Eqality and ability to pay in the Dutch tax system

123 Pages·2010·1.16 MB·English

EQUALITY AND ABILITY TO
PAY IN THE DUTCH TAX
SYSTEM
“The principle of equality and ability to pay in the Dutch income tax
system and the influences by domestic law, tax treaties, OECD , EU
law, WTO law”

Student: Mostafa Amini
Master Thesis: Tax Law
Student number: 904558
Date: May 2010
Supervisor: Drs. C.A.T. Peters
Table of Contents
Chapter 1 Introduction............................................................................................................. - 5 -
1.1 Eucotax Wintercourse ___________________________________________________ - 5 -
1.2 Dutch income tax and the value of equality in general __________________________ - 6 -
1.3 Purpose of this thesis ____________________________________________________ - 7 -
1.4 Outline of this thesis ____________________________________________________ - 8 -
Chapter 2 The Principle of equality in the Dutch tax system ............................................. - 10 -
2.1 Introduction to the Dutch principle of equality _______________________________ - 10 -
2.1.1 The prohibition on constitutional review _________________________________ - 11 -
2.1.2 The influences by the ECHR or the ICCPR _______________________________ - 12 -
2.1.2.1 Article 14 of the ECHR _____________________________________________ - 13 -
2.1.2.2 Article 26 of the ICCPR _____________________________________________ - 14 -
2.2 Historical background of the principle of equality ____________________________ - 15 -
2.3 The personal scope of the principle of equality provision ______________________ - 16 -
2.3.1 The substantive scope of the principle of equality provision ___________________ - 18 -
2.3.2 Horizontal tax equality and vertical tax equality ____________________________ - 19 -
2.4 Justification of a discriminating regulation __________________________________ - 20 -
2.4.1 The procedural aspects of the court about a violation of the principle of equality __ - 21 -
2.4.2 Dutch tax law provision in violation with the principle of equality______________ - 22 -
2.5 The principle of equality and the fundamental freedoms of the Treaty of Lisbon ____ - 23 -
2.6 The principle of equality and the non-discrimination clauses of the OECD Model ___ - 24 -
2.7 The principle of equality and the non-discrimination principle in WTO law ________ - 25 -
2.8 Conclusion ___________________________________________________________ - 27 -

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Chapter 3 The Ability to pay principle in the Netherlands ................................................ - 31 -
3.1 Introduction to the Dutch ability to pay principle _____________________________ - 31 -
3.2 Historical background of the principle of ability to pay ________________________ - 34 -
3.3 The substantive scope of the ability to pay principle __________________________ - 35 -
3.3.1 The personal scope of the ability to pay principle ___________________________ - 36 -
3.3.2 Relevant indicators for the ability to pay __________________________________ - 37 -
3.4 The ability to pay principle compared with indirect taxes (e.g.VAT) _____________ - 38 -
3.4.1 The ability to pay principle compared with non-income taxes _________________ - 39 -
3.5 Conclusion ___________________________________________________________ - 40 -
Chapter 4 Differences in Taxation in the Dutch tax system ............................................... - 42 -
4.1 Introduction __________________________________________________________ - 42 -
4.2 Dutch tax treatment with regard to labour income and capital income ____________ - 43 -
4.2.1 Treatment of social security taxes _______________________________________ - 46 -
4.3 The justification of the different tax regime for labour income and capital income ___ - 47 -
4.4 Conclusion ___________________________________________________________ - 50 -
Chapter 5 The principle of equality and ability to pay in tax systems abroad and a legal
comparison............................................................................................................................... - 52 -
5.1 Introduction __________________________________________________________ - 52 -
5.2 The principle of equality and ability to pay in Austria‟s tax system_______________ - 53 -
5.3 The principle of equality and ability to pay in Belgium‟s tax system______________ - 55 -
5.4 The principle of equality and ability to pay in France‟s tax system ______________ - 57 -
5.5 The principle of equality and ability to pay in Germany‟s tax system ____________ - 59 -
5.6 The principle of equality and ability to pay in Hungary‟s tax system _____________ - 60 -
5.7 The principle of equality and ability to pay in Italy‟s tax system _________________ - 61 -
5.8 The principle of equality and ability to pay in Poland‟s tax system _______________ - 63 -
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5.9 The principle of equality and ability to pay in Spain‟s tax system ________________ - 64 -
5.10 The principle of equality and ability to pay in Sweden‟s tax system _____________ - 66 -
5.11 The principle of equality and ability to pay in U.S.‟s tax system ________________ - 67 -
5.12 Recommendations ____________________________________________________ - 70 -
5.12.1 Recommendations for the principle of Equality in the Dutch tax system ________ - 71 -
5.12.2 Recommendations for the Ability to pay principle in the Dutch tax system ______ - 72 -
5.12.3 Recommendations for the distinction between labour income and capital income and
justification arguments for it in the Dutch tax system ____________________________ - 74 -
5.13 Conclusion __________________________________________________________ - 77 -
Chapter 6 Different tax regime in the boxes of the Dutch income tax. .............................. - 80 -
6.1 Introduction __________________________________________________________ - 80 -
6.2 The pro‟s for the boxes in the income tax. __________________________________ - 82 -
6.3 Critics on the income box system and specifically the capital yield levy ___________ - 86 -
6.4 Recommendations _____________________________________________________ - 94 -
6.5 Conclusion ___________________________________________________________ - 96 -
Chapter 7 Conclusion ............................................................................................................. - 99 -
Appendix ................................................................................................................................ - 104 -
Chapter 8 Bibliography ........................................................................................................ - 117 -

