IMF study, which ranged between 25-30%. To illustrate this point further, I can refer to Article IV of the IMF report for Aruba that was released in February 2008. On page 13 of that report, a comparison is given between Aruba’s tax revenue of 20.1% of GDP (for the period 2004-2006) and the same data for the Caribbean region, which was 23.9%. If Aruba's authorities prefer to have on average a relatively low public sector revenue, then the authorities actually have two options: (1) either provide the community with public goods and services only at a level of what is generated in public revenue. Or (2), allow the government to spend more than it receives, an approach that will inevitably result in increasing public debt. I will come back to this point later.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
• • •
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
• • • With the conclusions of this international study and a short reference to some public finance data for Aruba, we are now better equipped to look at the situation in St.Maarten now and in the future. If we consider the results of the IMF study to be an objective yardstick, then we can start from there and use the data for the new country of St.Maarten to analyze and benchmark the new country’s probable future situation.
4. The core task of and the fiscal benchmarks for the new country of St.Maarten This afternoon we have been discussing various aspects regarding the building of a new country, and we have concluded that this is not an easy task. Let me now focus on the possible organization of the new country of St.Maarten, drawing from my experience at the Central Government level in Curacao, and recently also for Bonaire, Statia, and Saba (BES islands) with public sector organizations and as a member of the Committee of Financial Supervision . The first question that the authorities should concentrate on when contemplating a new design of the government organization is: which tasks will this new government assume starting in 2009? From that starting point, a new government organization should be set up or at least a well- thought out plan will have to be constructed that will include the number of departments and ministries that will be needed under the new status and the formation necessary to run the various departments. Let us first start on the core tasks that the new country will be assuming. Some of these tasks are now being (partly) done by the Central Government and, therefore, it is to be expected that the new country of St. Maarten will have to take over these tasks from the Central Government. My starting point for a new organization is the functional classification that the governments use when preparing their annual budgets. I have concluded that at least the following tasks will become the full responsibility of the country of St. Maarten after 2008.
1. 2. 3. 4. 5. 6.
Heath Care and Social Affairs Finance and Fiscal Affairs Economic Affairs (and Tourism) Labor Relations Traffic and Transportation Education, Sports and Culture
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ 7. Justice and Police 8. General Affairs 9. Domestic Affairs and Legislative Matters Assuming that National Security will continue to be the prime responsibility of the Kingdom government after the dismantling of the Netherlands Antilles, we are left with the abovementioned tasks for the new countries of St.Maarten and Curacao. Figure 3 shows a possible scenario for the organization of the public sector responsibilities here in St. Maarten. For practical and efficiency reasons, I have combined the 9 main core tasks of the government that we have just discussed into 6 (six) organizational departments. For comparison purposes, I verified the organization of the country of Aruba; Aruba has 7 government departments. Given that Aruba has a larger economy (GDP is Âą 3 times that of St. Maarten), I think the organization as illustrated below can be considered a fair and realistic starting point for the country of St. Maarten. Figure 3. A possible organizational chart for the country of St .Maarten.
General Affairs, Domestic and Kingdom Affairs
Economic (Tourism) and Labor Affairs
Health Care, Education, Sports and Social Affairs
Finance and Fiscal Affairs
Justice, Police, Legislative and National Security
Traffic and Communication
With these ministries and given the complexity of the problems facing the country of St. Maarten and the population of the island, I’m convinced that this structure will work for the coming years and will serve the island well, particularly given that knowledge and experience suggest that the best way to set up a government apparatus is to start in the early stages of development with a small government body. With the passing of time and after more experience is gained in managing this apparatus, the structure can be modified if desired or necessary. Let us now turn to the numbers and figures from the IMF study and calculate the maximum expenses for wages & salaries, goods & services, expenditures and revenue for the country of St. Maarten.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ Table 1. Benchmarks from IMF study for country of St. Maarten ( GDP in 2007 is ± 1200 million guilders)
Wages & salaries Goods & services Total Expenditures Total Revenue
IMF results Benchmarks for for “smaller country of countries” in % St.Maarten GDP 11% 132 mln
Projected actual for St. Maarten
Projected actual in % GDP
130- 145 mln
10.8 -12.1%
8%
96 mln
87 – 93 mln.
7.3 – 7.7%
35-40%
420-480 mln
322 -343 mln.
26.8 – 28.5%
25-30%
300-360 mln
311.6 mln
25.9%
The projections and calculations on spending and revenue for the country of St.Maarten were performed based on the following assumptions. After dismantling the Netherlands Antilles, all of the tasks at the Central level will have to be transferred to the BES islands and the countries of Curacao and St. Maarten; thus, most of the expenditures starting in 2009 should be included in the budgets of the islands. On the expenditure side, I have taken the share of the GDP of St.Maarten now in the Netherlands Antilles (19%) as the distribution key of the total expenditures of the Netherlands Antilles after corrections for the interest payments and transfers (scenario 1). And the other calculation was based on a 25% share of St. Maarten in Central Government expenditures after correction. To calculate the revenues for the country of St. Maarten, I have added the base revenue that the island of St. Maarten is generating now with the revenue from the Turnover Tax, special customs duties, and economic levies, the transfer taxes. This resulted in total revenue for 2007 of 311.6 million, which is in the lower boundaries of the range of 300- 360 million that would be normal for ‘smaller countries’ according to the IMF study. In % GDP, this means that total revenue as % GDP for “smaller countries” should be 25 – 30% while the country of St. Maarten will probably score 25.9%. On the expenditure side, the total expenditures according to the IMF investigation for “smaller countries” should be in the range of 420- 480 million (35-40% of GDP). For the new country of St. Maarten, this would range between 322-343 million guilders or 26.8% -28.5% of GDP. Comparing this result with the IMF benchmarks, St. Maarten as the new country in the Dutch Kingdom is projected to have significantly lower total expenditures. One important category of the public spending is that of wages & salaries. After dismantling the Netherlands Antilles, the new country of St. Maarten would have a wage bill ranging between 130-145 million guilders or 10.8-12.1% of GDP. In the upper range of the projection, the wages & salaries in St. Maarten will be slightly higher than expected. However, the results are consistent with what Aruba has at this moment, and, therefore, this gives realistic projections for this expenditure category. For the other public spending category of goods & services, the projections for the new St. Maarten would be consistent with the IMF investigations for smaller countries. Finally, I want now to share with you some projections for public debt of the country of St.Maarten. For this, I have to use one important element of the approved final accord of 2006 between the islands of the Netherlands Antilles and the Netherlands.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ The interest standard or the so-called “rentelast norm” for the years 2005-2007 is one important factor to use to determine the maximum debt that the new countries of St. Maarten and Curacao can incur. In my calculations, I have used the data of the revenue calculated above for the new country of St. Maarten and calculated the maximum of 5% of the average revenue of 3 years to determine the “rentelast norm” for St. Maarten. The projection is approximately 13 million guilders. From this “rentelast norm,” one can resolve what the maximum public debt for the island of St. Maarten will be. Using the following formula (1) and assuming that the new country of St. Maarten can borrow at 6% in the financial market in future: (1) Capital market interest rate x (maximum) public debt = “rentelast norm”. (2) 6% x (maximum) public debt = 13 million. (3) Maximum public debt = 13 million / 6% (4) Maximum public debt = 217 million.
