EU Economy
Netherlands to renegotiate tax treaties, reform tax haven company rules
By Finfacts Team
Sep 9, 2013 - 8:48 AM

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Celebrations to mark the 100th anniversary of the opening of the Peace Palace in The Hague, August 2013

On Friday, the G-20 communiqué issued at the end of the summit in St Petersburg, Russia, of the leaders of the biggest developed and emerging economies, confirmed deadlines on tackling corporate tax avoidance. Also on Friday, the Netherlands confirmed that it will renegotiate international tax treaties that enable companies to engage in massive tax avoidance. It will also reform the company letterbox system that is used for channelling trillions of dollars worth of transactions annually even though the companies have no business activities in the Netherlands.

U2, the Irish rock group, is one of about 20,000 owners of Dutch letterbox companies.

Frans Weekers, Dutch deputy finance minister, 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,” Weekers told The Financial Times. “I see the Netherlands being portrayed in a bad light. I don’t want to be portrayed in a bad light."

At the end of last month, the Dutch government said tax treaties with Zambia and 22 other poor countries will be revised to allow the incorporation of anti-abuse clauses where necessary.

Frans Weekers said: ‘The Dutch government favours a worldwide tightening of the rules and greater transparency through consultations in the OECD, G-20 and the EU. Measures taken by the Netherlands on its own cannot prevent companies from using a different route; they merely shift the problem. But there are some things we can do. And so we will focus our efforts on improving transparency."

The government is taking the following measures:

General measures

  • The substantial activity requirements (companies must run genuine risks in the Netherlands and the actual management of the company must be conducted in the Netherlands) will apply to more companies;
  • The Netherlands will inform its treaty partners spontaneously when, in retrospect, a company turns out not to meet the substantial activity requirements. Thanks to this improved information exchange with the source country, that country will be in a position to deny the treaty benefits to a company;
  • Information exchange will also apply to particular financing companies that have obtained advance certainty;
  • The Tax Administration will process requests for a tax ruling from holding companies (these companies receive dividends from non-residents and pay out dividends to non-residents) only if the group in which they operate has sufficient ties with the Netherlands.

Specific measures aimed at low-income countries and low middle-income countries

  • The Netherlands will suggest to Zambia that the treaty, dating from 1977, be renegotiated and that anti-abuse provisions be included in the new treaty. The Netherlands will also approach the other low-income countries and low middle-income countries to see if they wish to add anti-abuse clauses to the existing treaties. In concluding new treaties, what anti-abuse clauses they could incorporate will be given careful consideration in close consultation with the partner countries. As a follow-up to a study by IBFD, an international tax advisory group, the tax treaties with other developing countries will be reviewed to see if they might be conducive to unintended risks of tax evasion.
  • The Netherlands says it provides technical assistance to strengthen tax administrations in low-income countries and low-middle income countries so that they can collect more tax revenues, reduce the number of unnecessary tax exemptions and combat tax evasion and tax avoidance. This support will be expanded wherever possible. If necessary, the government will release extra funds for this purpose.
Weekers agreed told the FT 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).

Multinational companies routed €10.2tn in 2010 through 14,300 Dutch “special financial units,” according to the Dutch Central Bank.

SEE: Finfacts report, Jan 2013: Dutch tax haven has 20,000 letter-box companies including U2's

FT video: Tax avoidance in the Netherlands

In St. Petersburg, the G-20 gave full support to the OECD's anti-avoidance proposals, which were outlined last July.

It said:

Profits should be taxed where economic activities deriving the profits are performed and where value is created. In order to minimize BEPS (base erosion and profit shifting), we call on member countries to examine how our own domestic laws contribute to BEPS 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. We acknowledge that effective taxation of mobile income is one of the key challenges. We look forward to regular reporting on the development of proposals and recommendations to tackle the 15 issues identified in the Action Plan and commit to take the necessary individual and collective action with the paradigm of sovereignty taken into consideration...Calling on all other jurisdictions to join us by the earliest possible date, we are committed to automatic exchange of information as the new global standard, which must ensure confidentiality and the proper use of information exchanged, and we fully support the OECD work with G20 countries aimed at presenting such a new single global standard for automatic exchange of information by February 2014 and to finalizing technical modalities of effective automatic exchange by mid-2014. In parallel, we expect to begin to exchange information automatically on tax matters among G20 members by the end of 2015."

The communiqué added:

We are committed to make automatic exchange of information attainable by all countries, including LICs (low-income countries), and will seek to provide capacity building support to them. We call on the Development Working Group in conjunction with the Finance Track, to work with the OECD, the Global Forum and other IOs to develop a roadmap showing how developing countries can overcome obstacles to participation in the emerging new standard in automatic exchange of information, and to assist them in meeting the standard in accordance with the action envisaged in the St Petersburg Development Outlook. The Working Group should report back by our next meeting. Working with international organizations, we will continue to share our expertise, help build capacity, and engage in long-term partnership programmes to secure success. In this respect, we welcome the OECD Tax Inspectors without Borders initiative, which aims to share knowledge and increase domestic capacities in developing countries in the tax area. Finally, we are committed to continue to assist developing countries, including through the IOs, in identifying individual country needs and building capacity in the area of tax administration (in addition to automatic exchange of information) and encourage such support to be developing country led."

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