A wage is now everything received from current or previous employment, including all that is provided or reimbursed to an employee in relation to that employment. The clause after the comma has been added, meaning that now, in principle, all benefits the employer provides and all expenses it reimburses to the employee in relation to employment are taxable.
To prevent all wages from being taxed, the WRC scheme aims to exempt certain benefits and expenses from being taxed within a simplified scheme. The WRC scheme became effective January 1, 2015, mandatory for all employers in the Netherlands, meaning employers had a four-year period to adapt to it.
After its first full mandatory year, the WRC scheme is still the talk of the town in the Netherlands, and payroll-related magazines have reserved fixed columns for topics related to it. Below, we’ll explain to global payroll professionals the basics of the WRC scheme, how best to take control of it, and offer considerations and recommendations.
Basics of the Dutch WRC Scheme
Under the new definition of a wage, all reimbursed expenses, employment-related costs, and benefits provided (collectively referred to as employee benefits) qualify as taxable wages. Certain employee benefits always qualify as individually taxable for the employee, such as the benefit in kind for the private use of a company car or reimbursed traffic fines.
That leaves us with the rest, and all of those benefits should be allocated to one of the four categories in the WRC scheme. These are:
- Intermediary cost
- Specific exemptions
- Zero valuations
- Other work-related cost within the WRC budget (1.2% of the total annual fiscal wage).
In case this WRC budget is exceeded, a final tax levy of 80% of the exceeding amount is due and borne by the employer.
The WRC scheme has a reporting period in line with the Dutch tax year, equal to the calendar year. The Dutch Tax Authority (DTA) has no directive on how an administration complies with the WRC scheme. Instead, the DTA has given employers the choice to organize this in a way that suits them best, as long as it ultimately leads to a correct first payroll tax return in the subsequent year.
In this payroll tax return, the final tax levy of 80% is included as one amount without any other specification required. Including a zero amount is also a filing, meaning that you indicate you did not exceed the WRC budget and declare you can prove this. Aside from these general principles of the WRC scheme, it’s important to understand the four categories within the WRC scheme.
Review of the WRC Categories
At its simplest, intermediary cost is any cost the employee incurs on behalf of the employer. This includes personal attention (not in money or voucher) to colleagues for private events (birth of a child, sickness, birthday) with a maximum value of €25, or office supplies the employee bought that an employer would normally make available.
Next are specific exemptions made for travel costs based on a lump sum amount or actual expense, business expenses for which the business need is made clear, employment-related study costs, and extraterritorial costs (actual cost or the lump sum amount under the 30% ruling, as explained below). More detailed rules govern exempting provided computers and mobile communication devices (tablet, smart phone, etc.), captured under the so-called necessity criteria, at the discretion of the employer. In short, this criteria means the employee benefit can only be exempted if there is little to no private advantage and when it’s necessary to have in order to fulfil the terms of the employment contract.
The third category covers so-called zero valuations, such as food and drink in the office that aren’t part of a meal, a fitness area within the building, and, under certain conditions, work uniforms.
Although the WRC scheme should have simplified the older rules, there are detailed requirements for qualifying employee benefits as taxable or non-taxable. If they are met, employee benefits of these three categories are tax-exempt within the WRC scheme and not considered in the WRC budget of 1.2%.
The fourth category includes other work-related costs. The WRC budget is calculated as 1.2% of the annual fiscal wage of employees’ taxable income in the Netherlands (watch those expats!) out of current employment during the reporting year. Once you determine the final WRC budget, only possible when the final payroll run is completed, you know what the budget amounts to. This is in contrast to how you should determine what other work-related costs you allocate to this WRC budget, as the DTA states it shouldn’t matter if you exceed the WRC budget in allocating employee benefits to the WRC budget.
The DTA introduced the conventionality test for determining if you can allocate employee benefits that shouldn’t be taxable income for the employee and don’t fall into one of the other three categories within the WRC scheme as other work-related cost. This test is at the discretion of the employer, limited by these considerations set forth by the DTA:
- The value of the employee benefit matters. If employee benefits (not a regular month’s salary or holiday allowance) qualified as work-related costs don’t collectively exceed €2,400 per employee, they can qualify as such.
- The nature of the employee benefit matters. It’s assumed if the exceptional allocation of the employee benefit doesn’t exceed 30% of what’s common, the employee benefit may qualify as other work-related costs.
- The employees receiving the employee benefits matter. Similar employee groups and consistent approaches are preferred in contrast to individual and ad hoc exceptions.
- The decisive criteria in allocating the employee benefit to the WRC budget matter. It shouldn’t be done solely for the purpose of achieving tax tariff advantages. For instance, individually grossing-up an employee benefit could mean applying 108.3%, whereby if the 1.2% WRC budget is exceeded, only 80% tax applies. This may not be the sole purpose.
If the criteria aren’t met, the employee benefits should be taxable for the employee following the normal rules. If the DTA challenges how employers interpreted the conventionality test, the DTA should prove why the employer is wrong, not the other way around. Documenting these qualifications completely and on time is therefore important.
The preceding is how the WRC scheme works in short, though in practice it can be a challenge to fully identify all employee benefits and then allocate them. Getting a grip on the WRC scheme requires a concerted approach of at least payroll, finance, and HR. Invoices related to events should be included, such as value-added tax (VAT) for the WRC scheme by finance, goody bags provided to new employees by HR, fixed commuting allowances processed by payroll, and expense reports from the business.