And this public debt as % of GDP for the year 2007 can be calculated as approximately 18% of GDP (217 mln./ 1200 mln). According to international standards, this figure is a safe starting point for the country of St. Maarten. I would not be fair with you, however, if I don’t give a forewarning at this stage. And I again use my experience with the work that I did on the Debt Commission for the Netherlands Antilles and Aruba in 1996 (the so-called van Lennep Commission). In 1996, the Kingdom Government together with the governments of the Netherlands Antilles and Aruba established a working group under the chairmanship of Dutch minister of State, the late Mr. E.van Lennep, to determine the characteristics and the level of the public debt of the Netherlands Antilles and Aruba. Again using Aruba as a reference point for this analysis of St. Maarten, I can show you how the public debt for Aruba has developed since 1996. In 1996, after completing the committee work for Aruba, that island had a public debt ratio of 29% of GDP, a percentage that was manageable and reasonable for that time. Today, the public debt ratio of Aruba has reached 45% of GDP. This steady increase of the public debt ratio of 1.5% per year was fueled mainly by budget deficits as % of GDP of around 2.9% (averages for 2003-2007 IMF1). This frail result for Aruba’s public debt was recorded despite the positive economic growth of 2.1% (averages for 2003-2007 IMF 2). Economic expansion has thus not safeguarded Aruba from incurring more deficits in the public sector and consequently a growing public debt ratio. I want to again refresh your memory of what I said in the beginning of my presentation: •
1 2
1.Smaller countries tend to have a bigger government and I can add to that statement that this will probably happen despite strong economic performance. 2. Higher financial deficits in the public sector will adversely affect economic growth in the long run. 3. Government apparatus is used for most of our islands to capture the ‘unemployed”. (Dutch “verborgen werkloosheid”)
Statistical section of the IMF article IV consultation for Aruba in February 2008. Statistical section of the IMF article IV consultation for Aruba in February 2008.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ 5.Concluding remarks and recommendations I can imagine that you are probably puzzled and somewhat exhausted by the many numbers, ratios, and comparisons that I have presented to you today. My main goal was not to give you a simple course in mathematics, but rather, to give you a clear and objective picture of what the country of St. Maarten might look like or turn out to be in the coming years. There are many positive signs for the island’s new status, but I have also given you some clear challenges that the island should work on to overcome difficulties it will face. Let me repeat some of the positive things with respect to St. Maarten. These include the sound and solid economic expansion, a public debt ratio that at the outset looks promising, expenditure and revenue as % of GDP that are comparable with the IMF’s study of smaller countries. Also the spending categories wages & salaries and goods & services are projected to be in line with the international benchmark. So far, so good!! But I have also indicated that it is important that from the outset, a solid and professional government organization and civil servant apparatus is in place. Another word of warning that I offered was related to the public debt ratio that could gradually increase over time despite the excellent starting point, and I have referred to the data of Aruba as an example. Strong economic growth has not guaranteed a sound public management there. In our projections for the new country of St. Maarten, the total expenditures as % of GDP will be in the range of 26.8% -28.5 %, slightly higher than the total revenue as 25.9% GDP. In time, the public debt will increase. Again this is consistent with the situation that we have seen in Aruba. The last point of concern is to see how the island can organize the smallest possible government staff able to work efficiently and become a realistic sparring partner for public authorities and the government of the island in future. An important thing is that as civil servants and advisors, you have to be frank and realistic in what you advise the government. Remember that sometimes bad news is not what the decisionmakers want to hear. They have a political role, while you are a technician, and that difference has to remain clear. However, my own experience is that by being honest with the government and the authorities, you will earn more respect in the long run. One of the things that I need to mention for St. Maarten is that it took me and my colleagues many days and even weeks to obtain and collect adequate data on the public sector to do the exercise that I have just shared with you this afternoon. If in the end, you feel uncomfortable about the data and figures that I have used today, I‘m prepared to go through the entire exercise with you again if necessary on another occasion. I want you to see this presentation as a truly and legitimate exercise on my part to trigger the authorities of the island together with those involved in the consultative work for the government to think about and review these data in order to start with a sound country. I wish you all the best in the future. Thank you.
Drs.A.G. Romero Executive director. Bank van de Nederlandse Antillen April 4, 2008.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Core Tasks and Fiscal Situation under the new constitutional status Special case : New Country St.Maarten By: drs A.G . Romero April 4, 2008.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Role of the public sector Question: How far should the government go with the provision of public goods and services without saddling the community with excessive high tax burden and/or other “forced” and elevated public contributions from the consumers, the producers and the business community?
Answer: If the community prefers that the government impose the lowest possible taxes, then this can only be achieved if the community is willing to accept that the government van provide only the bare minimun of public goods and servoces. servoces.
IM F study “Big Governm igh G overnm ents, H High D ebt and Fiscal Adjustm ents on Debt Sm all States”
D one in 42 countries Period 1990 - 2004 M ain topics
1. Sm all States tend to have bigger governm ents and higher public expenditures and taxes. 2. Sm all States are vulnerable to external shocks. 3. Grow ing public debt has had negative effetcs on the econom ic grow th in these sm aller econom ies.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
A possible organizational chart for the country of St .Maarten. General Affairs, Domestic and Kingdom Affairs
Health Care, Education, Sports and Social aAffairs
Justice, Police, Legislative and National Security
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Economic (Tourism) and Labor Affairs
Finance and Fiscal Affairs
Traffic and Communication
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
Table 1. Benchmarks from IMF IMF study for country of St. Maarten ( GDP in 2007 is ± 1200 million guilders) IMF results for ‘smaller’ countries in % GDP
Benchmark for the country St.Maarten
Projected actual for ST.Maarten
Projected actual in % GDP.
Wages & Salaries
11%
132 mln. mln.
130130-145 mln
10.810.8-12.1%
Goods & Services
8%
96 mln
8787-93 mln. mln.
7.37.3-7.7%
Total Expenditures
3535-40%
420420-480 mln
322322-343 mln. mln.
26.826.8-28.5%
Total Revenue
2525-30%
300300-360 mln
311.6 mln
25.9%
(1)Capital market interest rate x (maximum) public debt = “rentelast norm”. (2) 6% x (maximum) public debt = 13 million. (3) Maximum public debt = 13 million / 6% (4) Maximum public debt = 217 million.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
The End Questions?
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN Speech Mr. Victor Banks Minister of Finance of Anguilla Tax Systems in Small Communities: The Anguillian Experience
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ “Tax Systems in Small Communities: The Anguillian Experience” (Presentation by Victor F. Banks, April 4th, 2008) St. Maarten Foundation Tax Committee I am both honoured and flattered to have been asked to speak to this gathering this afternoon on the Anguillian experience as it relates to taxation in small communities. But I am also cautious and apprehensive, as any politician should be, when dealing with a subject which may haunt him/her whatever position he/she takes. I sincerely hope that I am on safe grounds in St. Maarten and that I can speak frankly about the topic without having to be called to account --- just nine miles across the pond.
I have chosen the sub-topic “The Anguillian Experience” to establish clearly that I have no intention of being prescriptive in anything which I have to say --- but also to allow me to focus my remarks on the specific circumstances of Anguilla rather than on a more general definition of small communities. In other words I will adopt the descriptive approach. Hopefully, during the discussion period I would have gathered sufficient courage to allow me to respond to some difficult questions about taxation in small communities as a whole.
It will be necessary for those of you who have not had the good fortune to visit Anguilla to be given some background so as to provide both a comparative and a situational context to my remarks. And I will speak about Anguilla after the 1967 Revolution --- but beginning with the period of Ministerial government in 1976. I have chosen this point of departure because since we are talking about tax structures, that period includes that time in our development when we were dependent on budgetary support (or as it is referred to the period of grant-in-aid) from our administering power, the UK. Then I will move on through to 1984 when budgetary aid ceased --- through to 2003 when capital aid ceased --- and since 2003 to the present when we have been fully responsible for all aspects of the budget both capital and recurrent.
Being involved in active politics since 1980, my remarks for the period under review are for the most part not from the eyes of a spectator but indeed from the vantage point of a player on the field --- and furthermore as the Minister of Finance for almost thirteen years --- perhaps one of the quarter-backs in the game. That reference point can be both advantageous and constraining --- thus providing yet another reason for me to adopt a descriptive approach to my presentation.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ Anguilla is an island of thirty five square miles or ninety-six square kilometers, unlike St. Maarten that measurement has not changed. At present we have an estimated population of sixteen thousand inhabitants --- up from about six thousand in 1976. Today we have a recurrent revenue budget of EC$ 238 million or approximately US$ 89 million as opposed to EC$3.2 million or approximately US$ 1.2 million in 1976. Of that revenue figure of US$, 1.2 million the UK in 1976 provided as much as fifty percent as grant-in-aid or budgetary support as well as a further amount for capital aid. So over the period the Government of Anguilla has moved from a position of dependency on the administering power for both recurrent and capital budgetary support to a period of fiscal and financial autonomy.
