IMF Urges Aruba To Consider 'Broad-Based Consumption Tax'

by Robert Lee, Tax-News.com, London

13 September 2001

The International Monetary Fund (IMF) has concluded its Article IV consultation with Aruba with the recommendations that the Island protects its sound economic position from vulnerability by diversifying the economy, strengthening its position within the tourism market and introducting a broad-based consumption tax.

According to the IMF review, the Aruban economy has consistently performed well over the last ten years thanks to its economic policies which have resulted in low inflation and financial stability. However, the IMF contends that more policies would have to be implemented to further strengthen Aruba's finances and attract domestic and foreign savings and investment.

The IMF states that an investment boom within the tourism industry combined with oil refinery upgrades saw an output growth of 10 per cent per year in the mid-1990s but growth has declined a more sustainable level reaching 4.5 per cent in 1999. It is expected that 2001 will experience a further deceleration in growth to about 1.5 per cent, 'caused by the ongoing deterioration in the external environment.' Price inflation reached 4 per cent in 2000 from 2.3 per cent in the previous year due to a rapid rate of domestic credit expansion and imported fuel costs.

Special tax measures were introduced temporarily in 1999/2000 to boost revenue. The measures were highly successful but since their withdrawal the IMF estimates that the deficit will equate to about 2.5 per cent of GDP which is largely due to implementation of the universal health system (AZV) in January 2001.

The review raised concerns over the 'deterioration of the budgetary postition', it welcomed the Aruban government's goal of eliminating the deficit and urged the authorities to 'address the ... fiscal imbalances without delay.' The government also has plans to simplify the tax system and curb special tax treatments as well as placing more emphasis on indirect taxes, and to complement these efforts the IMF strongly advised the introduction of the consumption tax.

The IMF also noted the considerable progress Aruba has made in strengthening its regulatory and supervisory framework for both its onshore and offshore financial operations. The review's conclusions also urged the Aruban authorities particularly to complete the 'reforms in the supervisory area through prompt passage of the necessary legislation regarding the regulation of company service providers in the offshore sector.'

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