February 18, 2022
Recently the tax authorities of Aruba proudly announced they have received the assignment from the government to start implementing a VAT tax system to replace the current BBO/BAVP/BAZV system, which essentially works as a Turnover Tax system.
We have previously provided you with an indication of the differences between both systems, but since these reforms will lead to a substantial change in the manner in which the turnover is taxed and administered for all entrepreneurs in Aruba, HBN Law & Tax will endeavor to provide you with practical guidance towards the changes in taxation as we continue to receive more information.
VAT-system
Reiterating what we described earlier, a VAT system aims to only impose tax on the added value that an entrepreneur adds to a product or service, therefore making it irrelevant how many entrepreneurs are adding value in the manufacturing and sales process, as well as the service towards the customer. Whereas the BBO/BAVP/BAZV system promotes all entrepreneurs to provide for as many services as possible in-house.
As example showing the more neutral position of the VAT, please consider the following:
One entrepreneur providing all services
| Tax rate: 6% | VAT | BBO/BAVP/BAZV | ||
| Price | Tax | Price | Tax | |
| Import of goods from abroad direct to customer | 1300 | 78 | 1300 | 78 |
| Total | 78 | 78 | ||
Multiple entrepreneurs involved
| Tax rate: 6% | VAT | BBO/BAVP/BAZV | ||
| Price | Tax | Price | Tax | |
| Import of goods by wholesale | 1000 | 60 | 1000 | 60 |
| Wholesale to supermarket | 1100 | 6 (1100-1000 *6%) | 1100 | 66 |
| Retail to consumer | 1300 | 12 (1300 – 1100 * 6%) | 1300 | 78 |
| Total | 78 | 204 | ||
This example shows that the BBO/BAVP/BAZV “punishes” outsourcing activities or the integration of a network of multiple specialist chains in the product chain, whereas the VAT system does not make such a difference.
Tax rates
To allow for no erosion in the income from the indirect taxes for the government, according to the government the tax rates in the VAT system should be higher than those in the current BBO/BAVP/BAZV and even though this may look like an increase in taxes, the cumulative effect of the BBO/BAVP/BAZV often leads to a higher material tax burden than an increase in the tax rates when implementing the VAT system as the example below shows.
| VAT (15%) | BBO/BAVP/BAZV (6%) | |||
| Price | Tax | Price | Tax | |
| Import of goods by wholesale | 1000 | 150 | 1000 | 60 |
| Wholesale to supermarket | 1100 | 15 (1100 – 1000 * 15%) | 1100 | 66 |
| Retail to consumer | 1300 | 30 (1300 – 1100 * 15%) | 1300 | 78 |
| Total | 195 | 204 | ||
With as little as two entrepreneurs importing goods and selling between each other and towards a customer (considering in most cases more entrepreneurs will be involved in a single supply chain), the added costs of the VAT will be less than the costs of a BBO/BAVP/BAZV system.
Administrative burden
The implementation of a VAT system will require a change in the administration of turnover and costs with regard to the monthly or quarterly tax returns and may lead to an increase in the administrative burden of the entrepreneurs. This will also depend on the number of exemptions and different rates that will apply. In general, a correct administration for a VAT system should also lower the administrative burden for compilation of the annual accounts and profit tax returns.
Once the implementation of the VAT system has been clarified by the government, we will inform you more about the changes to be made in your administrative system and how to best approach this.
HBN Law & Tax strongly believes that it is necessary to start preparing on time for such a significant change and would be happy to assist you with all your queries.