Dear FS Tax professional,
Plenty of topics to think about in the summer, for a large part relating to Banking regulations. Tax has become an additional item in Banking supervision, and time will tell how the regulators will deal with this additional information. Given the number of topics in the FS Tax arena, we have decided not to include VAT items in this 14th edition of our FS Tax newsletter, but to issue a separate FS VAT newsletter instead. We hope that you continue to find the contents of this newsletter useful and we encourage you to provide feedback to our FS Tax professionals or to your own contact person at KPMG Meijburg & Co.
Partner, Financial Services Tax
Table of Contents
- 1. Discriminatory taxation of Dutch-sourced dividends
- 2. Update Country by Country Reporting
- 3. New industry scheme for Dutch car leasing companies
- 4. Dutch tax authorities announce audit of large companies
- 5. Tax treatment of additional Tier 1 capital
- 6. Dutch Central Bank will investigate tax risks at Banks
- 7. Court of Justice of the European Union rejects UK challenge to EU Financial Transaction Tax
1. Discriminatory taxation of Dutch-sourced dividends
On April 16, 2014, the European Commission issued a reasoned opinion in which they asked the Netherlands to end the discriminatory taxation of Dutch-sourced dividends paid to EU/EEA insurance companies. In the absence of a satisfactory response within two months, the European Commission may refer the Netherlands to the Court of Justice of the European Union for an infringement procedure.
The abovementioned discrimination involves the following: Dutch insurance companies are effectively not taxed on dividends received on shares held in the framework of unit-linked insurances. For Dutch corporate income tax purposes, the insurance companies can deduct the increase in the obligation to their policyholders from the dividends received. As a result, the corporate income tax base is reduced to zero, while any withholding tax is credited. In contrast, the Netherlands taxes insurance companies established in the EU or the EEA (Norway, Liechtenstein and Iceland) on the gross Dutch dividends received on shares held in the framework of unit-linked insurance, without the possibility of a credit. The European Commission considers the higher taxation of insurance companies established elsewhere in the EU/EEA incompatible with Article 63 of the Treaty on the Functioning of the European Union and Article 40 of the European Economic Area Agreement. In our view, this request from the European Commission has a potential pan-European impact, since many other EU countries have similar legislation with regard to this taxation. This development may therefore be considered positive for Dutch insurance companies that are already claiming such refunds in other EU Member States. However, this procedure may also be a reason for the Dutch tax authorities to scrutinize the corporate income tax returns of Dutch insurance companies that have claimed a full or partial credit for withheld foreign WHT. Dutch insurance companies that have suffered substantial amounts of EU WHT should consider filing protective claims to preserve their rights before they expire.
If you have any questions about the above, please do not hesitate to contact Niels van der Wal.
2. Update Country by Country Reporting
As of April 22, 2014 the Lower House of the Dutch parliament (Tweede Kamer) approved the Decree on Country by Country Reporting of Financial institutions and Investment firms (attached). This decree implements Article 89 of CRD IV and was drafted after internet consultation and technical discussions between the Dutch Central Bank, the Dutch Banking Association and the Big Four.
The decree requires financial institutions and investment firms (hereafter “the banks”) to report on a consolidated basis – specified by Member State and by third country − the following in those countries where they have a permanent establishment:
a) Company name, nature of activities and geographical location;
c) Number of employees on a full time equivalent basis
d) Profit or loss before tax
e) Tax on profit or loss
f) Government subsidies received.
As of July 1, 2013 the banks must provide information on (a), (b) and (c), while global systemically important financial institutions must also provide information on (d), (e) and (f). The latter contains a confidential disclosure to the European Commission (EC) and the Dutch Central Bank. The EC will evaluate these disclosures, after which the regulations and any amendments thereto will apply to all banks as of January 1, 2015 (if not postponed by the EC) regarding FY 2014.
The main discussion has been about the interpretation of “tax on profit or loss”. The decree refers in this respect to the annual accounts of the banks, which means, in practice, the definition of income tax as it appears in IAS 12. IAS 12 defines income tax as taxes based on fiscal profits and includes withholding taxes which are payable by subsidiaries, associates and joint arrangements on distributions to the reporting entity. According to IAS 12, income tax includes both current tax and deferred tax; in other words: the effective tax and not the paid tax.
Another important issue is the definition of “consolidated basis”. The decree again refers to the regulations applicable to the annual accounts of the banks. This means that the banks can apply the same consolidation as that under IFRS or Dutch GAAP.
The decree does not apply to branches of a third country. If the parent entity of a Dutch branch or subsidiary already complies with Article 89 in a Member State, then the Dutch branch or subsidiary does not have to comply with the Dutch decree, provided it is clear where the information can be found (e.g. on the company’s website).
As announced in earlier publications of this FS Tax newsletter, several Member States (such as the UK) interpret “tax on profit or loss” as “cash tax paid”. The different interpretations of the term “tax on profit or loss” will obviously lead to different disclosures with respect to Article 89 of CRD IV.
Both the content of this regulation and the different interpretations of Article 89 in the Member States means that questions on interpretation and implementation may arise. If you have any questions in this respect, Michèle van der Zande would be happy to assist you.
