Value added tax (VAT, in Dutch ‘BTW’) is levied in the Netherlands at each stage in the chain of production and distribution of goods and services. The tax base is the total amount charged for the transaction excluding VAT, with certain exceptions. Because of deductions in previous stages of the chain, VAT is not cumulative. Every taxable person is liable for VAT on his or her turnover (the output tax), from which the VAT charged on expenses and investments (the input tax) may be deducted. If the balance is positive, tax must be paid to the tax authorities. If the balance is negative, a refund is received. The tax paid by the ultimate consumers of the goods or services is not tax-deductible. The tax is based on the VAT rate applicable to the price of the goods or services received, exclusive VAT.
Taxable persons are persons conducting a business, who are defined as those who conduct independent business, including natural persons, corporate bodies, partnerships, associations etc. Combinations of bodies forming a single financial, organizational, and economic entity can be considered as a fiscal unit for vat purposes. In such cases, the supply of goods and services within the unit is not subject to VAT. A public body can also act as a taxable person if its activities do not involve public duties.
There are four taxable activities:
- supplying goods;
- rendering services;
- acquisition of goods by businesses;
- importing goods.
Supplying goods and services
The term ‘supplying goods’ (goods are all physical objects, but also include electricity, heating, cooling, etc.) is interpreted in its broadest sense. For example, for VAT purposes the following activities are considered as supplying goods:
- the transfer of ownership of goods under an agreement;
- the transfer of goods on the basis of a hire purchase agreement;
- the delivery of goods by a manufacturer who has manufactured the goods from materials provided by the consumer;
- the private use of goods by a business;
- the self-supply of goods, if the goods are involved in exemption transactions for which prepaid tax cannot be deducted, or is only partly deductible.
Services are defined as all activities performed for remuneration that are not classed as supplying goods.
Location of deliveries and services
Although the difference between supplying goods and rendering services is usually a purely theoretical one, there is a valid reason for distinguishing between them concerning location. Transactions are subject to the conditions and rates applicable at the location concerned. The location at which the goods are supplied is defined as the location of the goods at the time of supply. An exception is made for goods transported in connection with the supply. In such cases, the location of supply is the location at which the transportation began. Another exception is made for a series of supplies of imported goods. In such cases, the location of all the supplies is the Netherlands.
The location at which services are rendered is generally deemed the place of residence or establishment of the person rendering the services. However, there is a separate regulation for certain services. A few examples include services involving copyrights and advertising, advice, information, banking, insurance and the services of employment agencies etc.
Where the services are rendered is the place of establishment of the person to whom the services are rendered. Services involving immovable property are rendered at the location of the property.
Several types of transactions are exempt from VAT. An exemption means that tax for the transactions should not be charged and that prepaid VAT attributable to those transactions cannot be deducted. Exemptions apply to transactions such as:
- the transfer or rental of immovable property, with certain exceptions. For example, when a newly-built property is supplied, for a period of two years after it is first used, and property when the supplier and recipient have opted for taxable delivery are taxable; however the possibility to opt for taxation is restricted to situations in which the property is used for (almost) wholly taxable purposes;
- medical services;
- services provided by educational establishments;
- sociocultural services;
- most services performed by banks;
- insurance transactions;
- non-commercial activities by public radio and television broadcasting organizations;
- postal services;
- sports (not entrance fees);
- the services of composers, writers and journalists.
Special arrangements for sole traders and the agricultural sector
Sole traders enjoy a tax reduction. If the VAT to be paid after the deduction of prepaid VAT is less than € 1,883, a reduction is granted of (€ 1,883 minus the VAT due) x 2.5. If a sole trader consequently does not have to pay any VAT to the authorities, he or she may request to be relieved of the obligation to keep accounts.
A special provision applies to the agricultural sector, i.e. arable farming, cattle breeding and horticulture, which is designed to exclude the agricultural sector from the VAT system entirely. Farmers do not charge VAT and do not have the right to deduct prepaid VAT. Buyers of agricultural products from these farmers receive a fixed prepaid VAT deduction of 5.1%. If the tax prepaid by the farmer were more than 5.1% of the value of his sales, this special provision would put him or his customers at a disadvantage. In such cases the farmer may then opt for the usual statutory regulation.
