Fiscal Fireworks: Dutch Announce a 5% Tax Rate
In February, we blogged about preparations by the Dutch government to change the way it taxes income from international financing operations of multinationals. Yesterday, the government published its proposals, which include a 5% effective tax rate on interest income. [proposal in Dutch, no official translation available, but a rough Google translation can be found here]
Fiscal fireworks indeed! When the US White House referred to the Netherlands as a low-tax country in its recent plan against tax haven abuse, the Dutch government was not amused and deployed high-level diplomacy to resolve this “misunderstanding”. Yet the announcement of the new low-tax regime suggests that the Netherlands still refuses to take responsibility for the effects of its fiscal policy on other countries.
Deputy Minister of Finance De Jager continues to argue that the Netherlands is not a tax haven because it actively exchanges tax information with foreign tax authorities. When individuals deposit their money in a tax haven to illegally hide it from the treasury, they need secrecy. The Netherlands does not provide such secrecy. But when multinationals use opportunities for international tax arbitration, their actions may be perfectly legal.
The proposed tax regime intentionally offers such opportunities. If a Dutch entity provides a loan to a foreign entity of the same multinational, the interest on this so-called group loan can usually be deducted by the foreign entity, say at a rate of 30%, while it would be taxed in the Netherlands at a rate of only 5%. The consequence is that tax authorities abroad might lose millions or even billions of Euros, information exchange or not.
The general idea behind the proposed changes is actually a constructive one. Because interest payments on (group) loans are tax deductible and (internal) dividend payments are not, multinationals have an incentive to structure internal financing in such a way to take advantage of the difference in tax treatment.
Lowering the effective tax rate for group interest to 5% limits this difference and helps to protect the Dutch tax base, notably against foreign private equity firms that take over Dutch companies and load them with internal debt. The compulsory 5% rate also applies to the deductions for interest paid on such debts. The main reason that group interest will not be entirely exempted from tax is that “there is a real chance that other countries will consider countervailing measures”.
To address erosion of the Dutch tax base by entities that use external loans to finance equity participations, the proposed changes include measures to limit overall interest deductions as well. One option uses a specific formula and the other is a general earnings stripping measure that limits interest deductions to 30% of cash flow income (EDITDA). Thus, the Netherlands seeks to protect its own tax base against undesirable financing constructions, while at the same time it creates new international arbitration opportunities that could harm other countries.
The 5% rate is also intended to attract financing operations of foreign multinationals, which are relatively mobile. Some firms, such as building materials manufacturer James Hardie, go to considerable lenghts to obtain tax advantages. Originally an Australian firm, in 2001, it moved its parent company to the Netherlands to benefit from the Dutch Group Financing Activities regime that is now being phased out. Dutch research group SOMO estimated this saved the company some €12 million per year. [unfortunately in Dutch only].
However, the situation did not work out as expected, and as the Australian newspaper Business Day reported, “a new tax treaty between the Netherlands and the US has created headaches. […] senior Hardie executives are now required to be Dutch residents.” Ironically, on the same day De Jager announced his plans, the Irish Independent reported that James Hardie is considering to further relocate its headquarters to Ireland, where it has no business operations either.
And yet, the Dutch are decent people. They have the habit of discussing issues with all interested parties and searching for consensus – sometimes endlessly – before they make a final decision. De Jager honours this custom and has invited stakeholders from the private sector, tax advisors, academics, and other interested parties to respond to the proposals. As he notes in his letter to Parliament, “Reactions will contribute to a sound assessment when deciding on a sustainable way forward.” [a Google translation is available here]
Reactions can be sent to vpb@minfin.nl before 1 August 2009 and will not be published. We hope to post some English translations of the proposal on this site soon to facilitate reactions from other countries. It is expected that the final law will take effect from 1 January 2010 – the ultimate fireworks date.
Fiscal fireworks indeed! When the US White House referred to the Netherlands as a low-tax country in its recent plan against tax haven abuse, the Dutch government was not amused and deployed high-level diplomacy to resolve this “misunderstanding”. Yet the announcement of the new low-tax regime suggests that the Netherlands still refuses to take responsibility for the effects of its fiscal policy on other countries.
