Tax accounting impact Tax Plan 2021
15/09/20
An updated version of this article is available here.
On Budget day 2020, the Dutch government announced several tax law changes as part of the Dutch Tax Plan 2021. These legislative proposals, when (substantively) enacted, are likely to have tax accounting implications. Key takeaways of the Tax Plan 2021 (under IFRS) are outlined below per measure, as these are expected to be (substantively) enacted before year end 2020.
Rate change CIT
The previously announced tax rate reduction in the high rate of corporate income tax from 25 to 21.7 percent will not be implemented. However, the corporate income tax rate applicable to the first bracket is still going to be decreased from 16.5 to 15 per cent. This low rate will apply in 2021 for profits up to EUR 245,000 and in 2022 this threshold will be increased to EUR 395,000.
Tax accounting impact
Remeasurement of existing deferred taxes could impact the effective tax rate (ETR) as follows:
- Remeasurement of existing deferred tax assets (DTAs) when applying a higher tax rate would lead to higher DTAs, which could lead to a decrease of the ETR.
- The remeasurement of existing deferred tax liabilities (DTLs) would lead to higher DTLs which could lead to an increase of the ETR.
Note that an assessment needs to be made of how the impact of the tax rate change on deferred taxes should be reported in the financial statements, either in P&L, equity or other comprehensive income (i.e. backwards tracing).
Innovation box rate change
Profits from research and development are taxed at a favourable rate in the Netherlands under the innovation box regime. The effective tax rate of the innovation box will be increased from 7 per cent to 9 per cent.
Tax accounting impact
Depending on the applied methodology to determine the tax base, this proposed change in tax rate could lead the re-measurement of the deferred taxes relating to the Innovation Box activities as follows:
- Re-measurement of existing DTAs when applying a higher tax rate could lead to higher DTAs which would lead to a decrease of the ETR.
- Whereas the re-measurement of existing DTLs could lead to higher DTLs which would lead to an increase of the ETR.
Corona reserve
If 2020 is expected to become a tax loss year for your company, while 2019 was a profitable year, an early reduction of your 2019 tax liability might be available by forming a corona reserve in your financial year (FY) 2019 tax return, which subsequently reverses in FY 2020.
This reserve can be formed up to the amount of the lowest of the FY 2020 (expected) loss or FY 2019 taxable profits. Any remaining losses that exceed the profits of the previous financial year, can still be set off against the profits of the six subsequent financial years. Thereby in effect having roughly the same outcome as a carry back.
This 'carry back of tax losses' is effectuated when filing the corporate income tax return for 2020. Because the tax returns for 2020 will only be submitted in 2021 or later and as the government considers it undesirable for companies to have to wait so long to collect a refund for a regular carry back, the government allows the formation of this 'tax corona reserve' for 2019.
This is elaborated in the Besluit noodmaatregelen coronacrisis of 8 May 2020 (Decree) and now also in the Tax Plan 2021.
The most important requirements are as follows:
- A ‘corona-related loss’ for book year 2020 should be expected.
- The ‘corona-related loss’ shall not exceed the total losses for 2020.
- The company’s loss that you are expecting to suffer in 2020 as a result of the corona crisis can be brought to a corona tax reserve against your profits for 2019. The corona tax reserve should not exceed the total amount of profits for 2019. The tax result for 2019 therefore cannot become negative as a result of this reserve.
- The corona tax reserve should be released within book year 2020 and hence, reduces the 2020 losses of your company.
- The addition to the corona tax reserve will be included in the 2019 tax return under the section “other tax reserves”. The release of the corona tax reserve in the book year 2020 is included as a withdrawal under the same heading of the 2020 tax return.
Tax accounting impact
Notwithstanding the retroactive force of the corona reserve to 2019, the impact of the corona reserve should be considered (substantively) enacted in the FY2020 financial statements. The corona reserve effectively means that the expected 2020 loss can be used to offset the 2019 taxable amount, resulting a current tax benefit i.e. reduction of the 2019 current tax liability. We note that in case the corona reserve is to be used, an assessment should be made if any remaining carryforward losses (if any) can be recognised. If not, this could affect the ETR (i.e. increase of the ETR).
For (open) financial statements 2019, an assessment should be made if the impact of the corona reserve should be stated in the disclosures of the financial statements in line with IAS 10.
