Wednesday, September 12, 2012

Paper: Dutch tax system drives tax treaty abuse

From the Journal of International Tax and Public Finance, an article by Francis Weyzig which confirms what many have long suspected: the Netherlands serves as a conduit for 'treaty shopping': that is, the economically unproductive diversion of Foreign Direct Investment through the jurisdiction so as to cut multinationals' tax bills. From the abstract:
"Many multinationals divert Foreign Direct Investment (FDI) through conduit countries that have a favorable tax treaty network, to avoid host country withholding taxes. This is referred to as tax treaty shopping. The Netherlands is the world’s largest conduit country; in 2009, multinationals held approximately €1,600 billion of FDI via the Netherlands [which corresponds to about 13% of global inward FDI stock].

This paper uses microdata from Dutch Special Purpose Entities to analyze geographical patterns and structural determinants of FDI diversion. Regression analysis confirms that tax treaties are a key determinant of FDI routed through the Netherlands. The effect of tax treaties on FDI diversion partly arises from the reduction of dividend withholding tax rates, which provides strong evidence for tax treaty shopping."
There is nothing productive about corporate tax-cutting via this mechanism or others: it merely diverts resources away from governments - which are currently starved of cash for investment in productive things like roads, schools, courts and hospitals -- towards multinational corporations - which are currently sitting on oceans of idle, unproductive cash.

So this activity is not only unproductive, but actively harmful: it transfers resources away from a sector that will put it to good use, to a sector that is letting it sit idle. Exactly the wrong medicine.

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