Having discussed this in the past and considering that this topic has been broached by a couple of other persons in the public domain, I would like to again bring this topic of matter up.
It is the issue of the high-profit tax on our island.
What is profit tax or corporate tax?
A corporate tax is a total tax applied to the net profits of a company, i.e. gross profits less expenses, depreciation, operation costs, and other costs.
The global average corporate tax rate is 23.64% as per Investopedia. St. Maarten (Dutch) has a rate of 34.5%. Whilst our neighbouring islands such as Aruba and Curaçao have a corporate tax of 22%. In addition, a few countries in the Caribbean region such as Anguilla, Bahamas, Bermuda, Turks and Caicos, and the Cayman Islands do not charge a corporation tax at all.
This structure perhaps assists these islands mentioned above in being more appealing to many entrepreneurs and US businesses. Combined with a simple structure for setting up offshore businesses, they have successfully become destinations for this service.
Presently, following a decade of debate, 142 countries recently agreed to the first major overhaul of the international tax system in a century.
With support and under direction from the IMF (International Monetary Fund), multinational companies which have a significant business, but few or no local operations, would not be allowed to allocate profits to countries in absence of physical establishments, thus reducing their dependencies for shell corporations in 0% tax jurisdictions.
The IMF has also suggested a global minimum effective tax rate of 15%, therefore putting pressure on 0% tax jurisdictions and reducing the need for corporations to hold shell companies.
Conversely, a very high corporate tax, like in St. Maarten, encourages profit shifting to lower tax jurisdictions. Considering our island which has a higher percentage of small businesses, a lower profit tax rate will encourage businesses to report profits legitimately.
Reducing the profit tax will boost new investments as a larger book profit makes a business eligible to get financing from a bank more easily. It also reduces the need for a business to use more creative accounting thus letting the money stay in the system.
Higher financing and more business expansion leads to wage growth and a higher GDP. It would be worthwhile to see what our island’s profit tax collection stands at 34.5% or in other words how many companies are actually profitable and to what extent?
All in all, we have been immensely stagnant on putting a tax reform into proper action. The positives of reforming our tax system outweigh the negatives we are currently facing. A reduced rate would enable more companies to be included in this ambit of “profitable” companies, which in turn would broaden the base of the collection.
If our neighbouring islands can progress over the years, what is stopping us?
Viren V. Kotai