Amendments to loss set-off regime
The Dutch government has announced that a separate bill proposal will be submitted that will amend the loss set-off scheme.
The bill proposal is expected to result in an indefinite loss carry-forward period (currently six years) as from 1 January 2022. However, losses can only be fully deducted (both forwards and backwards) up to an amount of EUR 1 million in taxable profits. In case of taxable profits of more than EUR 1 million, the losses will only be deductible up to 50 per cent of that higher taxable profit. For example, in case of a deductible loss of EUR 3 million and profits in the following year of EUR 4 million, EUR 2.5 million of profit can therefore be offset against losses (namely EUR 1 million and 50 per cent of the remaining EUR 3 million) and corporate tax will be paid over EUR 1.5 million.
As a result, larger profitable companies might still need to pay an amount of corporate tax in profitable years, even if there are enough unused tax losses available.
Tax accounting impact
The envisaged new loss set-off rules should be considered in the DTA recognition analysis for losses incurred as of 2022 (assuming the new rules apply for losses incurred as of 2022). Depending on the profit forecast of the company, an indefinite loss carry-forward rule could potentially increase the ‘headroom’ for the recognition of a DTA for unused tax losses. However, due to the introduction of a ’cap’ on the loss set-off rules the amount of required taxable profits to utilise all available tax losses might increase, which might decrease the DTA.
With an indefinite loss carry-forward the forecasting period will be very relevant. The further the company needs to look into the future to estimate taxable profits the harder it will be to come with a reliable estimate.
With the introduction of a ‘cap’ on loss compensation the ‘cash ETR’ could also be considered by the company (cashflow: i.e. actual paid corporate income tax).
N.B.: in the meantime the intended adjustment of the loss set-off rules has been published per Amendment Note. For the possible tax accounting impact of this, see 'Tax accounting impact proposed measure loss compensation'.
Changes to anti-abuse rules on interest (Article 10a CITA)
Under certain circumstances, the anti-abuse rules on interest and related costs could in effect result in a tax exception instead of a tax deduction limitation. (e.g. if foreign exchange gains exceed the interest costs on certain internal group debts) The rule is adjusted so that the exemption cannot be higher than the deduction limitation. The assessment will take place on a loan-by-loan basis.
Tax accounting impact
With the adjustment that the exemption cannot be higher than the deduction limitation, a potential permanent difference for interest and FX for such loans could be different as of 2021. This could affect the ETR as of 2021.
Amendments to liquidation loss rule
The bill to limit deduction of liquidation and cessation losses largely corresponds to the previously published private member's bill. Insofar as the liquidation loss exceeds EUR 5 million, it can only be considered if the taxpayer has significant authority in the dissolved entity and the dissolved entity is located in the Netherlands, another EU/EEA Member State, or a state with which the EU has concluded a specific association agreement.
The liquidation must have been completed within three years after it started, or within three years after the decision to liquidate. This time-related condition applies to all liquidation losses, irrespective of their size. A grandfathering rule applies to liquidations which have been decided on before 1 January 2021.
Tax accounting impact
The (potential) liquidation loss could be recognized as a DTA i.e. future deductible temporary difference. When assessing the recognition of the DTA, these amendments to the liquidation loss rule should be considered.
Conditional withholding tax on interest and royalties
Tax Plan 2020 – applicable as of 1 January 2021
By the 2021 Bill on withholding tax - part of the 2020 Tax Plan - a conditional source tax was introduced for outbound interest and royalty payments to related parties that
- are resident in countries without tax on profits or countries that levy such tax at a nominal rate of lower than 9 per cent,
- are resident in countries included in the EU list of non-cooperative jurisdictions, and/or
- in tax abusive situations
The tax rate for the source tax will be equal to the highest rate of the corporate income tax, i.e. 25% (2021). The bill will enter into force on 1 January 2021.
Tax accounting impact
With the introduction of the withholding tax on interest and royalty payments, consideration should be given on how the proposed (new) withholding tax is presented in the financial statements of the recipient, as a non-income or income tax (i.e. above the line or below the line). Both approaches impact the ETR in a different way. If the withholding tax is considered an income tax, deferred taxes should potentially be recognised.
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