In the year 2011 the tax legislator of Sint Maarten revised the TOT Ordinance and introduced the so-called reverse charge mechanism. The implementation of these amendments made it possible for the tax authorities to collect TOT due on services rendered by foreign service providers to Sint Maarten based consumers (businesses).
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The Supreme Court in the Netherlands recently confirmed to which extent the Sint Maarten tax authorities can apply the reverse charge mechanism to collect the Turnover tax (hereinafter referred to as: “TOT”) due on cross-border services transactions provided by foreign service providers to consumers in Sint Maarten. For cross-border service transactions involving a foreign service provider and a local consumer (a registered business), the TOT legislation of Sint Maarten (Dutch part) stipulates a so-called, reverse charge mechanism. This mechanism allows the Sint Maarten tax authorities to collect TOT on these transactions, which would otherwise remain out-of-scope and consequently not subject to TOT in Sint Maarten.
Introduction
In the year 2011 the tax legislator of Sint Maarten revised the TOT Ordinance and introduced the so-called reverse charge mechanism. The implementation of these amendments made it possible for the tax authorities to collect TOT due on services rendered by foreign service providers to Sint Maarten based consumers (businesses). The first step would be determining where the actual transaction takes place for taxation purposes and which entity is responsible for the TOT due on the relevant transactions. In this regard the TOT Ordinance stipulates that, in case the consumer of the cross-border service transaction is a business established in Sint Maarten, for taxation purposes the foreign service provider is deemed to take residency at the Tax Administration office of Sint Maarten. This specifically entails that, in principle, the foreign service provider should file a tax return and pay the TOT due.
How does the reverse charge mechanism work?
The reverse charge mechanism entails that in case the foreign service provider is not established in Sint Maarten (and hence the deemed residency at the Tax Administration office of Sint Maarten) the consumer now becomes responsible for the TOT due on the cross-border services rendered by the foreign service provider, in case the latter is non-compliant. The reverse charge mechanism is an exception to the main rule in which the tax burden of the TOT remains with the foreign service provider. Hence, the term reverse charge mechanism.
Why was the reverse charge mechanism introduced?
The reasoning for the implementation of the reverse charge mechanism can be found in the explanatory notes to the amendments of the law. From these legislative documents it can be derived that the reverse charge mechanism aims to create a level playing field for the local service providers established in Sint Maarten (Dutch part) versus the many regional foreign service providers, including the service providers located on Saint Martin (French part). Without the existence of a reverse charge mechanism, the business (customer) established in Sint Maarten (Dutch part) would pay the price for the cross-border service transaction, excluding TOT and often times excluding any other Sales tax equivalents, if the country of the foreign service provider has an export exemption. In such scenario, without the existence of the reverse charge mechanism, it would be more expensive to obtain services from local businesses.
What are the implications for the taxpayers?
The reverse charge mechanism only applies to cross-border services transactions in which the consumer is a registered business established in Sint Maarten (Dutch part). Based on the main rule, the foreign service provider would in principle be responsible for the monthly TOT filing and payment obligations resulting from the taxable turnover received from the consumer (registered businesses established in Sint Maarten). In order to comply with the aforementioned local tax compliance requirements, the foreign service provider should complete their registration with the tax authorities of Sint Maarten. In certain cases, the registration with the local tax administration could result too cumbersome, given the scope of the transaction. For these cases, the legislator made it possible to have both parties submit a written agreement based on which the consumer will take-on the TOT filing and payment obligations from the foreign service provider, by withholding the TOT due on each cross-border payment made by the local consumer. Currently the applicable TOT rate is 5% of the gross revenue and the monthly tax filing and payment are due within 15 days after month-end.
What is new?
The Supreme Court judgement
On March 10, 2021, the Joint Court of Appeals rendered a verdict in which the tax authorities were authorized to collect TOT due from the consumer in a transaction between a local company in Sint Maarten and a permanent establishment of a foreign company.
The defense argued in court that the permanent establishment should have been considered a local taxpayer, which results in a local transaction between two locally established businesses. Consequently, the reverse charge mechanism should be rendered out-of-scope in this situation. According to the defense, the consumer could not be held liable for the TOT due on the construction works performed by the permanent establishment of the foreign company. The Joint Court of Appeals ruled that the reverse charge mechanism can also be applied in cases where the TOT due on the services transaction was not paid by the foreign service provider, despite the fact that the foreign service provider had presence in Sint Maarten (Dutch part). The mere fact that the foreign service provider had a permanent establishment in Sint Maarten, does not render the reverse charge mechanism not applicable.
In the verdict dated November 10, 2023, the Supreme Court in the Netherlands concluded that the verdict rendered by the Joint Court of Appeals was correct.
How to avoid these unpleasant scenarios?
The first reason for tax authorities to use the reverse charge mechanism is in case of non-compliance with the TOT levies. Therefore, when a local business engages in a services transaction with foreign service providers, the local business should always be aware of possible adverse tax implications. If there is no TOT being calculated and paid on cross-border service transactions, the local business will be held liable for the TOT due. A general recommendation would be to have a well-functioning tax control framework in place, which puts your company in control of its tax position. Our team would gladly assist with the analysis of the processes in your company in order to determine possible adverse tax consequences in this regard. We can also assist with drafting of internal guidelines and tax policies to identify and mitigate possible tax risks resulting from services transactions with foreign service providers. Furthermore, any agreements with foreign service providers should be reviewed by your local tax advisor, regardless of the foreign entity having local presence in Sint Maarten (Dutch part).
We already embarked on a project with a foreign service provider, what do we do?
In case the local business already embarked on a project with a foreign service provider for which no TOT arrangements have been made yet, it could also be considered starting a voluntary disclosure procedure. This procedure can help reduce any fines on the TOT due depending on the facts and circumstances of each case.
Key Contact
Quincy Lont