Dear Editor,
It is positive to see ongoing discussions for tax reforms to change the Sint Maarten tax landscape. These changes are long overdue. Though the barrage of information may be confusing for professionals and laymen alike. As Marco Aalbers correctly mentions, the different taxes are intertwined and so are the proposed reforms. Therefore, a stand-alone view per tax leads to an incomplete and incorrect picture of the impact. Which is notable in the potential enactment of a Dividend Tax and the recently proposed profit tax adjustments.
We will now focus on the Dividend Withholding Tax (hereinafter Dividend Tax). Based on the remarks of the Minister of Finance it seems that this refers to the introduction, or actually, the enactment, of “The national ordinance on Dividend Withholding Tax 2000”.
Budget
For budget purposes the Minister estimated a budget by comparing the Dividend Tax with the Yield Tax (in Dutch: “opbrengstbelasting”) on the BES-islands [Bonaire, St. Eustatius and Saba – Ed.]. In first instance this seems as a fair comparison as the Yield Tax can be regarded as a form of Dividend Tax, though with a broader base, as foundations (“stichtingen”) and special purpose vehicles (“doelvermogens”) are included.
Next to that, the Yield Tax was introduced to replace the Profit Tax on the BES-islands. The Dividend Tax is an addition to the already existing tax landscape. In contrast to the Yield Tax, the Dividend Tax is a pre-levy for the local Income Tax and Profit Tax. Therefore, in these situations, it will not lead to additional tax revenue for the government. In this regard, the comparison by the Minister with the wage tax does makes sense, as it also acts as a pre-levy.
In general, Dividend Tax is not levied (or levied against a zero percent rate) in fiscal unity situations nor when the participation exemption applies (locally). Also, and this may seem obvious, Dividend Tax is only taxed on dividends. Distributions from, for example, permanent establishments (branches in layman terms) and private fund foundations are therefore out of scope of the Dividend Tax.
Mentionable exemptions are, (i) foreign shareholders with a 25%+ shareholding as included in the proposed legislation of 2000 and (ii) exempt companies. Also, lower rates may apply within the Kingdom or in case Double Tax Treaties are in place. In short, foreign shareholdings (no branches) with a shareholding of less than 25% will potentially lead to additional tax income. Or not?
Transparent entity
Wait, what about the announced introduction of the transparent company? In short, if you qualify for this regime, a legal entity is treated as a partnership. Legal entities with foreign shareholders that choose this treatment can potentially recognize a permanent establishment in Sint Maarten instead of a legal entity. As mentioned above, permanent establishments are out of scope of the Dividend Tax.
As mentioned earlier, the tax landscape is intertwined. In this case the potential additional budget created can be undone with the introduction of other new legislation.
Timing
It is correct that a timing difference, pulling tax payments forward, does occur. The question is: how much forward. In general, dividends over a year are established during the finalization of the financial statements, which happens in the following year. This is also recognized by the Minister, though interim dividends may occur. The Profit Tax deadline is 30 June and might be extended to 31 December. In practice it often occurs that the financial statements are only finalized after 30 June and even as late as the end of December.
Simplified example for Profit Tax (the receiver and distributer of the dividend are local legal entities), in case the financial statements are finalized by the end of March, which is early and is at the same time that the provisional profit tax returns must be filed. In this case, it is expected that the Profit Tax return will be filed before 30 June, so the timing impact is three months (ignoring the provisional return). Generally, you have two weeks to pay and file the Dividend Tax return, so effectively you gain two and a half months. Of course, it can be that the Profit Tax return is filed in December, in that case you gained eight and a half months (ignoring the provisional return).
In other case, for example within the Income Tax where the payment deadlines are broader, the time gained may be impactful.
Local impact
The Minister mentions that there is no/minimal local impact expected with the introduction of a Dividend Tax. Which might be correct for the total tax burden in case the Dividend Tax acts as pre-levy. But, as the Minister mentions, the legislation has a positive timing and liquidity impact for the government, therefore it obviously leads to negative timing and liquidity impact for local dividend receivers.
