"We have attained the status as Country St. Maarten. We should all celebrate this momentous accomplished feat. And we must also understand that as a new country, we must now be capable and efficient in financing the needs of our Government and our communities. Nobody likes paying taxes, particularly in times of economic hardship. But as St. Maarten emerges from the global crisis and builds itself as a new nation from scratch, new structures must be adopted and difficult choices must be made.
Balancing the budget
Since the emergence of the new Government into office, vigorous efforts have been put into place to balance the 2011 budget, which was initially prepared by the former Government. Numerous issues concerning the budget have been identified, and have revealed the 2010 budget to be not as solid as it was portrayed. For example, one major issue was the use of advanced portions of the Netherlands Antillean's assets ("boedelscheiding") of Nafl. 15 million to cover the gaps in the 2010 budget. This was an incidental benefit, therefore it should not have been used for the budget deficit. In summation all these 2010 budget issues that had to be addressed were the equivalent of Nafl. 47 million. When St. Maarten wanted to make the 2010 budget as a Country budget, it was stopped dead in its tracks and St. Maarten had to revert to an Island Territory budget which was artificially balanced. This would have helped to prepare St. Maarten for a transition into country status which was illogically (especially from an administrative perspective) planned for 10/10/10.
It must be stated that the basic costs for running a country are much higher than running an Island Territory. And this is partly due to the number of added tasks as well as agreements made with the Netherlands that the new Government must deal with. The costs associated with these new tasks were about 30% higher than anticipated. The former Federal Government failed to provide a sufficient budget and did not make the necessary funds available to invest in the workforce, knowledge base and infrastructure on St. Maarten; they also failed to address the operational costs properly. Our resolve in dealing with this insufficient resource scenario had to unavoidably be to raise the annual budget. Only after resolving the inherited burden from the previous Government, we could put into place new plans of action we see as vital for good governance, which rightfully increases our costs. The sum of all the costs for the new Government of putting new plans to work, deal with the old burden, and run the country for 2011 is of Nafl. 445 million. Please note that the new policies of the current Government are not yet incorporated in this emergency budget of 2011.
The Government put forward great efforts to improve public expenditure management by taking cost-cutting measures, such as implementing a cost of living increase of 2% in 2011 and 3,3% in 2012 instead of increasing straight to 5,3% in 2011, which results also in a decrease in back service debt for the pension premiums associated with this cost of living increase over 2011. Despite these efforts, there is still a budget deficit which can only be erased by income generating measures. Due to the short timeframe to submit a balanced budget by 15th December this year, the Government must adopt emergency measures which can generate a substantial amount of revenue and be implemented by January 2011. We have considered plans of action to introduce new taxes, such as sales tax, gaming tax or duties on cigarettes and alcohol. We have also considered changing the whole tax system by shifting from direct tax to indirect tax. These measures are certainly worth looking into, but at the moment have proven to be not feasible within the given time frame. Furthermore, other suggestions like increasing the time share tax or abolishing certain tax exemptions to broaden the tax base will not generate the amount of revenue the Government has planned for. Thus, in order to balance the budget, an increase of the Turn over Tax (ToT) with 2% is a necessity.
The answer to the question of why the Government did not start earlier in making the necessary tax reform, is that the competence and authority to make tax policy and write tax legislation were in the hands of the former Central Government. Only when after 10/10/10 and attaining country status, that responsibility has been transferred to St. Maarten and only then were we able to establish our own Department of Fiscal Affairs within the Ministry of Finance. Furthermore, the previous Federal Government of St. Maarten did not submit any proposals or requests to the former Central Government to change the tax legislation for St. Maarten. Should that had been done, we wouldn't likely be in the present urgent position where we are forced to take measures such as the increase of the ToT. But now is not the time to look back, we must approach the future with diligence and positive action. An enormous challenge is put in front of our young nation and failing to tackle the budget deficit quickly will lead to serious complications and failures which could result in the intervention of the Kingdom Government with higher supervision. This would be a catastrophic result, one none of our people desires and most certainly our new Government.
Our communities have expressed their concern and have raised valid questions with regard to the increase of the ToT. They fear that this measure may have an effect on the buying power of the consumers, in particular those who already have little to spend. We have addressed these concerns with the deserved attention. That is why the Government has introduced particular exemptions for basic commodities for goods such as sugar, milk, eggs, baby food, rice, beans, potatoes, grain and flour, which are currently taxed with 3% ToT. These mentioned items among others of vital importance will be completely tax exempt. This approach will cost the Government approximately Nafl. 10 million on an annual basis, but it is a necessary investment that must take place in order to compensate for the increase of the tax burden.
Our current tax situation
As in many democratic countries, the tax system of St. Maarten is based on the principle of voluntary compliance. In other words, this system relies on individuals and entities to adopt their responsible position and honorably to calculate their tax liability correctly and successively report their income freely and voluntarily, followed by filing a tax return on time. Unfortunately, many of our inhabitants and businesses misinterpret the definition of voluntarily and feel it is optional or that the tax law doesn't apply to them. While some of our inhabitants and businesses honor their responsibilities because they understand their role in society and the necessity to pay the costs of our common goods and our mutual well-being, there are many others who are avoiding their duties mostly due to low tax morale, incomprehensible tax system and weak tax administration enforcement.
