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IMF Suggests VAT Solution For Aruba

by Jason Gorringe,

09 May 2013

The International Monetary Fund (IMF) has stressed the importance for Caribbean territory Aruba to draw up fiscal plans to tackle its mounting deficit, potentially with the introduction of value-added tax by 2015.

Aruba has weathered two major shocks in recent years that resulted from the global financial crisis and the shutdown of its oil refining operations. Real gross domestic product (GDP) contracted by a cumulative 15% during 2009-10. Notwithstanding measures taken, Aruba’s fiscal position has deteriorated sharply since 2008. Preliminary data suggests the fiscal deficit totaled 8.5% in 2012, despite efforts to chase tax arrears. Revenues, too, were hit as a result of the halving of the business turnover tax rate to stimulate economic activity.

Tourism and the banking sector have withstood the recession relatively well, but economic output is still 12% below its pre-crisis level. Aruba faces the challenge of rebuilding its lost fiscal space without jeopardizing a relatively weak recovery. The fiscal deficit is projected to decline in 2013, and a daunting task remains ahead.

Authorities in Aruba intend to undertake fiscal consolidation from this year, and the IMF has recommended that the deficit could be reduced by 6% with a combination of measures, including public spending retrenchment already outlined in the 2013 Budget.

On the revenue front, the IMF has recommended: "International comparison suggests that there is scope for revenue increase through higher indirect taxation. This can be done either through increasing current indirect taxes, or through implementing a value-added tax (VAT) designed to fit Aruba’s specific needs. Since the latter may warrant technical assistance and a preparation time of 1.5 to 2 years, the authorities would need to start with the preparatory work for VAT soon, if they choose to go this way, in order to reap benefits in the medium-term."

"The mission recommends a consolidation of at least 8% of GDP to reach a small fiscal surplus and bring debt down to below 60% of GDP by 2018," requiring further pension system reform, it said.

TAGS: tax | investment | business | value added tax (VAT) | fiscal policy | banking | gross domestic product (GDP) | international financial centres (IFC) | budget | Aruba | offshore | unemployment

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