Deputy Minister of Finance, Mr. Weekers, has presented the Tax Agenda to the Lower House on behalf of the Cabinet. The Tax Agenda sets out the Cabinet’s position on changes to the tax system. Key terms are ‘simplification’, ‘a sounder basis’, and ‘fraud-resistant’. Work and business must become more profitable. The policy position set out in the Tax Agenda is fivefold:
· a shift from direct to indirect taxation;
· corporate income tax;
· businesses whose income is subject to personal income tax;
· a total salary levy;
· the relationship between the Dutch Revenue and taxpayers.
Below we summarize the Cabinet’s proposals for changes specifically aimed at businesses. The Tax Agenda is not yet a definitive bill, but provides an outline of the measures that are set to become legislation in the near future. It also describes ‘guideline scenarios’ that still require further elaboration and discussion.
1. Corporate income tax
1.1. Expansion of tax base
The Cabinet had already indicated in the coalition agreement that it intended to expand the tax base in respect of corporate income tax and to reduce the corporate income tax rate. The just published Tax Agenda sets out these intentions in more detail. A number of points elaborate on that contained in the Consultation Document published in June 2009, and in the letter of December 5, 2009. The Cabinet’s intention is that the current proposals will end the uncertainty that has arisen as a result of the drawn out discussions on the difference between the tax position of multinationals and other businesses. The Cabinet intends to bring this discussion to a close by tackling two presumed imbalances.
Acquisition holding companies
The Cabinet has proposed a measure to prevent takeovers of Dutch businesses by foreign investors that are excessively debt-financed, and whereby the interest is deducted from the Dutch profit. An acquisition holding company is often used for such takeovers. The acquisition holding company enters into the debt, after which a fiscal unity is formed with the acquired business. This construction allows the holding’s interest costs to be deducted from the acquired business’ profits, so that despite already existing deduction limitation measures, no taxable profit remains.
To tackle this situation, a deduction limitation for acquisition holding companies has been proposed. The intention is to prevent excessive interest deductions while, at the same time, sparing genuine financial relationships. The proposal means that the fiscal unity can no longer offset the interest relating to the takeover against the acquired company’s profits, but only against the profits of the acquisition holding company itself. Of importance is that this restriction applies to both group interest and third party interest.
To spare relatively minor takeovers, the first EUR 500,000 of interest will remain deductible. This limitation will also only be applicable to the extent that the fiscal unity’s equity/debt ratio does not exceed a certain, not further specified ratio. A similar mechanism is currently included in the thin cap rules, where a ratio of 1:3 is applied. The Consultation Document also proposed applying this ratio. Under the new deduction limitation, the value of participations will be deducted from the equity. The ‘goodwill gap’ has also been taken into account. This is a decrease in the equity for tax purposes that arises because untaxed gains and reserves belonging to the acquired business are eliminated when joining the fiscal unity. It has been proposed that after a fiscal unity has been formed, the equity may, for the purposes of applying the equity/debt ratio, be increased with the goodwill gap for a period of 10 years. To this end, the goodwill gap will be decreased on a pro rata basis annually. The Tax Agenda does not deal with any transitional rules that may apply.
Source exemption permanent establishments
Currently, losses incurred by foreign permanent establishments can be directly set-off against the profit made by the Dutch head office. Subsequent foreign profits are only exempted once earlier losses have been recovered. Anti-avoidance rules apply if a permanent establishment is converted into a subsidiary in the interim. However, loss recovery can, under certain conditions, be deferred indefinitely.
The Cabinet proposes eliminating the difference in treatment between permanent establishments and foreign participations, whereby a loss can only be deducted upon liquidation, by introducing a source exemption for permanent establishments. Such an exemption will remove both the positive and negative benefits associated with a foreign permanent establishment from the Dutch tax base, regardless of the tax levied in the country where the permanent establishment is established. Under the source exemption, the subject-to-tax requirement in respect of profits from active permanent establishments will cease to apply.
Pursuant to European law, it is permissible to deduct losses incurred by foreign permanent establishments to the extent that they have become definitive due to the cessation of the activities or a transfer to a third party. However, in the country in which the permanent establishment is established, no tax relief may be given.
The source exemption will not apply to gains from so-called passive permanent establishments in low-taxed countries. Instead, a credit will apply. Transitional rules are also not dealt with here.
1.2. Lowering tax rate
The Cabinet intends to channel the revenue made available by these measures back to businesses by lowering the tax rate. A tax rate of 24% is considered achievable. Currently, a 25% tax rate applies to profits of more than EUR 200,000. While a further lowering of the tax rates is not excluded, this is dependent on how the revenue made available from other measures is to be allocated. In the Tax Agenda the Cabinet emphasizes that the economic climate should be supported by a lower normal tax rate.
1.3. Tax treatment participation interest/thin cap rules
In addition to the aforementioned tax base expansion measures, a limitation to the deduction of participation interest has been considered. The Cabinet has set-up ‘Top Teams’ as part of its new business policy. The chairperson of the Head Offices Top Team will be asked to consult with the chairpersons of the other Top Teams and prepare an opinion on the tax treatment of participation interest. This concerns the ‘Bosal gap’. The Bosal gap occurs because the interest resulting from the financing of participations is, in principle, deductible, while the gains earned from the underlying participations are, for in most cases, not taxed under the participation exemption. In the letter of December 5, 2009, it was decided not to proceed with the limitation to the deduction of participation interest, because of European law risks. However, according to the Cabinet, the X-Holding judgment of February 25, 2010 has limited these risks. Due to the various influences that the abovementioned measure can have on the economic climate, the Cabinet is intending to finalize this matter in consultation with the business community. The findings resulting from this consultation will be presented to the Cabinet on June 14, 2011, after which the Cabinet will decide what position to take.