The example the Minister gives is correct at the distributing company level. Though not on the receiving end of the dividend distribution the (local) receiver does have the negative liquidity and timing effect.
Next to this, filing and paying a new tax leads to an additional administrative burden for (local) taxpayers and depending on the filing deadline (normally two weeks, which is short) to an increased penalty risk.
0% vs exempt (compliance)
Though the impact may seem the same, the effects of a 0% tax rate and an exemption can be different. If exemptions apply, normally no Dividend Tax returns should be filed when dividend is distributed. When zero percent applies then a Dividend Tax return should be filed. In the proposed legislation exemptions are included.
Though as the Minister introduces this legislation also to enhance compliance, it might be considered to include the zero percent rate. Though this will significantly increase the workload at the Inspectorate of Taxes and potentially lead to confusion for the taxpayer.
Even without the zero percent rate, the new tax will lead to additional work for the tax authorities. Ignoring the timing, it is questionable if the Dividend Tax will lead to significant additional tax revenues and whether these are higher than the additional cost created (for both the taxpayer and Inspectorate of Taxes).
Shifting away from dividend distributions
Additional considerations might be given to how taxpayers will react. Though, certainly not a reason to not introduce new taxes, however these effects should not be ignored. Some obvious examples to mitigate Dividend Tax are:
1. Instead of dividend distributions, loans might be considered.
2. Create a transparent company (or a permanent establishment).
3. Utilize other tax facilities.
4. Instead of distributing dividends, increase salary.
While some of these options may just shift the distribution away from the Dividend Tax to other taxes (potentially against lower rates), others may have adverse timing effects or lead to out-of-scope events.
Keep it simple
The national ordinance on Dividend Withholding Tax 2000 consists of 37 articles. By comparison, the Aruban Dividend Tax only consists of 11 articles (36 at introduction). This difference can be partly explained by the fact that the accompanying legislation in Aruba has been adjusted accordingly. For both business and Inspectorate of Taxes it would be beneficial to simplify the proposed legislation.
Going forward
After reading the above, you may have gotten a negative impression about introducing a Dividend Tax. This is incorrect. A Dividend Tax may have a place in the Sint Maarten tax landscape, amongst others for generating additional taxable income from foreign investors, for improved compliance and for timing purposes.
Declaring outdated legislation applicable, which has been written while the Dutch Antilles still existed and the transparent entity was not yet considered, without updating this legislation, diminishes effectiveness (yield) and disturbs the existing “balance” within the total tax system.
In order to keep calling the application of Dividend Tax moving forward, some reconsiderations are necessary in the author’s view. Luckily, it has been decided to postpone the introduction. So productive discussions can be started to improve the legislation.
Other questions to consider are, is the timing right or should we prioritize other changes first and give the Inspectorate of Taxes and business community ample time to prepare for changes.
In general, introducing new tax legislation does not have an immediate positive effect on tax compliance. Especially if other pillars for tax compliance do not yet have a solid foundation and contradicting legislation (Transparent Entity) is introduced almost simultaneously.
Also grandfathering rules should be considered. This to ensure that there is no doubt how “old” retained earnings, which originated before the introduction of the new Dividend Tax, should be treated. The original legislation for declaring the Dividend Tax applicable contains a one-year grace period to allow companies to upstream these retained earnings free of Dividend Tax. This might be rather short and hurt the liquidity of a company.
We must also consider the recent critical Audit Chamber report regarding the ex-officio assessment process, recent remarks made by COCI, and that (as we understand) the tax authorities are already understaffed. Simplifying the tax landscape will probably have a greater positive effect on compliance and revenue generated, while positively impacting the local businesses. Simplifying the tax landscape will also benefit the Inspectorate of Taxes and will give relief to their workload and can help aligning their internal processes, one of the concerns raised by COCI.
Stefan van Riezen,
Tax Adviser at Grant Thornton Sint Maarten