Obviously, this progression from 1976 to the present must be tied to economic performance and the sustainability of the tax base. I have noted the increase in the population. However, this growth is meaningless if the social and economic conditions do not allow for the implementation of an appropriate tax regime. Unlike St. Maarteners, Anguillians, historically, have never been very happy about paying taxes. Consequently, the philosophy of the Anguillian smugglers of yesteryear has not exactly changed --- it only manifests itself in different ways. So without an efficient and well monitored tax system the required yields for national development could not be attained in such an environment inimical to taxation.
In this context, there was a time when the mere mention of income tax or corporate tax by any aspiring politician or political party would be a recipe for standing on the sidelines of the Government wistfully looking in. I am not suggesting that it has changed --- but with education and international exposure through both travel and media --- a better understanding of these issues is evolving --- and I emphasize evolving. It was therefore necessary over the period for Anguilla to adopt a tax regime which does not in a direct way dig into individual paychecks or corporate profits --- one which is seemingly less painful at the payroll counter.
There is however, one exception that is worthy of mention, that is the implementation of Social Security in 1982 which required the foresight, tenacity and personal commitment of our Revolutionary Leader, the Honourable James Ronald Webster to make it possible. The success of that initiative is perhaps the catalyst for a growing acceptance of more targeted taxes to support critical social services needs in Anguilla in more recent times.
This background is by way of explaining why the Governments of Anguilla over the years have chosen to develop an indirect tax regime While direct taxation systems contain most of the attributes of an ideal tax structure, that is, they are relatively high yielding, efficient and
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ administratively feasible systems based on mainly income and profit taxes --- we in developing countries have found great difficulty in using the direct taxation method because of the relatively large informal sector which is difficult to capture in the tax structure. It is therefore a very practical approach for many small economies in our region to focus on taxes on international trade to achieve their revenue goals.
I mentioned earlier that in 2008 the Government of Anguilla has a recurrent revenue budget of EC$238.5 million. This represents an estimated recurrent surplus of EC$ 37.25 million based on recurrent expenditure estimates of EC$201.25 million. I also mentioned the existence of Social Security since 1982 so it is important to explain that the Social Security income is independent of the Central Government and is not factored in as government revenue.
How then does the Government of Anguilla achieve its revenue estimate for 2008? ( The year in question.) There are two broad categories/classifications of revenue sources in the fiscal structure, namely, Tax Revenue and Non-Tax Revenue. They are broken down as follows:
Tax Revenue Direct taxes Property taxes
Indirect taxes Taxes on Domestic Goods and Services Accommodation tax, Stamp duty, licenses etc.
Taxes on International Trade and Transactions Import duties, Export duties, Embarkation tax etc.
Non-Tax Revenue Fees, Fines, Interest and Dividends, Rents etc.
The two categories of tax revenue make up approximately eighty percent of the estimate while non-tax revenue stands at twenty percent. If you were to examine the budget further you will find that there are only two categories of direct taxes namely property tax and vacation residential levy which is a new tax associated with private villa developments on Tourism
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ Resorts. The expected yield from these two taxes is slightly over one percent of the total budget. Virtually insignificant
The fact is that property tax in Anguilla is essentially a house tax paid only on the value of the house and there is no complimentary land. This tax has not been increased since 1995 but there is a comprehensive program to increase the yield and compliance as well as modernize the entire system. The vacation residential levy is a new tax to be imposed on properties now being built on tourism developments. This levy has not yet kicked in because most of the properties have not been completed. The yield from this category is expected to be significant.
While it would be impossible in the allotted time frame to mention all the revenue sources under the categories in indirect taxes and non-tax revenue, I will mention a few of the main performers.
Accommodation tax is levied at ten percent of the hotel occupancy rate. The yield is approximately seven percent of the overall revenue estimate. This is of course tied to the performance of the tourism accommodation sector and will therefore mimic the performance of that sector.
The Stamp Duty revenue source is made up of land transfer tax as well as Alien Land Holding License duties which are charged to non-Anguillians approved for the purchase land. The land transfer tax is computed at five percent of value for ordinary transactions and one percent of value between close family members. The Alien Land Holding Licence Fee however is an additional twelve and a half percent. The yield from this subhead is expected to be fifteen percent of the overall revenue estimate.
Licenses are important parts of the registration and regulation of activities, organizations and equipment. The main categories are: Banking licenses, Drivers licenses, Motor Vehicle licenses, Registration of Companies etc. together they account for about seven percent of the overall revenue estimate.
Import duty is by far the largest source of revenue for government. The rates of duty vary between zero to thirty five percent on imports. And for the time being there are neither excise taxes nor consumption taxes on Anguilla. Many of the other ECCB countries have consumption taxes earning significantly more in relation to total revenue than Import Duties. In fact because of the close proximity of Anguilla to duty free St. Maarten, a higher rate of tax
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ or consumption tax could lead to consumers purchasing directly from abroad or indeed smuggling. There was therefore a conscious effort by Government to keep duty at a rate which would not become an incentive for smuggling. The yield from this source is expected to be forty percent of the overall revenue estimate.
Because of the importance of protecting revenue collections from Import Duty some major reforms took place in 1992 with the introduction of the Automated System for Customs Data, known as ASYCUDA. This new system has provided a greater degree of control over revenue from this department. To the extent that false declarations were reduced considerably and trade statistics became easily obtainable for the first time.
Under the non-tax revenue category the main group of sub-heads are: fees, fines and permits. These include income streams like work permit fees, company registration fees, pier dues, immigration fees etc. Because of the increase in the immigrant work force the yield from this area has been increasing rapidly and now stands at twelve percent of the overall revenue estimate.
The lower yielding subheads account for the remaining seven percent of the overall revenue estimate for 2008.
However many of these subheads have the potential for growth in
particular the two direct tax subheads property tax and vacation residential levy and looking forward into the future we can expect more levies particularly in the social service sector targeting cost recovery in areas like health and education. In fact the implementation of a national Health Fund finance in a similar method as Social Security is in the process of development.
The question is asked how adequate is our tax system to the future requirements of Anguilla? Obviously, tax regimes must of necessity be dynamic and adjust to the requirement of the community. In this context, tax reform is inevitable and governments must be constantly striving to make their systems more efficient. There was a time when taxation regimes were considered the sovereign domain of every country. Now we are hearing talk from the OECD countries and the EU about harmful tax competition and taxation on savings initiatives across national borders. Indeed one gets the impression that it may be actually required that we have our taxation systems approved by first world nations or face sanctions. The OECS states are actively talking about tax harmonization and a regional tax authority --- which may in fact be the only way to protect ourselves from global initiatives from the North.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ Will tax systems like ours survive these external threats? For example while Anguilla understands that taxes on income and profit are among the more equitable taxes in any tax base. These types of taxes may be incompatible with the future direction of Anguilla as a Financial Services Center where low direct taxes are an incentive. Furthermore, without a tradition of taxes on income, it is almost inevitable that there will be administrative challenges. In the first place, very few Anguillian businesses produce financial statements.
Despite all of the foregoing in recent times Anguilla has made great strides in improving the efficiency of its tax collection system. In the lean years after Hurricane Lenny in 1999, the world wide recession of the same period and the 9/11 aftermath, it was necessary to put in place deliberate measures to restore fiscal stability. These included sound financial management.
It shows that while a robust and effective tax structure is important the other part of the equation, that is, expenditure is equally important. So while prudent financial management is not a part of my remit here it would futile not to mention that aspect of good governance as a requisite pillar for developing a fair and equitable tax regime which imbues confidence in the people we serve and a willingness to be compliant with the fiscal measures implemented.