The Cabinet has hinted that the limitation to the deduction of the participation interest could be accompanied by the repeal of the current thin cap rules.
1.4. No notional net worth deduction/addition for tax purposes
The Cabinet has decided not to proceed with the notional net worth deduction/addition for tax purposes as proposed by the Study Committee in its report on the tax system of April 2, 2010, whereby, for example, 4% of the equity could be deducted or, in the case of a negative equity, be added. One of the reasons for the Cabinet’s backtracking is the expected budgetary loss.
1.5. Foreign substantial interest
While the Tax Agenda states that the regulation regarding foreign substantial interest will be amended, it does not elaborate further on this point.
1.6. The follow-up
According to the schedule included in the Tax Agenda, the Cabinet intends to include the measures described in 1.1, 1.2, and 1.5 in the bills that will be presented in September 2011 on Budget Day. The planned effective date for the proposals, which will be included in a separate Corporate Income Tax Bill, is January 1, 2012.
It is Cabinet’s intention to restore calm to the area of corporate income tax. The measures and the clarity they aim to provide should help stimulate the Dutch economic climate. The Cabinet is of the opinion that, during this term of office, the treatment of equity and debt capital as it applies to corporate income tax must be limited to the measures stated in the Tax Agenda.
The Cabinet has indicated that it will monitor the consequences of the further elaboration of the Tax Agenda as it affects the Dutch treaty network.
2. Dividend withholding tax
Businesses and tax consultants regularly argue for the abolition of dividend withholding tax. However, the Cabinet does not consider it expedient to do this at present.
3. VAT: abolition of reduced rate, formalizing and computerization of supplemental returns
The Cabinet is looking to shift more of the tax burden away from direct taxes to taxes on consumption. The intention is to increase VAT, while at the same time lowering the tax rate for income received from work and profit. To this end, the Cabinet has chosen to gradually phase out the reduced VAT-rate. The current VAT reduced rate of 6% will be increased by 2% in 2012. The goal is one uniform VAT rate of 19%. The budgetary effect of increasing the reduced VAT rate from 6% to 8% will be EUR 1.4 billion. The final increase to 19% will result in an increase in revenue of EUR 9.2 billion.
The reduced VAT rate is, for example, applicable to food, medicine, medical aids, sport, recreation, books, and magazines. The effects will be felt most in the healthcare and food sectors. The Cabinet expects considerable opposition from Parliament in respect of increasing VAT on food. An alternative has therefore been proposed, whereby a reduced VAT rate for food would remain in place alongside a uniform VAT rate. To ensure that the tax revenue remains the same, the implementation of this alternative would necessitate a slight increase to the uniform VAT rate.
An important issue for businesses is the filing of adjustments to previously filed VAT returns, i.e. the supplemental returns. The Cabinet acknowledges that the supplemental returns have no legal basis and that the Dutch Revenue, out of necessity, has to process them manually. The Cabinet therefore intends to investigate if it can implement a legal basis for the supplemental returns, in order to make them part of the regular, computerized VAT return process. The Cabinet has also confirmed that the currently available choice between quarterly or monthly VAT returns will remain in place and that simplification of the small business regulation will be looked in to.
4. Total salary levy
The Cabinet intends to investigate the possibility of a total salary levy. The levy will apply one rate to the total salary amount paid by the employer. The fixed percentage that the employer must remit to the Dutch Revenue will be based on this total salary amount. The percentage will be determined in such a way that the budgetary gains from payroll tax and social security contributions, employee insurance contributions, and the income-related contributions to health insurance under the Healthcare Insurance Act can be realized. The aim is to simplify and lessen the employer’s administrative burden.
5. Uniform Definition of Salary
The bill Uniform Definition of Salary will be enacted as drafted.
6. Businesses whose income is subject to personal income tax
The Cabinet intends to focus business incentives more on growing businesses and will investigate the possibility of a ‘profit box’ with one or two tax rates. As a first step, the Cabinet will change the self-employed deduction to a fixed basic deduction. The profit-dependent exemption will remain.
7. Formal proposals
One of the Tax Agenda’s fundamental goals is a fraud-resistant tax system. To achieve this, the Cabinet has announced plans to simplify the tax system. It is the Cabinet’s intention to introduce simplified procedures in respect of the rules governing the relationship between the public and the Dutch Revenue, for example a personal internet page where businesses and individuals can easily and quickly register changes without having to resort to formal procedures. This must not, however, detrimentally effect the safeguarding of legal rights.
The Cabinet also intends to change the way tax disputes are handled. A bill will be introduced this year to make court proceedings regarding tax litigation open to the public.
Further emphasis will be placed on combating fraud. To this end, control measures, rather than legislative amendments will be announced. For example, a special anti-fraud working group (“the Anti-Fraud Box”) has been set up within the Dutch Revenue to combat system fraud.
The Cabinet has backtracked on its earlier proposal to differentiate the percentages for interest to be refunded to the taxpayer and interest to be paid by the taxpayer to the Dutch Revenue. It has been announced that the way in which interest on due taxes and late payment interest is dealt with will be amended. The current interest rule included in the General Administrative Law Act will act as starting point, and the period for which interest is calculated and/or refunded will be amended. These amendments will take effect as of 2013.