Since there is no single source of truth, it’s important that someone steps up and takes on the responsibility (and accountability) for the WRC scheme. Payroll can be that frontier, as the WRC scheme is a payroll-related regulation and the DTA expects to see the end result as part of the first payroll tax return of the subsequent year. For payroll, this is also a chance to step up and once again improve its interdepartmental relationships. So, how does one take ownership and control?
Taking Control of the WRC Scheme
As you might understand by now, one of the most challenging parts of Dutch payroll is taking control of the WRC scheme. Because information is needed from various sources with different owners, it can be a real challenge to ensure the WRC scheme administration is complete. Even if your organization only has a handful of employees, your administration should be in order to prove to the DTA that you have considered all taxable events and items in relation to the WRC scheme. Just stating that you have done this and concluded that no 80% final tax levy is due doesn’t suffice.
I recommend that you integrate the WRC scheme into a Global Payroll Control Framework (GPCF) to ensure local compliance. In previous issues of Global Payroll magazine, I detailed how the GPCF can enable organizations to take control of global payroll with four interrelated sections. Naturally, the GPCF methodology is a best practice for the WRC scheme as well, based on the four sections.
Global Payroll Objectives cover the categories of operations, reporting, and compliance. If, for instance, an operational objective is that “Payroll is run in a timely, accurate and complete manner” and a compliance objective is that “Payroll is compliant to applicable payroll regulations next to the organizations’ policies and procedures,” the tone is also set in relation to the WRC scheme. This should be administrated in such a way that it’s in line with these objectives; no slacking is allowed.
Global Payroll Control Components should interact as a well-oiled machine. As part of the first control component (control environment), it’s important to have an overview of employment-related policies (employee discount, car policy, collective bargaining agreements, employee discount policies) in the broadest sense for your employees in the Netherlands. Note the IT environment to identify systems that are potential sources of information for the WRC scheme. Insight into who the owners of these systems are and who the broader stakeholders are is a start toward ensuring you receive all data.
Through the control environment and objectives, possible risks to non-compliance can easily be identified, assessed, and described as part of risk assessment. Risks can include not being able to disclose all information required to determine if the 1.2% WRC budget is exceeded, or the risk of not having local awareness to red-flag possible taxable events in relation to the WRC scheme. Knowing these risks means control activities can be designed to mitigate them. For instance, you can agree on set times for owners of other sources (specific ledger accounts such as employee appreciation or other personnel cost or reports from the T&E system) to disclose information to the WRC scheme owner or have governance calls with local business owners to identify possible taxable events.
This can be part of a broader system of monitoring activities, which are ongoing and separate evaluations. Include the WRC scheme in a business process and share one overview with a broader group (finance, HR) to discuss WRC budget statuses and to review control activities and highlight broader company events (parties, gifts, etc.). This overview is an example of communicating the right information, at the right time, to the right people as part of the Information and Communication component.
Each Global Payroll Operating Model should be efficient, effective, and transparent. This can be achieved by balancing people, systems, and sourcing in each business process. Designing and implementing a business process for the WRC scheme can be a global process, as most countries have rules around administrating and taxing work-related benefits, and gathering this information is a necessity.
It’s important to detail which people are involved, which systems are utilized, and whether sourcing is needed (for instance in determining the taxability of items to ensure local compliance) in the process. The output of this process leads to an insightful overview of the WRC scheme used in the control components monitoring activities and information and communication.
In Country Standard Operating Procedures, information on how to run payroll locally is included, and the WRC scheme is a perfect example of a topic to include in the Dutch one. The procedures should include a full list of all employee benefits for your Dutch entity and how these are allocated to the four categories within the WRC scheme. It is important to keep this overview updated and version-controlled at all times. The procedure also must include how the possible final wage tax levy of one year is included the first payroll taxes return of the subsequent year.
Having these four sections in balance should enable each payroll team to take ownership of the WRC scheme and control the process.
Final Considerations and Recommendations
Whether the Dutch government has succeeded in simplifying the way expenses and benefits are handled is a much-debated topic. One can argue that the WRC scheme is slightly less complicated and allows the organization to have a cost-effective approach to other work-related costs in the WRC budget.
It remains a challenge to fully comply, especially for global payroll teams without an on-the-ground presence in the Netherlands. The WRC scheme can only be a success if all involved departments disclose information timely and involve each other in planning events and policy revisions. If your organization has yet to fully implement the WRC scheme, take these steps:
- Gain insight into all employee benefits (events, expenses, allowances, gifts, discounts, and so on) in light of the WRC scheme by allocating them in the four categories of the WRC scheme. Get help from a local specialist in the allocation activities, as the devil is in the details.
- Forecast the annual taxable wage to determine the free space in the WRC budget along the year so as to not have any surprises at the end. Optimize employment conditions to not exceed available space, and take as much advantage of it as possible, in cooperation with the works council (if present).
- Ensure a timely, accurate, and complete administration of the WRC scheme by constantly gathering all information from appropriate sources while continually identifying new taxable events and items.
Last, ask yourself this: Have I knowingly included the final tax levy (either zero or 80% of the overspend in the 1.2% WRC budget) in the payroll tax return of January 2016? Let the WRC scheme work for your organization and take on the challenge the Dutch government has provided. Get in control.