European Commissioner Wopke Hoekstra's Omnibus proposal could cost the Dutch treasury €8 billion a year in lost tax revenue. Leiden professors of tax law Jan van de Streek and Jan Vleggeert analysed the implications and see cause for concern.
The Omnibus proposal has been widely welcomed in Brussels because it is intended to simplify tax rules and make investment within the EU easier and less costly. The two professors analysed what the package could mean for the Dutch public finances and warn in a memorandum that someone will ultimately have to foot the bill.
Three reforms
The proposal contains three tax reforms that the professors say would have far-reaching consequences for the Dutch public finances.
- The Netherlands would no longer be allowed to levy withholding tax on dividends paid by Dutch listed companies to companies in other EU Member States. This would result in a structural loss of around €4 billion in tax revenue each year.
- The corporate income tax currently paid by Dutch companies on dividends received from other EU Member States would be abolished. According to the professors, this would undermine the proposed Box 3 tax reforms (on savings and investment income) and cost an estimated €1 billion a year.
- Companies would also be allowed to deduct substantially more interest expenses from their taxable profits, resulting in an additional annual loss of €2 to €3 billion for the Dutch treasury.
In total, the measures would cost an estimated €8 billion a year from 2037 onwards, and €3 billion a year as early as 2029.
'If businesses pay less tax, that shortfall will have to be made up elsewhere.'
We spoke to Jan Vleggeert, who says he is struck by the fact that the costs of the proposal have barely featured in the Dutch debate. Most of the attention has been positive, particularly from tax advisers and the business community - the very groups that stand to benefit from the package. 'This may well be beneficial for businesses, so criticism is unlikely to come from that quarter,' says Vleggeert. 'Nor do they have little reason to point out that it could have enormous budgetary consequences. That's where we come in.'
Shifting the burden
Who benefits from the gains ultimately determines who bears the costs. If businesses contribute €8 billion less to the public purse, the shortfall will have to be made up elsewhere. 'Minister Heinen doesn't have a money tree in his backyard,' says Vleggeert. The government has three options: borrow, cut expenditure, or increase other taxes.
Finance ministers are rarely keen on the first two options. That leaves passing the cost on to ordinary taxpayers, which Vleggeert says is 'not a particularly popular message.' The professors therefore favour a different approach. 'If these proposals generate an €8 billion windfall for businesses, the offsetting revenue should come from other measures that target businesses,' says Vleggeert. In other words, the bill should not be passed on to citizens.
Implications for Box 3
For the average Dutch saver, the immediate impact is likely to be limited. The dividend withholding tax that would be abolished, accounting for roughly half of the €8 billion revenue loss, is already borne primarily by foreign investors. However, the proposal would make investing through a private limited company (BV) more tax-efficient than investing directly as an individual. This sits uneasily with a core principle of the Dutch tax system: the way people choose to invest should not affect the amount of tax they ultimately pay.
The proposal also compounds a problem for which the Dutch government is already seeking a solution. Reform of Box 3 became an urgent priority after the Dutch Supreme Court ruled that the current system is incompatible with the European Convention on Human Rights. According to the professors, the Omnibus proposal would only complicate that reform.
'The proposal could have enormous budgetary consequences. That's precisely what we want to draw attention to.'
A long road ahead
Vleggeert describes the proposal's timeline as 'highly ambitious'. The package still requires the approval of all 27 EU Member States, and, in his view, the target implementation date of 1 January 2029 is already 'effectively unattainable'. Nor is the Netherlands the only Member State that would be affected. 'I expect there's still a long road ahead when it comes to negotiations,' he says. 'It's conceivable that the proposal will be watered down to such an extent that these elements disappear altogether.'
