Special tax regime for the BES Islands

May 06, 2012 7:00 PM

Mr. Prem Radhakishun from Prem Radhakishun Advocaten at Amsterdam, talked about the new tax regime on the BES Islands on Radio 1 NL with Peter Kavelaars, Professor of Fiscal Economics at the Erasmus University Rotterdam, and Alex Brenninkmeijer, the National Ombudsman. DCLP took the liberty to report and summarize the interview and asked mr. Emile Steevensz of Certa Legal Tax Dutch Caribbean to comment on this issue.

In the Kingdom of the Netherlands are as of January 1^st , 2011 two different tax systems in force. Since the dismantling of the Netherlands Antilles, the Netherlands is also responsible for the tax system at Bonaire, Sint Eustatius and Saba, called the BES Islands. On January 1, 2011 the Netherlands introduced a tax regime for the BES Islands which is different from the regime in the Netherlands, by introducing a flat-tax regime and a 0% profits tax regime. A few reasons for this “simpler” tax regime are to reduce the tax burden for the residents, to make the tax regime transparent and to stimulate the local economy. 

The BES Islands residents are as of January 1^st , 2011 bound to pay a flat-tax of 30.4% on their income to the sum of 250.000,-- USD. This means that the residents are paying one tax rate regardless of the amount of their income, and only with two exceptions apply:
- Incomes above 250.000,-- USD will pay a flat-tax of 30.4% on their income to the sum of 250.000,-- USD and 35.4% on de sum above 250.000,-- USD; and
- Low incomes will pay a flat-tax of 0% but only if their income is below the threshold level of 10.000,-- USD.
For the record: the threshold level is recently increased to 10.000,-- USD, because the the BES Islands brought in more - 10 mnl USD - than budgeted: approx. 50 mln USD and received approx. 60 mln USD.

Furthermore companies will not have to pay profit-tax. The tax rate for profits out of business is set at 0%. However dividends are still bound to a tax rate of 5%.

One of the reasons for the introduction of the flat-tax regime is because the tax burden was on the high side for the BES Islands residents and entrepreneurs. Because of the introduction of the dollar and the import duties on goods from other countries, for example Curacao, life and goods become more expensive for the BES islands residents. Before the separation people could import goods from Curacao without paying import duties and if you are living on an islands you are highly dependent on import. Furthermore they wanted to introduce a tax system that is simple and transparent and easily to coordinate.
Note that on December 12, 2011, the Dutch Under-secretary of Finance has announced that Curaçao and the Netherlands have reached an agreement on trade and transit of goods from Curaçao to the Islands of the Dutch Caribbean. Both countries agree upon the fact that such transit must not be interfered by taxes.

Goods that come from third countries to Curaçao with destination the Caribbean Islands of the Netherlands, and the other way around, goods that come from third countries to the Caribbean islands of the Netherlands with destination Curaçao, will be transited under a custom procedure and can be transited to Curaçao or the Caribbean islands of the Netherlands without any custom or excise duties.
Furthermore both countries have agreed that no sales tax (omzetbelasting) or general spending tax (algemene bestedingsbelasting) will be levied on goods that will be exported from Curaçao to the Caribbean Islands of the Netherlands and the other way around. It is the intention of both countries to sign a convention on this matter before or on May 1, 2012 the latest. Both countries have also the intention to analyze whether goods produced in Curaçao or the Caribbean islands of the Netherlands can be imported without taxes on Curaçao or the Caribbean islands of the Netherlands.

Question: You could say that this flat-tax regime is attactive for high incomes, but maby not so much for the low incomes? One of the objections to this regime could be that low incomes pay as much as higher incomes and that this “advantage” is not in line with “The Dutch ability to pay principle” and therefor not quite fair? Do we abandon our principles on the BES islands?

Answers: According to circumstances on the BES Islands it appears that the difference between the income of its residents is not that big. The BES islands are thinly populated - approx. 20.000 people, the income distribution is not so great and there are only a few high incomes. So you could say that the theory of the tax burden should be distributed according to the individual's ability to pay is not in danger of being compromised

The flat-tax regime is also a some sort of exeperiment. If it works it will stimulates the economy and the development on the BES Islands. It could also be a future role-model for the tax regime in the Netherlands. However, the Second Chamber of the States general is still divided in opinion on this tax regime for the BES islands. Some parties are pro other are less enthusiastic. De facto, the much-debated flat tax is already a fact. We could say that the general view at this point is: “Let's see how it works”.

One of the other parts of the tax-regime on the BES Islands is the 0% profit-tax. We remark that the main rule is that companies are subject to Dutch corporate income tax (tax rate 25%) but that, on request of the tax payer, the BES tax legislation will be applicable (and thus the 0% tax rate on profits and the 5% dividend withholding) if certain conditions are met.
Reasons for this 0% tax rate is to increase the economic development by attracting investments and more economic activity. Naturally, the entrepeneur must be based on one of the BES Islands and the business have to take place on one of the BES islands. A post adres is not enough, those are bound to the tax rules of the Netherlands. The same rules apply investment companies. 