3. New industry scheme for Dutch car leasing companies
The Dutch Tax and Customs Administration Amsterdam and the Dutch Association of Car Leasing Companies (Vereniging van Nederlandse Autoleasemaatschappijen; VNA) recently agreed on a new industry scheme that covers the annual profit determination of leasing companies affiliated with the VNA. The previous industry scheme, which ran until 2014, has undergone major changes. As of 2014, the possibilities for making transfers to the reinvestment reserve (“HIR”) have been extended and it is also once again possible to account for a liability item in respect of future maintenance. In addition, the differences in the determination of annual profit for tax and financial reporting purposes have been removed where possible. In addition to a copy of the scheme, please find attached the explanatory note prepared by KPMG Meijburg & Co, which has been approved by the tax authorities.
If you have any questions about the above, please do not hesitate to contact Leo van Elburg or Warner Bruins Slot.
4. Dutch tax authorities announce audit of large companies
Last Wednesday, the Dutch Tax and Customs Administration sent a letter to a select group of 350 large companies where horizontal monitoring has partially or fully been introduced. The letter notifies the recipients that a regular audit will be conducted, which will concentrate on the accuracy of the VAT and corporate income tax returns. In the attached letter, we explain in more detail what clients can expect from a tax audit and how they can prepare for this.
5. Tax treatment of additional Tier 1 capital
Under the old regime, the Netherlands and the other EU Member States treated additional Tier 1 capital as debt for tax purposes, which made the return tax deductible. As a result of the Capital Requirements Directive (CRD IV), which took effect as of January 1, 2014, additional Tier 1 capital issued after January 1, 2014 is no longer treated as debt for tax purposes and consequently the return is also no longer deductible. The new regime has led to a situation where Dutch banks are no longer on an equal footing with banks in other European countries.
On April 10, 2014 the Deputy Minister of Finance, Mr. Wiebes, announced by letter that he intends to resolve this inequality by assuring banks that the return on additional hybrid Tier 1 capital will be tax deductible and that it will be taken into account by the tax collector.
If you have any questions, please contact Niels Groothuizen.
6. Dutch Central Bank will investigate tax risks at Banks
The Dutch Central Bank has announced on their website (http://www.dnb.nl/publicatie/publicaties-dnb/nieuwsbrieven/nieuwsbrief-banken/nieuwsbrief-banken-april-2014/index.jsp) that they will review the tax risk management of banks. This leads to questions such as: what is the tax risk exposure and is a formal tax risk policy in place? The DCB’s main focus will be on whether the bank is in control for tax purposes. After its review, the Dutch Central Bank will test, possibly by means of statistical random sampling, the control procedures to ensure their effectiveness.
KPMG Meijburg & Co can assist you with designing a tax control framework and its implementation and testing. The tools we use to do this include data analyses and statistical sampling (please refer to the attached fact sheets). We have also developed a Maturity Monitor, which can be helpful in determining your current level of tax control. We refer to www.taxcontrol.nl.
7. Court of Justice of the European Union rejects UK challenge to EU Financial Transaction Tax
On April 30, 2014, the Court of Justice of the European Union (CJEU) rendered its decision in the United Kingdom of Great Britain and Northern Ireland v. Council of the European Union case (Case C-209/13). The UK government had filed an action for annulment of the decision of the Economic and Financial Affairs Council (ECOFIN) to authorize eleven EU Member States to move forward with a common Financial Transaction Tax under the enhanced cooperation procedure.
As a reaction to the financial crisis, the European Commission presented a proposal for an EU-wide Financial Transaction Tax. Due to a lack of consensus, the proposal could only be approved by applying the enhanced cooperation mechanism of the EU treaties. On January 22, 2013, the ECOFIN decided to authorize eleven Member States to move forward with a common Financial Transaction Tax under the enhanced cooperation procedure. Under enhanced cooperation, a limited number of Member States (at least nine) may adopt measures that will then only apply to those Member States, subject to complying with certain procedural and legal requirements.
The United Kingdom filed an action for annulment of the ECOFIN decision authorizing enhanced cooperation, on the grounds that it infringed provisions of the Treaty on the Functioning of the EU (TFEU). While recognizing that its action, brought as a precautionary measure, could be considered premature, the United Kingdom based its action on two legal arguments. The principal argument concerned the infringement of Article 327 TFEU and of customary international law insofar as the contested decision authorizes the adoption of an FTT with extraterritorial effect. The argument in the alternative concerned the infringement of Article 332 TFEU, in that the ECOFIN decision authorizes the adoption of an FTT which will impose costs on Member States that are not participating in the enhanced cooperation.
The CJEU Decision
The CJEU rejected the UK arguments on the grounds that they were directed at the elements of a potential FTT, and not at the authorization to establish enhanced cooperation, which was the subject of the UK action. Since the Council’s decision to authorize enhanced cooperation did not contain any substantive element on the FTT itself, the arguments were dismissed. Although the UK’s challenge was rejected, the CJEU did not rule out any future challenges, once the substantive elements of the FTT are known.