Implementation of new VAT regime postponed
Citing recent political events and inflationary pressures, Aruba’s prime minister announced on 19 August 2022 that the planned introduction of a VAT regime to replace the turnover tax regime will not take place on 1 January 2023. While no revised implementation date was announced, it is likely to be 1 January 2025 or 2026. Subsequently, on 30 September, the minister of finance and culture announced that the turnover tax rate will be increased as part of the 2023 tax plan.
Aruba, whose primary source of income derives from tourism, was one of the countries hit hardest by the COVID-19 pandemic. Tourism came to an abrupt halt on 13 March 2020, with the borders gradually re-opening for tourism starting on 1 July 2020. The evolving COVID-19 virus and measures taken by governments worldwide to attempt to mitigate the economic impact of the pandemic had a severe detrimental impact on travel and tourism and, therefore, on Aruba’s finances.
As Aruba is part of the Dutch Kingdom, the Netherlands agreed to provide financial support in the form of special COVID loans to help lessen the economic impact of the pandemic. However, these loans did not come without conditions: in addition to a required reduction of government expenses, the Netherlands requested that Aruba become more efficient in collecting taxes and recommended the introduction of a VAT (or similar indirect tax) with a standard rate of at least 12.5%.
Aruba currently operates a turnover tax regime that is comprised of three taxes: (i) a 1.5% 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 combined tax rate of 6%. 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. The government has now decided that, in lieu of the introduction of the VAT regime in 2023, the 1.5% turnover tax rates will be increased to 2.5%, which will bring the total combined rate to 7%.
Stakeholder sessions on the VAT regime
The Aruba government, via the tax department, launched stakeholder sessions in February 2022 to provide the first insights into the overall tax reform plans—including the introduction of VAT as from 1 January 2023—but did not release any draft legislation (for prior coverage, see the “Bytes” column in the April 2022 issue of Indirect Tax News). The following outlines of the VAT regime were addressed during the stakeholder sessions:
- Two rates would apply:
- A standard rate at a maximum of 18% on supplies of goods and services (although a lower standard rate of 14% was also discussed in a later session); and
- A reduced rate of at least 6% on food and drinks (excluding alcohol).
- Exports would be exempt or subject to a 0% rate.
- Small entrepreneurs (i.e., those with annual revenue not exceeding AWG 84,000) would be exempt.
- Exemptions also would apply to the education and medical sectors, banks (foreign exchanges only), insurance, utilities and hotels (the latter with respect to room revenues); and it is possible that the exemptions could be expanded to all exemptions currently found in the turnover tax legislation.
- An “offset system” would apply under which excess input VAT could be carried forward for offset against the VAT due in the following period, but VAT refunds would not be issued.
- A 6% insurance tax would be introduced (as insurance would be exempt under the VAT regime).
Although the government claimed that the VAT plans were in line with a 2018 Technical Assistance Report prepared by the International Monetary Fund (IMF), stakeholders were of the opinion that was not the case. For example, the IMF recommended a single flat 10% rate on all domestically supplied goods and services (and not exports), with no or few exemptions and thus a broad base (including utilities, such as water and electricity, which are currently exempt from turnover tax).
Stakeholders also were of the opinion that the planned effective date of the VAT regime on 1 January 2023 did not leave adequate time for businesses to prepare (the IMF recommended a longer period of about 18 months before the regime was implemented), and the inflationary effects of the regime were underestimated (2.5% per the Aruba government, whereas stakeholders estimated at least 10%). Due to international market conditions, Aruba already imports inflation mainly from the U.S., and additional inflation due to VAT imposes too much of a burden on consumers and businesses. Finally, other changes proposed by the government in conjunction with the new VAT regime would significantly increase the cost of doing business, again causing an upward push on prices.
As noted above, the government has now decided to put the VAT plans on hold, and instead increase the current turnover taxes. Since the turnover taxes charged by entrepreneurs are part of the taxable base, the actual increase in these taxes would be 1.144% (with a 1% increase). Since the turnover taxes are cumulative, tax due would exceed 15%. And because turnover taxes are included in the price (and not added to the price as in the case of a sales tax), all prices may have to be increased for the third time in three years, leading to an even greater administrative burden and more expenses for entrepreneurs.
The majority of stakeholders, in principle, favour the introduction of a simple VAT system (i.e., a low rate and a broad base with few exemptions). However, at this stage, the following issues remain unresolved, both in the context of the new VAT regime and any increase in the turnover tax rates:
- Whether the VAT regime is on hold permanently or only on a temporary basis (and introduced in 2025 or 2026);
- Whether turnover tax will no longer be part of the taxable base;
- What are the additional revenue estimates from an increase in the turnover tax rate;
- The inflationary effect of the increase in the turnover tax rate; and
- Steps the tax department is taking to reduce expenses to improve compliance with turnover taxes, since compliance is relatively low.