Introduction
Amongst others in order to improve the investment climate in Aruba, the Aruban Government announced and applied the so-called ‘beneficial policy’ (begunstigend beleid) as per June 28, 2013.
In relation therewith, the bill regarding the Establishment beneficial policy; introduction payment on declaration Profit Tax (‘Vastlegging begunstigend beleid; invoering voldoening op aangifte winstbelasting’), (‘the Bill’), was recently presented to the Aruban Parliament. The Bill proposes certain changes to the Aruban Profit Tax. This article discusses these changes.
The proposed changes to the Aruban Profit Tax
The Bill proposes the following changes to the Profit Tax:
▪ The taxation of Profit Tax will switch from a taxation system based on assessment, to a system based on declaration;
▪ The removal of the IPC-regime, with a transition period;
▪ A 10% Profit Tax and a 0% Dividend Tax will apply to a limited number of activities mentioned in the law (‘qualifying activities’);
▪ Special Profit Tax rates will be introduced for resorts (hotels);
▪ Introduction of a tax facility for timeshare resorts to form a tax-free reserve for maintenance fees;
▪ Introduction of the deduction of interest due on loans con-cluded for the purchase of a local company;
▪ The investment allowance is (temporarily) reintroduced;
VAS
VAS (‘Voldoening op Aangifte Systeem’), introduces a system of taxation based on declaration instead of on assessment. The main purpose of VAS is to eliminate the systemic backlog in the imposition of Profit Tax assessments by the Aruban Tax Department. The delay is ex-acerbated even further by the many objections filed by taxpayers against Profit Tax assessments. Aruba is losing millions in Profit Tax revenues owed by companies that are not registered in Aruba for work performed on projects that have since been concluded or, by companies that have since been dissolved. This process has an adverse effect on Aruba’s financial planning.
Taxation on declaration
Under this regime, the taxpayer declares and pays the Profit Tax at the same time. The taxpayer, does not receive tax assessments, whilst the Tax Office immediately collects the taxes.
The declaration and payment should be done at the latest on the 31st of May following the ending of the fiscal year on December 31st (5 months).
It is noted that the filing period of 5 months is shorter than the 6 months filing period granted in other Aruban Ordinances for filing financial statements, e.g. the Ordinance on the oversight of insurance companies, and the Ordinance on the oversight of loan institutions (Landsveror-dening toezicht verzekerings-bedrijf, Landsverordening toe-zicht kredietwezen).
If the taxpayer is not able to timely comply with his filing obligations, he may request a filing extension. A maximum ex-tension of 6 months is proposed, which is half of the currently applicable filing extension for tax declarations, i.e. 12 months ex Article 9 (1) General ordinance on taxes (Algemene landsver-ordening belastingen).
The taxpayer would however still have to pay a provisional amount that is (at least) equal to the amount paid on the basis of the most recent final declaration. The provisional Profit Tax is remitted on the basis of a pro-visional declaration.
If the taxpayer is of the opinion that a lesser amount is owed in Profit Tax, it is up to him to file the final declaration as soon as possible and receive a tax return.
The tax return is granted within 6 months of the filing of the final declaration. The taxpayer may file an objection against the decision of the Tax Department.
VAS will come into effect at enactment of the Bill and will apply to the 2014 fiscal year onward. As a result of the transition from a system based on assessment to a system based on declaration, the taxpayer may still receive assessments relating to fiscal years prior to 2014.
Furthermore, in some cases the Tax Department retains the right to impose an assess-ment, e.g. in case a company is dissolved, or ceases its activities or, in regards to the profits of a company that is not vested in Aruba and only conducts business here temporarily.
Other Dutch Caribbean Islands already have a VAS system in place. The experiences are generally positive. In Curacao, for instance, it appears that filing extensions are only requested by a fraction of tax-payers.
The IPC-regime
Under pressure of the OECD, Aruba amended its tax regime.
As a result, certain tax facilities were cancelled. Subsequently, Aruba introduced the so-called IPC Corporation (AB 2002, no. 123, Landsverordening divi-dendbelasting en imputatie-belasting) which was meant to replace the cancelled tax facilities (the IPC-regime).
Under this regime, the tax-payer pays the Profit Tax at the regular rate (as of January 1, 2016: 25%), followed by a restitution, ultimately resulting in an actual combined Profit and Dividend Tax rate of 2% – 12% (referred to as the ‘imputation system’).
The IPC-regime is not popular amongst taxpayer and is only scarcely used. Therefore, the Bill proposes to replace the IPC-regime with a 10% Profit Tax and 0% Dividend Tax (further dis-cussed hereunder).