The programmatic results of these initiatives were the establishment of a modern fully automated Inland Revenue Department, a fully automated treasury system, monthly fiscal reviews, an improved statistical department; a debt management division to name a few.
But I must touch on borrowing. The Government has achieved again as a result of these measures the ability to borrow without the need for approval from the UK Government funds to assist in financing its capital development needs. For example in 2008 our Capital Budget which is not a part of our recurrent expenditure is EC$53 million. More than fifty percent of which (EC$27 million) is financed by borrowing without the need for approval from the Secretary of State. This status was achieved by meeting agreed financial ratios.
Net Debt Ratio/Rec. Rev.
<80%
Debt Service ratio/Rec. Rev.
< 8%
Liquid Asset Ratio
> 20.83%
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42.12%
5.04%
23.93%
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ Government of Anguilla since 2003 have accumulated reserves in the amount of EC$41 million to achieve the liquid asset ratio required for borrowing which give us the capacity to carry five times that amount in total borrowing. It is obvious that our fiscal measures for the time being are meeting our requirements. However, as small communities we must remain cognizant of our vulnerability to natural and external shocks which can render all these gains inadequate. These are the unexpected challenges which a taxation system must be robust enough to mitigate. In this sense the question of the adequacy of our systems may be a factor of the global agenda and indeed Godâ&#x20AC;&#x2122;s providence.
I hope that these rambling remarks can lend some value to the discussions this afternoon as well as your quest for an appropriate tax system for St Maarten. As our closest and friendliest neighbour --- indeed our family --- your success in this venture can only redound to our mutual benefit.
I thank you all for your patience and kind attention.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN Speech & Presentation Foundation Tax Committee What determines an adequate tax system?
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ SLIDE 1 GOOD AFTERNOON LADIES AND GENTLEMEN, DIGNATORIES, COLLEGUES, GUESTS, IT IS A PLEASURE TO BE HERE AT THIS SPECIAL OCCASION DISCUSSING WITH YOU A TOPIC THAT IS OF SUCH PRESENT INTEREST FOR ALL OF US AND SO IMPORTANT FOR THE FUTURE OF THE COUNTRY SINT MAARTEN. THE FOUNDATION TAX COMMITTEE STARTED IN 1992 AS THE FISCAL WORKING GROUP OF THE SINT MAARTEN CHAMBER OF COMMERCE AND INDUSTRY AND HAS SINCE THEN BEEN ACTIVE PROVIDING ADVICE TO GOVERNMENT ON A VARIETY OF TAXATION AND TAXATION RELATED ISSUES. IN THE EXHIBIT TO THE PROGRAMBOOK YOU WILL FIND SOME OF THE HIGHLIGHTS OF THE FOUNDATION OVER THE LAST 16 YEARS. THE OVERALL SUBJECT OF THIS AFTERNOON IS “NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN”. ONE OF THE QUESTIONS ALREADY BROUGHT FORWARD DURING ONE OF THE PRESENTATIONS WAS, “DO WE REALLY NEED A NEW TAX SYSTEM”? WHY WOULD WE CHANGE SOMETHING THAT SEEMS TO WORK? THE QUESTION HOWEVER IS, DOES IT REALLY WORK AND OUR ASSESSMENT IS THAT IT DOES NOT. OUR PRESENT TAX SYSTEM IS BASED ON OLD DUTCH TAX LAWS, MODIFIED TO TAKE AWAY ISSUES OF UNFAIR TAXATION, BUT MAINLY MODIFIED WITH THE PURPOSE TO SATISFY THE NEED FOR MONEY OF GOVERNMENT AND NOT NECESSARILY BASED ON ECONOMIC PRINCIPLES OR PRINCIPLES OF EFFICIENCY AND AN OPTIMAL RETURN FOR THE PUBLIC BUT ALSO THE PRIVATE SECTOR. IN THE NEAR FUTURE THE TAX LEGISLATION WILL BE THE RESPONSIBILITY OF THE COUNTRY SINT MAARTEN. AS SUCH THIS PRESENTS A GREAT OPORTUNITY TO LOOK FOR A NEW TAX SYSTEM, A SYSTEM TAILORMADE FOR THIS COMMUNITY, A SYSTEM THAT SIMPLIFIES, COMPLIES AND FLIES.
SLIDE 2 THE SUBJECTS WE ARE GOING TO DISCUSS THIS AFTERNOON ARE: • • • • • • •
CORE TASKS OF GOVERNMENT TAX BURDEN TAX BURDEN AND SOCIAL SECURITY PREMIUMS TAX INCENTIVES INTERNATIONAL TAX TREATIES COMPLEXITY AND SIMPLIFICATION FLAT TAX
WE WILL CLOSE THIS PRESENTATION WITH SOME CONCLUSIONS.
SLIDE 3 THE TAX LAWS, ORDINANCES, GUIDELINES, COLLECTION LAWS, EXCEMPTIONS, TAX FACILITIES, INTERNATIONAL TREATIES TOGETHER WITH THE ORGANIZATIONAL STRUCTURE OF THE FISCAL AUTHORITY OR, IF YOU WILL REVENUE SERVICE, FORM THE TAX SYSTEM OF A COUNTRY. IT IS IN GENERAL A COMPLICATED EXTENSIVE SYSTEM THAT HAS AN IMPACT ON
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ MANY ASPECTS OF EVERYBODY’S LIFE. WE WILL USE THE FOLLOWING DESCRIPTION OF AN ADEQUATE TAX SYSTEM: AN ADEQUATE TAX SYSTEM OF A COUNTRY PROVIDES (1) SUFFICIENT INCOME FOR GOVERNMENT TO EXECUTE ITS CORE TASKS, IT PROVIDES (2) THE TOOLS FOR DEVELOPMENT OF A SUSTAINABLE ECONOMY AND (3) DETERMINES THE QUALITY OF LIFE OF THE POPULATION OF THAT COUNTRY. IN ORDER TO ACHIEVE A SUCCESSFUL TAX SYSTEM IT NEEDS TO BE BASED ON THREE PILLARS: • • •
GOOD QUALITY GOVERNMENT REASONABLE RATES MANAGEABLE LEGISLATION
IN ADDITION, THE LEGISLATOR NEEDS TO STAY AWAY FROM USING (OR ABUSING) FISCAL LEGISLATION TO ACHIEVE SOMETHING THAT IS NOT FISCAL. THE REASON FOR THIS IS THAT SUCH LEGISLATION POLLUTES THE SYSTEM AND MAKES IT LESS ADEQUATE.
SLIDE 4 IF WE RATE THE THREE ASPECTS OR AREAS OF ATTENTION IN OUR PRESENT TAX SYTEM, NAMELY 1. SUFFICIENT INCOME FOR GOVERNMENT, 2. SUSTAINABLE ECONOMIC DEVELOPMENT AND 3. QUALITY OF LIFE, WE CAN CONCLUDE THAT OUR TAX SYSTEM GETS A LITTLE LESS THAN FAIR RATING. THIS RATING IS NOT BASED ON SCIENTIFIC DATA OR IN DEPTH ANALYSIS. IT IS HOWEVER IMPORTANT THAT A PROPER ANALYSIS OF OUR TAX SYSTEM IN A BROAD CONTEXT BE EXECUTED AND THAT THE STRENGTHS AND WEAKNESSES BE CLEARLY DETERMINED.
SLIDE 5 THE NEW TAX SYSTEM WE WOULD LIKE TO SEE HAS TO BE ADAQUATE IN ALL RELEVANT AREAS. THE MATRIX SHOWN IS JUST A SIMPLIFICATION AND SHOWS JUST SOME OF NUMEROUS RELEVANT ASPECTS AND ATTENTION AREAS.
