2022 Tax Plan: Tax accounting considerations
22/12/21
Dutch Tax Plan 2022 substantively enacted
On Budget day 2021, the Dutch government announced several tax law changes as part of the Dutch Tax Plan 2022.
On 21 December 2021, the Dutch Senate (in Dutch: “Eerste Kamer”) adopted the Dutch tax plan 2022. This means that the proposed legislations as included in the Dutch Tax Plan 2022 are considered to be substantively enacted under IFRS and Dutch GAAP. As such, the tax accounting impact of these measures should be considered and taken into account for (interim) reporting periods ending on or after 21 December 2021. For US GAAP reporting purposes it is considered enacted when published in the official Gazette. The key tax accounting considerations are outlined below per measure.
CIT rate change
The (highest) CIT rate (currently being 25%) will increase to 25.8% as of 1 January 2022. No changes are implemented relating to the CIT rate of the lower income bracket (currently being 15%).
Tax accounting impact
IFRS and Dutch GAAP prescribe that deferred taxes are measured against the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Due to the substantive enactment of the proposed CIT rate increase to 25.8%, the existing deferred taxes should therefore be re-measured against the new CIT rate for (interim) reporting periods ending on or after 21 December 2021.
Remeasurement of existing deferred taxes could impact the effective tax rate (ETR) as follows:
- Remeasurement of existing deferred tax assets (DTAs) against the increased CIT rate would lead to a larger amount of DTAs, which subsequently could lead to a decrease of the ETR.
- The opposite effect is that the remeasurement of existing deferred tax liabilities (DTLs) would lead to a larger amount of DTLs, which subsequently could lead to an increase of the ETR.
Under IFRS and Dutch GAAP, an assessment should be made on how the impact of the tax rate change on deferred taxes should be accounted for in the financial statements, either in P&L, equity or other comprehensive income (i.e. application of the backwards tracing principle).
Tightening of the Dutch earnings stripping rule
Based on the current earnings stripping rule, interest expenses are limited in deduction as far as the balance of the interest due and received (i.e. net financing costs) exceeds the higher of the following two amounts: (i) 30% of the fiscal EBITDA; or (ii) an amount of EUR 1 million. The Dutch earnings stripping rule will be tightened by reducing the deductibility of interest based on the fiscal EBITDA from 30% to 20% for financial years starting on or after 1 January 2022. This change may potentially lead to a larger amount of net financing costs that will be treated as non-deductible in the Netherlands.
Tax accounting impact
Under the current Dutch earnings stripping rule mechanism, when a part of the net financing costs is not deductible in a certain year, that non-deductible amount can be carried forward (without time limitation) to the following years. The carried forward net financing costs may be taken into account (i.e. deducted) in a following year to the extent carry forward interest can be utilized in future years. For tax accounting purposes, the carry forward of net financing costs that have been treated as non-deductible in a certain year can be considered as a tax attribute (i.e. unused tax credit). For such unused tax credits, an assessment should be made whether a DTA should be recognised. In this respect, it should be assessed whether it is probable that future taxable profits will be available against which the unused tax credits can be utilized (i.e. DTA recognition assessment).
For (interim) reporting periods ending on/after 21 December 2021, the reduction from 30% to 20% should be considered in the DTA recognition assessment of the carried forward net financing costs.
Tax liability measure for reverse hybrids
Reverse hybrid entities (transparent according to Dutch law but non-transparent according to foreign law) will be liable to Dutch CIT as of 1 January 2022. This measure stems from the EU ATAD2 Directive. Read more.
Tax accounting impact
Pursuant to the new legislation, Dutch partnerships and entities established under foreign law located in the Netherlands that qualify as a reverse hybrid entity, will become a taxpaying entity (i.e. non-transparent) in the Netherlands as of 1 January 2022. This change in tax status will likely have tax accounting implications at the level of the reverse hybrid entity itself, but also for the participants in such an entity.
Tax accounting implications at the level of the reverse hybrid entity
- Due to the new CIT liability measure, a fiscal opening balance sheet should be prepared at the level of the reverse hybrid entity.
- Upon commencement of the CIT liability status (i.e. 1 January 2022), it should be assessed whether deferred taxes should be reported in the financial statements. Subsequently, the change in tax status will likely result in current or/and deferred tax impact after that date and thus will likely impact the ETR.