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Eucotax-Wintercourse 2010 Tilburg
Chapter 1 Introduction
1.1 Eucotax Wintercourse
The intensive programme of European Universities Cooperating on Taxes (EUCOTAX) is based
on the aspiration of the participating universities (Barcelona, Budapest, Leuven, Lodz, London,
Paris, Rome, Uppsala, Tilburg, Osnabrück, Vienna, Warsaw and Washington) to set up a
permanent structure in order to stimulate the instruction in and research on European aspects of
Tax law where both students and researches contribute.1 Besides, the number of participating
universities is increasing during the years which is more significant for the programme.
The subject area of the EUCOTAX Wintercourse has always been “The European
Harmonization of Tax Law “and each year there is a different theme that will be explored and
studied.2 This thesis is a part of the intensive programme of EUCOTAX 2009-2010 which was
held in Uppsala from April 8 to April 17. For 2009-2010 the main theme is “The principle of
equality in taxation (constitutional law, European law, WTO and tax treaties)” with subparts;
 Equality and ability to pay in national income tax systems
 Equality and the choice of the legal form for a business
 Equality and special income tax regimes for businesses
 Equality and special income tax regimes for individuals
 Equality and financial and fiscal accounting systems
 Equality and other taxes than income taxes
This thesis deals with the first subpart “Equality and ability to pay in national income tax
systems (including differences in taxation – plus social taxes – of labour income and capital
income)”.

1 www.wintercourse.com
2 www.wintercourse.com

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1.2 Dutch income tax and the value of equality in general
Equality is one of the main predominant principles that has got its significance for the rule of law.
It is a fundamental right and principle which may have an obligatory influence. The principle of
equality improved itself over time in the Constitution of the Netherlands with its main concept to
treat equal circumstances equally. Laws and treaties must be in the line with the equality
principle which makes tax regulations prohibited to be in violation with the equality principle.
Therefore, the principles has got a big impact for tax matters.
Equality is a big topic that will be discussed often in different area fields. Equal
treatment is the main prescription for it and nondiscrimination is (incorrectly) often associated
with the principle of equality. The principle of equality demands “treating likes alike” and this is
also the case for tax legislation which, like all legislation, must conform to the demands of the
principle of equality. 3 Nevertheless, it is in the nature of laws to classify or discriminate.
This leads to the point that unequal circumstances has to be treated also unequally to their degree
of inequality.
Further, a tax is an imposed financial charge or contribution; it is not a donation or a
payment that is done voluntary by the taxpayer. This general principle of equality is laid down
often in the constitution upon individuals to preserve the government. A state can barely function
right without taxation. Moreover, taxes are collected to support the activities of government
agencies whereby Oliver Wendell Holmes was referring to this basic function when he stated
that taxes are the “price we pay for a civilized society”.4 Though, at the same time taxes do
create a burden of a taxpayer‟s freedom.
Though the main basis of taxation in the Netherlands is taxation of income, there are
various theories of taxation including ability to pay, benefits and consumption. The most
important law in the Netherlands for income tax is the Dutch Income Tax Act 2001. After the
amendment in 2001, the box system was introduced and every box was had its own category and
an independent character to levy taxes. Hereby, the Dutch Income Tax Act changed from a
synthetic to an analytic tax system. Finally, article 1 of the Dutch Constitution that includes
the equality principle, has got its significance for tax matters.

