Published On: Tue, Aug 23rd, 2016

Direct vs Indirect Taxes

All over the internet you come across the same statement: “In 1939 St. Maarten was declared a duty-free port”. Literally, every wiki site and encyclopedic source online about the history of St. Maarten contains this one line: “In 1939 St. Maarten was declared a duty-free port”. But no clarification is given nor any further background information provided on this historical sentence. Declared a duty-free port by whom? King Willem of Orange-Nassau? Where is the royal decree to that effect? What does this duty-free status mean in practice? Are there really no import duties on St. Maarten? Are there no taxes being levied on products imported, distributed and sold on St. Maarten? Is this duty-free status an actual legal status or just a perception that no taxes are due on St. Maarten? What about income tax, profit tax, turnover tax, inheritance tax, etc.? Maybe some of our local or Dutch historians can provide some answers to these questions as much research in this area is needed. Certainly, the image is widespread and ingrained into the psyche of many, living on St. Maarten and abroad, especially in The Netherlands, that St. Maarten is a free-for-all and that no one really pays any taxes here on the island.

Interestingly enough, on Monday a press release from the United St. Maarten Party was published in the daily newspapers wherein the USP proposes a reform in the tax system and tax administration, shifting from direct to indirect taxes. “Citizens will no longer pay direct taxes and will not suffer the burden and uncertainty of filing tax returns. This reform will give the people of St. Maarten much needed tax relief and more spending power, particularly those in the lower income brackets. Tax reform as proposed by the USP will create a win-win-win scenario for the citizens, businesses, and the government by creating the much needed stimulus, more economic activities, more jobs, and increased prosperity for St. Maarten as a society in general,” the press release states as words coming from the mouth of party leader, Frans Richardson.

Here is where a little bit of history would do well to be considered when proposing a shift from direct to indirect taxes. Is this even legally possible? Did King Willem I not decree that St. Maarten would be a duty-free island for all eternity? A tongue-in-cheek question, however the perception of St. Maarten being a tax-free haven within the Dutch Kingdom of The Netherlands may very well be based on some obscure royal declaration hidden in the Royal Archives in The Hague in Holland. There is also that pesky old Dutch American Treaty we in St. Maarten have to abide by, whether we want to or not. So anything is possible.

Indirect taxation is practiced in the form of a sales tax or value added tax (VAT). Countries that have this practice see VAT rates as high as even 21 per cent, as is the case in The Netherlands. Our own next door neighboring island federation of St. Kitts and Nevis has a VAT rate of 17 per cent. Abolishing our progressive income tax structure means that we would have to immediately implement a sales tax or value added tax of at least 30 percent. This percentage is based on an educated guess. However Antigua & Barbuda, whose Prime Minister’s recent announcement at the beginning of this year to abolish personal income tax effective April 2016, already has a Sales Tax Rate (VAT) of 15 per cent. This rate would have to be doubled in order to compensate for the loss of revenues from the income taxes, which accounts for half of the two-island nation’s inland tax revenues. So in St. Maarten the present turnover tax rate of 5% will have to be increased significantly and drastically in order to compensate for the loss of revenues from direct taxes.

We already are well aware that our tax administration is not up to par and the levying and collection process requires much improvements. So we must agree that abolishing direct taxes in favor of indirect taxes requires an effective and efficient tax administration that is currently non-existent in St. Maarten. All this will need to be studied thoroughly before any particular decision or action is taken. Not to mention the urgent need for a study of the effects of indirect taxation on the lower income bracket earners. Include also a study of the negative effects of increased imports on the foreign exchange reserves as a direct result of the increased disposable income spending. The CFT will most likely have much to say on this topic as well.

Politicians and political parties proposing the reform of the current tax system on St. Maarten as a means of scoring political mileage with the electoratte will first have to do much research and have experts sit at the drawing table to improve the tax administration system before championing the abolition or shifting of one tax system in favor of another. Also, finally, they need to find out first if the 1939 royal decree declaring St. Maarten a duty-free port really exist or not. Or is it just another anecdotal story like how St. Maarten was divided into a French and Dutch part by two men walking in opposite directions.

By Terrance Rey
Opinion Columnist for TODAY Newspaper Online