As said the tax rate on dividends is still set at 5%. What if people want to transport their profits, after paying taxes, to the Netherlands? A separate tax system for the BES islands means a risk of double taxation or double exemption? To avoid this double taxation two rules has set up: legislation providing for the prevention of double taxation between the Netherlands situated in Europe and part of the BES islands and legislation providing for the avoidance of double taxation between the BES islands and other countries. So in general there will be no double taxation.

A 0% tax regime on profits seems to be very attractive, but are there also disadvantages? Yes, there are. Because of the 0% tax rate it is not advantageous for other countries to close a tax treaty with the BES islands. In order to stimulate the economy, tax treaties are very important for increasing business traffick between countries. For example The Netherlands has approx. 90 tax treaties! 

This is problem not only for the BES Islands, but alsof or Curaçao, Aruba and Bonaire. Let us begin to state that most of the tax treaties the Netherlands has to avoid double taxation contain the possibility that those tax treaties can be extended to the territory of the Netherlands outside Europe. None of the tax treaties the Netherlands has, have been extended to the territory of the Netherlands outside Europe.  Furthermore, all the Islands in the Dutch Caribbean have the possibility to enter into tax treaties with third countries. Curaçao, for example, has a tax treaty with Norway. The problem for most other countries is that the tax system of the BES Islands as well as Curaçao, Aruba and St. Maarten, differs from the Dutch tax system, though there are also similarities. Furthermore, the territory of the Netherlands in the Caribbean bears the burden that it was considered a ‘tax haven’ until 2001 and many countries, wrongly, still look upon us as such. The former Netherlands Antilles are only on the OECD white list since 2009. These, we think, are the main reasons why the Dutch tax treaties are not extended to the BES Islands, Curaçao, Aruba and St. Maarten.

As mentioned, the islands can enter into tax treaties themselves. This proves to be a very difficult task. First of all there is the question whether there is any double taxation of income or profits. Other reasons to enter into a tax treaty may be the reduction of withholding taxes on dividends, royalties and interest and of course the procedure to exchange information. This last item can be covered in so-called Tax Exchange and Information Agreement (TEIA) without entering into a full tax agreement to avoid double taxation. The former Netherlands Antilles have entered into a large number of TEIA’s which, after the separation, are also applicable on the BES Islands. Also economic motives (trade, banking and finance, employment mobility) can be motives that countries enter into tax treaties.  

So, I (E. Steevensz) think it is not just the 0% profit tax that makes it difficult to enter into tax treaties, but the fact that the 0% does not seem to cause any double taxation except for the withholding tax on dividends, is of course a factor of importance. Countries may be afraid that activities and corresponding profits are shifted to countries with a lower tax rate. But contrary to other countries that do not levy a profit tax, the BES islands levy a dividend withholding, so the risk of tax avoidance seems to be avoided or at least reduced. The 5% seems to be competitive in this respect. 

On the other hand, enterprises on the BES-islands that are subject to Dutch Corporate Income Tax (“CIT”) should not be denied treaty protection under the Dutch tax treaties. We have obtained a letter from the Dutch Ministry of Finance that treaty protection is available in case a Dutch BV has its effective management and control in the BES islands and is taxed under the rules of the Dutch CIT. It seems to us that this should also be the case if the company is established under BES law and is subject to Dutch CIT.  Of course the treaty partner may think differently. 

How about goods that are produced on the BES Islands but are transported to Europe? The BES islands are not a part of the European Union, so that legislation is not applicable for the BES Islands. Of course that situation has crossed the minds and in line with stimulating and increasing the economic activities there is made a small exemption or rather a small part of the European Union legislation is made applicable to the BES Islands: no duties to be paid on goods produced on the BES Islands and which are exported to the European Union. 

Still not all heavy tax presures are taken away. The so called consumption-taxes (algemene bestedingsbelastingen) are still high. The prices of the Islands goods became higher, in contrast to the current incomes, they are remaining the same. Would it not be better to reduce the tax on income and to increase the tax on consumption? And is it not also fair to tax the consumption of people more than their income?

This subject is still pending and is also high on the agenda of the State Secretary of Finance of the Netherlands, mr. Weekers. There are different possibilities conceivable. No conclusions are te be made yet, to be continued…

At last, what do the BES residents themselves find of the new system? The National Ombudsman has investigated the state of minds of the residents and the consequences of the new regime to them. The changes on the BES islands overwhelms a bit. It takes time for people to cataloge the benefits and disadvantages of the new system(s). The National Ombudsman has distributed leaflets with information about the new tax system and opened a hotline for residents. Until today they haven’t had much complaints about the system. Overall, so far so good, let's see how it works…. Enough material to think about. To be continued.

For the live interview please go to: radio 1

In case of anyinaccuracies or incorrect quotes please contact our redaction at e: dutchcaribbeanlegalportal.com

For more information about this subject: http://www.rijksoverheid.nl/onderwerpen/caribische-deel-van-het-koninkrijk/fiscaal-stelsel