The International Monetary Fund (IMF) has advised the Netherlands to simplify its value-added tax (VAT) regime.
In its 2014 Article IV consultation report for the country, the IMF welcomed the Governments planned reform of the tax system, but it said that consideration should be given to reducing VAT distortions and the labor tax wedge, and extending tax allowances to corporate equity.
The IMF has said that Dutch authorities should implement reform measures to amalgamate the nations 21 percent headline rate and its 6 percent reduced rate, which currently applies to foodstuffs, books, and pharmaceuticals, among other items.The report also said that reducing the labor tax wedge, especially the highest marginal tax rate, would help expand labor market supply and provide incentives for companies to hire. It noted that the Netherlands has one of the highest marginal income tax rates among members of the Organisation for Economic Cooperation and Development (OECD) at 52 percent.
Finally, the IMF noted that the tax system allows interest deductibility to households and corporations with no similar benefit to equity financing. To address this bias, an Allowance for Corporate Equity (ACE) could be introduced to extend tax allowances to corporate equity at a specified “normal return,” it said. The ACE could link the “normal return” to corporate bond rates, the allowance should only apply to new investments, and authorities should permit the netting of benefits for holding companies, the IMF said. The report added that such an approach could also be extended to households to build new home equity.
The Government plans to reduce the tax burden on labor by EUR1bn (USD1.24bn) next year by increasing the employed persons tax credit and cutting the lowest rate of income tax. It also plans to start discussions in 2016 on more fundamental reforms to the tax system.