Double Dutch taxation
Treaties lead to huge revenue losses in developing countries
Guest blog by Katrin McGauran, from campaign group SOMO, on their latest research into the Netherlands' role in corporate tax avoidance.
The Netherlands is a gateway to the world – at least for foreign investors
The Netherlands serves as a conduit country for international tax dodging. This was recently highlighted in the UK when Starbuck’s chief financial officer Troy Alstead had a hard time justifying to a group of MP's why the company paid so much in royalties to its Netherlands regional headquarters, leaving almost no tax to be paid by its UK business.
In fact in the Netherlands status as a conduit country has become a central element of government policy along side the country’s extensive tax treaty network.
Part of this system are the numerous double taxation treaties (DTT's). These DDT's lower taxes in operating countries’ on income leaving the country. This income (known as passive income) takes the form of interest, dividend and royalty payments and capital gains. These payments are used to shift profits out of regular tax jurisdictions to tax havens.
SOMO found that of the 36 countries for which Dutch Foreign Direct Investment data was available, 28 experience revenue losses as a result of Dutch treaties, amounting to an annual revenue loss of 771 million euro on dividend and interest income alone.
Venezuela, Brazil and Kazakhstan lose out in absolute terms, but many more countries are affected. Asian countries such as Indonesia, the Philippines and Malaysia are also shown to suffer unnecessary revenue losses. Eastern Europe also has very disadvantageous treaty provisions, leading to high revenue losses in Serbia and Croatia, for example.
The total revenue loss resulting from Dutch DTAs will be even higher. This is because tax avoidance through profit shifting with the use of royalties and capital gains not included in the calculations.
SOMO’s research findings are confirmed by similar impact assessments and case studies published this month in other countries. The non-profit group Swedwatch finds that Swedish investments in Zambia are routed through the Netherlands for, among other reasons, tax reduction purposes.
An impact assessment soon to be published by the civil society network Latindadd shows that between 2009 and 2011, Ecuador lost USD 290 million as a result of its DTA network.
Why do countries sign DTA's?
The simple answer is: they thought for a long time that tax treaties stimulated foreign direct investment and that this increase would outweigh the revenue losses.
However SOMO found that there is no evidence that tax losses due to treaties are compensated with an increase in investment.
In fact, they are even no longer necessary to avoid double taxation or ensure information exchange in tax matters.
This is increasingly being recognised by developing countries. Mongolia and Argentina have taken the drastic measure of cancelling treaties with a number of tax conduit countries, including the Dutch-Mongolian treaty. If Dutch DTAs are not revised to stop treaty abuse and related revenue losses, more cancellations are likely to follow.
So what now?
The G8, G20 and OECD have already pressured the Netherlands to change its conduit regime to stop eroding other country’s tax bases. Now it is time for the Dutch government to introduce anti-abuse measures and for developing countries to follow a treaty strategy that suits them rather than businesses.
SOMO's latest report provides a number of recommendations to protect the revenue bases of Dutch tax treaty partners.
For instance the Netherlands should conduct a comprehensive and public DTA impact assessment before entering negotiations with other countires.
Read the full report here.
For the Swedwatch report, click here.
For more information on the Netherlands as a tax haven see Tax Justice NL.
The Centre for Research on Multinational Corporations (SOMO) is an independent, not-for-profit research and network organisation working on social, ecological and economic issues related to sustainable development.
Read more about our tax justice campaigning including our boycott of Amazon.