SLIDE 6 IN THIS STRONGLY SIMPLIFIED MATRIX WE ANALYZE WHICH FACTORS DETERMINE THE RATING OF EACH ATTENTION AREA. IT SHOULD BE CLEAR THAT THERE ARE MANY MORE FACTORS THAT PLAY A ROLE. FROM THE MATRIX WE READ: •
•
THE PRESENT TAX SYSTEM APPEARS TO PROVIDE SUFFICIENT INCOME FOR GOVERNMENT TO EXUTE ITS CORE TASKS ADEQUATELY, WHILE THE OVERALL TAX BURDEN IS SOMEWHAT FAIR, HOWEVER COMPLIANCE AND SIMPLICITY ARE NOT AT THE REQUIRED LEVEL, THE PRESENT TAX SYSTEM THROUGH TAX INCENTIVES AND INTERNATIONAL TREATIES SUPPORTS FAIRLY THE DEVELOPMENT OF A SUSTAINABLE ECONOMY. THE TOTAL OF TAX AND SOCIAL SECURITY PREMIUMS BURDEN IS RELATIVELY HIGH.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ •
THE PRESENT TAX SYSTEM ADS TO THE QUALITY OF EVERYBODY’S LIFE, QUESTIONMARK?
SLIDE 7 DRS ROMERO EXTENSIVELY ADDRESSED IN HIS PRESENTATION THE IMPORTANCE OF GOVERNMENT CONCENTRATING ON ITS CORE TASKS. OF COURSE THERE WILL BE MANY DISAGREEMENTS ABOUT WHICH TASKS SHOULD BE FULFILLED BY GOVERNMENT AND WHICH TASKS BY THE PRIVATE SECTOR. THERE WILL BE MANY GREY AREAS IN WHICH A CLEAR CUT DEFINITION WILL DEPEND ON HOW THE ROLE OF GOVERNMENT IS DEFINED. DEFINING THE CORE TASKS OF THE GOVERNMENT OF A COUNTRY AND THE ASSOCIATED COST AND COST DEVELOPMENTS IN THE FUTURE IS ESSENTIAL FOR DETERMINING THE AMOUNT OF TAXES TO BE LEVIED AND ESSENTIAL FOR DETERMINING THE OPTIMAL TAX SYSTEM. I FOR ONE BELIEVE IN A SMALL GOVERNMENT, A LEAN MEAN GOVERNMENT MACHINE. PRELIMINARY ESTIMATES OF THE COST OF THE NEW GOVERNMENT ORGANIZATION OF THE COUNTRY SINT MAARTEN AS ANTICIPATED BY THE WORK GROUP CONSTITUTIONAL AFFAIRS AMOUNTS TO ROUGHLY ABOUT NAF 400 MILLION PER YEAR, OR ALMOST NAF 10,000 PER RESIDENT PER YEAR. MIND YOU, THAT IS EQUAL TO APPROXIMATELY 60% OF THE ANNUAL MINIMUM WAGE WHILE THE TAX CONTRIBUTION IS LESS THAN 10%. ACCORDING TO OFFICIAL DATA, A SIGNIFICANT PERCENTAGE OF OUR WORKFORCE EARNS MINIMUM WAGE. PERHAPS THIS IS ALREADY A SIGN THAT WE MAY HAVE TO RETHINK WHAT REALLY IS A CORE TASK AND WHICH AMOUNT WE ARE WILLING TO SPEND ON THE EXECUTION OF THAT TASK. IN THIS CONTEXT WE WOULD LIKE TO MENTION THAT IT IS GENERALLY PERCEIVED THAT THE INFORMAL ECONOMY IS SUBSTANTIAL AND THE AMOUNT OF FREE RIDERS SICGNIFICANT. GETTING THE INFORMAL ECONOMY UNDER CONTROL IS ESSENTIAL AND WILL LEAD TO AN OVERALL DECLINE OF THE TAX BURDEN AND POSSIBLY TO AN IMPROVEMENT OF THE PUBLIC SERVICE LEVEL. UNFORTUNATELY, UNDER OUR PRESENT TAX SYSTEMIT IS A MONUMENTAL TASK AND ONE THAT WE BELIEVE IS UNACHIEVABLE. A NEW TAX SYSTEM ALONE WILL NOT SOLVE THE PROBLEM OF THE “FLORISHING” INFORMAL ECONOMY. SOLVING THE PROBLEM OF THE INFORMAL ECONOMY AND ITS FREE RIDERS ALSO STRONGLY DEPENDS ON IMMIGRATION, LABOUR LAWS AND POLICIES AS WELL AS A PERCEIVED GOOD QUALITY GOVERNMENT.
SLIDE 8 THE TAX BURDEN IS THE AMOUNT OF TAXES IMPOSED ON A PERSON, GROUP OF PERSONS, BUSINESSES ETC. NORMALLY EXPRESSED IN A PERCENTAGE OF INCOME AND WHICH CAN VARY SIGNIFICANTLY. NORMALLY THE HIGHER INCOME EARNERS ARE PROPORTIONALLY HIGHER TAXED THAN THE MIDDLE CLASS AND LOW INCOME EARNERS. THE TAX REVENUE OF A COUNTRY CAN BE EXPRESSED IN A PERCENTAGE OF GDP OF THAT COUNTRY. FOR SINT MAARTEN THE TAX REVENUE AS A St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ PERCENTAGE OF GDP AMOUNTS TO ABOUT 30% BASED ON THE FOLLOWING ESTIMATES FOR 2009: TOTAL OF TAXES: NAF 360 MILLION GDP NAF 1.2 BILLION WHEN COMPARING SUCH A PERCENTAGE WITH OTHER COUNTRIES LIKE FOR INSTANCE SWEDEN: 51%; HOLLAND: 38%; MEXICO: 20% THIS SHOULD BE DONE TAKING OTHER FACTORS INTO ACCOUNT, FACTORS THAT DETERMINE THE CORE TASKS OF GOVERNMENT. TO GIVE AN EXEMPLE: THE QUESTION IF A GENERAL HEALTH INSURANCE FOR THE WHOLE POPULATION SHOULD BE THE RESPONSIBILITY OF A SEPARATE SOCIAL SECURITY INSTITUTION LEVYING SOCIAL SECURITY PREMIUMS OR IF IT SHOULD BE COVERED BY THE COUNTRIES BUDGET, HAS A GREAT EFFECT ON THE AMOUNT OF TAXES TO BE LEVIED. THE COST OF HEALTHCARE ON SINT MAARTEN AMOUNTS PRESENTLY TO AT LEAST NAF 100 MILLION PER YEAR. NATIONAL HEALTHCARE CONTRIBUTIONS PRESENTLY CONSISTS OF MANDATORY SICKNESS INSURANCES, GOVERNEMENT CONTRIBUTIONS, PRIVATE INSURANCES AND OUT OF POCKET PAYMENTS. WHEN THIS BURDEN OR PART OF THIS BURDEN BECOMES THE RESPONSIBILITY OF GOVERNMENT, AS THE COST OF A GENERAL HEALTH INSURANCE, THERE WILL BE AN ENORMOUS IMPACT ON THE AMOUNT OF TAXES TO BE LEVIED. CHOICES LIKE THIS NEED TO BE MADE IN THE COMING PERIOD.
SLIDE 9 IN ADDITION TO THE AMOUNT OF TAXES PAID BY PERSONS AND BUSINESSES, AN AMOUNT OF ABOUT NAF 120 MILLION IS PAID ANNUALLY IN SOCIAL SECURITY PREMIUMS LIKE THE ZV/OV PREMIUMS, AOV/AWW PREMIUMS, AVBZ PREMIUMS, AND FZOG PREMIUMS BRINGING THE TOTAL OF TAXES AND SOCIAL SECURITY PREMIUMS GENERATED ON SINT MAARTEN TO ABOUT NAF 480 MILLION (40% OF GDP). WHEN LOOKING AT A NEW TAX SYSTEM WE MAY AS WELL LOOK INTO THE POSSIBILITIES TO INCLUDE SOCIAL SECURITY PREMIUM ISSUES IN THAT NEW SYSTEM. FOR INSTANCE, THE BASIC WAGE TAX RATE CAN INCLUDE EMPLOYEE’S CONTRIBUTIONS OF SOCIAL SECURITY PREMIUMS. THIS IN ITSELF CONTAINS AN IMPORTANT SIMPLIFICATION; INSTEAD OF THREE WINDOWS TO PRESENT RETURNS AND MAKE PAYMENTS THIS IS REDUCED TO ONE.
