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September 6, 2013 9:08 am

Netherlands to review tax treaties with least developed countries

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Frans Weekers©AFP

Frans Weekers, deputy finance minister of the Netherlands

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.

In an interview with the Financial Times, the Netherlands’ deputy finance minister, Frans Weekers, acknowledged the criticism over the past year had taken a toll. And he said the controversy over the letterbox companies had damaged the Netherlands’ investment climate.

“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.

The missing taxes are a result of treaties which usually grant companies a discount on withholding-tax rates when they send money to related companies in the Netherlands. The aim is to avoid double taxation, but if the companies have no business activities in the Netherlands, and use complicated manoeuvres to avoid paying taxes elsewhere, the revenue streams may never be taxed at all.

The tax and treaty advantages have made the Netherlands a key player in foreign direct investment. After Ghana signed a tax treaty with the Netherlands in 2007, Dutch investment grew a hundredfold within three years, making the Netherlands the country’s largest source of FDI.

Tax justice groups say developing countries miss out on between €450-550m per year through such misuse of Dutch tax treaties. The government report, which looked at somewhat different countries and revenue streams, put the figure closer to €150m.

Lilianne Ploumen, the Dutch minister for development aid, presented the new Dutch plan along with Mr Weekers last week. She said it would help to make up for cutbacks in development aid, which the Dutch have slashed by nearly a third during the eurozone crisis.

“The official development aid given to poor countries is shrinking enormously, so other streams of money become more important,” Ms Ploumen said.

The Dutch propose to insert new anti-fraud provisions in the tax treaties with 23 least-developed countries, starting with that of Zambia. Mr Weekers said the treaty with Zambia, which dates from 1977, had no anti-fraud provisions at all.

I see the Netherlands being portrayed in a bad light. I don’t want to be portrayed in a bad light.

- Frans Weekers, deputy finance minister

In a second move, the Dutch will pass on information to tax inspectors in least-developed countries when multinationals request a so-called “tax ruling” in the Netherlands. Such rulings, offered by the tax authorities in order to give companies advance certainty on their tax treatment, are one of the main reasons for companies to set up Dutch subsidiaries.

Finally, the Dutch will crack down on letterbox companies by forcing even companies that have not asked for tax rulings to meet the country’s “substance demands”. These mandate that companies have a substantial presence in the Netherlands, such as capital, board members, or employees, in order to take advantage of tax treaties, and were previously only applied when companies request a ruling.

After developing countries receive the information, it will be up to their tax authorities to demand that companies pay what they owe. “I am not setting up the Netherlands as a tax inspector to the world,” Mr Weekers said.

Advocacy groups in the Netherlands have cautiously applauded the Dutch move, but said the new measures were modest. The number of companies that do business in developing countries but do not request tax rulings is fairly small, they said, and making them meet the substance requirements may have limited effects.

Rodrigo Fernandez, a researcher at SOMO, a Dutch tax justice group, said the substance demands were in any case too easy to comply with. He said capital adequacy requirements for companies should be raised, forcing companies to leave more money in the Netherlands and making it less attractive to establish letterbox companies.

Mr Weekers agreed that the steps the Netherlands was taking were limited, but said that was because more serious issues required agreements at the multilateral level. He pointed to Dutch collaboration with the anti-profit-shifting project of the Organisation for Economic Cooperation and Development (OECD).

“Companies often abuse the differences between different countries’ tax systems,” Mr Weekers said, listing a series of tax manoeuvres such as hybrid loans. “Ultimately, I don’t think that should be allowed. But you can only deal with it internationally.”

On Thursday, Jeroen Dijsselbloem, the Netherlands’ finance minister and head of the Eurogroup, echoed the Dutch resolve to end situations where “companies pay no tax in any country.” He said the issue would be on the agenda at the EU economic and financial council meeting on September 14.

But tax justice advocates say that given its central position in tax avoidance, the Netherlands should be trying more aggressively to push such international negotiations ahead.

“The Netherlands is the primary centre of fiscal arbitrage, if you look at it by measures of foreign direct investment,” said Mr Fernandez. “The Dutch government should not get away with saying we’ll wait until something happens. They should say, we are part of the problem, we will become part of the solution.”

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