Sunday, December 27, 2009

Netherlands & the Antilles: towards a no-tax zone

From our Dutch correspondent:

It’s been a turbulent period for the Dutch Finance Ministry since they invited comments on a proposal for corporate tax reform last June. Much of that has to do with the soap-like collapse of DSB Bank, triggered by a guest on a TV progamme calling on people to withdraw their savings. And then there were a range of other issues related to the financial crisis. Compared to that, developments on the fiscal side may seem unspectucular, until you learn what’s going on: a no-tax zone being pushed through. Yes, you read it correctly. The Netherlands could have a zero corporate tax zone as of October 2010.

We expected that the Dutch tax reform outlined in June could set off some true fiscal fireworks. After all, the original plan spelled out a quite fundamental reform of corporate income tax. This included a special 5% tax rate on interest received from or paid to companies belonging to the same multinational, a measure referred to as the ‘group interest box’. Surprisingly, the proposed measure was approved by the European Commission in July – after it had refused to agree on a previous version for almost three years. The Dutch reform plan also included an overall limit to interest deductions (see previous blog).

However, the original proposal has been much watered down since then. To put it in other words, the fireworks got wet. Three weeks ago deputy minister De Jager twittered: ".. But now interest box seems to have more disadvantages than advantages for business climate. And limiting interest deduction vulnerable from European law perspective..." In early December, he sent a more official letter to parliament that in the short term, he could only repair a legal loophole that had allowed Private Equity firms to claim back over €400 million of taxes after they took over Dutch companies (see previous blog). The fundamental reforms will require more time. The Ministry, which seems to have underestimated the complexity of the reforms, has now set up a Study Commission to study the options in more detail and consult, again, all relevant stakeholders (they have already met with Tax Justice NL).

Note that the group interest box was partly intended to attract financial operations of large foreign multinationals and to provide a low-tax facility for Dutch multinationals. However, while this measure would benefit multinationals investing via or from the Netherlands, it would harm multinationals investing in the Netherlands (and, obviously, put smaller companies at a disadvantage). A footnote in De Jager’s letter confirms: “There are signals that the current uncertainty about the introduction or not of the interest box already lowers foreign investments in the Netherlands.” So here’s another piece of evidence, for those who aren’t convinced yet: stimulating tax haven activity harms your real economy!

What about that no-tax zone, then? Well, that comes from a completely different legal trajectory. On 10 October 2010, the Netherlands Antilles will be dissolved. However, this is not the end of a tax haven, the various Carribbean islands that currently make up the Antilles will get a new status. Curaçao and St Maarten will become autonomous territories within the Kingdom of the Netherlands, just like Aruba at present. The other three islands – Bonaire, St Eustatius and Saba, together called the BES islands – will become some kind of special municipalities of the Netherlands (more details here).

Now, here’s the thing. The BES islands will get their own tax code, and the current proposal does not include a corporate income tax. Only the distribution of dividends to shareholders will be subject to a ‘revenue tax’ of 5%. You can imagine that Curaçao, whose financial sector has been shrinking ever since it started phasing out its tax haven regime under pressure from the Netherlands, was not amused. With this special tax code, nearby Bonaire might take over what is left of Curaçao’s financial sector. The Ministry’s explanatory note confirms that tax competition is going on here: “The proposed system for corporate and dividend taxation for the BES islands strengthens the relative competitive position of the BES islands in the Caribbean region.” No, we’re not joking, it really refers to the Caribbean region. The reference group for special Dutch municipalities includes Bermuda and the British Virgin Islands.

To qualify for the no-tax zone, companies do have to meet economic substance conditions. They must use at least half of their assets for business activities on the BES islands, excluding for example loans to overseas entities, and they must employ at least three people. If companies don’t meet these criteria, the normal Dutch tax regime applies. However, the Council of State, which advises the Dutch government and parliament, warned that the proposed legislation is sensitive to tax avoidance constructions and explicitly advised“not to submit the law to parliament before a corporate income tax has been added”. De Jager disregarded this advice and has submitted the law to parliament for approval. So we still expect to see some fireworks soon.

In practice, the new tax code might not make big difference. Currently the tax rate in so-called e-zones on the BES islands is a mere 2%, thus already close to zero. The greatest beneficiary of the current system is probably Valero Energy Corporation, a giant oil company from the US, whose oil terminal occupies a large part of the island St Eustatius. Huge oil tankers from the Gulf call at St Eustatius, as they are not allowed in US ports for security reasons. A Dutch documentary showed in early 2007 that Valero has concluded a 10-year agreement with the government of St Eustatius and the Antilles, fixing its corporate tax rate at 2% (with a minimum of approximately €400,000 per year) and exempting it from a range of other taxes. Despite its sea port, the island with just 3,500 inhabitants and poor administrative capacity is far from prosperous and struggles to manage its public budget.

As for Curaçao and St Maarten, these islands will maintain their fiscal autonomy, but they are bound to the EU code of conduct on business taxation. For further details, including about the e-zones on other islands, see the answers to parliamentary questions from the Socialist Party, which has been pressing the Dutch government about the tax regime on the BES islands for three years now.

Finally, one more thing from the Finance Ministry to watch for. On the initiative of the Green Party, the parliament recently requested an assessment of the Dutch fiscal system for multinational corporations regarding tax avoidance and evasion at the expense of developing countries. This is highly welcome. With a fundamental reform of the tax system being prepared, it not a bad idea at all to have a look at how one’s tax system might just have an impact on others as well.


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