This article has been updated. It was originally published on 16 May 2023
Aruba intends to introduce a turnover tax on imports as from 1 August 2023—the effective date has been pushed forward from the originally proposed 1 June. The main reasons for introducing a turnover tax on imports are that: the tax is simple; it will not increase the expenses of entrepreneurs; it will create a level playing field with online platforms; and it will provide the revenue necessary for Aruba to repay the COVID-19 loans received from the Netherlands.
The current turnover tax regime is comprised of three taxes: (i) a 2.5% tax on company turnover; (ii) a 1.5% tax on additional projects; and (iii) a 3% destination tax (for general sickness insurance), resulting in a total tax rate of 7% (for prior coverage, see the article in the October 2022 issue of Indirect Tax News). Turnover tax is levied on the supply of goods and the provision of services in Aruba, with the same base applying to all three taxes. However, it is no longer completely accurate to use the term “turnover taxes” because:
- Tax is also due by individuals renting out real estate (unless the property is used as a dwelling by a tenant);
- Due to the reverse charge rule introduced on 1 January 2023, if a foreign service provider provides specific services to a local entrepreneur, the local entrepreneur becomes the taxpayer for the turnover taxes due by the foreign service provider; and
- As noted above, the 7% turnover tax on imports is intended to apply to the import of all goods by both entrepreneurs and individuals. The taxable base will be the customs value of the goods.
Overview of turnover tax on imports
The turnover tax on imports means that Aruba’s turnover tax will no longer be an entrepreneurial tax only on turnover, but also a tax due by individuals and on some expenses of local entrepreneurs as a result of the reverse charge.
It is intended that local entrepreneurs will be allowed to deduct the turnover tax paid on imports to the extent “trade goods” are imported. Trade goods are defined as goods that are purchased and then sold without any further handling or modification. It should be noted that, in the Aruba tax authorities’ presentation of the tax on imports to parliament, the definition of trade goods included goods that are processed, used or assembled to make a new trade good in the enterprise of the entrepreneur. However, the additional language was removed in the draft presented to parliament, which creates some uncertainty about whether trade goods exist in certain situations.
For imported goods that are not considered trade goods, the cost of doing business will increase by 7% of the customs value of the goods, thus implying that the cost of doing business will increase for entrepreneurs, causing an upward push on prices and possibly undercutting one of the rationales for the turnover tax on imports. It is unclear why the government has not chosen to allow local entrepreneurs a full deduction of the turnover tax paid on imports, which would be a prelude to the introduction of a full-fledged VAT system and would imply that entrepreneur expenses would not increase. Furthermore, it is intended that input tax exceeding output tax in any month would be paid out by the tax authorities once a refund decree is issued; however, based on current practice, these decrees are not always released in a timely manner. Since the law does not provide a statutory period for the issuance of a refund decree and taxpayers cannot object to or appeal the absence of a decree, the payout of refunds will likely be protracted, which could create cash flow issues and give rise to financing expenses for entrepreneurs.
The turnover tax on imports should level the playing field with online platform operators because individuals and businesses will be less inclined to avoid direct imports (of trade goods) simply because no tax would be due. What the government overlooks, however, is that because of Aruba’s small size, many goods are not available in the variety and quantity needed so (direct) imports will continue to fill that void, and because the taxable base is customs value rather than sales value, if goods are less expensive abroad than locally, (direct) imports will still occur.
BDO in Aruba