Tuesday, February 02, 2010

Netherlands proposes a minor detail - a tax haven clause

From a guest blogger in the Netherlands:

"Just over a month ago, I wrote a blog noting that the Dutch Finance Ministry wants to create a no-tax zone, as part of its shake-up of the status of the Netherlands Antilles. More precisely, in October 2010, the Netherlands Antilles will be dissolved, and three of its islands (Bonaire, Sint Eustatius and Saba - known as BES) will continue as overseas municipalities of the Netherlands with a special tax regime – without a corporate income tax. The Ministry has now responded to questions about the proposal from a parliamentary committee. And the answers are remarkable.

One might be tempted to believe that the words of the deputy minister (de Jager - see previous blog) were sincere. Indeed, the Ministry’s answers about the new tax system for the BES islands are almost convincing. Almost. Yet somehow there’s this uneasy feeling that something is wrong... Perhaps the Ministry is still hiding something. Perhaps a crucial question was not asked. Perhaps there’s a minor detail that reveals the real purpose of the tax law.

And indeed there is.

But first, something brief about the clarifications from the Ministry, to put things into perspective.

The Ministry is clear about the principles underlying the reform. For example, the overall tax burden – the ratio of tax revenues to the GDP of these tiny islands – should remain broadly the same. Of course, this is a bit of an odd starting point for the reform of a tax haven -- even more so, if you consider that the BES islands have a public debt problem, living standards that are not particularly high and current tax revenues amount to a mere 15% of GDP -- a figure comparable to sub-Sahara Africa.A further principle for reform is that the new tax system should be simple and transparent. So the various special tax regimes and tax holidays should be abolished, and the administrative burden of tax collection should be reduced. Add these two principles together and abolishing corporate income tax makes complete sense: it does not increase the tax burden, but does away with all the special regimes. Simple and transparent indeed!

To make up for the small loss in tax revenues, and to distinguish the BES islands from other Caribbean tax havens, a property tax will be introduced. More precisely, a 20% tax will be levied on 4% imputed income, meaning that the value of real estate will be taxed at 0.8% per year. In addition, an anti-abuse rule will be introduced. According to the Ministry, because of this anti-abuse rule, the result is “definitely not a fiscal regime aimed at attracting companies that do not have economic activities and do not have substantial economic presence on the BES islands.” Right then.

Now if the anti-abuse rule were effectively supposed to prevent companies from using the islands as offshore financial centres, one might accept that the aim of the proposal is to establish a simple but fair tax regime. But that is not how things seem to be turning out. For there’s this minor detail.

The anti-abuse rule is relatively simple. A company on the BES islands will be taxed under the mainland Dutch tax system and not exempt from corporate income tax, unless it meets the following criteria:

a. the assets of the entity consist of less then 50% of financial assets;


b. the entity

1º. employs at least three natural persons living on the BES islands; and

2º. for a period of at least 24 months, has commercial property of at least USD 50,000 at its disposal for carrying on business activities and the entity has “an own office of its own located therein that is equipped with facilities that are usual in the financial sector”.

Did you get it? A company will be exempt from corporate income taxes if it is either not a financial company or if it is a financial company with at least three employees and a small office. That’s all that is needed to legally avoid paying taxes. The real purpose of the law is revealed by those last few words in italic, explicitly mentioning that financial sector offices qualify for the special tax regime. This is not an anti-abuse clause, it’s a tax haven clause. A minor detail.

So, let the multi-billion dollar investment funds and corporate financial headquarters come in! No mailbox companies allowed, mind you. You need to hire a room and three people! But first the proposal has to pass through the Dutch parliament.

Let’s see what happens... we’ll keep you posted."


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