The general rate is 21%. A reduced rate of 6% is applicable to the supply, import, and acquisition of goods and services mentioned in Annex 1 to the VAT Act. The reduced rate is mainly applicable to foodstuffs and medicines. Other goods and services subject to the lower rate include water, art, books, newspapers and magazines, materials required by the visually handicapped, artificial limbs, certain goods and services for agricultural use, passenger transport, hotel accommodation and entrance fees for museums, cinemas, sports events, amusement parks, zoos and circuses and some labour-intensive services. The zero rate is intended primarily for exported goods, seagoing vessels and aircraft used for international transport, gold destined for central banks, and any activities which may take place within bonded warehouses or their equivalent. There is also a zero rate for goods that are transported to another EU Member State on which VAT is levied because of the acquisition in that Member State.
The VAT system in the single European market
The single European market became effective from 1 January 1993. From this date onwards, goods, persons, services and capital may move freely within the EU. The transitional arrangements that apply after this date, for which the 1968 Turnover Tax Act of the Netherlands was amended, contain the following main points.
- Private persons buying goods in another Member State pay VAT in the country in which the goods are bought (based on the country of origin principle). Exemption on exports from the Member State and the obligation to pay VAT on goods upon arrival in the Netherlands do not apply.
- VAT is levied in the Member State to which the goods are transported for trade in goods between businesses in Member States (based on the country of destination principle) at the rates and under the conditions of that Member State. The business supplying the goods applies the zero rate. The business receiving the goods submits a tax return with regard to the goods purchased in another Member State. (This transitional arrangement applies up to the date on which transactions become subject to the country of origin principle).
- The country of destination principle also applies to intra-community deliveries to exempted parties, farmers falling under a lump-sum compensation scheme and legal entities not liable for taxation (authorities), unless the total value of the goods purchased exceeds the threshold of € 10,437.
- A similar provision to the one referred to in point 3 applies for mail order transactions or teleshopping involving private persons, exempted businesses, legal entities not liable for taxation and farmers entitled to a lump-sum compensation scheme. The threshold is € 104,369.
- The country of destination principle always applies to the purchase of new, or almost new, motor cars by private persons or businesses in another Member State.
- Every business making intra-community deliveries to another Member State must submit regular reports regarding deliveries subject to taxation in that Member State (known as the listing requirement). The business will be required to supply further details if this is necessary for intra-community checks on imposing vat.
- Because border controls for tax purposes have been discontinued within the EU, VAT levies on imports and the zero rate for exports apply only to goods outside the EU.
Imports are confined to bringing goods from countries outside the EU into free circulation in the Netherlands. The rates to be applied are the same as those applicable to supplies of goods in the Netherlands. VAT will be levied either in the same way as import duties or, after the appropriate license has been granted, in accordance with the deferred payment system. The customs procedure applies to the first situation. This means that the declarant must pay the tax due when submitting an import declaration, or else provide security for this purpose. In the second situation, the tax due is collected from the business that is the destination of the goods.The time of payment is then deferred until the time at which the business must submit a periodic domestic VAT return. In such cases, the time of payment coincides with the right to deduct the same tax. There are exemptions on imports, but these do not affect the right to deduct VAT on input.
Tax returns and assessments
Tax returns may be for monthly periods, quarterly periods, or annually, depending on the amount of VAT due. Almost all VAT returns are prepared and dispatched through a computerized system. The system checks that the forms are returned and the amounts in question are paid in good time. The return must be submitted within one month from the end of the period to which it relates. The tax owed must also be paid within this period.When no tax is due, or a refund is requested, returns should be submitted within one month.
A significant percentage of retrospective assessments is caused by returns being submitted too late, or the relevant payment not being made in good time. As mentioned above, these are monitored by a computer system, which automatically prepares a retrospective assessment if a payment is not made, or a return is not submitted in good time. The system uses information from returns relating to previous periods to determine the amount of the assessment for the period in question.
In addition to assessments resulting from failure to file a return or pay the tax owed in good time, retrospective assessments are also issued if checks reveal that insufficient VAT has been paid. Taxpayers can object and lodge an appeal against retrospective assessments. However, this does not suspend the obligation to pay the tax deemed to be payable.