3 J.L.M. Gribnau and C. Peters, Introduction, in Legal Protection against Discriminatory Tax Legislation: The
struggle for Equality in European Tax Law, Kluwer Law International, Den Haag, 2003, p.1.
4 C. Eugene Steurle, Contemporary U.S. tax policy, The Urban Institute Press, Washington, 2008, p. 1.
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1.3 Purpose of this thesis
This thesis deals with analyses on the Dutch income tax regulations specified on the explication
of the Dutch box system tested against the principle of equality and ability to pay. Essentially the
legitimization of differences in taxation will be mentioned with the focus on justification
between labour income and capital income. Also, a legal comparison with international tax
regimes concerning income tax will be given and compared with the domestic tax system.
It is necessary to know the tax regulations and how the tax regulations apply
conform the equality and ability to pay principle. And since we are dealing in this thesis with
the national income tax, the Dutch Income Tax Act will be analyzed and discussed with its
characterization. Going into the detail of the principle of equality, the Dutch tax system will be
tested against it. Afterwards, the ability to pay will be analyzed in discussed about its position in
the Dutch tax system and the progressive characterize will be mentioned and discussed.
One notice has to be done before continuing this thesis, the terms labour and ordinary
income, do have the same meaning. The differentiation between capital income and labour
income will be pointed out and the reasons to tax and treat them differently. In addition, a
determination of the elements or essential features of the Dutch box system in the income tax
will be tested against the differentiation between capital gains income and ordinary income. As
said before, the focus will be on the income tax after having shown the interaction of the other
taxes. And as a result of the EUCOTAX Wintercourse, a general legal comparison with other
countries will be provided based on equality and the differences in taxation. Besides, the boxes
of the Dutch income tax include a differentiation of tax regime but do not go always without
problems. To optimize a tax system, critique should be taken into account.
Tax impediments remain and have been discussed often to prevent it. A government or
the legislature tries to stay in the line with the principles and avoids fiscal obstacles but
classification will continue and discrimination can occur. Consequently not every equal situation
is treated equally and every different situation unequally to their proportionality which leads
sometimes to unjustified discrimination. Moreover, these problems exist through their actions or
regulation in domestic tax law. All these hindrances will cause an obstacle for the taxpayer‟s
income whichever leads to the question how well tax is levied on different kind of income and if
it is in the line with the principle of equality and ability to pay. Following this, it is crucial for the
public interest and taxpayers to maximize the equality and fairness of taxation. And for tax
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legislation, a consistent and impartial legislative classification is one which includes all persons
who are similarly situated with respect to the purpose of the law and that this will be also
performed.5 Therefore, the question will arise whether the current system is efficient and correct
and how to achieve a more improved or optimized tax system that is conform the principles. This
all lead to the subsequent research questions:

How do the principles of equality and ability to pay have an impact on the Dutch income tax
system and how can it be improved? More specifically, what is the legitimization for the
differences in taxation of labour income and capital income and how is it possible to achieve a
more optimal income tax system that is justified, relying on the principle of equality and ability
to pay?
1.4 Outline of this thesis
This thesis deals with the subtopic “Equality and ability to pay in the Dutch income tax system”,
starts with Chapter 1 as a general introduction. Chapter 2 includes article 1 of the Dutch
Constitution and the interesting part in the Netherlands, the ban on constitutional review is laid
down in Article 120 of the Dutch Constitution, will be mentioned. Moreover, the growing
influence of the international law and especially the impact of the ECHR and the ICCPR are
definitely issues to bring up. In addition, if regulations do discriminate, how can it be justified
and what are the conditions that the justification has to fulfill to? Besides, the nondiscrimination
principle of the Lisbon Treaty, the nondiscrimination clause in Article 24 of the OECD Model
Tax Convention and the WTO international trade rules with the non-discrimination provisions,
has to be pointed out and how it gets along with the Dutch principle of equality.
In Chapter 3 the ability to pay principle will prove its significance in the Dutch Income
Tax and with its attention to personal circumstances of a taxpayer will be discussed. The ability
to pay principle is the main indicator for income tax but how important is it and what is its
relationship with the equality principle? The classification between direct and the indirect taxes
and its tax acts will be reflect and compared with their explanations on the ability to pay

