Netherlands: VAT recovery based on bank’s “actual use method” (Supreme Court decision)

The Dutch Supreme Court (Hoge Raad) on 11 November 2022 issued an opinion in a case concerning the value added tax (VAT) recovery right of a bank that sought to determine its VAT recovery right on its mixed costs on the basis of a financial analysis of the profit and loss (P&L) per product. The bank believed that this VAT recovery method constituted an “actual use method” permitted for determining the VAT recovery right.

The taxpayer is a bank that performs VAT-exempt and VAT-taxed services. All the costs incurred by the bank can be regarded as mixed costs. Its turnover consisted for the most part of interest income and commission income. The majority of the interest income was exempt, while a large part of the commission income was subject to VAT. The bank had transferred part of its mortgage receivables to separate securitization companies, and it had passed on the interest received on these receivables to those companies.

The taxpayer prepared a financial analysis of the P&L per product. Accordingly, 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 the bank’s mixed costs being allocated to the various product categories.

In its VAT return, the taxpayer recovered VAT on the mixed costs in accordance with the turnover pro rata method. Under this standard method, the VAT recovery is calculated in accordance with the ratio: turnover that allows VAT recovery (in particular VAT-taxed turnover) to total turnover (including VAT-exempt turnover). In doing so, no account is taken of (i) the interest expenses paid, (ii) the interest the bank received on its notes in the securitization companies, and (iii) the interest passed on to the securitization companies. In essence, the taxpayer wanted to use this procedure to apply the recovery of VAT in accordance with actual use.

The Court of Appeals in Den Bosch ruled that the VAT recovery calculation based on the P&L per product results in a more accurate determination of the VAT recovery than the turnover pro rata method and is based on (sufficient) objectively and accurately established data. The taxpayer therefore was allowed to determine its VAT recovery on mixed costs on the basis of this actual use method. The Deputy Minister of Finance appealed, and the taxpayer cross-appealed and argued that the interest expenses paid can be deducted from the interest income received. It also claimed that the interest that was passed on to the securitization companies could be excluded from its turnover.

The Supreme Court held that the Court of Appeals interpreted the actual use method too liberally and had erred in finding that it was sufficient that an actual use method led to a more accurate result than the turnover pro rata method. Rather, an actual use method must be based on objectively and accurately ascertainable data, on the basis of which the actual use of mixed costs can be objectively and accurately established.

The Supreme Court also held that all of the mixed costs must be taken into account when deciding on an actual use method. Accordingly, the actual use method can only be applied if it is plausible that the actual use of the mixed costs as a whole is not in line with the turnover pro rata method. The “as a whole” implies that all the mixed goods and services used by the VAT taxable person must be taken into account. In addition, in the case of a VAT group, all the mixed costs of all the members of that VAT group must be taken into account. If a VAT group consists of several separate banks and the taxpayer makes use of the approval in the Bank Decree no. 282/15703 (9 November 1982) to calculate the VAT recovery for each separate bank, then the mixed costs of all the business units of that separate bank must be taken into account. The taxpayer had made use of the approval to calculate the VAT recovery for each bank but wanted to use the actual use method to calculate the VAT recovery for one of the two banks. However, the Supreme Court inferred from the court documents that the tax inspector had argued before the Court of Appeals that the taxpayer had not taken all the costs of all the business units of that bank into account when calculating the VAT recovery on the basis of actual use. It is unclear whether the Court of Appeals took this unchallenged argument into account in reaching its decision, but the Supreme Court found that the Court of Appeals either assumed an error of law or wrongly failed to take the tax inspector’s argument into account in its decision.

The taxpayer also contended that in determining the turnover pro rata method the interest expenses paid must be deducted from the interest income. The taxpayer also wanted to exclude the interest that had been passed on to the securitization companies from the calculation of the turnover. These arguments were rejected without any further substantiation.

The Supreme Court has not completely rejected the actual use method but has persisted with its previous position that an actual use method must be based on objectively and accurately ascertainable data, on the basis of which the actual use of mixed costs can be objectively and accurately established. The Supreme Court neither further defined the terms “objective” and “accurate,” nor did it opine on the method applied by the taxpayer. Proving that the actual use method leads to an objective and accurate result and is applied to all costs remains difficult given that no guidance has been provided.

The Supreme Court’s opinion 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 sector, education and healthcare.

Read a November 2022 report prepared by the KPMG member firm in the Netherlands