The Court of Appeals Den Bosch issued a judgment concerning the recovery of value added tax (VAT) and concluding that a bank’s “actual use method” had been sufficiently substantiated so that the recovery of VAT on mixed costs did not have to be determined on the basis of the standard turnover-based pro rata method, but could be based on actual use.
The decision, released 27 March 2020, is not only relevant for financial institutions, but also for other taxpayers performing VAT-taxed and VAT-exempt services, such as parties in the public, education, and healthcare sectors.
The taxpayer (a bank) performed both exempt and VAT-taxed services. All costs incurred by the taxpayer could be regarded as mixed costs. Most of its turnover consisted of VAT-exempt interest and commission income, the majority of which was subject to VAT.
The taxpayer had transferred part of its mortgage receivables to separate securitization companies. The interest received on these receivables was passed on to the securitization companies by the taxpayer.
The taxpayer had made a financial analysis of the profit and loss (P&L) of each product. With regard to the P&L per product, the costs were apportioned to the various product groups by means of three interval-based allocation formulas (based on time registration, actual products purchased, and proportional distribution). This resulted in an allocation of the taxpayer’s mixed costs to the various product categories.
In its VAT returns, the taxpayer recovered VAT on its mixed costs in accordance with the turnover-pro rata method without taking account of (1) the interest expenses paid, (2) the interest received on its notes in the securitization companies, and (3) the interest passed on to the securitization companies. In essence, the taxpayer wanted to use these proceedings to apply the recovery of VAT in accordance with actual use.
At issue were the following questions:
Decision by Court of Appeals Den Bosch
A judgment was rendered by the district court in May 2018, and was appealed to the Court of Appeals which rendered judgment in this case. In general, the case revolved around the question how strictly the VAT recovery based on actual use would be applied in the Netherlands. The appeals court found the taxpayer’s actual use method permissible.
With regard to the application of the actual use, the appeals court noted that in determining the actual use, some leeway must be allowed in respect of accuracy and that such a determination was not an exact science. The appeals court agreed with the taxpayer (and the district court) that the taxpayer’s turnover did not accurately reflect the actual situation. For example, interest rates have fallen sharply since 2011, which resulted in a significant decline in the VAT-exempt interest income. The appeals court deemed it plausible that the extent to which mixed costs were used for the activities of the taxpayer had not kept pace with this decline. According to the appeals court, the taxpayer had convincingly demonstrated that a calculation based on actual use could result in a more accurate determination of the VAT recovery, provided the actual use can be determined on the basis of objective and precisely determined data.
The appeals court saw no reason to doubt the P&L per product and therefore regarded the allocation formulas and the cost allocation arising from the P&L per product as a basis for determining actual use. Since the submitted P&L per product was used to allocate all the mixed costs to the various turnover categories, that contained both taxed and exempt turnover, the P&L per product produced sufficiently objective and precisely determined data.
The appeals court therefore did not agree with the tax authority that the taxpayer had not convincingly demonstrated the actual use. The court also rejected the tax inspector’s objection against the application of the ratio per category.
With regard to the second disputed item, the appeals court saw no reason to allow the interest expenses paid to be deducted from the interest income received. According to the court, the inclusion of an interest margin did not lead to a more accurate result than that obtained under the standard pro rata method.
With regard to the third disputed issue, the appeals court found that the interest that was passed on to the securitization companies could not be kept outside the taxpayer’s turnover. According to the court, the specific circumstances of this case meant that the taxpayer would still be regarded as a lender.
Tax professionals note that many market parties will welcome this decision. EU case law has long offered more scope for applying an actual use method instead of a standard turnover-pro rata method. Due to the strict interpretation of actual use applied in Dutch case law, as well as the Dutch tax authorities’ interpretation based on this case law, this scope could not actually be used. The basic principle for recovering VAT must however be that it is as realistic as possible, is as much as possible in line with use, and thus allows for tax neutrality.
The decision will be important for application of the actual use method to mixed costs by taxpayers that perform both VAT-taxed and VAT-exempt services. Although it is not inconceivable that this judgment will be appealed to the Supreme Court, the decision of the appeals court provides an opportunity for financial, public, educational, and healthcare institutions to take a closer look at their VAT recovery on mixed costs.
Read a March 2020 report prepared by the KPMG member firm in the Netherlands
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