LEGAL AFFAIRS

A Tax Refund or a Tax Assessment: Is It Legally Yours?

By Liane van de Vrugt

Many, many years ago, employees received their wages every week in cash in so-called pay packets. The pay-out generally took place in bars and similar such places. In order to prevent these employees from spending their whole salary on alcohol (which was actually common practice) instead of on food and clothing for their families – not to mention taxes – the Dutch government decided, as of January 1, 1941, to enforce an advance levy on the income taxes due.

In short, this advance levy, currently laid down in the Dutch Wage Tax Act 1964, comes down to the following: although the employee remains the tax subject (i.e. the one responsible for paying taxes) his employer acts as his wage withholding agent. As such, the employer takes care of withholding wage taxes and social security premiums and the subsequent remittance to the competent authorities.

In theory, the total annual wage withholdings should equal the amount of income taxes due when the employee files his annual income tax return. The employee is not entitled to a tax refund nor is he obliged to pay additional taxes. In practice, this is only the case for employees who do not have a mortgage, other income tax-deductible items, or assets. Especially in the case of expats who are assigned temporarily to the Netherlands on either a tax equalisation or net salary basis, discussions might arise as to who is entitled to a tax refund. Is it the employee or his employer? And what if additional tax assessments are levied? Are these assessments for the account of the employee or his employer?

The Notion of Tax Equalisation
The principles behind a ‘tax equalisation policy’ is that the employee should neither suffer financial hardship nor enjoy a financial windfall, as a result of the tax consequences of an international assignment. He or she should pay neither higher nor lower taxes than he would have had he never left his former home. Hence, the employer should be paying all related worldwide effective taxes for the employee. This policy serves to put the employee in a tax-neutral position during the assignment.
Mobility is promoted because several assignment locations constitute neither a tax benefit nor a tax disadvantage for the employee. Compliance with both home and local tax laws is a must. Under this policy, the employer pays all worldwide actual taxes, while the employee pays only his usual home country taxes.
In order to implement the tax equalisation procedures, the employer withholds a hypothetical tax from the employee when the international assignment starts. At the end of the year, the hypothetical tax is compared with the estimated home country taxes, and a settlement is made. But what if the partner of the employee also earns an income and different tax rates apply? What if personal decisions, such as keeping a second or third home, influence the actual tax burden?

The Notion of Net Salary
In case of net salary arrangements, the employee is entitled to a certain net amount and the employer is to gross-up the net amounts due.
The employer profits from certain tax benefits such as the 30%-allowance and is the one responsible for a correct wage tax return. The employee is only interested in a net income. But when filing his income tax return, this employee can be confronted with negative consequences such as the following, this time from a Belgian source: (http://www.xpats.com)
“Could you please give me some advice. I am an expat on a ‘net’ salary contract. The company has just given me my tax return to sign. This year there is a tax shortfall, so that I need to pay the ‘fisc’ a few hundred euros. My problem is that the company have assigned a proportion of my salary to my wife. By doing this have they seem to have effectively reduced the shortfall. My question, and the answer seems obvious to me, but I am Belgian tax native, I was assuming that the benefit of transferring money to my wife’s name should accrue to me, not benefit the company? Anyone had similar experiences? What can we do? Can we opt to file separate returns?”
Some of the answers are (in whole or partly quoted and anonymous):

“Read your contract, but if they have guaranteed you a 'net' salary, then you should not have to pay the fisc anything. Also, by agreeing to a 'net' salary, and to have the company file your tax returns, you have effectively given them the right to do whatever they want with your tax situation and allowances. All they have to do is provide you with the 'net' salary they said they would. If that means using your tax allowances efficiently (i.e. by allocating some of your income to your wife), then that's their problem, not yours.”

“My contract states a net salary – not that they will file a return for me. And for sure my wife is not under contract with the company.”

“You are being paid a NET salary, i.e. your company carries the burden of filing a tax return for you while you stay in Belgium. Should they then not also transfer the benefit of any tax breaks they can find on wives, children, live-in pets and pests? After all, this does not influence the (undoubtedly generous) NET salary that you have been granted through your contract of employment.”

What Is the Correct Answer?
The correct answer should be in the contract. Therefore, before actually signing the contract you should discuss with your employer all items that are included in the tax equalisation or net salary arrangement. Does the arrangement include personal income or only employment income? Has your whole personal situation (partner/kids/personal assets) been taken into account or only your employment situation? Who will file the tax return and who will bear these costs? Make pro forma calculations to see what the actual tax consequences will be. Explicitly state in writing which items fall within the scope of the arrangement. If you do this, you can avoid unpleasant surprises when filing your income tax return. So be prepared!

Liane van de Vrugt is a lawyer, specialised in the fields of (international) labour law, social security, wage tax and pensions. She can be contacted on 010 - 848 68 71 or lvdvrugt@vedeve.com.