TAX

Dutch Tax Return: Heaven or Hell?

By Arjan Enneman

Nobody likes to pay taxes, although some people take a positive stance, saying, “the more tax I pay, the higher my income will have been.” A lot of people see paying tax as a punishment – but that, of course, is not the intention behind the tax system. The reason why tax has to be paid is to finance the collective services of the Dutch government which would otherwise not have been commercially interesting, or to provoke certain desired behaviour from Dutch residents.

Of course people try to find (legal) ways to evade taxation. The tax rates and national insurance contributions can be high. The taxpayer is becoming more and more inventive in finding ways to reduce the amount of tax he owes, and the government has to find ways to limit the taxpayer’s tax evasion.

Changes
The Netherlands’ income tax system was introduced in 1914, undergoing an update in 1964 and 1990. 2001 saw the introduction of the most recent big change. The government reduced the tax rates and at the same time cut a lot of tax deductions. This way the tax system became less complex, while the number of court cases were also reduced. At least that’s what they thought.

Electronic Filing of Tax Returns
Tax advisors and their clients kept looking for other options to reduce taxation. The Court of Justice couldn’t handle all cases. New rules led to new problems and the tax authorities were inundated with questions. To speed up the work of the tax authorities, the government introduced the electronic filing of tax returns. The tax returns could no longer be filed on paper and checked by a real tax inspector, but instead the tax returns were filed electronically and checked by the system. That’s when the real problems started.

Expatriate Tax Problems
Over the years, the tax office started to use different programmes from different suppliers – each meant to do part of the work. It turned out that these programmes couldn’t communicate with each other in the way that had been anticipated. The term ‘chaos’ was mentioned in parliament. The State Secretary of Finance admitted he didn’t have any solutions because it wasn’t even clear what the exact problems were. Recently the Dutch newspaper De Telegraaf wrote that it will probably take a couple of years before the tax assessments which are created by the system are correct. Until such time, the question will always remain what kind of message will be slipping out of the tax office’s blue envelopes that hit your doormat. Of course a letter of objection can always be sent, but this will lead to extra delays because tax returns then can’t be processed. Especially the more complicated tax returns for international situations suffer from this delay. An expatriate often has to wait more than one or even two years for his tax refund, which of course is not acceptable. It is time that, if the government wants to keep attracting international employees, they also focus on the specific tax problems of these expatriates.
Having said this, it is important that you, as an expatriate, look into the rules regarding filing a tax return. Although this may seem like a hellish task, being able to claim a tax refund can turn this experience into heaven. And we believe that the problems with the software system will be solved by the tax office eventually and that filing tax returns electronically will speed up the procedures.

Filing a Tax Return
In the Netherlands, the tax year is equal to the calendar year. Before April 1, a tax return needs to be filed for the previous year. This is, however, not always mandatory. In many situations where somebody has worked the whole year and is not able to claim any deduction or tax credit, the wage tax withheld on the salary is the final tax claim (see our article Tax Refund or Tax Assessment, page 12). This way the number of tax returns that have to be filed is reduced. The tax office will determine, based on the information they have received from third parties such as employers, banks, the municipality, insurance companies – and on tax returns from previous years – whether they need to send you a tax return. If you have to pay tax, you will most certainly receive an invitation to file a tax return. If you don’t receive this invitation before August 1 and you know that you have to pay additional tax, then you have to formally request the tax office to send you an invitation to file a tax return. If you are able to claim a refund because of certain deductions or because of having been tax resident for part of the year while you didn’t file a tax return in previous years ,then it may be necessary to file a tax return without the invitation. It is important to consider this; you don’t want to lose a refund because you were not invited to file a tax return.
As mentioned earlier, the deadline for tax returns is April 1, but a time extension can be arranged – a registered tax advisor can even arrange a time extension of one year or longer. To be able to file the tax return you will have to collect all the necessary documents, such as year end statements and proof of payment of certain deductions. A tax advisor can help you to determine what is required and what is deductible.

Interest Rates
It can take a long time before the tax authorities issue a tax assessment showing the expected refund. The tax authorities will however also calculate interest. The interest rates applying in 2007/2008 are:
1st quarter 2007: 4.7%
2nd quarter 2007: 5.0%
3rd quarter 2007: 5.25%
4th quarter 2007: 5.4%
1st quarter 2008: 5.3%
Saving money with the tax office can therefore be beneficial; where else will you get such a high interest rate? On the other hand you can borrow money from the tax office against a relatively low interest rate but don’t forget you will have to pay it all back in one go. If you want to minimize the amount of interest or speed up the payment of the refund, you can request the tax office to issue a provisional tax assessment, which can already be done during the year.

The filing procedure in the Netherlands can take a lot of time, but by respecting the rules and using the available options for reducing your tax liabilities, you can turn your worries into joy and make your stay in the Netherlands financially more worthwhile. Of course, also make sure whether the tax refund will be legally yours – see the article on page 12.

Arjan Enneman is managing director of Expatax BV, specialized in assisting expatriates and foreign companies with their tax issues in the Netherlands. He can be contacted on 030 - 246 85 36 or arjan@expatax.nl.