Tax dodging by multinationals perpetuates poverty as it robs countries of the necessary resources to invest in pro-poor policies. There are many ways to dodge tax, but tax havens in particular play a facilitating role in denying countries their fair share of taxes. Below we will share with you some revelations from todays article from the independent journalism platform De Correspondent. The full article is available in Dutch on the platform's website.
The article shows tax haven's are not always palm tree-lined islands as some might assume. The biggest tax haven for American multinationals? If you thought it was Bermuda, Switzerland or Luxembourg, you'd better think again. After months of going through hundreds of confidential documents De Correspondent journalist Jesse Frederik discovered that the Netherlands is the place to be for American multinationals that wish to dodge tax, and how it got to be that way.
It all started back in 1995 when the IRS implemented the check-the-box-rule, which gave American companies the choice whether they wanted to have their Dutch subsidiaries taxed in the US or the Netherlands. This gave American multinationals the opportunity to take full advantage of differences between the American and Dutch tax laws, by simply starting a limited partnership (CV in Dutch) in the Netherlands. This is because American tax law states that such an LP should be taxed in the Netherlands, while Dutch tax law states it should be taxed in the US.
In 2002 such constructs were starting to gain popularity, which is why a provision to prevent abuse was added to the tax treaty the Netherlands and the US were negotiating at the time. The loophole was closed and that's the end of tax dodgers using the Netherlands as a tax haven.
That is until former venture-capital executive at ABN Amro Holding NV Joop Wijn becomes State Secretary of Economic Affairs in May 2003. It's not long before the Wall Street Journal reports about his tour of the US, during which he pitches the new Netherlands tax policy to dozens of American tax lawyers, accountants and corporate tax directors. In July 2005, he decides to abolish the provision that was meant to prevent tax dodging by American companies, in order to meet criticism from tax consultants.
De Correspondent used the Dutch Access to Information Law (WOB) to gain access to critical documents which point to the conclusion that the role of the Netherlands as tax haven was not incidental, but a result from deliberate decisions.
The article shows that behind the scenes the Director of International Fiscal Affairs warns that this would give American companies a huge competitive edge and that by doing this the Netherlands is basically financing the takeover of its own businesses by those from the US. The US Department of Finance is far less critical however: We are happy to have you guys give better treatment to our companies. ‘If you would like to and can do so without it suggesting that we should do the same for your companies.’
But that's not all Joop Wijn did to boost profits for multinationals. In 2006 he abolished another provision meant to prevent abuse, this one pertaining to hybrid loans. Some revenue services classify those as loans, while others classify those as capital, so some qualify payments as interest, others as profits. This means that if a Dutch company provides such a hybrid loan to a foreign company, the foreign company could use the payments as a tax deduction, while the Dutch company can classify it as profit from capital, which is exempt from taxes in the Netherlands. This way no taxes are paid in either country.
This all resulted in the Netherlands becoming the primary tax haven for American multinationals. Since 2005 nearly half a trillion dollars has been accumulated in the Netherlands by companies such as Nike, General Electric, Heinz, Caterpillar, Time Warner, Foot Locker and Activision-Blizzard.
As for mister Joop Wijn? He received an Investment Award from the American Chamber of Commerce for his extraordinary contribution to the Dutch business climate. For those who aren't familiar, the American Chamber of Commerce is one of the most influential lobbies in The Hague, where the Dutch government is seated. To top it all off, mister Wijn's life partner, Patrick Mickelsen, becomes director at AmCham in 2012.
Because of all the publicity international tax dodging and tax havens have received over the last few years this issue has also attracted the attention of the OESO and the European Commission, which have both started projects to prevent tax dodging. As a result of this the Netherlands has been forced to agree to put an end to this loophole by 2020. However, the Dutch Ministry of Finance and the AmCham have been discussing alternatives since 2014. The first of the AmCham's wishes, expanding the withholding exemption on dividend tax, will probably be made into law by 2018.
The reasons for the Dutch government to want to remain a tax haven? These limited partnerships are required to also have a private company attached with employees. These provide jobs in the Netherlands and pay a (relatively) small amount of taxes. The ministry of Finance estimates that these LP-PC structures provide approximately 77,600 jobs, of which half could be easily moved elsewhere if that would prove more profitable for the parent company.
Finalizing his article Jesse Frederik points the (Dutch) reader to a critical question: does this small amount of jobs really outweigh depriving other countries, many of which are developing countries, of billions of dollars in taxes? And if so, is this really the way the Netherlands wants to make money?
Source (in Dutch):
www.decorrespondent.nl. Follow the link in this tweet from Jesse Frederik, the writer of the article.