By Hilbert Haar
St. Maarten is not the only little island in deep financial trouble; Aruba has so much headaches over its national budget that the government in Oranjestad will introduce a crisis tax of 2.5 percent that will go into effect on July 1. Aruba also increases tax on fuel by 2 cent per liter. The crisis tax is added to the turnover tax, bringing the level in Aruba to 6 percent. Currently, St. Maarten levies a turnover tax of 5 percent, a tariff that was introduced in 2011. Before that time, turnover tax was 3 percent.
There is no doubt that a higher turnover tax will result in higher consumer prices. Companies are not allowed to add the tax to their prices, but they will darn well make sure that they pass the buck to their clients by incorporating it in their prices for goods and services.
In a free economy, the government cannot forbid retailers to up the price for, say, a kilo of cheese from 20 guilders to 21.50 or forbid service providers like for instance computer repair shops, to increase their tariff for one hour of work by a margin that covers the money they have to fork over for turnover tax.
And entrepreneurs have a natural tendency to go a little bit over the top with such calculations. An hour tariff of, say, 75 guilders that includes 3.5 percent turnover tax will not go to 76.88, because the government ups the turnover tax to 6 percent. It’s more likely to become 77 or even 80 guilders. Boom!
The turnover tax has a history in St. Maarten that goes back to 1997 when the government of the Netherlands Antilles imposed a tariff of 3 percent as a temporary measure to attain real economic stimulus in the local economy.
Two third of the money thus collected did not stay in St. Maarten – it went to the central government in Curacao where, so the story goes, it simply evaporated. It inspired former Constitutional Affairs Minister Roland Duncan to say in an interview with Ultimo Noticia: “Curacao has ripped off St. Maarten for more than fifty years.”
In 2010, the St. Maarten Hospitality and Trade association (SHTA) lobbied for lowering the turnover tax to 1 percent per October 11 of that year – the day after St. Maarten became an autonomous country in the Kingdom. The SHTA wanted the government to abolish the turnover tax completely starting in 2011.
That did not happen. In 2011 the government increased the tariff from 3 to 5 percent. The underlying legislation set off the alarms at the SHTA because the government wanted to impose the turnover tax also on imported goods. The SHTA labeled the measure as “irresponsible” and noted that the cost of living could increase by 15 percent because of it.
During the previous summer the turnover tax remained a hot topic. Xavier Blackman, then commissioner of finance in the Executive Council of the Island Territory, said in July that an increase of 3 percent in the turnover tax would make a drop of 50 percent in wage taxes possible. Already then, the government was considering a shift towards indirect taxes. As an idea, this concept is still alive, but so far it has not become a reality.
Emil Lee, at the time president of the SHTA noted at the time that the turnover tax puts local suppliers at a disadvantage and he explained it like this: “If Le Grand Marché buys products from Prime Distributors, it pays turnover tax. When they sell those products, consumers would have to pay again, so you end up paying the same tax twice.”
The second problem stems from the fact that St. Maarten has no import duties. Under those conditions, Lee said, the turnover tax creates an uneven playing field. “Already now there is a 3 percent advantage to buying, for instance, a car in the United States. If the tax-rate goes up, that incentive becomes bigger as well. This does not only apply to cars and lumber, but to anything you can buy over the internet. That tax puts local suppliers at a disadvantage. That is why we are not a proponent of the turnover tax. Simplifying the system makes more sense.”
In 2015 the Social Economic Council (SER) advised against increasing the turnover tax any further. The SER noted in its advice that the increase from 3 to 5 percent in 2011 had an adverse effect and has cost the government 27 million guilders in revenue.
If you look back over the years there has hardly ever been a moment when the turnover tax was not controversial. But unless the government finds a way to bring home the bacon in different ways, the turnover tax is here to stay and this is why: in 2016 turnover tax contributed 132.5 million guilders to the budget and the projection for 2018 was 143.9 million.
Of course, that projection was made before Hurricane Irma changed everything. Now the government is looking at an incredible hole in its budget for the near future. That makes considering the introduction of a crisis tax as Aruba has done an almost irresistible temptation.
