Published On: Tue, Oct 3rd, 2017

Tax observations and considerations after natural disasters

It is with great admiration for the people of Sint Maarten, and especially the business community of Sint Maarten, that we at Meijburg & Co Caribbean are monitoring the rapid rebound of the Friendly Island. In the following we would like to contribute to the rebuilding of Sint Maarten by providing some valuable considerations regarding tax implications of such devastating natural disasters. In these challenging times one could not help but wonder: Does the Sint Maarten tax legislation provide ‘disaster’ tax relief? Our focus in this contribution is primarily on the tax treatment of companies for profit tax and turnover tax purposes, but please bear in mind that most observations and considerations are also relevant for entrepreneurs subject to individual income tax.

  1. Profit tax incentives

Although, there are no specific tax incentives for disaster relief, one could think about a few existing tax incentives that could come in handy when replacing damaged business assets. The replacement reserve is one of the tax incentives that should be taken into account when dealing with the aftermath of a hurricane or of other natural disasters. When damaged operating assets are replaced or repaired, a taxable book profit may arise. To prevent that profit tax or income tax is due immediately upon replacement of the operating assets, it should be considered to create a replacement reserve.

The benefit of the replacement reserve can be illustrated with the following simplified example:

A business uses for its operations equipment with a book value of USD 100,000. As a consequence of the damages suffered during the passage of the hurricane this equipment is now worthless and needs to be replaced. The insurance company pays out USD 180,000 for the replacement of the damaged equipment. This compensation for the assets lost would generally be subject to profit tax. One way to shield such insurance compensation for damages on business assets from immediate taxation is to apply the replacement reserve. The compensation for damages of USD 180,000 remains untaxed for up to 4 years and can be fully applied upon purchase of new business assets replacing the lost assets.

If the replacement reserve is not applied the outcome for tax purposes would be completely out of touch with reality and unreasonable for the taxpayer since the business just received a hard blow rather than a profitable year. If the replacement reserve is applied correctly, the aforementioned adverse profit tax consequences could be mitigated and deferred to future years.

Other tax incentives that relate to the replacement of operating assets for businesses in Sint Maarten, are the investment allowance and the accelerated depreciation on newly acquired business assets. In this respect it should be noted that the investment allowance on “new buildings” as well as the “improvement of buildings” is 12% and can be applied for two consecutive years. In case of other business assets the investment allowance amounts to 8% of the amounts invested in new operating business assets. If the tax incentives of investment allowance and the accelerated depreciation are applied correctly, the company could report taxable losses, which can be used to offset taxable profits for the next 10 years.

  1. Turnover tax exemptions

Fortunately for our island, it is common that after a natural disaster the Kingdom partners and international organizations will provide monetary aid intended for the recovery of the island. Said funds are organized through public and/or private entities, or combined initiatives, which would then hire various contractors to provide services and supply goods required for the rebuilding of the nation.

It should be noted that based on the applicable Turnover tax legislation the turnover realized with supply of goods or rendering of services to organizations that are funded with “development” funds will be exempted from the 5% Turnover tax. The rationale of this exemption is allowing the development aid funds to reach to the cause, without incurring any unnecessary leakage through taxation. The question arises: at what moment in time does the emergency aid transform into development aid?

Furthermore, there are Turnover tax exemptions that relate to provisioning of ships that leave Sint Maarten. The latter could be relevant when providing aid to the neighboring islands, including our sister islands: Saba and Statia.

  1. Foundations and taxation

A number of foundations and associations have been established lately to provide emergency aid and support in the rebuilding of Sint Maarten after passage of hurricanes Irma and Maria. Due to contradicting public announcements on the taxation of foundations we can imagine that it is not completely clear to the public if and to what extent these foundations would be subject to profit tax in Sint Maarten. In case these foundations, associations and trusts intend to exclusively serve a general public interest these entities should not be subject to Profit tax if certain conditions are met. Also, in case such a foundation would only receive donations, the funds received should not be considered taxable turnover for Turnover tax purposes (at the rate of 5%). In addition, if the remuneration paid to volunteers or part-time workers is organized in a certain manner some Payroll taxes would not be applicable. In order to avoid unnecessary taxation of funds exclusively serving a general public interest, it is recommended to pay close attention to the articles of incorporation of said entities, and especially to the tax specific terminology used in bold italic fonts above.

  1. Postponement of filing and payment dates

For completeness sake we recommend to pay close attention to the announcements made by the Tax Administration with regard to postponement of the filing dates for the monthly taxes. In this regard please be informed that the due date for the August monthly taxes, originally on September 15, 2017, is postponed to October 15, 2017.

  1. Emergency tax measures

Meijburg & Co Caribbean also conducted a preliminary analysis on the different approaches of other tax administrations which have been confronted with challenging economic situations after a natural disaster. Based on this analysis the following emergency tax measures, among others, should be taken into consideration by the Legislator in an effort to provide major tax relief for victims of natural disasters:

  • Enable employers to offer emergency aid to their employees without fringe benefits implications. For example, provide a temporary income tax exemption for accommodation, transportation and child care support for the employees who are left homeless after the natural disaster;
  • Temporary increase of the investment allowance. Currently, the Profit Tax Ordinance stipulates that 8% of the amounts invested in business assets is deductible from the taxable income, while the investments in new or renovated buildings are deductible for 12%. By increasing the investment deduction percentage temporarily on acquired business assets and (reconstruction of) buildings as a result of the massive destruction, the profit tax due would be reduced considerably, which will enable businesses to invest in more qualitative business assets;
  • Temporary increase of the accelerated depreciation to nil for business assets that are acquired to replace assets that are completely destroyed due to natural disasters. This measure will give businesses a boost to invest in new business assets, which would obviously have a positive spin-off effect on the economy;
  • Permanently introduce the possibility to create a tax provision for natural disasters. This measurement could be taken into consideration in order to limit the financial damage in the future by budgeting for disasters.

With the above we seek to provide information to the business community and the tax authorities of Sint Maarten. In case additional information or clarifications on the above is required, we would be glad to further elaborate on this matter.

By: Quincy N. Lont, LL.M and Wendell J. Meriaan, LL.M