Fiscal fireworks: Dutch to change taxation of multinationals

By a Dutch guest blogger.

For several months, the Dutch government has been preparing to change the way it taxes income from the international financing operations of multinationals, possibly in a rather fundamental way. The changes might surprise some foreigners, since so far all policy information appears to be available in Dutch only. Will the surprise be a pleasant one? That’s still uncertain, but the English summary below outlines what kinds of measures are being considered. First, some context: a quick review of the past year’s turmoil over taxing multinationals .

In January 2008 parliamentary questions were asked about the effective corporate tax rate for Dutch multinationals (rough English here), but the Ministry of Finance did not provide a quantitative answer because it said it considered such information to be confidential. But in February NRC Handelsblad, a mainstream Dutch newspaper, used information from anonymous tax officials to report that Dutch multinationals hardly pay any tax in the Netherlands. They had used loopholes in the new Corporate Income Tax Act (which came into effect on 1 January 2007). The Ministry had tightened the laws to disallow certain tax avoidance constructions as of January 1 last year.

The article was followed by a priority debate in parliament. Some parties called for legislation against current tax avoidance opportunities while others stressed who smaller companies are disadvantaged, as they are usually not able to use such tax planning schemes. The Christian Democrats stood alone in defending 5% as a ‘fair share’ (!). In the end, Ministry agreed to examine artificial constructions reducing the Dutch tax base and to introduce new legislation if necessary.

In August 2008, another newspaper discovered that foreign Private Equity funds had claimed back €400 million of Dutch corporate income tax (English automatic translation here). The investors had taken over several large Dutch companies in 2006 and loaded them with debt, so the companies reported heavy losses in 2007. They then used a one year carry-back provision in Dutch tax law to reclaim all taxes paid in 2006. All major political parties were outraged about these fiscal tricks and the Minister of Finance announced he would prepare defensive measures.

A week later, three Dutch professors in fiscal law (two of which are also tax advisors) published a proposal to address aggressive debt financing strategies (in rough English here). The proposal would simplify Dutch tax law and also address the so-called ‘Bosal mismatch’, the possibility for companies to deduct interest payments from their Dutch income when they borrow money in the Netherlands and invest it as equity capital abroad. In essence, the professors proposed disregarding intra-group interest payments for Dutch tax purposes: that is, stop allowing deductions for intra-group interest expenses on the one hand, and stop taxing intra-group interest income on the other. They also proposed balancing the expected increase in revenues by abolishing dividend withholding tax and reducing corporate tax rates.

This package may have solved the main tax leaks for the Netherlands, but if other countries do not adjust their legislation, it would create new opportunities for international tax arbitration that will affect revenues elsewhere. Albert Hollander, president of Tax Justice NL, commented in an opinion article in the Financiele Dagblad newspaper (English here) that the Netherlands should also take responsibility for effects abroad when developing tax laws.

In October, Statistics Netherlands finally published the study about effective corporate tax rates that had been commissioned after the parliamentary debate in February. The study finds that the average effective tax rate for Dutch multinationals is substantially lower than for foreign multinationals or domestic companies. This is partly attributed to the use of tax facilities for financing operations. In December, a SOMO briefing showed examples of individual multinationals reducing their tax rate by 2 to 10 percentage points, by applying the Dutch Group Financing Activity regime, a tax facility that is currently being phased out.

It seems not entirely consistent that the government is outraged when foreign investors avoid tax in the Netherlands using financing constructions, while it has been actively facilitating multinationals to do the same in other countries, by offering special low tax rates on interest income received from foreign affiliates.

In December, the Ministry finally announced that it is exploring the following measures to repair loopholes in corporate tax law:

- disregarding all interest payments for tax pusposes;
- a form of comprehensive business income tax (CBIT);
- disregarding interest payments within a multinational for tax pusposes;
- a compulsory group interest box;
- earnings stripping measures (limiting decuction of interest payments).

The group interest box is a Dutch tax facility that sets a special tax rate of 5% for certain financing activities of multinationals. It was introduced as an optional tax facility in 2007, but has not entered into force yet because it has been under investigation by DG Competition ever since it was first proposed. The European Commission might announce its decision any moment, though.

The effects of the various measures on the Dutch economy have already been analysed. Disregarding some interest payments for tax purposes or earnings stripping measures were identified as the most realistic scenarios. The various options are currently being further investigated. A concrete law proposal is expected in the first half of 2009.

So what type of fireworks will this new law generate? Beautiful fountains, gratefully admired by other countries? Big bangs, creating new international arbitration opportunities and therefore scaring the hell out of tax authorities abroad? Or just red sparks, signalling the Netherlands cannot solve it all alone? Keep following this blog and you’ll be prepared.