In the Herald of 26 January an extensive interview with the Chairman of the “College Financieel Toezicht” (CFT), the financial supervisor of our government was published. In this article several statements of the Chairman were made that need further discussion.

Quote CFT: “The tax quota, the total of all taxes collected set against the gross domestic product (GDP), is too low. This needs to be tackled. Tax compliance needs to increase.”

This statement assumes that a low quota is (primarily) caused by low tax compliance. Obviously, there can be (are) other causes for this low quota. The data collected by St. Maarten has been below par for a very long time. This results in unreliable statistics, including the officially published Gross Domestic Product (GDP) statistics. These GDP numbers have been questioned, even by the CFT. Enough to mention it in their report Q3:

“Het CFT vermeldt in zijn reactie op de uitvoeringsrapportages doorgaans de schuldquote van de collectieve sector van Sint Maarten en de schuldquote van de overheid van Sint Maarten. Deze schuldquotes bedroegen respectievelijk 59 procent en 80 procent per 30 juni 2020. Het Department of Statistics van Sint Maarten heeft wijzigingen doorgevoerd bij het berekenen van het bruto binnenlands product (bbp), waardoor het bbp hoger uitkomt. Het Internationaal Monetair Fonds (IMF) heeft inmiddels de aanpassing van het bbp overgenomen. Nadat ook de Centrale Bank van Curaçao en Sint Maarten (CBCS) het aangepaste bbp heeft overgenomen, zal het CFT de berekening van de schuldquotes baseren op het aangepaste bbp. Toepassing van het hogere bbp zal leiden tot lagere schuldquotes.”

Apparently, the GDP numbers are not to be questioned. Note that the Q3 report does not quantify the new Debt to GDP. The figures are quite high, GDP is 18 and 24% higher for 2018 and 2019 respectively. Debt to GDP drops by 20%, the Tax quota (tax revenues in a percentage of GDP) will show a similar decrease. Any economist should have serious concerns about the data. Especially since the producer of the GDP data has an interest in an elevated GDP level so that the established debt ceiling increases.

Statements indicating that St. Maarten taxpayers are less compliant, should be backed by data. The low level of tax compliance is certainly not the only explanation for a lower-than-expected tax quota. Another cause for the low tax quota is the fact that average incomes have been decreasing because of hurricane Irma. Consequently, an increasing number of people earned income below minimum wage level and did not have to pay wage-/income tax. Businesses became less profitable and paid less profit tax. Obviously, this trend has re-emerged because of the Corona crisis. Also, an important factor is the inadequate performance of the tax office and the tax receiver.

It would be good to have a thorough discussion amongst the social partners about the state of the economy and what is and isn’t feasible. Preferably, this would happen in the setting of the Social Economic Council. The fact is that during the last 10 years, the taxpayers of St. Maarten have been on the sidelines and none of the relevant authorities offer any meaningful transparency. Of course, the taxpayer in general and the business sector specifically, will be on the hook for debt that will be created and the increases of tax.

Quote CFT: The country package speaks of a shift from direct to indirect taxes. I partly agree, but I do question whether St. Maarten should have a general sales tax ABB. The IMF is highly sceptical about that. They say it is too complicated. The fact that there is a Dutch and French side plays a role in this. An added value tax BTW is also mentioned.

Business shares these concerns. However, doing nothing is not an option. Arguing about what may or may not be the best way forward does not lessen the damage caused by the current system that runs on TOT, a temporary emergency measure from the 90’s. TOT harms economic activity, for instance by hampering the development of export activities. This while St. Maarten is ideally situated for the development of distribution activities. There is no time like the present for implementing something different. As a matter of fact, the Social Economic Council issued a report on the need to replace the TOT with a better developed system that would be less harmful for economic development. It is up to Sint Maarten to collectively agree on a way forward. 

Quote CFT: “Some St. Maarten politicians are saying that in the future there should only be indirect taxes. I think that is undesirable. I think that more taxes should be levied in St. Maarten, and not less. The tax burden is low in St. Maarten, while the expenditure level is rather high.”

This remark needs clarification. The nominal tax rates on St. Maarten are the highest in the region. The low tax quota is therefore caused by other factors. A part of the answer is improving the performance of the tax office (both Inspectorate and Receiver) and increase compliance. USZV has shown that significant increases can be realized by focusing on enforcement. Another part would be to take a serious look at the current tax legislation. The above-mentioned minimum wage exemption is extremely expensive and a cause for abuse.

The redesign of St. Maarten’s tax system should not be done based on gut feelings or thoughts. Preferably it should be done based on reliable data and in consultation with the social partners. In the past, the Ministry of Finance (under then Minister H. Shigemoto) embarked on an ambitious project to overhaul our tax system and clean up the tax databases of the Inspectorate of Taxes. The social partners were requested to provide input, SHTA did provide that input. Unfortunately, the project was abandoned when the government fell and a new one was installed.

More taxes are probably not the answer, as it would make things more complicated and not less. In a period of serious economic hardship increasing taxes is not the way to go.

Quote CFT: “By swiftly implementing the reforms and to improve tax collection, we think that St. Maarten will be able to hold up its own pants earlier than that. Raising tax collection to a higher level is key to that.”

Improving/Raising Tax Collection

There is little public information on the tax department, but as the reviewer of things budget there is something the CFT must know. In the country’s 2014 annual report there is information on tax collection. End of 2013 the inspectorate had 7.5 Billion guilders in generated assessments outstanding. Profit tax assessments levied 2013 are 500+ million, the budget 2014 sees 28 million in Profit Tax revenues. The tax department sends out 25% of GDP in Profit Tax assessments, with such a low chance of collection that it isn’t even budgeted. Yet the business sector is once again burdened with ANG 500 Million in assessments that they need to protest. The Inspector of Taxes and Receiver are spending significant time on assessments that must be cancelled or are uncollectible. Seems like there is something very wrong with the way tax assessments are generated. That cannot be blamed on non-compliance. It most likely increases non-compliance. It appears that this should be easily fixed. And that will free up resources at the inspectorate and allow them to focus on meaningful enforcement. 

Nobody disagrees that tax reform is needed, but the low compliance rhetoric is not based on evidence. To the contrary, what evidence there is shows the lack of data and a strange policy on generating tax assessments.

The unwillingness by successive governments to really deal with improving the performance of the tax office and really work on tax reform is lamentable. The lack of transparency is an issue for anyone trying to figure out what is really happening. Tax reform cannot happen without broad social partner consultation based on available evidence and research. It is in our laws, there is no way around it, the only recourse is the administrative court.  For the government, aided or not by outside entities, to devise tax reform in a vacuum at the top of an ivory tower, sitting on a mountain of questionable assumptions, will not benefit anyone.

As representative of the private sector, the group that will end up footing the bill of any tax changes, SHTA has not been presented with any opportunity to provide input or expertise. No amended 2020 budget, no approved 2021 budget, no annual accounts. COHO?

Structural dialogue offers a framework for us to come to grips with our socio-economic realities. There is no way, other than blind luck to move the reform agenda forward. There is enough capacity (except with respect to legislative experts) on Sint Maarten to come up with the best possible fiscal reform AND support the efforts in that direction. Up to now, the government prefers to ignore its taxpayers to the detriment of the economy, now and in the future.

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