Netherlands is attractive location for international businesses
In terms of tax regulations for internationally operating businesses, the Netherlands’ ranking puts it on a par with countries such as the United Kingdom, Switzerland and Luxembourg, according to the Netherlands Court of Audit in its report entitled “Tax evasion: A more in-depth study of tax evasion relative to prevailing tax rules and the existing double taxation convention network”, which it drafted upon the request of the Lower House of the Dutch Parliament.
The Netherlands is an attractive country of establishment because it levies no further tax on profits having originated abroad and charges no withholding tax either on interest or on royalties, in addition to which it operates double taxation conventions with 94 other countries – including 23 developing countries – in which arrangements have been worked out concerning the reduced withholding tax rate. Moreover businesses have the option of liaising with the Dutch Tax and Customs Administration in advance to be told exactly which of their business operations are to be taxed. It remains unknown what the impact of this tax policy is in terms of dividend tax revenue (which in 2013 turned out at 2.2 billion euros in the aggregate).
Tax and Customs Administration data have borne out that internationally operating businesses whose tax returns are processed by the Rotterdam Tax Office by virtue of double taxation conventions and EU legislation pay less than 1% in dividend taxes rather than the regular 15%. The past decade has seen a significant increase in the dividend, interest and royalty-related amounts routed through the Netherlands. The Lower House as yet has not succeeded in forming an integrated picture of the fiscal establishment policy relative to tax evasion practices by businesses.
It is only by concluding international agreements that something can be done to counteract the unintended effects of tax evasion. A file search carried out by the aforementioned Court of Audit has borne out that the Tax and Customs Administration keeps the closest of tabs on internationally operating businesses and that such advance agreements as are arrived at are in line with Lower House guidelines. Roughly one in every three eligible businesses prefers to come to such arrangements in advance by seeking a tax ruling. The Tax and Customs Administration with effect from this year has significantly stepped up the intensity and frequency of its checks of such front companies (or conduit entities, special financial institutions (“BFIs” in Dutch) or mailbox companies, as they are also referred to) to see whether they meet the substance requirements. The basic question is whether a business operates a genuine presence in the Netherlands with the aim of availing itself of the tax facilities. It is as yet too soon to tell what the outcome of these extra checks has been.
Lower House unable to form conclusive picture
The Tax and Customs Administration does not keep track of the aggregate amounts associated with dividend tax exemption owing to double taxation conventions, or with interest and royalties. The Lower House lacks a comprehensive picture of the outcome of the Dutch business establishment policy. The Court of Audit has recommended to the cabinet that the House should henceforth be provided as a matter of course with information as to how abuse or unintended use is being prevented. If the House decided that it should annually be provided with reliable information on funds flows, it would be up to the State Secretary for Finance to furnish the relevant data.
Policy geared to attractive business establishment climate
It is the custom for most countries to strive for a fair division of tax charges between civilians on the one hand and the business community on the other. At the same time most countries will also be keen to ensure that their establishment climate is fiscally attractive and their economic environment offers plenty of incentives. This inevitably brings about a fiscally competitive situation resulting in ever-dwindling corporation tax rates internationally. The introduction of facilities geared to innovative businesses, for example, such as the reduced “innovation tax rate” in the Netherlands, is likewise causing the tax base (which is what corporation tax assessments are based on) to taper off.
The fiscally competitive situation is grist to the mill of multi-country international operators in particular, as it enables them to set up selected operations in such a manner as to end up paying as little corporation and withholding taxes as possible. The lower the taxes on earnings international operators are having to pay, the greater the impact in all countries involved on the division of the tax burden between private individuals and the business community. The SME sector has fewer options for planning or tax evasion at its disposal as the businesses in this sector tend to operate at national level only, which is placing them at a competitive disadvantage to their internationally operating counterparts owing to their having to pay more taxes on their business earnings. Developing countries too may find themselves drawing the short end of the stick where they collect less in withholding taxes as a result of their having agreed in a double taxation convention context to apply a lower withholding rate to outgoing dividends, royalties and interest.
State Secretary’s response
The State Secretary for Finance concurs with the Court of Audit’s conclusion that the Dutch fiscal policy is not out of kilter with that of fellow European countries as well as endorsing the recommendation of organising an international forum to discuss tax evasion with a view to concerns about the viability of government finances and a balanced division of the tax burden, and has offered periodically, at annual intervals, to provide an insight into the attractiveness of the Dutch business establishment climate based on the movements in the volumes of the inbound and outbound funds flows relating to dividends, interest and royalties.