Deputy Minister of Finance De Jager continues to argue that the Netherlands is not a tax haven because it actively exchanges tax information with foreign tax authorities. When individuals deposit their money in a tax haven to illegally hide it from the treasury, they need secrecy. The Netherlands does not provide such secrecy. But when multinationals use opportunities for international tax arbitration, their actions may be perfectly legal.
The proposed tax regime intentionally offers such opportunities. If a Dutch entity provides a loan to a foreign entity of the same multinational, the interest on this so-called group loan can usually be deducted by the foreign entity, say at a rate of 30%, while it would be taxed in the Netherlands at a rate of only 5%. The consequence is that tax authorities abroad might lose millions or even billions of Euros, information exchange or not.
The general idea behind the proposed changes is actually a constructive one. Because interest payments on (group) loans are tax deductible and (internal) dividend payments are not, multinationals have an incentive to structure internal financing in such a way to take advantage of the difference in tax treatment.
Lowering the effective tax rate for group interest to 5% limits this difference and helps to protect the Dutch tax base, notably against foreign private equity firms that take over Dutch companies and load them with internal debt. The compulsory 5% rate also applies to the deductions for interest paid on such debts. The main reason that group interest will not be entirely exempted from tax is that “there is a real chance that other countries will consider countervailing measures”.
To address erosion of the Dutch tax base by entities that use external loans to finance equity participations, the proposed changes include measures to limit overall interest deductions as well. One option uses a specific formula and the other is a general earnings stripping measure that limits interest deductions to 30% of cash flow income (EDITDA). Thus, the Netherlands seeks to protect its own tax base against undesirable financing constructions, while at the same time it creates new international arbitration opportunities that could harm other countries.
The 5% rate is also intended to attract financing operations of foreign multinationals, which are relatively mobile. Some firms, such as building materials manufacturer James Hardie, go to considerable lenghts to obtain tax advantages. Originally an Australian firm, in 2001, it moved its parent company to the Netherlands to benefit from the Dutch Group Financing Activities regime that is now being phased out. Dutch research group SOMO estimated this saved the company some €12 million per year. [unfortunately in Dutch only].
However, the situation did not work out as expected, and as the Australian newspaper Business Day reported, “a new tax treaty between the Netherlands and the US has created headaches. […] senior Hardie executives are now required to be Dutch residents.” Ironically, on the same day De Jager announced his plans, the Irish Independent reported that James Hardie is considering to further relocate its headquarters to Ireland, where it has no business operations either.
And yet, the Dutch are decent people. They have the habit of discussing issues with all interested parties and searching for consensus – sometimes endlessly – before they make a final decision. De Jager honours this custom and has invited stakeholders from the private sector, tax advisors, academics, and other interested parties to respond to the proposals. As he notes in his letter to Parliament, “Reactions will contribute to a sound assessment when deciding on a sustainable way forward.” [a Google translation is available here]
Reactions can be sent to vpb@minfin.nl before 1 August 2009 and will not be published. We hope to post some English translations of the proposal on this site soon to facilitate reactions from other countries. It is expected that the final law will take effect from 1 January 2010 – the ultimate fireworks date.
posted by TJN at 7:25 am
2 Comments:
That is, i think is the lowest as compared to the other countries.
Although tax exchange agreements have severe weaknesses, one result of the OECD in using sign-ups as the basis for its white list was that the principle was established that would look globally at tax practices, and not just highlinght offshore jurisdictions as tax havens.
This meant that the Neverlands (and Belgium, Austria) could no longer hide under the protection of EU membership. The "Duck test" - if it walks talks and quacks it is a duck (or a tax haven) is now applied more rigourously.
Although it is something of a mystery how Delaware managed to creep off the radar!
http://www.nytimes.com/2009/05/30/business/30delaware.html?ref=global-home
North Orange, a ho-hum thoroughfare in Wilmington, Del., is, on paper, home to more than 6,500 companies. Many of them are empty shells. They make nothing and sometimes employ just a lone clerk. But all are there for the same reason: to help corporations avoid paying taxes in other states.
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