IMF Calls For VAT In Aruba

by Leroy Baker, Tax-News.com, New York

29 October 2010

In its latest Article IV consultation with Aruba, the International Monetary Fund (IMF) suggested that revenue measures, a key component of which could be a value-added tax, would be needed alongside spending cuts to help balance fiscal constraints and social priorities.

Aruba had reacted to the slump by loosening fiscal policy, using what the IMF called "primarily permanent measures" to create a large underlying deficit. The new government cut an unpopular business turnover tax in half in 2010 and increased social transfers to mitigate the impact of the recession.

After a period of "social dialogue", important measures were introduced in August 2010 to improve the financial health of Aruba’s main pension and health care schemes. The IMF said this reduced longer-term risks to the public finances but yielded limited fiscal savings in the short-term. The government also announced a path that would bring the fiscal deficit to below 2% by 2014, but, the IMF thought, measures to achieve this objective had not been specified.

The IMF encouraged Aruba to develop a medium-term fiscal adjustment program to ensure that public debt remained on a sustainable path and to provide space to react to external shocks. It also recommended that Aruba seek technical assistance based on international best practices, for example by joining CARTAC, an organization based in Barbados to provide technical assistance and training in core areas of economic and financial management.

The IMF called for the elimination of the tax on foreign exchange transactions, which, it said, constituted an "unapproved exchange restriction under Article VIII of the Fund’s Articles of Agreement".

The IMF agreed that the peg to the US dollar had served Aruba well and noted that the prudent regulatory environment and strong capital positions had helped Aruba’s banking system weather the downturn without major strains. With the switch from a credit ceiling to an unremunerated reserves requirement as the key monetary policy tool, the IMF noted that, although welcome, challenges to prudential supervision would likely increase in the the absence of a credit ceiling.

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