In the past, the Federal Government failed to implement the necessary steps to improve tax compliance, mainly because as an Island Territory of the Netherlands Antilles, St. Maarten received the needed funds from the Netherlands to pay the costs of the public expenditure. Furthermore, some politicians have even used this lack of tax enforcement as a selling point and presented St. Maarten as a tax haven in order to attract foreign investors.
The times have changed and St. Maarten no longer has the luxury to ask the Netherlands to bail us out or give us a loan every time we are running out of funds. Becoming a country means we now have to act with pride and acknowledge and assume the responsibility of our actions, decisions and policies also to encompass the obligation to report, explain and be answerable for the resulting consequences of those actions, decisions and policies. Accountability, transparency and good governance are the key factors and foundation to build our young nation. Now is the time to finally do something about tax evasion practices (efforts not to pay taxes by illegal means) and bring justice to those citizens and businesses that have consciously avoided paying their taxes, and fairness to those who have been in compliance. As I have been quoted saying: "For many decades, St. Maarten has been home to many form all over the world, and has provided countless economic opportunities for all of its inhabitants. Now St. Maarten as an emerging country in challenging times needs its inhabitants to be resolute, resilient, steadfast and contribute back to its development into a band new nation."
Our vision and approach
The Government has established several task-forces to respectively reform the tax system, update the database of taxpayers and efficiently enhance the enforcement capacity of the tax administration. With this collaborative approach we will tackle the non-compliant tax behavior and ensure that all our citizens and all our companies are paying their fair share. I realize that this issue has been paid much lip-service in the past, but it simply has to be done now, and it will be done under this administration.
Many empirical studies and international country surveys on the growth of the informal economy have concluded that the direct tax burden, the complexity of tax legislation and the lengthy and complex administrative procedures are the key factors discouraging individuals and businesses to operate in the formal sector. Our current tax system, which is inherited from the former Netherlands Antilles, is quite complicated and has a narrow tax base and relatively high direct tax rates (e.g. Wage tax, Income tax and Profit tax).The existing tax system is also full of loopholes, designed by clever well-connected lobbyists on behalf of well-heeled interests and individuals. It's a tax system that makes it too easy for some citizens and businesses to dodge their responsibility, while ordinary St. Maarteners pick up the slack. It's a tax system that makes it possible for tax payers to hide behind legal structures associated with the neighboring islands and using intermediate companies of their own as billing companies to create false invoices in order to lower their tax liability and, as a result, keeping the prices of the products in St. Maarten artificially high.
With the tax reform, the Government is going to put an end to these harmful tax evasion practices, closing the loopholes and making it more profitable for companies to create jobs here in St. Maarten. By doing so, we will save taxpayers millions of guilders: money that can be reinvested in St. Maarten and reduce the budget deficit, cut taxes for our businesses that are playing by the rules, provide relief for hard-working families and, most of all, restore fairness to our tax code by helping ensure that all our citizens and all our companies are paying what they should. The new tax framework of St. Maarten will be simple, efficient and fair.
To ensure that our tax administration have the necessary tools to enforce the law, we will put in place an unprecedented effort to upgrade and strengthen our enforcement capacity. Compliance strategies, such as penalties, audits and prosecutions will be applied consistently on an escalating basis of severity. Further steps are being taken to reach a level of transparency in which the database of taxpayers will be as accurate and complete as possible through exchange of information between the tax administration and other governmental and semi-governmental entities like the Chamber of Commerce, Immigration, Census, Cadastre and GEBE. To combat international tax evasion schemes, St. Maarten will be working jointly with the tax authorities from the neighboring islands by requesting their assistance in the assessment and the collection of taxes, but also by seeking their tax data regarding, among others, bank accounts, beneficial ownership, companies and properties of our taxpayers to cross-reference with our data.
Joint effort
Achieving financial health for St. Maarten through raising the tax burden on the people hasn't been an easy choice. It is only fair that the citizens and businesses who pay taxes, demand a more responsive and accountable government and transparency in the way public resources are raised, allocated and managed. Establishing a dialogue between the Government, our people and business community to understand each other's standpoint and expectations, is of the utmost importance and at the top of our list. In the tax reform process, the Task-Force Tax Reform will be inviting the representatives of the business community, social partners, interest groups and other stakeholders to share their vision on the possible tax framework of St. Maarten. A special forum will also be created on the website of www.sintmaartengov.org where all citizen of St. Maarten can post their valued ideas and suggestions regarding the ideal tax system.
Becoming a country in these challenging times is not an easy task and it demands our joint effort, solidarity, mutual understanding and unfortunately also some sacrifices for the greater good. As Martin Luther King declared, "The ultimate measure of man is not where he stands in moments of comfort and convenience, but where he stands at times of challenges and controversy."