SLIDE 10 TALKING ABOUT TAX INCENTIVES, WE NORMALY THINK ABOUT TAX HOLIDAYS, TAX CREDITS OR TAX DEDUCTIBLES AND EXEMPTIONS. TAX INCENTIVES AND OPOSITE SPECIFIC TAX MEASURES, TAX DES-INCENTIVES LIKE THE EXCISE TAX ON GASOLINE, ALCOHOL AND CIGARETTES (NOT EXISTING ON ST. MAARTEN) ARE OFTEN USED TO INFLUENCE BEHAVIOUR. TAX INCENTIVES AND TAX DES-INCENTIVES APPEAR PERFECT TOOLS THAT ARE AVAILABLE TO GOVERNMENT TO INFLUENCE NOT ONLY THE ECONOMY OF A COUNTRY BUT ALSO TO DISCOURAGE ECENOMIC ACTIVITIES WITH A NEGATIVE IMPACT. THE PROBLEM IS THAT THESE MEASURES OFTEN RESULT IN COMPLEX TAX LEGISLATION PRONE TO AVOIDENCE AND INCREASED COST OF MANAGING THE TAX SYSTEM. IN MOST CASES, THERE ARE EASIER METHODS OF INFLUENCING BEHAVIOUR. THERE IS PRESENTLY A COMPLETE IMBALANCE IN TAX INCENTIVES. PRESENT TAX INCENTIVES DISCOURAGE A
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ SUSTAINABLE ECONOMY AND PROMOTE AN UNSTABLE SOCIAL WELBEING. IT TAKES COURAGE TO MAKE A CHANGE. • • • •
PRESENT TAX HOLIDAY POLICIES NEED DRASTIC REVISION, TAX DEDUCTIONS SHOULD BE ELIMINATED AGAINST AN OVERALL DECREASE IN TAX RATES, EXEMPTIONS (TAX FREE BRACKET) SHOULD BE IN PLACE TO ENSURE A MINIMUM ACCEPTABLE QUALITY OF LIFE GAMBLING, DRINKING, SMOKING, OVEREATING SHOULD BE SEVERELY DISCOURAGED BY MEDIA CAMPAIGNS, EDUCATION AND OTHER EFFORTS RATHER THAN EXTRA TAX MEASURES.
SLIDE 11 THE PRESENT TAX SYSTEM IS GENERALLY CONSIDERED AS TOO COMPLEX. THE FACT THAT THERE ARE SO MANY ACCOUNTING AND TAX ADVISORY FIRMS ON THE ISLAND MAY CONFIRM THIS PERCEPTION. THE FACT IS THAT THE SYSTEMS COMPLEXITY IS NOT NECESSARILY THE CONSEQUENCE OF COMPLEX TAX LAWS. MUCH OF THE SO CALLED COMPLEXITY LAYS IN THE LACK OF SIMPLICITY OF THE EXECUTION OF THE TAX LAWS. SURE THERE ARE MANY WAYS TO SIGNIFICANTLY SIMPLIFY THE EXISTING LAWS OR BY JUST ELIMINATING TAXES OR BY REDUCING RATES AND ELIMINATE DEDUCTIBLES AND TAX FACILITIES (ACCELERATED DEPRECIATION, INVESTMENT ALLOWANCES JUST TO MENTION A FEW). HOWEVER, TAX INFORMATION, PUBLIC ACCESS TO TAX INFORMATION AND ASSISTANCE AVAILABLE TO THE PUBLIC, PROPERLY WORKING AUTOMATED SYSTEMS, TRAINING OF PERSONNEL, UP TO DATE COMMUNICATION BETWEEN PUBLIC AND TAX AUTHORITIES ARE CRUCIAL IN AN ADEQUATE TAX SYSTEM. WE BELIEVE THAT THE NEGLIGENCE OF THE FEDERAL GOVERNMENT TO PUT A PROPER ORGANIZATION IN PLACE SIGNIFICANTLY CONTRIBUTES TO THE PERCEPTION THAT OUR TAX SYSTEM IS TOO COMPLEX. TO MAKE A BREAKTHROUGH, ALL AVAILABLE CAPACITY SHOULD BE USED TO SET UP A PROPERLY WORKING UP TO DATE TAX ORGANIZATION. THE POLICY OF GOVERNMENT TO FOCUS ON TAX AUDITS AIMED AT INCREASING GOVERNMENT REVENUE BY AUDITING TAX PAYERS WHO COMPLY ALREADY IS HOPELESSLY SHORT-SITED AND DOES NOT LEAD TO STRUCTURAL SOLUTIONS. CAPACITY SHOULD BE AIMED AT IMPROVING THE TAX ORGANIZATION, ELIMINATING THE BACKLOG IN ASSESMENTS, PENDING OBJECTION LETTERS AND ELIMINATING THE EVER GROWING INFORMAL ECONOMY AND FREE RIDERS. WITHOUT A PROPERLY FUNCTIONING AND UP TO DATE TAX ORGANIZATION IN PLACE TAX AUDITS WILL FRUSTRATE THE SYSTEM, FEED THE POOL OF FREE RIDERS AND WILL HAVE AN OPPOSITE EFFECT ON GOUVERNMENT REVENUE IN THE LONG RUN. TAX AUDITS HAVE ONLY EFFECT WHEN THE SYTEM IS ADEQUATE.
SLIDE 12 FOR YEARS WE HAVE BEEN TALKING ABOUT MOVING AWAY FROM DIRECT TO INDIRECT TAXES. UNFORTUNATELY, WE HAVE NOTICED THAT WE DID MOVE TOWARDS INDIRECT TAXES BUT DID NOT MOVE AWAY FROM DIRECT TAXES. THE AMOUNT OF DIRECT TAXES COLLECTED LIKE THE WAGE TAX, INCOME TAX AND PROFITTAX STILL EXCEEDS THE AMOUNT OF TURNOVER TAX AND EXCISE TAX COLLECTED AS YOU HAVE SEEN IN PREVIOUS PRESENTATIONS. RECENTLY THE ISLAND GOVERNMENT HAS DECIDED TO INCREASE THE TURNOVER TAX RATE FROM 3 TO 4 PERCENT WITHOUT St. Maarten, April 4 2008
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ TAKING ANY MEASURES IN THE DIRECT TAX RATES. THE FOUNDATION TAX COMMITTEE PROPOSED THAT THE EFFECTS OF THE INCREASE IN TURNOVER TAX SHOULD BE COMPENSATED BY DECREASING THE SURTAXES ON WAGETAX AND PROFIT TAX, BY CONSIDERING TO ALLOW EMPLOYERS TO PAY THEIR EMPLOYEES A TAX FREE TRANSPORTATION ALLOWANCE UP TO A CERTAIN LEVEL AND TO EXEMPT PRICE CONTROLLED GOODS FROM TOT. IN ADDITION IT WAS PROPOSED THAT THE POSSIBILITY BE STUDIED TO COMPENSATE PROFIT TAX PAYABLE WITH PAID TURNOVER TAX. SIMPLFICATION OF THE TAX SYSTEM COMBINED WITH REDUCTION OF RATES WILL LEAD TO INCREASED COMPLIANCE. INCREASED COMPLIANCE LEADS TO AN INCREASE OF TAX REVENUES WHICH, IN A PERFECT WORLD WILL LEAD TO A FURTHER DECREASE IN TAX RATES, WHICH IN ITS TURN WILL