According to laws of the United States, US taxpayers are liable for tax on their worldwide income.
In order to combat tax evasion by U.S. persons holding investments in offshore accounts, the Foreign Account Tax Compliance Act (FATCA) was enacted as part of the HIRE Act (Hiring Incentives to Restore Employment), by the Internal Revenue Service (IRS) of the US Treasury, and is expected to come into force in the coming year 2013. The FATCA is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.
Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed $50,000.00 must report those assets to the IRS. Failure to report on these assets will result on discovery of the infraction, of fines and penalties ranging from $10,000 to $50,000. Further underpayment of taxes that resulted from non-disclosed financial assets will result in a penalty of 40% of these assets. In addition, FATCA will require foreign financial institutions (FFI’s) to report directly to the IRS
information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest (FE’s).
To properly comply with these new reporting requirements, a FFI will have to enter into a special agreement with the IRS by June 30, 2013, under which amongst other requirements a FFI will have to report annually its accountholders who are U.S. citizens or foreign entities with substantial U.S. ownership and withhold and pay to the IRS 30% of any payments of U.S. source income. Another option is to enter into a treaty between the US and relevant countries.
FATCA will have a major impact on US taxpayers living in Sint Maarten and the business of Sint Maarten.
It is extremely likely that the cost of implementing FATCA, which will be borne by the FFI’s, will by far outweigh the revenues raised by the US Treasury, even excluding the additional costs to the US Internal Revenue Service for the staffing and resources needed to process the data received.
Measures has been taken by some European institutions to combat the effects of the FATCA, however Sint Maarten cannot do much against this because it is a small island entirely dependent on the US economy.
Some FFIs worldwide are already turning away U.S. citizens and closing their existing accounts; their business is not worth the hassle anymore.
The effect of FATCA on US taxpayers in Sint Maarten
FATCA exposes Sint Maarten residents who are US citizens or green card holders and FE’s in Sint Maarten, to the possibility of increased reporting obligations to the IRS and severe penalties for non-compliance. There are fears of imposition of capital controls, and as a result capital flight can very well be underway. After all, FFI’s may consider leaving Sint Maarten in order to settle in a non-compliant country. There have also been privacy concerns, in particular for those with dual citizenship. In an era of common dual citizenship, it is impossible for a FFI to definitely know whether any of its clients is also a U.S. taxpayer (i.e., citizen, green card holder, etc.).
The effect of FACTA on FFI’s of Sint Maarten
The IRS uses a broad definition of a financial institution. It is clear that beside banks, insurance companies, pension funds and investment funds are covered. In other words, most of the financial sector in Sint Maarten falls under the scope of the FATCA legislation.
Although the measure at first sight is based on good intentions and the only focus seems to be on American citizens, it goes much further. All financial institutions and investment companies that have investments and income in the United States are affected by this measure. Beside the banks, all insurance companies, pension funds, asset managers, private equity funds and other collective investment institutions will be affected. In order to comply with the rules on the first of January 2013, these financial institutions must have measures in place to shape their existing systems and business processes in a way that they facilitate compliance with FATCA. These adjustments require a lot of time and money.
From the above it can be concluded that Sint Maarten will also bear the brunt of American Legislation. In the formulation of a response to it, the Government of Sint Maarten will carefully examine the options that are available with a view to settling on a solution that will serve in the best interest of the business and people in Sint Maarten.
Visit to Trinidad and Tobago and COTA GA
On 20th July 2012, the General Assembly of the Caribbean Organisation of Tax Administrations (COTA) in Port of Spain, Trinidad has ratified by acclamation the decision of the COTA Executive Council to admit Sint Maarten as an Associate Member. This membership is an important first step for Sint Maarten to seek assistance and tax cooperation with other Caribbean jurisdictions. Not only
does it serve to achieve efficiencies in the tax administrations, but is also contributes to the prevention and effective combating of money laundering and tax fraud.
With the rapid growth of regional firms doing business in multiple jurisdictions, coupled with increased international demands to deal with issues of tax transparency and the exchange of information (like the recent US FATCA Act as mentioned before) the need to work together between the Caribbean nations becomes greater and more urgent.
Being an Associate Member of COTA, Sint Maarten can reap the benefits from cooperation with the regional community of tax jurisdictions. To name a few: the improvement of the local investment climate, the increase of efficiency and effectiveness of the Tax Administration and the strengthening of the strategic position of Sint Maarten in the global tax dialogue by seeking regional alliances.
During the visit to Trinidad, I was accompanied by the Ambassador of the Dutch Kingdom, Miss Lucita Moenir Alam. I met with the Minister of Finance, Mr. Larry Howai, with whom different matters were discussed. Since Sint Maarten is now an associate member of COTA, Mr. Howai will support Sint Maarten’s attendance to the meetings of the CARICOM Ministers of Finance as observer. This will ensure that Sint Maarten will be kept updated on important developments, like the FATCA legislation. Mr. Howai also expressed interest in the further development of the tourism industry of Trinidad and Tobago. I pointed out to him that Sint Maarten could provide assistance and cooperation in this respect, and will follow up with my colleague Mr. Pantophlet.
During my visit, I also met with the Deputy Director of the Caribbean Financial Action Task Force (CFATF), Miss Dawne Spicer. With Miss Spicer, I discussed the process of Sint Maarten’s assessment, which is important for our credibility in the international financial world.
Sint Maarten became a member of the CFATF in 2010. It is very important that Sint Maarten passes the assessment in November of this year. Together with my colleague Minister Duncan, I will work towards finalizing this process within the required deadlines.
Motor vehicle tax
Paying taxes is not normally embraced, therefore greater effort should be made to make the experience of taxpayers as painless and efficient as possible. The way the Motor vehicle tax is levied and collected is not customer-friendly and certainly does not encourage compliance Every year, car owners are lining up at the Receiver’s Office to pay the tax and to collect their new number plates. This system is highly ineffective, time-consuming, environmental unfriendly and in dire need of reform.
The Government is currently examining the possibility to move away from the yearly issuing of number plates by levying and collecting the Motor vehicle tax electronically, starting in January 2013. This initiative is a prerequisite to modernize the tax system, lowering the administrative burden and further improving the tax compliance.