Tax accounting implications at the level of the participants
- Currently, reverse hybrid entities are often considered as transparent entities. The accounting for deferred taxes of investments in such entities may differ from the deferred tax accounting of investments in non-transparent entities (i.e. so-called look-through vs outside basis approach). Once reverse hybrid entities become subject to Dutch CIT, an assessment should be made on how this impacts the accounting for deferred taxes at the level of the participants (especially in the case of multiple participants).
- Due to the fact that reverse hybrid entities will be subject to Dutch dividend withholding tax and conditional withholding tax on interest and royalty payments, consideration should be given on how to present these taxes, when levied, in the financial statements i.e. as non-income or income tax (also referred as ‘above the line vs on the tax line’). Both approaches impact the ETR in a different way. Also, consideration should be given to whether deferred taxes for outside basis differences should be recognised when these entities become subject to Dutch dividend withholding tax.
Informal capital situations ('preventing mismatches when applying the arm's length principle')
Transactions between group companies should be based on sound business principles (i.e. at arm’s length). If the intergroup transactions are not carried out according to the at arm’s length principle, a correction will be included to arrive at an at arm’s length remuneration or payment. Such corrections are applied for Dutch tax purposes even if there is no corresponding adjustment made at the level of the other state involved in the intercompany transaction.
As of 1 January 2022, the at arm’s length expense will not (or not fully) be taken into account if the corresponding amount is not taxed (or is taxed at a lower amount) as income at the level of the group company that is involved in the intercompany transaction. Read more.
Tax accounting impact
We have outlined the tax accounting considerations of the key measures that are included in the new legislation here below.
No downward tax adjustment (i.e. tax deduction) in the Netherlands if there is no corresponding upward tax adjustment (i.e. tax levy) in the foreign state that is involved in the intercompany transaction.
This measure may lead to a higher taxable profit by not allowing ‘at arm's length’ tax deductions. As a result of this measure, both the current (i.e. no tax deduction allowed) and deferred taxes (pertaining to net operating losses (NOLs)) could be affected and thus potentially have an impact on the ETR of companies.
No step-up to the higher (at arm’s length) acquisition price of a business asset will be provided in the Netherlands if the Dutch taxpaying entity (i.e. acquiror) does not make it plausible that the higher acquisition price is also included in the profit tax base of the foreign group entity (i.e. transferor).
This measure may impact the depreciation amount of business assets acquired as from 1 January 2022 that fall within the scope of the envisaged legislation. This potentially could impact the current (i.e. lower depreciation allowed) and deferred tax position (pertaining to NOLs) of companies.
The depreciation on business assets transferred by another group entity to the Dutch taxpaying entity in the financial years starting on or after 1 July 2019 and before 1 January 2022 may be limited if the transfer of these assets would fall within the scope of the envisaged legislation.
- This measure impacts existing informal capital structures. The existing depreciation on business assets (that fall within the scope of this measure) will be affected. Consequently, the tax base of the aforementioned assets should be reassessed. This could potentially have an impact on the deferred taxes of companies.
- For financial statements that have not been issued yet (e.g. for FY 2020), an assessment should be made if the impact of these measures should be disclosed in the financial statements in line with IAS 10 Events after the Reporting Period or DAS 160.
Temporal limit with regard to set-off of dividend withholding tax with corporate income tax
As of 1 January 2022, the set-off of dividend withholding tax against Dutch CIT (and potentially gambling tax, also considered a pre-tax for CIT) will be limited to the amount of CIT due before the set-off. Dividend withholding taxes that cannot be set off in a year are carried forward to future years without time limitation.
Tax accounting impact
This new legislation affects non-CIT paying companies that are currently receiving a refund of Dutch withholding tax on dividends received.
From a tax accounting perspective, the nature of the Dutch withholding tax on dividends may change under this measure. Under the current legislation, Dutch withholding taxes on dividends are recorded as a current tax receivable, as these taxes could be set-off against the Dutch CIT due. If there is no Dutch CIT due, the Dutch withholding taxes on dividends may be refunded. Under the new legislation, the part of Dutch withholding taxes on dividends that cannot be offset in a year and that is carried forward to future years turns into a tax attribute (i.e. unused tax credit) for tax accounting purposes. For such unused tax credits, an assessment should also be made whether a DTA should be recognised. In this respect, it should be assessed whether it is probable that future taxable profits will be available against which the unused tax credits can be utilized (i.e. DTA recognition assessment).
Contact
For further details and advice on any of the subjects discussed in this publication, please contact your local PwC advisor or one of the below authors.
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