According to a recent report entitled “Tax Battles: the dangerous global race to the bottom on corporate tax” that has been released by Oxfam International, five European countries fall within the list of the world’s fifteen most prominent corporate tax havens. These European countries are the Netherlands (third position), Switzerland (fifth position), Ireland (sixth position), Luxembourg (seventh position), and Cyprus (tenth position). According to Oxfam, the world’s top corporate tax paradises remain Bermuda and the Cayman Islands.
The report was compiled on the basis of data related to various factors, such as countries’ corporate tax policies, provision of excessive governmental tax incentives, the level of financial transparency, and country’s cooperation in the battle against international tax avoidance.
Since the Netherlands takes the highest position among European countries in the tax haven rating, a logical question arises: what elements of the Dutch tax system can make one think about the Netherlands as an offshore paradise? The report distinguishes the tax haven-characteristics of the Netherlands, such as tax incentives, 0% withholding taxes, and evidence of large-scale profit shifting.
Special agreements with multinationals
The Dutch corporate tax rate (i.e., 20% for income under or equal to EUR 200.000 and 25% for income exceeding EUR 200.000) is rather normal for Europe. However, large multinational companies residing in the country are provided with an opportunity to negotiate special agreements with the Dutch tax authorities. Such agreements allow multinationals to define which part of their profits will be subject to corporate taxation. The artificially set taxable base may differ significantly from company’s actual profits. It does not come as a surprise that famous brands, such as The Rolling Stones, U2, Boeing, US Steel, Walt Disney, and Johnny Walker, have taxable presence in the Netherlands. On the basis of special agreements with the Dutch government, Fiat and Starbucks succeeded to take tax advantages resulting in EUR 20-30 million each. However, the tax deals with the two companies were announced as an illegal state aid by the European Commission.
Soft tax regime
The Netherlands does not tax extensively incoming dividends and royalties. Furthermore, the country provides for other tax-optimization schemes through Dutch shelter companies, also known as mailbox-companies. At present, the country hosts over 12.000 such mailbox companies that channel around EUR 4.000 billion annually.
In addition to the above, corporate taxes can be reduced by using country’s subsidies system (e.g., innovation and employment of long-term unemployed persons). The report states that it is estimated that one particular tax incentive, namely, the “innovation box”, costs the country over EUR 1.2 billion annually. This sum amounts to 7.6 percent of the country’s total income from corporate tax.
Other elements that contribute to country’s image as a corporate paradise include, but are not limited to, (i) the lack of taxation on income from certain hybrid financial instruments, (ii) no beneficial ownership test with regard to reduction of withholding tax on dividends, and (iii) preferential tax treatment of income from intellectual property assets.
Addressing the criticisms
In order to address the ongoing criticisms for providing opportunities for tax evasion, the Netherlands discussed and initiated a number of national legislative changes during its EU presidency in 2016. None of the proposed measures have come into force yet.