The Case For A Territorial Tax Regime For Curaçao
Recently the Curaçao Minister of Justice, Mr. Nelson Navarro, approved the so-called Investor’s Permit to accommodate bonafide high net worth persons and entrepreneurs who seek admission to Curaçao. The purpose of the Investor’s Permit is for the investor to provide real economic benefit to Curaçao by increasing employment opportunities and increasing the inflow of foreign currency. While we applaud this initiative, we realize that it alone will not lift us from the extended period of low economic growth we have been experiencing. We have a number of lingering macroeconomic weaknesses we have not been able to deal with, especially because of lack of political willingness. Complex and rigid labor law regulations and lengthy waiting time for an arsenal of permits are the most important ones. While I am not going to deal with these two very important issues in this article, I want to shed light on a way to better connect the Investor’s Permit to our local tax regulation. I am going to argue for a territorial tax regime for Curaçao instead of the worldwide income regime we currently have in place. But first a few definitions.
Worldwide income regime is the aggregation and taxation of a taxpayer’s domestic and foreign sourced income. In Curaçao citizens and residents are subject to tax on their worldwide income. This means that citizens and residents alike are required to file a tax return based on their worldwide income, regardless of the source of income and even if they already paid taxes on that income in another country.
Countries all over the world have been trying to get to as many exemptions as possible to the worldwide income regime by negotiating Double Taxation Avoidance Agreements (DTAA). The purpose of these agreements is for countries to enable their administrations to eliminate double taxation of income (in the country of residence and the country with which the agreement has been established). Each DTAA erodes the concept of the worldwide income regime. In theory, should a country negotiate DTAAs with all countries and territories in the world it would still have a worldwide income regime, but has in principle simulated a territorial tax system. Ireland has 72 DTAAs while Germany has more than 80.This takes us to the territorial tax regime.
Territorial tax regime is a tax system that in principle only taxes income from sources within that country. For example if someone lives in Curaçao, one only owes taxes on income earned in Curaçao. Even if one conducts business in for example the USA, income from that business (transaction) is not taxed in Curaçao (though it will probably be taxed in the USA).
The case for a territorial tax system
Countries with a worldwide system are obviously emulating the territorial tax regime with the negotiating of as many DTAAs as possible to avoid double taxation. Now let’s look at Curaçao. I am very proud that as State Secretary of Finance (2006-2009) I was able to negotiate a series tax treaties which eventually got us on the OECD’s white list. Yet as no other I am painfully aware of the fact that it is very difficult, if not impossible given our limited (human) resources, to be able to negotiate a sizable amount of DTAAs. So, why not unilaterally reach your goal without being dependent on others to come to the negotiating table with you? Unilateral action in this case would be for us to make a bold move and opt for a territorial tax regime. Before going into more details regarding my proposal, there is something to be said of unilateral action.
The GATT (General Agreement on Tariffs and Trade) and its successor the WTO (World Trade Organization), have shown that multilateral (several countries) trade liberalization is an almost impossible feat. Most countries
have therefore opted for bilateral trade liberalization by negotiating Trade Agreements with each other. Only a few, among others Hong Kong, Dubai, Chile and Singapore, have opted for a third way, namely unilateral liberalization. They decided not to go through the painstaking process of negotiation reduction/elimination of trade barriers, but decided to do away with (most of them) through unilateral actions by their national Governments (and Parliaments). Not surprisingly, most of these countries have also opted for a territorial tax regime. The results speak for themselves.
Going back to the territorial tax regime, I would like to point to the following advantages of the system.
1. More competitive
A global (or worldwide) tax system is uncompetitive, especially with high tax rates, because it imposes a high income-tax rate on income, regardless of where it is earned. Corporations operating under a global tax system without extensive exemptions in local legislation are less competitive, as their profits will always be subject to double taxation. By contrast, a territorial tax system taxes only income earned domestically.
1. Less compliance costs
The complex rules associated with worldwide tax call for more resources (human and monetary) to be invested in the Curaçao Tax Department.
1. Less dependency on DTAAs
The contradiction with the worldwide tax system lies in the fact that countries all over the world are trying to negotiate Double Taxation and Avoidance Agreements (DTAAs) to precisely get what a territorial tax system advocates. While some countries have been able to build up a network of almost one hundred DTAAs, Curaçao only has two. The perspectives that we will quickly get DTAAs with countries that are interesting for us are dim. So, why not unilaterally reach your goal without being dependent on others to come to the negotiating table with you? Unilateral action in this case would be for us to make a bold move and opt for a territorial tax regime.
1. Positive strategy to bolster business
The territorial tax system fits perfectly with the Investor’s Permit we mentioned before. Not only that, I believe that a new tax system will greatly improve what the Investor’s Permit has been designed to achieve: attract more investment, create more jobs and more tax revenues.
And finally, is the territorial tax regime perfect? No it is not. But neither is the worldwide system. The territorial system could also include new rules to prevent income shifting and general anti-abuse regulations. That is not the point though, at least not for now. The question is if we want to look beyond our comfort zone and existing paradigm and take a serious look at this new model. Actually I think we need to. The time has come to have open and serious discussions about this matter not only within the Government, but especially within and with the financial sector of Curaçao. I look forward to discussions with the sector and within the Government on the merits of a territorial tax regime.