LEAD TO INCREASED COMPLIANCE ETC. ETC.. PRESENTLY THE TAX LAWS CONTAIN VARIOUS FACILITIES (INVESTMENT ALLOWANCE, ACCELERATED DEPRECIATION, TAX HOLLIDAYS) THAT WERE PUT IN PLACE DURING THE EARLY EIGHTIES AND THAT WERE BASED ON A WEAK ECONOMY IN CURACAO. REEVALUATION OF THESE TAX FACILITIES SHOULD BE DONE, SOME MAY BE ELIMINATED IN EXCHANGE FOR LOWER TAX RATES. AS MENTIONED BEFORE, PROCEDURES OF THE LEVYING AND COLLECTION OF TAXES, OR RATHER THE FILING AND PAYING OF TAXES SHOULD BE STREAMLINED. LONG QUEUS AT THE RECEIVER OFFICES ON THE LAST PAYMENT DAYS ARE IN FACT PROOF OF AN INEFFICIENT AND MAYBE UNRELIABLE SYSTEM OF PAYMENTS. MUCH MORE CAN BE DONE IN PRIVATE SECTOR – PUBLIC SECTOR ININTIATIVES IN THIS AREA. THE SAME CAN BE SAID ABOUT THE SYSTEM OF FILING TAXES. ACCESSIBILITY TO INFORMATION ABOUT TAXES IS FAR BELOW ACCEPTABLE LEVEL. THIS AREA HAS BEEN SERIOUSLY NEGLECTED FOR WHICH THE ACCOUNTING AND TAX ADVISORY FIRMS ARE VERY GRATEFUL.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ SLIDE 13 WHEN WE TALK ABOUT SIMPLIFICATION IN THE TAX LAWS, LET ME GIVE YOU ONE EXTREME, AND THEREFORE IRREALISTIC, EXAMPLE. THE ULTIMATE TAX SIMPLIFICATION, BARRING A GOVERNMENT THAT DEMANDS ALL YOUR MONEY AND PROMISSES TO TAKE CARE OF THE REST, WOULD BE TO ELIMINATE ALL TAXES EXCEPT THE GASOLINE EXCISE TAX AND TO INCREASE THIS TAX FROM THE PRESENT NAF 0.29 TO NAF 12 PER LITER. BY DOING SO WE WILL MAKE THE DIRECTORATE OF TAXES, THE INSPECTORATE OF TAXES AND THE RECEIVERS OFFICES OBSOLETE. IN ADDITION WE DON’T NEED A BAB ANYMORE AND THE TREASURER IS GUARANTEED OF 12 MONTHLY PAYMENTS BY THE 2 GASOLINE PROVIDERS PER YEAR. 24 PAYMENTS TO COVER NAF 400 MILLION IN GOVERNMENT EXPENDITURES. THE REASON WHY THIS DIDN’T HAPPEN IS OBVIOUS, IT IS JUST NOT REALISTIC. TO FILL A TANK AT THE PUMP WITH THE NEW TAX RATE WILL EASILY COST OVER ANG 500. A BUS TRIP FROM ST. PETERS TO TOWN WILL MOST LIKELY COST ANG 30 PER PERSON ETC. ETC.. AND OF COURSE EVERYBODY WOULD START RIDING BYCICLES. COME TO THINK OF IT, THIS WOULD SOLVE TRAFIC JAMS AND OBESITY. IT IS CLEAR THAT THIS EXTREME MEASURE OF SIMPLIFICATION WILL NOT FLY. HOWEVER IT IS VERY VALUABLE TO PHILOSOPHY ABOUT EXTREME MEASURES LIKE THE ABOVE TO BETTER UNDERSTAND THE WORKING OF TAX LAWS AND THE IMPACT ON THE ECONOMIC ACTIVITIES AND SOCIAL WELFARE AND BEHAVIOUR OF PEOPLE.
SLIDE 14 IF WE TALK ABOUT SIMPLIFICATION OF THE TAX SYSTEM, THE FLAT TAX CAN NOT BE FORGOTTEN. ACTUALLY THE SUBJECT FLAT TAX IS IN. I MYSELF AM A BIG FAN OF A FLAT TAX. THERE ARE VARIOUS ADVANTAGES • • • • • •
IT IS SIMPLE AND WILL LEAD TO INCREASED COMPLIANCE, SIMPLICITY LEADS TO LOWER COST OF LEVYING AND COLLECTION, A FLAT TAX MAY INCLUDE PERCENTAGE POINTS TO COVER SOCIAL SECURITY CONTRIBUTIONS, IT IS SAID TO BE ECONOMICALLY EFFICIENT, IT IS FAIR (TO A POINT) IT IS A PROVEN METHOD OF SUCCESS
FLAT TAX SYSTEMS (FOR WAGE AND INCOME TAX) HAVE BEEN INTRODUCED IN VARIOUS EASTERN EUROPEAN COUNTRIES, RUSSIA AND IRELAND. IN ALL THESE JURISDICTIONS THE INTRODUCTION OF A FLAT TAX HAS RESULTED IN INCREASE TAX REVENUES, BETTER COMPLIANCE AND INCREASING ECONOMIC ACTIVITIES. OBVIOUSLY THE PRESENT HIGH INCOME EARNERS WILL CONSIDDER A FLAT TAX FAIR, A MIDDLE CLASS INCOME EARNER MAY THINK DIFFERENT. HOWEVER, NORMALLY IN CASES OF FLAT INCOME TAX LEGISLATION, INCOME UP TO A CERTAIN LEVEL IS EXEMPTED. IN THAT SENSE EVEN A FLAT TAX IS NOT AS FLAT AS FLAT SHOULD BE. IN ADDITION TO THAT, ONE HAS TO UNDERSTAND THAT INCREASING FAIRNESS IN A TAX SYSTEM ALSO INCREASES COMPLEXITY. A FLAT TAX ON INCOME IS ALREADY MORE FAIR THAN FOR INSTANCE LEVYING THE REQUIRED REVENUES SOLELY THROUGH AN IMPORT DUTY.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ SLIDE 15 THE IMPLEMENTATION OF A FLAT TAX WILL HAVE A SERIOUS IMPACT IN THE ECONOMIC STRUCTURE OF A COUNTRY: • • •
•
INEQUALITY: A FIXED RATE FOR EVERYBODY IS NOT EQUAL FOR EVERYBODY. THE FLAT TAX SHIFTS THE TAX BURDEN FROM HIGH INCOME EARNERS TO LOW INCOME EARNERS, A FLAT TAX FOR LOW INCOME EARNERS WITHOUT TRESHOLD IS NOT POSSIBLE UNLESS REMUNERATION PACKAGES INCREASE SIGNIFICANTLY, THE EFFECTS OF THE IMPLEMENTATION OF A FLAT TAX ON OUR ECONOMY CAN NOT BE DETERMINED.
WITH INEQUALITY WE MEAN THAT THE BURDEN OF A FLAT TAX ON A LOW INCOME EARNER IS HEAVIER THAN THE SAME FLAT TAX FOR A HIGH INCOME EARNER. INTRODUCTION OF A TAX FREE BRACKET ELIMINATES SOME OF THAT INEQUALITY. EVEN THOUGH THE IMPACT ON OUR ECONOMY CANNOT BE DETERMINED AT THIS TIME, THE EXPECTATIONS ARE THAT IT WILL FAVORABLY IMPACT OUR ECONOMY.
