Friday, February 22, 2008

Dutch multinationals hardly pay any tax

Last August, we (and many others) noticed a big story in the Financial Times newspaper, entitled "A third of UK’s big business pays no corporation tax" It quoted Bill Dodwell of Deloitte, who said this "shows the giant contribution of small companies. It is probably because many are less international and so have different planning opportunities.” Quite: this ability of big multinationals to hop offshore to cut their tax bills, penalising the smaller firms, is one of TJN's core concerns. More recently, TJN's Richard Murphy released a report for the UK Trades Union Congress (TUC) showing how the public purse loses £13 billion a year through tax avoidance by the wealthy and £12 billion a year through tax avoidance by corporations.

Well now a similar story has emerged in the Netherlands. Our attention has been drawn to some excellent reporting by the quality Dutch newspaper NRC Handelsblad. If you read Dutch, you might click on this link entitled Multinationals betalen vrijwel geen belasting, and associated stories. If you don't, our fine partner organisation SOMO, who has investigated this before (and who are organising a tax justice conference in Amsterdam on May 21), has kindly sent us an abridged informal translation of some selected parts of the NRC stories. This is what SOMO said:

Three large articles in the Economics section of NRC describe in detail how changes in the corporate tax law, introduced in 2007, created new tax avoidance and arbitrage opportunities for large multinationals. The articles are based on investigations by NRC journalist Joep Dohmen, who interviewed professors in tax law and anonymous tax officials. A summary of the articles is provided below.

Senior tax officials told the newspaper that an increasing number of Dutch multinationals pays no or very little corporate tax in the Netherlands. The companies use tax avoidance schemes permitted by the new Corporate Income Tax Act, called ‘Working on Profit’, which came into effect on January 1, 2007. The Act was intended to enhance the business climate in the Netherlands and it lowered the general corproate tax rate from 29.1 to 25.5 percent. Multinationals, however, would effectively pay much less. In October 2007, tax officials warned Deputy Minister of Finance Kees de Jager, who is responsible for tax policy, about undesirable effects of the new Act. They insisted on repairing the law because it favoured a small group of large multinationals. In reaction, De Jager tightened the law on January 1, 2008, mentioning that this was ‘unfortunately absolutely necessary to prevent large damage to the treasury.’

According to Edwin Heithuis, a tax law professor, the new loopholes have been exploited on a large scale. He said that the Ministry should not have been surprised about this, however, because it had created the legal basis for the tax avoidance constructions. "It is incredible that Parliament accepted this," he said. At a congress for tax experts in 2006, Heithuis already argued that major tax loopholes had been created for multinationals, but the Ministry had not appreciated this. Jaap Zwemmer, another proferssor in tax law, confirms that the issue is politically sensitive. "There is a fear in The Hague of being labeled a tax haven internationally. So everything should be as low-profile as possible."

Three quarters of the constructions involve intra-group interest payments or arbitrage in the classification of equity and external capital. Frank Engelen, part-time professor in international tax law and tax advisor at PricewaterhouseCoopers, estimates that the average Dutch multinational pays 15 to 20 percent tax on profits in the Netherlands. However, multinationals told one tax official that ‘they considered €0 a fair share’ because they already generate a lot of employment. ‘Out of the twenty largest companies, not even five pay corporate tax in the Netherlands.’

Information on the true corporate tax payments in the Netherlands of multinationals are not publicly available. In January 2008, parliamentary questions were asked about the average effective tax rate on the domestic income of Dutch multinationals, but the Ministry's answer was evasive. An examination of effective corporate taxes on the global income of publicly listed Dutch multinationals shows that most of them pay less than 25.5 percent. Philips and Arcelor Mittal, for example pay between 11 and 12 percent, and SMB Offshore, with one of its offices in Monaco, also pays low rates.

The newspaper lists six main tax avoidance schemes.
1. The 2007 Act allowed tax deductibility of interest paid from a Dutch company to a subsidiary in a country with a tax rate of 10 percent, such as Cyprus.
2. Some forms of hybrid capital qualified as equity in the Netherlands are qualified as loans in other countries, including France. Related interest payments are deductible abroad but considered as tax-exempt dividends in the Netherlands.
3. A ‘Patent box’ introduced in 2007 provides for a low tax rate of 10 percent on certain kinds of royalty income.
4. A ‘Group interest box’, which has not yet entered into force because it is being investigated by the European Commission, provides for a 5 percent rate on intra-group interest income.
5. US-based multinationals can use so-called BV1/BV2 constructions, with two Dutch corporations of which one is classified as a transparent entity by the US tax authority, deducting interest in the Netherlands or abroad, while the corresponding interest income is not taxed anywhere.
6. Companies can compensate losses with profts from the previous year. This so-called “carry-back” option was restricted from three years to one year by the new Act, but even the one year carry-back is rather unique at the international level.

Several of these contructions are described in the SOMO reports
The Netherlands: A tax haven?
Tax Haven and Development Partner: Incoherence in Dutch Government Policies?

And you can be sure that Britain and the Netherlands are not the only countries affected.

Update - we are grateful for a comment which we will highlight here:

"A rather interesting discussion on this matter is evolving in the weblog of this newspaper. Reactions of parliamentarians, tax professors and others can be read on and (in Dutch)."

(Update, Feb 28: questions have now been asked in the Dutch parliament. Read more here.


Anonymous Anonymous said...

A rather interesting discussion on this matter is evolving in the weblog of this newspaper. Reactions of parliamentarians, tax professors and others can be read on and (in Dutch).

2:52 am  

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