Efforts to increase tax compliance fail

POSTED: 10/17/14 4:33 PM

Audit Chamber report Optimizing Tax Revenue

St. Maarten – All efforts to increase tax compliance and tax revenue during the past three years have failed. This appears from the performance audit Optimizing Tax Revenue the General Audit Chamber published last week.

The Finance Minister in the first Wescot-Williams cabinet, Hiro Shigemoto, stated in the 2011 budget “that improvement of the functioning of the organization for assessment and collection together with the introduction of a simplified system should lead, in the coming years, to an additional 20 million guilders in tax revenue. The amount was increased to 30 million guilders in the 2013 budget,” the Audit Chamber-report states.

It sounded good, but it did not happen. An overview shows how tax revenue jumped by 23 million from 2011 to 2012 (from 304.1 to 327.4 million) and by a mere 1.4 million in 2013 (328.8 million).

The Audit Chamber notes however that the surge in tax revenue in 2012 “cannot be attributed to increased compliance.” The analysis shows that the increase originates from higher turnover tax-revenue (from 111.7 to 134.4 million). This increase is due to the higher rate per February 2011 (from 4 to 5 percent). The government also collected more room taxes.

According to the report, there has been no improved compliance at all, though the scope is “not precisely known.”

“In 2011, the estimates of non-compliance range from 30 to 40 percent (budget 2011). In 2013, the estimate was 40 to 60 percent (budget 2013),” the report states.

Finance Minister Martin Hassink wrote in a reaction to the report that non-compliance data have to be carefully interpreted. “Using non-compliance figures is very dangerous because they lack any scientific basis. It also creates the impression that the government is missing out on a proportional part of revenue. This assumption is incorrect and has already resulted in misunderstandings in the past,” Hassink wrote. “If out of 100 tax payers 30 are non-compliant, the conclusion could be that non-compliance is 30 percent. However, if this 30 percent represents only a tax-share of 5 percent, the effect on revenue is 5 percent and not 30 percent.”

The government did establish a compliance team, consisting of staff from the audit and criminal investigation department. This team focused, according to the report, “on industries for which the tax department has received indications that taxable entities are not or largely not compliant.”

The report identifies these industries as: real estate brokers, property owners who live abroad and importers.

One of the stumbling blocks the tax inspectorate encounters in its efforts to increase compliance is the availability of public sector databases. The databases of the Census Office, Chamber of Commerce, Social Health Insurance (SZV) and the cadaster all contain information about citizens that would allow the tax inspectorate to make file comparisons.

At the time of the report, there was only an agreement with the Census Office about database-access. “The database of the Chamber of Commerce related to businesses is not available because management of the Chamber claimed that the information is not up to date,” the report states.

Finance Minister Shigemoto announced in the 2011 budget a review of tax holiday facilities that are designed to attract foreign investors. The Audit Chamber found that tax holidays don’t work: “Those interviewed state that it is too labor intensive and has the unwanted effect of some investors abandoning the island at the end of the ‘holiday period.’ Hence the measure achieves the opposite of what is intended,” the Audit Chamber writes in the report.

The government is apparently considering doing away with tax holidays as part of the plan for a simpler tax structure. “This choice is not substantiated through independent research or an exhaustive quantitative analysis,” the Audit Chamber points out, adding that discussions about this issue between the ministries of Finance and Tourism, Economic Affairs, Transport and Telecommunication “are currently at a stalemate.”

The project plan for a new tax department started already five years ago, in 2009, but the results so far are very close to zero. “Regardless of how good the intentions of the various ministers and department heads are, little or nothing of the improvement proposals have come to pass,” the Audit Chamber remarks in the report. “Implementation often depends on the political climate, despite the fact that organizational improvement processes are essentially technocratic and professional in nature.”

The report notes that the tax department still has “insufficient qualified staff and management personnel to support everyday operations and there is certainly inadequate staff to independently execute the required change process.”

The organizations and work processes of the inspectorate and the receiver still have to be integrated, the ICT-systems must be upgraded and the departments must be physically brought together in one building. Since the plan assumed that the organizational reform must be completed first, real tax reform is still a long way away.

Another issue Shigemoto brought up already in 2011 is the phenomenon of so-called free-riders. While the report does not explain who fall under this moniker, the fact that improved immigration checks were part of the plan to tackle this issue make it safe to assume that these are so-called suitcase-entrepreneurs who freely come to the island with their merchandise and disappear again without paying a penny in taxes. The report estimates that lost income to free-riders equals 2 to 4 percent of gross domestic product. Estimate GDP in 2013 was 798.3 million, so the loss in that year was between $16 and $32 million.

Minister Hassink agrees in general with the findings in the report: “In our opinion, it clearly shows that policy and change processes need to be approved for the long term and need to be less sensitive to changes of government.”

Audit Chamber Chairman Ronald Halman responded to the minister’s reaction in a letter dated October 1. The letter ends with the following statement: “In conclusion we cannot fail to note the absence of any intent from the Minister in terms of the general recommendations listed in our report. Given the acknowledgement by the Minister regarding the many challenges facing the tax department and fiscal affairs, as well as his desire to achieve the five policy objectives in question, we hope that our well-considered suggestions receive attention.”

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