Friday, September 06, 2013

Netherlands officially admits shame in being a tax haven, pledges limited reforms

Frans Weekers
We have long criticised the Netherlands for being a particularly important tax haven for multinational companies. As, increasingly, have many others in Europe, the United States, and elsewhere. We recently noted, too, how some developing countries have been kicking back at some of the abuses that have been perpetrated upon them with the help of the Netherlands and other tax havens.

We are now delighted to see a Financial Times interview Netherlands’ deputy finance minister, Frans Weekers, making an admission that his government is uncomfortable with, and perhaps even ashamed of, the Netherlands' role in this pernicious trade. The Financial Times reports:
"A proposal by the Netherlands to renegotiate its tax treaties with 23 least-developed countries marks a turning point for a country that has until now deflected accusations that it is a key player in tax avoidance by multinational corporations.

The initiative, which comes as the G20 meeting in St. Petersburg is putting tax harmonisation issues high on the agenda, is the most concrete move yet by the Netherlands to address the criticisms. Tax justice advocates say the country’s network of treaties with over 90 countries makes it a nexus for tax avoidance, allowing multinationals to reroute their profits through Dutch “letterbox companies” that do no real business in the Netherlands and exist largely for tax purposes."
This comes in the context and the spirit of today's G20 leaders' declaration, which includes a statement that:
"We call on member countries to examine how our own domestic laws contribute to BEPS [TJN: Base Erosion and Profit Shifting, OECD-speak for corporate tax dodging] and to ensure that international and our own tax rules do not allow or encourage multinational enterprises to reduce overall taxes paid by artificially shifting profits to low-tax jurisdictions."
There is, of course, far less to the Dutch plans than Weekers' words would perhaps suggest. The FT article describes an official Dutch report presented last week, which seeks to insert new anti-fraud provisions in their tax treaties with the 23 countries; will pass on information to tax authorities in developing countries; and will 'crack down' on letterbox companies with no genuine substance behind them. The article also cites our excellent Dutch NGO colleagues at SOMO as saying, among other things, that new demands for letterbox companies to have 'substance' will be too easy to comply with.

In a brief email to TJN, Lee Sheppard of Tax Analysts spoke of the Dutch
"promises to put more 'substance' in shell companies MNCs [Multinational Corporations] use. Turns out the "substance" ain't gonna be much."
(For those interested, more details on this lack of substance in the Annex below.)

Despite this disappointment in the detail -- as is so often the case with shiny-looking tax justice-styled reforms, or world leaders' statements on these kinds of issues -- the broad new public statement by the Dutch authorities is welcome. The headline announcement is politically significant, and an official admission that the tax justice movement, in the Netherlands and elsewhere, has had a point all along.

Today's blogger remembers a tax justice meeting in Amsterdam a few years ago when a top Dutch tax official gave a horribly patronising presentation, seeking to pooh-pooh a seminal report by SOMO pointing out the damage that the Netherlands was transmitting globally through these practices. But, as the FT report continues, this attitude is changing:
“Over the past 10 years the trend has been for the number of letterbox companies in the Netherlands to keep growing. I want to turn that trend around,” Mr Weekers said. “I see the Netherlands being portrayed in a bad light. I don’t want to be portrayed in a bad light.
The Dutch move stems from a government-commissioned report over the summer which, for the first time, agreed with tax-justice groups that developing countries miss out on substantial tax revenues because of their treaties with the Netherlands.”
Here is a clear and public admission by the Netherlands government that this tax haven activity is causing great harm around the world. Or, to put it more succinctly, Tax Havens Cause Poverty.

Which, of course, immediately raises the next question: why stop at 23 countries? And why stop at these limited measures?

The logic points inexorably in one direction: the Netherlands should work towards rolling up this whole sordid industry and starting to compete on the basis of genuine business activity.

We urge other nations engaged in this shameful trade - such as Ireland, Luxembourg, Switzerland, Belgium, the United Kingdom and others - to take note.

For those with a Financial Times subscription, there is a whole lot more in the FT story.

Update from SOMO, via e-mail:
"Next week there will be a Round Table, organised by the Dutch Parliament about national tax policies in order for them to gain more insights on the matter. Tax Justice Network Netherlands as well as SOMO will participate as speakers, a.k.a. spokespersons for a fair tax system."
Annex update: a Dutch correspondent sent us this commentary on the relative lack of substance, via e-mail:
"About the substance demands: the government does not propose to raise or increase the substance demands, they only want to expand the group of companies that have to comply with them. Right now, only companies applying for a tax ruling (Advance Pricing Agreement or Advance Tax Ruling) have to meet the requirements. This will change so that all companies that function as a vehicle for channeling through royalty and interest payments (so called "schakelvennootschapen" which would be literally translated into "linking companies") have to meet these requirements.

The problem is, as you already pointed out in the blog, that the substance requirements are much too easy to comply with. The government, in their reaction published last Friday, actually said that it carried out a random sample and found that most "linking companies" already comply with the requirements. Requirements include things like: at least half of board members have to live or be "officially situated" in the Netherlands, they need to have "the necessary professional knowledge to carry out their tasks", the (important) management decisions need to be taken in the Netherlands, the company needs to have an address situated in the Netherlands, and the company needs to have equity that is "fitting for the activities it carries out". 

As you can see, all requirements are fairly easy to fulfill and open for interpretation. The government, however, stated that - based on research published earlier this summer - there's no point in raising the requirements by for example asking for a number of employees, since this will lose all effect if companies find a way of hiring personnel without increasing their real economic activity. The mailbox companies indeed already do the same with recruiting board members: trust offices offer companies to find Dutch board members, which are persons that are member of numerous boards at the same time.

So the Dutch governement, by saying that they do not raise substance requirements "since that will have no effect", combined with finding that almost all companies concerned already meet the existing requirements, are seemingly taking a kind of useless measure to obligate all "linking companies"  to comply with current requirements. It seems an empty measure really." 


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