Dutch Moving Forward

The Dutch government recently announced that it wants to continue its program of reducing the administrative burden for companies in the Netherlands by 25%. After a largely successful reduction of administrative compliance in the period 2002-2007, the Dutch government has set a new, more aggressive goal to further reduce this burden during the current administration. Compared to the first phase of reductions, the new program will focus on eliminating visible burdens for Dutch companies. As an element of this plan, the government has proposed to simplify taxation of labor.

In the Netherlands, the current system of labor tax and social security contributions is characterized by a large differentiation to cater many different interests. While this certainly has its advantages, it also leads to a high degree of complexity in the system. There are 6 separate taxes on labor, all of which use different tax rates and often also different tax bases. This results in a high compliance burden for companies, a fact that is supported by the Doing Business report.

The Paying Taxes indicator in Doing Business measures 3 separate indicators of a countries’ tax system: total tax rate, number of payments and compliance time. While the Netherlands ranks in the top 10 of OECD countries for the first two sub-indicators, it drops to the bottom half when focusing on compliance time. The case study company spends 180 hours per year on tax compliance of which almost half is solely due to labor tax and social security compliance.

The Doing Business report has shown that one of the most popular methods to significantly lower the administrative tax burden for SMEs is the introduction of online filing. When the Netherlands introduced online filing for labor taxes and social security contributions on 1 January 2006, the labor tax compliance went down from 150 hours per year to 80 hours.

The proposal by the Dutch government to remove the current difference in tax bases between several labor taxes and social security contributions is likely to have a similar effect, but is more difficult to implement. It requires more legislative effort and political will than the introduction of online filing. Therefore, it will be interesting to see the results of the second phase of reductions. One thing is clear: the Netherlands is presenting itself as one of the most active reformers in cutting red tape, taking into account real concerns of companies.