Netherlands: Gov Investigates the Effectiveness of Reduced VAT Rate

How effective is the reduced VAT rate in the Netherlands? Many have been asking the same question, including the Dutch government. On 11 April 2023, the Dutch State Secretary for Finance sent a report to the Lower House of Parliament questioning the effectiveness of the reduced (9%) VAT rate in achieving its desired objectives.  

Here's what you need to know about the report's outcome and what it means for your business. 

VAT in the Netherlands: An overview

Before looking into the reduced VAT rate and its effect, it's essential to look at it within the greater VAT context of the Netherlands. The standard VAT rate within the Netherlands is currently at 21%. In addition, two other rates form the VAT landscape.

• The 9% reduced VAT rate: supplies of foodstuffs, certain pharmaceuticals, water, books, magazines, newspapers, flowers, plants, clothing and shoes, and admission to circuses, zoos, museums, musical and theater performances, cinemas, sports events, and amusement parks.
• The 0%: rate: Exports or EU intra-community supplies, services for the international carriage of goods or work on goods exported to countries outside the EU; international transport of passengers.

The reduced VAT rate in the Netherlands

A lower tax rate, which generally applies to food, medicines, and cultural activities, was introduced in 1968 to lower costs for people on lower incomes and to steer consumer behavior. However, the recent report dives into the reality of consumer behavior in the modern day and whether or not the current reduced VAT rate (9%) still achieves its desired goal. What are these goals? 

• Encourage the purchase of certain goods and services
• Reduce the tax burden on the less affluent
• Combat the black market
• Support certain sectors

Upon review and investigation, the Dutch government has included in their report that applying the 9% reduced VAT rate often does not lead to the desired outcome. 

The key takeaways and outcome of the report

The Dutch government has reviewed the application of the 9% VAT rate and zero-rated category to simplify their use and repeal unwarranted applications. In brief, their report can be summarized as follows: 

• The low value-added tax (btw) rate of 9% is a costly and ineffective measure that has little impact on people's buying habits.
• The report also notes that the wealthiest 50% of households benefit twice as much from the reduced VAT rates as the poorest 50%
• The report concluded applying a reduced VAT rate generally does not lead to the desired outcome. 

What are the next steps? 

The report recommends that the government look into additional ways to achieve the initial goals set out by the lower rate, including lowering income tax or subsidies. The State Secretary has announced that the government will consider the report and will respond before the presentation of the 2024 Budget scheduled for 19 September 2023.

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