Broadening possibilities for deducting GCT in the construction sector (Caribbean Netherlands)

Last Friday (December 1st), the Supreme Court concluded that a company established especially for the construction of a resort in Bonaire qualifies as an entrepreneur as well as a producer for general consumption tax (“GCT”; in Dutch: Algemene bestedingsbelasting). A significant aspect of this judgement gives practical guidance for cases where an incorrect GCT rate has been charged to a contractor by its subcontractor. In this particular case, the contractor was able to claim a GCT deduction retrospectively. This tax update provides further background on this matter.

Case Summary

The interested party (hereinafter: the “Company”), was established in 2015 with the objective of constructing a resort in Bonaire. The party assigning this construction project is an affiliated party of the company. For the execution of the construction work, mostly subcontractors were contracted. After the successful completion of the resort, the company has sent an invoice to his affiliated party without calculating 8% GCT.

Following a tax inspection, the Tax Inspector imposed GCT assessments to the company, not taking into account the deduction of GCT to the extent that the subcontractors mistakenly charged the entity the 6% GCT rate for services. In the appeal phase, the company argues that, in relation to the realization of the resort, it should not be considered an ‘entrepreneur’ nor a ‘producer’ according to the GCT definitions. However, both the Court of Appeals and the Supreme Court disagree: the company is indeed considered an entrepreneur and producer for GCT purposes. As a result, the company must charge 8% GCT on its invoice to his affiliated party, but is entitled to a deduction of GCT charged by its subcontractors. The Supreme Court grants the right of deduction despite the fact that the subcontractors applied the service rate of 6% instead of the delivery of goods rate of 8%. Up to this judgement, it was generally believed that no right to deduct could be claimed in such situations.

Expansion of GCT deduction situations in the construction sector

The company has engaged subcontractors to carry out its project. These subcontractors mostly provide services, and in principle, they should charge 6% GCT (the service rate). However, in the construction sector, this would cause a cumulation of GCT, as the company is only entitled to a deduction if it is charged 8% GCT (the rate for goods supplied by producers). To prevent this cumulation, the State Secretary issued a policy in 2011, under which, regardless of the qualification of those services, the services purchased from subcontractors are considered as goods supplied by a producer and should thus be invoiced with 8% GCT. This guidance allows the contractor to claim a deduction and prevents cumulation in the construction chain.

To apply the above-mentioned policy and enable the contractor to claim a deduction of GCT, it is explicitly required that the invoice issued by the subcontractor to the contractor is prepared in the prescribed manner. Until now, this has been interpreted in practice as if the 8% GCT rate had to be applied to that invoice.

In its judgement, the Supreme Court considered the mentioned policy and stated that the purpose of this policy is to prevent cumulation of GCT in the construction sector. It then indicates that the absence of the explicit mention of the applicable rate on an invoice or the charging of the incorrect (lower) rate does not in itself justify refusing the deduction. That would undermine the purpose of the legislation. This would be different if there is fraud or abuse involved.

Key take-away for (tax) practitioners would be that contractors to whom subcontractors have mistakenly charged the GCT service rate of 6% may still claim a deduction of that GCT.

December 2023