Proposed tax reforms in Aruba – implementation of a VAT in 2023

Proposed tax reforms in Aruba – implementation of a VAT in 2023

November 16, 2021

Yesterday, the prime minister of Aruba announced that the government of Aruba will be working on tax reform per January 1, 2023, allowing for a shift from direct taxation (on income and profits) to indirect taxation (on expenditure). As part of this reform, Aruba will be implementing a VAT system per 2023. In this Tax Instant Newsflash, we will provide you with an overview of the main differences between a VAT system and the current turnover tax system. Please note that this is a general comparison and exact differences can only be described once the government has outlined the tax legislation.

A VAT system aims to only impose taxes on the added value any entrepreneur adds to a product or service. To allow for this mechanism to work, the VAT will allow entrepreneurs for a deduction of the VAT imposed on them by other entrepreneurs if and when this VAT is used for taxable purposes. Consumers and entrepreneurs providing exempt products or services will not be allowed a deductions of the VAT imposed and therefore the VAT will become an actual tax income for the government.

Turnover Tax-system (BBO/BAVP/BAZV)
Within the current Turnover Tax any entrepreneur has to impose BBO/BAVP/BAZV on the sale of their products and services without any deduction of the BBO/BAVP/BAZV imposed on them. This allows the government to receive the taxes at an earlier stage, but also may impose taxes upon taxes during the sales process if multiple entrepreneurs are involved.

Price Tax Price Tax
Import of goods 1000 60 1000 60
Wholesale to supermarket 1100 6 (66-60) 1100 66
Retail to consumer 1300 12 (78-66) 1300 78
Total   78   204

This example shows that the VAT, albeit paid over multiple returns, limits the taxation of the product to be a certain percentage of the sales price to the consumer, independent of the amount of transactions between import and sale to the consumer, whereas the turnover tax increases the amount of tax paid depending on the amount of sales between the initial import and the sale to the consumer.

Advantages of a VAT system
Even though the income for the government is lower at the same tax rate within a VAT system and therefore, the government will look to increase the nominal rate of the VAT as opposed to the BBO/BAVP/BAZV, the avoidance of double taxation over previous sales or services provided by other entrepreneurs, will counter that effect for most entrepreneurs.
A turnover tax system will encourage entrepreneurs to avoid using the services of other entrepreneurs, since the turnover tax on their services will instantly increase the price of the product and services sold. A VAT system would allow for these business decisions not to be influenced by tax efficient motives.
Even though research shows that the administrative costs for entrepreneurs are higher than the costs of administration of a turnover tax, it also shows a higher rate of compliance with regard to the filing of tax returns, which is explained by the fact that refund of the imposed VAT can only be received when a tax return has been filed.

Implementation of a VAT system
The implementation of a VAT system will need to be monitored closely, both entrepreneurs and the tax administration will have to adjust their administrative system. Therefore, the government has allowed for a 14 month period to implement all necessary steps. It is necessary to start preparing for such a significant change on time. HBN Law & Tax would be happy to assist you with all your queries.