5 J.L.M. Gribnau and C. Peters, Introduction, in Legal Protection against Discriminatory Tax Legislation: The
struggle for Equality in European Tax Law, Kluwer Law International, Den Haag, 2003, p.32.

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principle.
A description of the Dutch tax system including the differences in taxation
between labour income and capital income will be emerge in Chapter 4. This leads to the fact
that there are many kinds of ways to get income or capital that creates a diversity in taxes.
Assume there is a differentiation in the Dutch tax regime, how is this settled down? Besides, the
focus on when tax is legitimatized or can be levied, however, the attention to which taxes are
important in the Netherlands and which ones do have big influence on labour and capital income.
Also, the social security taxes can be divided in categories and the vital role of the employer will
be mentioned. The amendment in 2001 made the Dutch income tax turn out to another direction
and structure. The significance of the boxes performed and the analytic system showed up again.
Nevertheless, the box 3 measure with new a rate and criterion of charging brought a lot critics
and commotion. Furthermore, what was the impact of the legislative changes in 1997 for the
substantial shareholder in box 2?
In Chapter 5 will point out the principle of equality and ability to pay and differences in
taxation in international tax regimes. The differentiation will focus on the division between
labour income and capital income and how it is justified. Besides European countries also the
United States will be mentioned and a legal comparison with analyses will examined.
In Chapter 6 a review on the different tax regime in the boxes of the Dutch income tax
system will be given whereby pro and contra arguments will be point out. Compared with
Chapter 4, this Chapter will provide a explanation for the obstacles or problems and will end
with a solution upon the research hypothesis. In the end, in Chapter 7 the conclusion for this
thesis research will be provided.

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Eucotax-Wintercourse 2010 Tilburg

Chapter 2 The Principle of equality in the Dutch tax
system
2.1 Introduction to the Dutch principle of equality
The Dutch legal system is based on fundamental principles and regulations. It is crucial
to distinguish these two norms from each other because they each have logically a different
character.6 To completely comprehend the Constitution and to understand the legal system, one
must know the fundamentals. A fundamental principle is the central source for the law and may
have an obligatory influence for example for the tax inspector and the taxpayer.7 Equality is one
of the main and predominant principles. The equality principle is a dynamic principle and has
improved itself over time to become one of the fundamental rights in the Constitution of the
Netherlands. “Things that are alike should be treated alike, while things that are unalike should
be treated unalike in proportion to their unalikeness” is a common saying that is linked to the
principle.8 The equality principle found its existence as a norm and it is been used often as a
norm between the relationship of the state and the citizen.9
The fundamental rights in the Netherlands can be divided into so-called classical
fundamental rights and social fundamental rights. While the more recently accepted social
fundamental rights pertain to the social and economic development of the individual,
classic fundamental rights, laid down in articles 1 through 17, particularly focus on the
individual freedom of persons.10 Although some of the fundamental laws in the Dutch

6 R.H. Happé, Drie beginselen van fiscale rechtsbescherming, Kluwer, Deventer, 1996. p. 77-78.
7 J.L.M. Gribnau and J.A. Smit, Rechtsbetrekking en rechtsbeginselen in het belastingrecht, Rechtsgeleerd magazijn
Themis : tijdschrift voor publiek- en privaatrecht, No. 7, 1999, p. 259.
8 J.W. van den Berge, Equality: Applying the Principle of Non-discrimination (Article 14 ECHR, Article 26
ICCPR), in Legal Protection against Discriminatory Tax Legislation: The struggle for Equality in European Tax
Law, Kluwer Law International, Den Haag, 2003, p.56.
9 T. Loenen, Het gelijkheidsbeginsel, Nijmegen: Ars Aequi Libri, 1998, p. 10.
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