Sunday, October 10, 2010

Netherlands starts operating Caribbean tax haven

From our Dutch correspondent

Today, on 10-10-10, the Netherlands Antilles cease to exist as a country. Ah, one tax haven down? Well, that’s unlikely, things might even get worse. This blog explain why. It is a tale of how not to reform a tax haven – with the Netherlands, not the Antilles, playing the lead role.

Since 1986, the Netherlands Antilles consisted of four-and-a half islands. These are Curaçao – the main island with its numerous mailbox companies – plus Bonaire, St. Eustatius, Saba, and St. Maarten. The last one is only the Southern half of an island, the Northern half is French and part of the EU. Dissatisfied with the internal dominance of Curaçao, the islands of Bonaire, St. Eustatius and Saba – together called the BES islands – chose to become part of the Netherlands. St. Maarten and Curaçao, on the other hand, decided to continue as separate, autonomous countries within the Kingdom of the Netherlands, just like Aruba.

Now, let’s focus on those tiny BES islands, with a joint population of 18,000. Tiny as they are, they do host some major multinationals, including a large oil terminal of Valero Energy Corporation on St. Eustatius. These multinationals operate under special tax regmies with a corporate income tax rate of 2% or even 0%. The BES islands have now become special Dutch municipalities, and although their tax system will be reformed, it will remain different from the rest of the Netherlands. Last week, the Dutch parliament approved the proposed tax law, which eliminates corporate income tax altogether. There you go – the Netherlands starts operating a Caribbean tax haven.

Companies will not be completely tax exempt, though. They will be subject to a property tax. The reason for this? Because, according to Dutch Finance Minister De Jager, there are many jurisdictions in the region that do not levy corporate tax and it is “fairly easy” to divert profits from the BES islands to such a jurisdiction. A property tax would be easier and more robust. And let’s be honest, he does have a point there: multinationals go to great lengths to shift profits around so it has become extremely difficult to tax corporate income at the national level. Yet while a property tax could be a solution for the BES islands (the oil terminal won’t be exempt), it makes matters worse for other countries.

De Jager, of course, denies this. He argues that “the current system is not a tax haven” [his statement to the Dutch House of Representatives can be found here, in Dutch] because the Antilles are committed to exchange of information. Indeed, the Antilles signed 18 Tax Information Exchange Agreements. Never mind that these include merely cosmetic treaties with St. Lucia, Antigua & Barbuda, Bermuda, Cayman Islands, British Virgin Islands, St. Kitts & Nevis, Faroe Islands and Greenland.

Furthermore, De Jager argues that the new system has “all kinds of lines of defence” so that “we are not even coming close to a tax haven” [also from the parliamentary debate cited above]. This, however, is nonsense. The law has basically two lines of defence. The first one is a high brick wall against mailbox companies with a large open gate in it for financial entities with minimal presence. As I have previously blogged, the law specifically requires that financial entities employ three people and have commercial property of at least USD 50,000 at their disposal. With property taxed at 1% per year, that ensures a financial entity will pay at least USD 500 in taxes, no matter how much profits they shift into this far corner of the Netherlands. Hardly a barrier! The second one is a “revenue tax” of 5% on distributed dividends, against conduit entities. This line of defence is like a big tree: looks impressive, but it takes no effort to get around it. There are many ways of getting cash out of a tax haven entity, apart from dividends – borrowing it, for example.

Apparently only the Socialist party saw the danger. However, their proposal for a corporate income tax of 15% instead of the property tax did not make it. Interestingly, the Socialist party claims that it received a letter from the Minister of Finance of the Netherlands Antilles, which proposed to introduce a 15% corporate income tax on Curaçao and St. Maarten if there will be such a tax on the BES islands too. De Jager denied that there would have been such a proposal.

The new Dutch tax law will enter into force on January 1st of 2011 if it gets approved by the senate, which seems quite likely. After all, what’s the whole point about giving those islands a simple tax system? Well, you never know. It wouldn’t surprise me if Dutch companies are the first to set up tax avoidance constructions involving the BES islands and it’s quite predictable what would happen next: public outcry about the tax dodging, parliament sincerely outraged, and the Finance Minstry trying to repair the loopholes again while stubbornly denying there’s an international problem…

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