VAT: Fiscal Priority

The recent elections in Aruba have led to a new government, and a similar situation is expected to occur soon in Curaçao. New governments ideally usher in new policies, including new fiscal policies. Although I do not know if there is any clarity on this matter yet, it is a good moment to reflect on a topic that I believe is important: the various forms of value-added tax in the countries and islands of the Caribbean Kingdom. These value-added taxes need urgent attention.

Two important observations can be made. The first is the rarity of each country having its own value-added tax system, which also differs from the Dutch VAT system. Additionally, a significant disadvantage of these systems is that the cumulative effect of value-added taxes occurs, which is undesirable.

Both points are certainly not new, but they are certainly undesirable, and it seems that with the emergence of the two new governments, it is a good moment to address this situation. Firstly, the countries should sit down together to develop a uniform form of value-added tax that is consistent across all territories of the Caribbean part of the Kingdom. The second point, of course, is which system is preferred. Personally, I believe that none of the current systems should be retained, as each of these systems leads to some form of cumulative value-added taxes. This is undesirable, as it disrupts the economy.

There may also be another political reason: it can be challenging to opt for the system of one of the countries. Therefore, a new system that does not apply to any of the countries is preferable. It stands to reason that this should be a VAT. This is also logical because the IMF recommended the introduction of VAT to both Aruba and Curaçao several years ago. It is particularly regrettable that neither of these countries has visibly taken this on board. The time that Curaçao has spent setting up a rather pointless scheme like Pillar 2 could have been better spent replacing the sales tax with a VAT.

Another reason is that a VAT system already exists in the Netherlands, which can serve as a partial basis for the new system. The advantage of this is that there are numerous experiences from which the legislators in the Caribbean Kingdom can draw and learn. Finally, it is relevant that a large part of the world has opted for some form of VAT. For various reasons, it would therefore be beneficial if the different types of sales taxes in the Caribbean Kingdom were abolished and replaced by a VAT, preferably designating the six islands as a VAT and customs area, possibly together with the European part of the Kingdom, namely the Netherlands. However, this last point could also face objections. After all, the Netherlands is bound by the European VAT directive, which may not necessarily be favorable for the Caribbean parts of the Kingdom. The directive imposes numerous obligations, etc., which are not always practical, especially for areas that are economically, socially, and culturally different. However, a VAT system for all Caribbean parts of the Kingdom would be a sensible route towards a better fiscal framework.

There are, however, a few caveats regarding a VAT. It is essential to apply as few exemptions as possible, as exemptions always lead to distortions and implementation issues. One important exemption that must be applied is for small entrepreneurs. They should not be burdened with VAT assessment. The form and level of this exemption also require considerable attention. In terms of form, it would be best to connect to a turnover threshold below which individuals are not subject to VAT. This is also important for the tax authority's execution, as it places enormous demands on capacity if numerous small entrepreneurs need to be audited. Audits usually yield little return. Capacity could be better deployed elsewhere.

Another point of concern is rate differentiation. It is often argued that basic necessities should be taxed at a lower rate than other goods. This would benefit people with low incomes. However, various studies show that this is not the case. Such income policy can be much better and thus more effectively implemented through income tax. Moreover, rate differentiation leads to distortions, higher implementation burdens, and discussions regarding so-called mixed supplies. This must be avoided.

Finally, an important point of attention is the refund system of a VAT: the entrepreneur can reclaim from the tax authorities the VAT charged to them. This carries a risk, namely that VAT is reclaimed for which there is no right. This can also lead to fraud, as was recently evidenced in a court case in the Netherlands: an empty company had claimed and received VAT refunds for an extended period. By the time the tax authorities

discovered that this could have been incorrect, hundreds of thousands of euros had already been disbursed. By then, the company had already been liquidated, and the tax authorities were left unable to recover the money. Occasionally, the underlying shareholder can still be pursued, but they often vanish as well. Therefore, there must be a robust control mechanism in place.

In any case, a common VAT for the Caribbean Kingdom is, in my opinion, a meaningful concept. Hans Ruiter – a tax specialist in Aruba – is currently conducting his doctoral research on this topic with me. It is interesting to keep an eye on this research while also getting to work on a VAT.

Peter Kavelaars is a Professor of Fiscal Economics at Erasmus University Rotterdam and Of Counsel at Deloitte Dutch Caribbean.