On April 21, 2023 the Dutch Secretary of State for Finances sent a letter to the House of Commons in which he replies to several motions that were adopted by the House of Commons with respect to the introduction of a broader windfall tax/solidarity contribution and an extra bracket in the Dutch corporate income tax (DCIT).
Over the last period the Dutch House of Commons adopted several motions that all regard the introduction of a broader levy/windfall tax to tax excess profits realized during a crisis, or that regards the introduction of a third bracket for Dutch corporate income tax purposes also meant to tax excess profits realized during a crisis. In his letter from April 21, 2023 the Secretary of State replies to these motions. Our eye immediately fell on the arguments the Secretary of State gives for why the Dutch government feels its unwise to introduce a ‘broader’ windfall tax/solidarity contribution to tax excess profits that are being realized during a crisis. Reason here for is that one of the arguments is similar to the argument we made in our article from September 19, 2022 (“What would be a suitable period for determining the normal profit when introducing a windfall tax?”) against the proposal of the European Commission to introduce a solidarity contribution for companies active in the oil industry.
In his letter the Secretary of State states that creating a general legal basis for a windfall tax/solidarity contribution for companies that benefit disproportionately from a crisis is legally impossible and is also considered undesirable by the Dutch government. In this respect the Secretary of State uses amongst other the following arguments. A tax basically consists of a taxpayer (the subject), the tax base over which the is levied (the object) and a (tax) rate. The basis for a tax is a formal law in which that core is clearly stated. Without it being clear which target group will be taxed, with regard to which excess profit and against what rate, it is impossible to create a legal basis.
In hi letter the Secretary of State argues that it is not easy to define the term ‘excess profit’ and that a definition can easily be arbitrary and subjective. The question that arises for example, is the question against which the profit in the year of assessment should be compared and why. This is similar with the argument we made in our article of September 19, 2022. The Secretary of State adds that another question that arises is what to do with the situation in which a loss arises after the year of profit.
The Secretary of State argues that in addition, making linking exceptional circumstances and excess profits is laborious and complex, because no measurable criterion exists. As a result, it is not possible to determine whether there is an excessive profit to which a solidarity contribution can be applied or whether there is a higher profit due to business economic circumstances. As the Secretary of State states a company's profit can also be higher as a result of successful innovation or a reward for risks taken. In addition, for example an incidental profit may be realized as a result of the sale of a business unit.
In addition to the legal objections referred to above, the Dutch government considers a broader solidarity contribution of which it is not clear whether it will be effective and, if so, what the consequences thereof will be, undesirable. According to the Secretary of State a broader solidarity contribution of which it is not clear in advance whether it will be effective and, if so, what its impact will be, leads to legal uncertainty for taxpayers and is detrimental to both the legislator's predictability and the government's reliability. In the government's opinion, a broader solidarity contribution will lead to arbitrary levies and disruptions in business economic processes. For example, investments that have already been planned can be reconsidered and the Netherlands will be less attractive for future investments and innovative activities. The Dutch government attaches importance to legal certainty and a predictable and stable investment climate, since these are important preconditions for (additional) investments. The Netherlands needs these investments, and innovative activities in particular, to face other challenges such as the energy transition. According to the Secretary of State the same objections apply to a broader solidarity contribution in a European context. Later this year the European Commission will present the EU-wide results of the solidarity levy. When these results are available, the Netherlands will ask attention for the lessons that individual Member States and the European Union as a whole can draw from the emergency intervention made regarding the high energy prices, of which the introduced temporary solidarity contribution was part.
A last argument that the Secretary of State table is the fact that the introduction of a broader windfall tax/solidarity contribution might put pressure on the Dutch tax authorities and the IT systems the Dutch tax authorities use.
The Secretary of State finishes by stating that due to the aforementioned legal complexity of a broader solidarity contribution and the fact that the government attaches importance to legal certainty and a stable and predictable investment climate, the government does not opt for such a broader solidarity contribution.
With respect to the introduction of a third/additional bracket for Dutch corporate income tax purposes, the Secretary of State states that similar objections apply as those that apply to the introduction of a broader solidarity contribution. It is legally laborious and complex to link exceptional circumstances in which that extra bracket would apply and any excess profits achieved due to those exceptional circumstances. No measurable criterion exists. In general, it cannot be determined whether an excessive profit exists to which an extra bracket in the Dutch corporate income tax should apply. It is therefore also not possible, if an extra bracket for Dutch corporate income tax purposes were to be introduced, to activate that extra bracket in crises and to deactivate it in normal circumstances. Due to the aforementioned legal objections and because it may encourage splitting behavior (and thus potential tax avoidance) the Dutch government considers it undesirable to introduce an additional bracket in the Dutch corporate income tax. Furthermore, this leads to legal uncertainty, where a predictable and stable investment climate is an important precondition for (additional) investments. Finally, it is legally and technically laborious and complex to link the exceptional circumstances in which that extra bracket would apply and any excess profits achieved through those exceptional circumstances.
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