Significant developments are in progress affecting MedTech Companies in Netherlands as a result of recent information exchange between EU Member States. The Dutch Tax Authorities (DTA) are most likely looking to conclude settlement agreements on the matter. Agreements that may very well cascade to other jurisdictions which can trigger VAT audits in multiple EU Member States.
DTA to assess medical device companies on VAT rates
The VAT audit was specifically aimed at reviewing the appropriate use of the Dutch low VAT rate (6%) on the supply of (certain) Medical Devices. During the audit the DTA expressed their intention that they most likely will use the outcome of this VAT audit to audit other Medical Device companies in the Netherlands as well.
This would mean that the underlying audit(s) are being carried out by means of a so-called random sample check, whereby the DTA randomly selects the supplies of a number of product (types) in one year, reviews the VAT treatment of these supplies and determines a margin of error based on this random sample check. This margin of error is subsequently extrapolated over the entire revenues for the underlying year resulting in a VAT assessment for this particular year.
In addition, this outcome will be used to come to a settlement agreement with regard to other years that are still open for assessment. The underlying technique of auditing does raise some questions from a formal VAT law perspective.
There is no certainty that the DTA will in fact also audit (affiliates of) other Medical Devices companies as the DTA merely expressed an intention. It is known from practice that Medical Device companies are struggling with applying the low VAT rate on their products. Most of our clients sell more than 50,000 types of products, managing the correct VAT rate for every product is almost impossible. In practice we therefore see a lot of VAT assessments and penalties due to applying the low VAT rate incorrectly.
Given the above, we do recommend for other Medical Device Company to proactively review their use of the low VAT rate in the Netherlands.