Dutch tax treaties lead to huge revenue losses in developing countries

Update: June 17. The Somo report is updated from the original version, after some amendments to clarify the analysis of anti-abuse provisions in treaties and in domestic laws in chapter 4.6.

We recently reported a powerful speech (and accompanying article) by Lee Sheppard, among other things slamming the OECD's role in creating a model for bilateral tax treaties that

"protect multinationals primarily. That’s all they were ever for: to make life comfortable for multinationals". . . The international consensus is "basically a load of nonsense that protects multinationals."

Now, backing this up, the excellent Somo in the Netherlands has produced a report (our emphasis added):

Should the Netherlands sign tax treaties with developing countries?

The Netherlands serves as a conduit country for international tax dodging. A central element of this fiscal policy is the country’s extensive tax treaty network. Double taxation treaties or agreements (DTAs) often lower corporate tax rates and help companies to shift profits from operating countries to tax havens. The new SOMO report ‘Should the Netherlands sign tax treaties with developing countries?’ shows that Dutch DTAs lead to huge revenue losses in developing countries because they reduce taxation on passive income. This is in contradiction to the Dutch government’s policy coherence for development.

“The research report commissioned by the lobby association Holland Financial Centre that is launched this week defends the country’s tax regime that is used by global tax dodgers with the argument that this regime attracts ‘real businesses’ to the Netherlands. Even if this were true, the question is whether the comparatively small financial gains the Netherlands enjoys from this system justify the massive revenue losses poor countries endure”, says SOMO researcher Katrin McGauran.

More than € 771 million loss

SOMO research shows that 28 countries together lose € 771 million on dividend and interest tax income alone every year. Yet the total revenue loss resulting from Dutch DTAs will be much higher. This is because tax avoidance through profit shifting with the use of royalties and capital gains are not included in the calculations. These findings underscore the importance of a comprehensive DTA impact assessment of the entire DTA network from a development coherence perspective. The results of a government assessment of a number of treaties are expected in June.

Seriously negative impact on poor countries

“The Dutch government’s claim that treaties are beneficial for developing countries is simply not true. This report shows that Dutch tax treaties have a seriously negative impact on poor countries’ revenue and that there is no evidence that these tax losses are compensated with an increase in investment as a result of having DTAs”, says SOMO researcher Katrin McGauran. “They are even no longer necessary to avoid double taxation or ensure information exchange in tax matters”. 

One of the outcomes of the research, which has not been highlighted in recent media reports, is the fact that Eastern European non-EU countries have very disadvantageous treaty provisions. Serbia, Ukraine and Croatia, for example, suffer high revenue losses compared to their Gross Domestic Product.

Confirmed by other studies

SOMO’s research findings are confirmed by similar impact assessments and case studies published this month in other countries. The non-profit group Swedwatch finds that Swedish investments in Zambia are routed through the Netherlands for, among other reasons, tax reduction purposes. An impact assessment soon to be published by the civil society network Latindadd shows that between 2009 and 2011, Ecuador lost USD 290 million as a result of its DTA network.

Predatory state at the North Sea?

Mongolia and Argentina have taken the drastic measure of cancelling treaties with a number of tax conduit countries, including the Dutch-Mongolian treaty. If Dutch DTAs are not revised to stop treaty abuse and related revenue losses, more cancellations are likely to follow. The Dutch government should take action: The Dutch writer Multatuli referred to the Netherlands as ‘a predatory state at the North Sea‘, referring to the colonial robbery in the Dutch East Indies. Does the current government really want to go down in history as having defended a modernised fiscal version of this economic injustice 150 years later?”, says McGauran.

Recommendations

The report concludes with a number of recommendations to protect the revenue bases of Dutch tax treaty partners, and - in line with Dutch development coherence policy - poor countries in particular. Amongst others, the Netherlands should end its domestic harmful tax regime and allow capital-importing states to set high withholding tax rates on passive income in treaties. It should also conduct a comprehensive and public DTA impact assessment before entering negotiations.