Tax Advisers - Deloitte

The Netherlands
Protecting against tax risk
Frits Barnard
Deloitte
Amsterdam
The public, investors and the tax authorities have become
increasingly impatient with manifestations of white-collar
crime, such as accounting scandals, options that are backdated,
insider trading and tax schemes that are unable to stand up to
official scrutiny. The climate created by this general disquiet
also has implications for tax planning. While a sharp
distinction, based on the principle of legality, has traditionally
been made between tax planning on the one hand and tax
fraud on the other, this distinction may have become blurred
in practice. More than ever, it is important for companies to
ask what they can do to protect themselves against both tax
risk and the risk of damage to their reputations.
New filing procedures
Historically, a company would file a corporate tax return in
paper form, attaching as many clarifications and exhibits as it considered appropriate.
The tax inspector reviewed the return and raised an assessment, but at that point was
not able to impose a penalty. Because an additional assessment could only be made
(and a penalty could only be imposed) when the tax inspector discovered new facts or
could prove that the taxpayer had not acted in good faith, companies were encouraged
to file extensive explanations and exhibits together with their returns. As long as
positions were properly disclosed in the return, penalties were almost never imposed,
regardless of the merits of the position.
Today, the requirement to file returns electronically leaves much less latitude for
attaching exhibits and explanations. Now a tax inspector can impose penalties of up to
100% of the under-reported tax due when raising an initial assessment. Although the
Netherlands has no formal rules requiring the reporting of particular tax structures (as
do the US and the UK), in practice, companies should seriously consider whether
positions adopted in their tax returns are sufficiently defensible.
Increased scrutiny
The tax authorities are increasingly focusing their attention on the substance of
structures and transactions rather than their technical, formal merits. The authorities
are aware that multinational enterprises engage in very complex transactions that
sometimes carry a substantial tax risk. While in the past the authorities were often
content almost to facilitate such transactions, they are now clearly concerned to
uncover the underlying tax issues. They have been successful in challenging certain
offshore structures on the grounds that those structures lacked substance. Transfer
pricing also has become the subject of much attention, and taxpayers are required by
law to maintain full transfer-pricing documentation. Audits now encompass reviews of
due diligence reports, minutes of board meetings and even e-mail correspondence.
There may well be a point at which the tax authorities perceive that a transaction or
structure is so lacking in substance that it may be regarded as tax fraud rather than
legitimate tax planning.
The tax authorities have a choice between imposing administrative penalties or
referring a case to the public prosecutor. More and more cases are considered for
prosecution and the Ministry of Justice has made more resources available for public
prosecution, with the result that the number of high visibility cases that go to trial has
increased over the last few years.
The Dutch tax authorities have adopted the US approach of dividing taxpayers into
risk categories to allow them to concentrate their enforcement efforts on those
designated as a high risk. However, the classification is quite arbitrary, and amounts to
little more than a system for punishing aggressive tax planning without legal basis.
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