Insight into schemes that reduce the liability to tax
An analysis of tax schemes that reduce the government’s tax take
An audit of tax schemes in the Netherlands that reduce the government’s tax take, further to the government’s wish to review the Dutch tax system. We determined which policy goals were being pursued by these tax facilities and instruments, their financial importance, where ministerial responsibilities lay, whether the schemes had been evaluated and how parliament had been informed of them. Parliament can use this information to determine whether policy goals are being achieved through the use of these schemes and weigh the facilities and instruments up against the demands made on the public purse.
Conclusions Insight into schemes that reduce the liability to tax
Parliament does not have a full understanding
We found that parliament is not periodically provided with a full understanding of Dutch tax schemes that reduce the tax take. It does not receive information about the intended goals and effects of a large proportion of the tax facilities, or at what price they are achieved. It is also not clear which minister is responsible for many of the tax facilities.
Financial importance
The tax facilities and instruments have a significant financial importance. It is estimated at at least €97.6 billion. We identified 179 tax facilities and 34 tax instruments in the tax legislation we studied. We cannot calculate their precise financial importance because figures (financial estimates or actual figures) are not known on a considerable proportion of them.
Responsibility for tax facilities and tax instruments
The State Secretary for Finance is responsible for the implementation of tax laws and therefore for all tax facilities and instruments. We found, however, that it was not known who had actual responsibility for 89 of the facilities. This uncertainty makes it difficult to render account for the achievement of the intended policy goals and it is not known how much it costs to achieve a policy goal. We did not study this point further for the tax instruments.
Limited information provided to the House of Representatives
We found that the Budget Memorandum periodically informed parliament of some of the facilities in accordance with the agreements made with the House of Representatives. We also found that there was no requirement to evaluate 89 of the tax facilities. It is therefore not known whether 89 tax facilities and the 34 tax instruments achieve the underlying policy goals or intended goals regarding purchasing power, income and capital formation or at what price they are achieved.
Background
Why did we audit schemes that reduce the tax take?
As part of our audit of the central government accounts 2015 (Netherlands Court of Audit, 2016), we examined a tax scheme implemented by the Ministry of Finance for foreign experts working in the Netherlands, the 30% regulation. We concluded that ‘the effectiveness of the 30% regulation has been inadequately studied’. This conclusion prompted us to determine whether the effectiveness of other schemes had been established and what agreements the government had made regarding budgeting, monitoring, evaluation and the provision of information. We accordingly drew up a list of tax schemes for the purposes of this audit. For parliament to exercise its duty of scrutiny, the cost of such schemes must be known and auditable. Moreover, parliament must know whether schemes that encourage or discourage certain behaviours among taxpayers are effective.
Methods
Analysis of tax facilities and tax instruments
Using public information (tax legislation, tax plans, budgets and Budget Memorandums) we identified the tax facilities and tax instruments of relevance to our audit. Our main audit question was, What tax schemes that reduce the government’s tax take, defined by us as tax facilities and tax instruments, are there in the Netherlands?
We then answered the following questions for each tax facility:
a. What form does the facility take?
Tax facilities can take various forms, for example tax deductions and exemptions.
b. Is the financial importance known and, if so, how big is it?
Insight into the financial importance is necessary to make, for example, a reasoned choice between the reduced tax take and the facility’s goal.
c. What are the goals and who is the target group?
Tax facilities are designed to achieve policy goals, for example to promote culture or to clean up the environment. They are often aimed at a specific target group, such as a particular industry, but there are also generic facilities.
d. Which ministers or state secretaries are responsible for budgeting and accounting?
Tax facilities can be seen as policy instruments because they are designed to achieve policy goals. It is therefore important to know who is responsible for the policy.
e. Is parliament periodically informed of the facility?
We determined whether parliament was periodically informed of each facility.
f. Has the tax facility been evaluated as to its effectiveness and efficiency in accordance with the Periodic Evaluation Regulation (RPE)?
In accordance with the Tax Expenditure Assessment Framework, tax expenditure must be evaluated after introduction. Tax facilities are not classified as tax expenditure, but they are occasionally evaluated at the request of the House of Representatives. We determined which facilities had been evaluated in recent years.
We answered only question b for each of the tax instruments.