Tuesday, August 23, 2011

Dutch National Bank lists the Netherlands with tax havens

A guest blog by Koos de Bruijn, member of the global Board of TJN.

Interesting news from an unexpected source. Two weeks ago the National Bank of the Netherlands (De Nederlandsche Bank (DNB)) announced that the Netherlands is world leader when it comes to the size of inbound and outbound direct investment. According to DNB, the Netherlands takes about 18% of the global total accounted Foreign Direct Investment (FDI) with $ U.S. 3.7 trillion. DNB notes quite correctly that this originates in large part from the favorable tax regime in the Netherlands. It is significant that DNB compares the Netherlands with tax havens like Luxembourg and Switzerland.

As is commonly known in tax justice circles, these countries are characterized by secrecy and/or very low tax rates. Netherlands on the other hand is not very secretive (as TJN's Financial Secrecy Index shows) and is not known to have very low tax rates. While pointing to that fact the government is very keen to stress it is not a tax haven, The Netherlands is well known for its network of tax treaties to avoid double taxation. When it comes to real economic activity, these treaties are fine. However, as the DNB also indicates, the inward and outward investment is dominated by Special Financial Institutions (SFIs). These are, in the words of the DNB, companies that - because of the favorable (tax) investment climate in the Netherlands - act as financial turntables for companies with a foreign parent. In plain language: these are conduit companies, including many mailbox-companies. That these companies are facilitated, makes the Netherlands a Treaty Haven.

In fact, most of the Dutch investment portfolio mentioned before, are a collection of conduit foreign investment.

State Secretary of Finance Mr. Weekers is committed to extending the treaty network with developing countries. One of his arguments is that this ensures that investment in developing countries becomes more atractive. But there are question marks in the room.
There is no evidence that tax treaties lead to an increase in total FDI in a country. A tax treaty with the Netherlands will lead to a shift of direct investment from other countries to investments with a conduit through treaty paradise the Netherlands. And based on that same tax treaty, the partner country cannot levy withholding tax, which otherwise could be lifted.

In other words, a tax treaty with the Netherlands doesn’t lead to more investment, but rather to other investment routes.

Both western governments and MNC’s are eager to tell us that developing countries need domestic resource mobilisation. They are very right on that.

But where governments (including the Dutch government) invest in capacity building in developing countries on the one hand, this is offset with the loss of tax revenue created by a tax treaty with the Netherlands.

As blogged earlier, a proposal in the Dutch parliament for future new treaties to be investigated on the consequences for developing countries before negotiations start, didn’t make it. Now it is up to the Senate to correct this omission and change the new policy on tax treaties with developing countries.

A Dutch version of this article was published in the Dutch Financial Daily (FD) on 20 August 2011


Anonymous Anonymous said...

It's up to the source country how and if it taxes the source, right? It's also up to the source country to enter into a tax treaty with the Netherlands, correct? It's also up to the tax authority of the source country to grant or deny treaty benefits (lower WHT on dividends for example)?
So it's really up to the developing country to levy the appropriate amount of tax they see fit?

4:57 am  
Blogger TJN said...

You'd think so, wouldn't you? It's not so simple, unfortunately. Take a look here, for example

1:34 am  
Anonymous Anonymous said...

I've read the article. I see where you're coming from and what you would like to achieve. I guess if you strictly look at taxation you have a point. But if you look at investment flows and subsequent ROI on those flows you could argue that a low tax burden raises the ROI on those flows and the bottom line investment sum is higher. This should benefit a developing country as well?

8:23 am  

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