Job van der Pol: Prospective new investors into the Netherlands can reduce the risk of becoming involved in a dispute with the Netherlands tax authorities through concluding an advance tax ruling (ATR) and/or an advance pricing agreement (APA).
This is not obligatory, but an option for investors who wish to have certainty in advance, without running the risk of having to debate the issue at stake a number of years later when the tax return is filed. As regards the matters covered by such ATR / APA, the risk of dispute would be (largely) non-existent, provided full disclosure of relevant facts has been given at the time the ATR/APA has been obtained and these facts have not materially changed.
Companies that are already active in the Netherlands also have the option of obtaining an ATR or APA. Large corporate taxpayers (and, increasingly, small and medium sized taxpayers as well), however, will typically conclude a horizontal monitoring covenant with the Netherlands tax authorities. As per such covenant, the tax authorities and the taxpayer will strive towards a transparent relationship in which the taxpayer will keep its tax inspector up-to-date on developments.
Accordingly, these taxpayers are less likely to request an ATR or APA, although on specific subjects this may well happen.
Also, less formalised rulings can be obtained in practice. Under the administrative concept of justifiable trust the tax authorities may be bound to honour confirmations given to tax payers on tax positions discussed, again under the condition that full disclosure was made and provided the tax payer is otherwise in good faith. One of the objectives of a covenant is to avoid becoming involved in disputes with the tax authorities, but in some circumstances the covenant leaves room for agreeing to disagree, which would mean that parties can agree to submit a technical dispute to the tax court.
What options do taxpayers in the Netherlands have to resolve tax disputes with the authorities other than litigation?
Settlement is a widely used and commonly accepted method of resolving tax disputes. Large Netherlands corporate taxpayers ,as well as the tax authorities, would often attempt to settle any disputes before going to court, and even after a dispute has been brought to court but a final judgement has not been given. This frequently occurs.
If a matter is taken to court, the larger taxpayers and the tax authorities would typically try to agree on what they disagree on – which ideally would only be technical matters of tax law, and not matters of fact.
This is primarily because of the cost, timing aspects (if disputes involve more instances, for example, Supreme Court and/or European Court of Justice, cases may take many years) and reputational risk a court case involves, even though tax court cases are typically only published in an anonymous form. Settlements obviously need to conform to the tax laws and case law.
Having said that, in cases where there is material uncertainty about the interpretation of the tax law, settlements can also take into account such uncertainty (in which case the tax under dispute is paid for a certain part only).
More recently, mediation has come up as an alternative dispute resolution mechanism. Mediation was rolled out generally in 2007 and is now offered by the lower and district courts as an alternative dispute resolution mechanism in tax matters.
Mediation can be started both before and during a matter having been taken to court. In fact, the tax judge could bring the possibility of mediation to the parties’ attention whilst the procedure is ongoing. Even after such suggestion by the tax court, both parties still need to voluntarily elect for mediation – which is obviously one of the key factors for any mediation; in other words, either party can decide to continue the court proceedings.
From my own experience in tax dispute matters I have worked on, mediation was considered in a situation where the relationship between the tax inspector(s) and the taxpayer’s representative was difficult. In fact, this may have been partly to blame for the dispute in the first place and going to court was likely to result in the conflict escalating even further, whilst the parties involved would have to continue a working relationship for the years to come.
Whilst seeing the pros of mediation in this particular situation, there was some reluctance because mediation is still relatively new ground for large corporate taxpayers. Mediation is not generally considered a suitable instrument for resolving disputes on technical tax matters. One of the issues around mediation is the use of internal mediators employed by the tax authorities.
Are you seeing any trends in the types of cases the Dutch tax authorities are taking up, and those where they are succeeding in the courts?
The Netherlands tax authorities have, in recent years, been particularly active and successful in questioning the arm’s-length character of intercompany loans.
Taxpayers will, in response to these court cases, ensure to have documentation in place substantiating the arm’s-length nature of the terms and conditions of intercompany loan arrangements, in particular showing that the creditor is not taking any risks it is only willing to accept because of the shareholder relationship with the debtor. Despite the increased awareness with taxpayers, this issue is likely to be the subject of a number of future court cases.
The number of disputes in which large taxpayers have been involved seems to have decreased as a result of the horizontal monitoring approach. Cases that have reached the courts are more focused on principal matters of law, rather than on factual disputes.
What do you think taxpayers can expect from the Dutch tax authorities in the future?
Horizontal monitoring will continue to be high on the tax authorities’ agenda. With the objective of devoting audit resources as efficiently as possible, the tax authorities endeavour to work in the present and to not have to audit the past.
As mentioned before, under the terms of a covenant, the authorities and the taxpayer will strive towards a transparent relationship in which the taxpayer will keep its tax inspector updated on developments. Before entering into the covenant, the tax authorities will typically audit any years not audited yet with a view to commence the horizontal monitoring approach with a fresh start.
In such cleaning up the past approaches, there is sometimes room for the taxpayer to settle past tax controversies. The taxpayer will have to commit not to actively seek the boundaries of what is acceptable tax structuring, to disclose to the tax authorities the accounting treatment of certain tax-driven structures and to transparently discuss all material tax risks. In return, the tax authorities commit to dealing with the tax assessments and questions from the taxpayer in an expeditious manner and in principle not to conduct extensive tax audits. Moreover, the taxpayer will have to set up a tax control framework, which is to be agreed upon (and audited) by the tax authorities.
A recent review of these practices by an independent committee, however, may lead to more confirmatory audits being carried out on the effectiveness and completeness of tax control frameworks. There is pressure from parliament (and recently also a policy intention by the new government was published) to confirm that disclosures made by larger tax payers are complete and correct. This may mean increased audit activity.