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________ SLIDE 16 LISTENING TO ALL THE PRESENTATIONS TODAY MUST HAVE LEAD YOU TO UNDERSTAND THAT A SIMPLE SOLUTION FOR A COMPLEX ISSUE LIKE THE TAX SYSTEM OF A COUNTRY IN OUR CASE MOST LIKELY DOES NOT EXIST. MOST LIKELY SINCE WE LACK THE TOOLS TO PROPERLY CALCULATE THE CONSEQUENCES OF MEASURES TO BE TAKEN AND CERTAINLY MEASURES THAT ARE AIMED AT SIGNIFICANT CHANGES IN THE TAX SYSTEM OF A COUNTRY. SUMMARIZING THE ABOVE WE CONCLUDE THAT THE FOLLOWING STEPS BE TAKEN: • • •
• • •
ANALYZE THE WEAKNESSES AND STRENGTHS OF THE PRESENT TAX SYSTEM, DEFINE THE CORE TASKS OF THE GOVERNMENT AND ESTABLISH A REQUIRED TAX REVENUE LEVEL, INSTIGATE A PROCESS OF SIMPLIFICATION OF THE EXISTING TAX LAWS, TO BE IMPLEMNTED OVER A NUMBER OF YEARS, BY ELIMINATING TAX FACILITIES IN EXCHANGE FOR LOWER TAX RATES, SHIFTING FROM DIRECT TO INDIRECT TAXES, START A PROCESS OF SIMPLIFYING FILING AND PAYMENT OF TAXES PROCEDURES IN COLLABORATION WITH THE PRIVATE SECTOR, SIGNIFICANTLY IMPROVE THE ACCESSIBILITY TO INFORMATION AND COMPLIANCE REQUIRMENTS AND SET-UP WELL EQUIPED HELP DESKS, FOCUS ON INCREASING COMPLIANCE
SLIDE 17 ON BEHALF OF THE BOARD OF THE FOUNDATION TAX COMMITTEE I THANK YOU FOR YOUR ATTENTION
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
New Tax System for the Country Sint Maarten WHAT DETERMINES AN ADEQUATE TAX SYSTEM Foundation Tax Committee April 4 2008
SUBJECTS 1. GENERAL 2. CORE TASKS OF GOVERNMENT 3. TAX BURDEN 4. TAXES AND SOCIAL SECURITY PREMIUMS 5. TAX INCENTIVES 6. COMPLEXITY AND SIMPLIFICATION 7. FLAT TAX 8. CONCLUSIONS 9. CLOSING
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
1. GENERAL (A) DEFINITION OF AN ADEQUATE TAX SYSTEM AN ADEQUATE TAX SYSTEM OF A COUNTRY PROVIDES SUFFICIENT INCOME FOR GOVERNMENT TO EXECUTE ITS CORE TASKS, IT PROVIDES THE TOOLS FOR THE DEVELOPMENT OF A SUSTAINABLE ECONOMY AND DETERMINES THE QUALITY OF LIFE OF THE POPULATION OF THAT COUNTRY
1. GENERAL (B) PRESENT TAX SYSTEM (IST)
ADEQUATE
FAIR
INADEQUATE
SUFFICIENT INCOME FOR GVT SUSTAINABLE DEVELOPMENT ECONOMY QUALITY OF LIFE FOR THE POPULATION
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
1. GENERAL (C) NEW TAX ADEQUATE SYSTEM (ZOLL)
FAIR
INADEQUATE
SUFFICIENT INCOME FOR GVT SUSTAINABLE DEVELOPMENT ECONOMY QUALITY OF LIFE FOR THE POPULATION
1. GENERAL (D) PRESENT TAX SYSTEM
ADEQUATE
FAIR
INADEQUATE
CORE TASKS
TAX BURDEN
COMPLIANCE, COST AND SIMPLICITY
SUSTAINABLE DEVELOPMENT ECONOMY
?
TAX INCENTIVES INTERNATIO NAL TREATIES
TAX AND SOCIAL SECURITY BURDEN
QUALITY OF LIFE FOR THE POPULATION
?
?
?
SUFFICIENT INCOME FOR GVT
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
2. CORE TASKS OF GVT DEFINING THE CORE TASKS OF THE GOVERNMENT OF A COUNTRY AND THE RELATED COST AND COST DEVELOPMENTS IS ESSENTIAL FOR DETERMINING THE AMOUNT OF TAXES TO BE LEVIED AND IS ESSENTIAL FOR DETERMINING THE OPTIMAL TAX SYSTEM. PRELIMINARY ESTIMATES OF THE COST OF THE NEW GOVERNMENT ORGANIZATION OF THE COUNTRY SINT MAARTEN AMOUNT TO ABOUT NAF 400 MILLION PER YEAR, OR ABOUT NAF 10,000 PER RESIDENT PER YEAR.
3. TAX BURDEN THE TAX BURDEN IS THE AMOUNT OF TAXES IMPOSED ON A PERSON, GROUP OF PERSONS, BUSINESSES ETC. NORMALLY EXPRESSED IN A PERCENTAGE OF INCOME AND WHICH CAN VARY SIGNIFICANTLY TAX REVENUE EXPRESSED IN A PERCENTAGE OF GDP AMOUNTS FOR SINT MAARTEN TO ABOUT 30% TOTAL OF TAXES: NAF 360 MILLION GDP NAF 1.2 BILLION (SWEDEN: 51%; HOLLAND: 38%; MEXICO: 20%)
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
4. TAXES AND SOCIAL SECURITY PREMIUMS THE TOTAL OF TAX REVENUE AND SOCIAL SECURITY PREMIUMS (SSP’S) COLLECTED AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT AMOUNTS TO ABOUT 40%. TAXES AND SSP’S GDP
NAF 480 MILLION NAF 1.2 BILLION
5. TAX INCENTIVES • TAX HOLIDAYS • EXCEMPTIONS • CREDITS/DEDUCTIBLES
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6. SIMPLIFICATION (A) •
SIMPLIFICATION TAX LEGISLATION
• SIMPLIFICATION EXECUTION TAX LAWS • SIMPLIFICATION COLLECTION
6. SIMPLIFICATION (B) • MOVE
FROM DIRECT TOWARDS INDIRECT TAXES •TURNOVER TAX •GASOLINE EXCISE TAX •ALCOHOL AND CIGARETTE EXCISE TAX • DECREASE TAX RATES AND ELIMINATE TAX FACILITIES • IMPLEMENT A FLAT TAX ??? • IMPROVE/IMPLEMENT AUTOMATED PROCESSES • IMPROVE TAX INFORMATION SYSTEM
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6. SIMPLIFICATION (C) THE ULTIMATE SIMPLIFICATION: •ELIMINATE ALL TAXES EXCEPT THE GASOLINE EXCISE TAX • INCREASE THE GASOLINE EXCISE TAX FROM NAF 0.29 TO NAF 12 PER LITRE OR • ELIMINATE ALL TAXES EXCEPT THE TURNOVER TAX • INCREASE THE TURNOVER TAX RATE TO 16% BOTH OPTIONS ARE NOT REALISTIC
7. FLAT TAX (A) Advantages • simplicity resulting in increased compliance and lower
• • • •
cost for tax payer and tax collector, may include the social security premiums, economic efficient, increased compliance leads to higher tax revenue, fair/unfair?
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NEW TAX SYSTEM FOR THE COUNTRY SINT MAARTEN _____________________________________________________________________
7. FLAT TAX (B) Disadvantages • inequality • shifts the tax burden from high income earners to middle income class • flat tax without threshold for low income earners is not possible, unless wages increase • effects on our economy are questionable most likely not favorable.
CONCLUSIONS • ANALYZE THE WEAKNESSES AND STRENGTHS OF THE PRESENT TAX SYSTEM, • DEFINE THE CORE TASKS OF THE GOVERNMENT AND ESTABLISH A REQUIRED TAX REVENUE LEVEL, • INSTIGATE A PROCESS OF SIMPLIFICATION OF THE EXISTING TAX LAWS, TO BE IMPLEMNTED OVER A NUMBER OF YEARS, BY ELIMINATING TAX FACILITIES IN CHANGE OF LOWER TAX RATES, SHIFTING FROM DIRECT TO INDIRECT TAXES, • START A PROCESS OF SIMPLIFYING FILING AND PAYMENT OF TAXES PROCEDURES IN COLLABORATION WITH THE PRIVATE SECTOR, • SIGNIFICANTLY IMPROVE THE ACCESSIBILITY TO INFORMATION AND COMPLIANCE REQUIRMENTS AND SET-UP WELL EQUIPED HELP DESKS.
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CLOSING THANK YOU FOTR YOUR ATTENTION ON BEHALF OF THE BOARD OF THE FOUNDATION TAX COMMITTEE: • MICHEL SOONS • PAUL VAN VLIET • GERT BERGMAN • HANS PFENNINGS • MARTIN HASSINK
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