The ‘old’ IPC-regime will expire retroactively as per June 28, 2013, following the enactment of the Bill. As per June 28, 2013, a new IPC-regime has already been put into place. As a result, the old and new regimes will coexist until the Bill is enacted. The new IPC-system will remain applicable until 2026.
The imputation system will remain applicable to companies that have expressly opted for this system prior to the enactment of the Bill.
The 10% Profit Tax and 0% Dividend Tax
The Bill introduces a 10% Profit Tax and a 0% Dividend Tax. These rates will only apply to a limited number of activities mentioned in the law. These activities are listed under Article 1 Decree indication imputation- N.V. activities (Landsbesluit aanwijzing imputatie N.V. activitei-ten, AB 2003, no. 53), and include amongst others: conducting a hotel business; the paid transportation of persons and goods by land or by sea; the provision of inter-national services.
Other activities may be added to the list.
Activities that do not qualify, will be taxed at the normal Dividend Tax rate of 10% (in certain limited cases 5% or 0%) and, a Profit Tax rate of 25%. The Profit Tax rate will be lowered from 28% to 25% as per January 1, 2016.
It is noted that the Aruban legislator has opted for a 10% Profit Tax rate in order to meet international minimum fiscal requirements that may be applicable to global concerns with an establishment in Aruba (e.g. Marriott, Ritz Carlton, RIU, Hilton). The Aruban legislator furthermore opted not to abolish the Dividend Tax and to instead use it as leverage during tax treaties negotiations.
The reduced Profit Tax rate of 10% is expected to cost AWG 2.3 million in tax revenues per year for the fiscal years 2016 and 2017.
The 10% Profit Tax and 0% Dividend Tax will come into effect retroactively as per June 28, 2013, following the enactment of the Bill.
Special Profit Tax rates for resorts
For resorts, special Profit Tax rates are introduced for 4 separate categories:
▪ Resorts with a ‘Rev par’ (Revenue per available room) of USD 185 (AWG 331) will be taxed at a rate of 10%;
▪ Resorts with a Rev par of USD 175 (AWG 313) will be taxed at a rate of 12%;
▪ Resorts with a Rev par of USD 160 (AWG 286) will be taxed at a rate of 15%;
▪ Resorts with a ‘4 diamonds status’ will be taxed at a rate of 12%.
The resort qualifies for the special rate, provided:
(i) The resort possesses a so-called ‘Earth Check certificate’ which would serve as proof that the resort uses water and energy in an efficient manner.
‘Earth Check’ is in accordance with international standards and was created, amongst others, to maximize the efficiency in the hotel industry;
(ii) The resort will make a minimum investment in the local community. The amount of the investment depends on the cate-gory of the resort and its size.
Resort with more than 100 units will be required to make a larger investment than a resort with 100 units or less. This system corresponds with the existing policy on hotel investments.
The investment amount should be allocated as follows:
◦ 1/3 of the amount should be spent on ‘green projects’ that aim to improve the environ-ment of Aruba;
◦ 1/3 of the amount should be spent on the education of the Aruban workforce;
◦ 1/3 of the amount should be spent on the purchase of products manufactured locally;
The costs connected with the minimum investment are fully deductible.
The special Profit Tax rates will come into effect retroactively as per June 28, 2013, following the enactment of the Bill.
Timeshare resorts
Timeshare resorts also qualify for the special Profit Tax rates, provided the conditions are met.
The Bill introduces the option to form a reserve for maintenance fees, which will not be subject to Profit Tax, provided:
▪ The maintenance fees are received from timeshare owners (e.g. rent payments from shops in the resort do not qualify as such);
▪ The maintenance reserve is spent on the maintenance of the resort within 10 years of the formation of the reserve. Otherwise, the reserve becomes subject to taxation. The reserve also becomes subject to taxation in case the resort ceases its activities.
All timeshare resorts qualify for the facility, no matter their legal form. The facility will come into effect on the first day of the month following the enactment of the Bill.
Deduction of interest on the purchase of a local company and the investment allowance To stimulate the investment climate of Aruba even further, the deduction of interest on loans concluded for the pur-chase of a local company is introduced.
Because it is impossible to mea-sure the financial implications of this tax facility, the interest may not be deducted in the first two years following the purchase. In the following three years, the interest may be deducted in equal parts.
The investment allowance (of 6%) is furthermore reinstated. Both tax facilities will become effective retroactively as per January 1, 2013, following the enactment of the Bill. The investment allowance would be temporary.