Reforma Fiscal: Further Guidance Implementation VAT and other measures

March 4, 2022

Following up on earlier announcements, the government of Aruba has started their stakeholders meetings with regards to the proposed changes in the tax system of Aruba between 2023 and 2027. Most importantly, they are providing further insight in the plans to introduce a VAT system in Aruba and have provided more guidance in the shift from direct taxes to indirect taxes.

The main tax reforms are proposed to take place per January 1, 2023, whereas further updates and modernization of the legislation is planned for phase 2 and innovation for phase 3.

VAT-system

The government has announced the BBO/BAVP/BAZV will be abolished per January 1, 2023 and a VAT system will be introduced per that date. The proposed tax rates for the VAT are:

• A low rate of 6% for food, drinks and basic commodities (excl. alcoholic beverages);
• A standard rate of (up to) 18% on all other goods, services and import;
• 0% on the export of goods;
• Exemption of VAT on certain services such as education, the medical sector, banks, the utility sector and hotels (for the room charges, subject to tourist tax);
• Exemption of VAT for insurance services, implementation of a 6% insurance charge.

The VAT will be implemented with an system offsetting the input VAT, rather than offering the possibility of a refund when the input VAT is larger than the VAT payable in any given tax period.

For restaurant services specifically, the tax authorities have indicated that the provision of services in a restaurant will become taxable against the standard rate, whereas the delivery of food or take-out of food will be considered delivery of food and drinks and taxable against the lower rate.

Please note that as per our previous Tax New Items, a VAT system aims to only impose taxes on the value any entrepreneur adds to a product or service, therefore making it irrelevant how many entrepreneurs are adding value in the production and sales process towards the customer. This allows for a higher rate in the VAT without inflationary effects on the economy. We calculated that at a rate of 15% the VAT would be less of a tax burden compared to 6% BBO with only two entrepreneurs between import and sale to the public, as per below:

Please note that at a rate of 18% the most common chain of sales in Aruba will have an effect on the prices and the effect would only diminish when three or more parties are involved in the supply chain in Aruba as per below examples:

Profit Tax

The profit tax proposal prepared in 2020 and abolished due to the COVID-19 pandemic will be implemented per January 1, 2023, leading to the following changes:

• The general profit tax rate will be reduced to 22%;
• The IPC regime, with profit tax rates between 10 and 15% will be abolished with grandfathering rules until the end of 2025;
• The self-administered pension plans of Directors-Shareholders will be abolished;
• The depreciation on real estate will be limited to a new minimum value (in Dutch: “bodemwaarde”), the exact amount to be determined;
• The investment allowance (in Dutch: “investeringsaftrek”) will be abolished;
• Further rules regarding the deduction of costs will be introduced.

Income Tax

In the income tax various measures will be taken to lower the tax burden and some measures to increase the taxable base:

• The personal income tax rates will be lowered (between 10% and 50%);
• The general tax-free amount will be increased from Afl 28.861 to Afl. 36.000;
• The depreciation on real estate will be limited to a new minimum value (in Dutch: “bodemwaarde”), the exact amount to be determined;
• The self-administered pension plans of Directors-Shareholders will be abolished;
• The investment allowance (in Dutch: “investeringsaftrek”) will be abolished
• All income from tips will become taxable income for wage tax and income tax purposes, whether administered or not;
• A “market value” salary will be implemented for the Director-Shareholders (in Dutch: “gebruikelijk loon”).

Tourist Tax

The rate of the tourist tax will be increased from 9.5% to 12.5%

Real Estate Transfer Tax

The real estate transfer tax, currently levied on the transfer of deeds of transfer of real estate, will be expanded to include the transfer of economic value of real estate and the transfer of shares in real estate companies.