Blacklisting tax havens: something about a pot and kettle

Edition 1 February 2019, by Johannes Visser

The Dutch government recently published its expanded blacklist of tax-avoiding countries. Some of the countries on the list, like Saudi Arabia, are incensed. People point to the apparent hypocrisy of the Netherlands, as the world’s largest tax haven, blacklisting others, but the government says the aim of the list is in fact to fi ght tax avoidance through the Netherlands. On 28 December last year, the Dutch ministry of Finance announced that it had added sixteen countries to the blacklist of tax havens. These are, in addition to the fi ve nations previously blacklisted by the European Union (American Samoa, the US Virgin Islands, Guam, American Samoa and Trinidad and Tobago): Anguilla, Bahamas, Bahrain, Belize, Bermuda, British Virgin Islands, Guernsey, Isle of Man, Jersey, Cayman Islands, Kuwait, Qatar, Saudi Arabia, Turks and Caicos Islands, Vanuatu and the United Arab Emirates.

Three measures

With this new blacklist, the Treasury now has tools to tackle tax avoidance in more rigorously. At the moment, around 22 billion euros of unpaid taxes is routed through the Netherlands to low-tax countries every year. Companies set up so-called letterbox fi rms in the country, thus establishing their domicile here using only a mailing address, while conducting their commercial (often industrial) activities in their country of origin for the purpose of minimizing their tax liability. To put a stop to this, the blacklist makes a distinction between ‘desirable’ and ‘undesirable’ fi scal constructions worldwide. From 1 January, multinational corporations can no longer shift part of their assets to blacklisted countries via the Netherlands. Secondly, corporations paying taxes in the blacklisted countries via the Netherlands will start to pay over 20 percent tax on the interest and royalties they receive from the Netherlands from 2021 onwards. And lastly, companies that are active in countries on the blacklist can no longer make special agreements with the Dutch tax authorities, so-called tax rulings.

Wheeling and dealing

The Dutch Tax Offi ce historically had a policy of making deals with international companies about the amount of tax they had to pay on international transactions taking place via the Netherlands. The Dutch system of tax rulings came into being after the Second World War: as part of the Marshall Plan, United States companies could invest in the Netherlands, which was in urgent need of rebuilding. By making favorable agreements with the Tax and Customs Administration, reconstruction aid could more easily fl ow into the country. This practice never ended. Foreign companies still got to make sweet deals with the Tax Offi ce, not about the tax rates themselves, which are fi xed, but on determining the amount of profi t on which tax is levied. Using other clever tricks, like price agreements which companies charge for products and services, the amount of taxable revenue is further reduced. As it stands, this ‘accommodating approach’ by the Dutch Tax Offi ce is one of the main attractions for multinational corporations wishing to establish themselves in the country.

Taxes are big business

About 23.500 letterbox firms, officially known as ‘target companies’, currently operate from the Netherlands. Of the world’s hundred largest companies, eighty have a venture set up in the country with the aim of saving on taxes, including Google, Starbucks, Microsoft, Ikea, Wal-Mart, Chevron, Apple and Samsung. It wasn’t until US president Obama formally named the Netherlands a tax haven in 2009, that the country was shamed for its tax practices. In that year, about 8 trillion (eight thousand billion) dollars, or about a tenth of total world trade, fl owed through the Netherlands. The trust sector provides 2,200 jobs in the Netherlands, yet tax revenues from target companies annually generate a paltry €1.8 billion for the Treasury. It is estimated that tax avoidance by multinationals costs Europe around 1,000 billion euros a year, while developing countries lose hundreds of millions of tax revenue due to Dutch tax practices.

Indignant

It’s no surprise then that some of the newly blacklisted countries point to the Netherlands’ dubious status as the world’s largest tax haven. Saudi Arabia has responded with great indignation for being blacklisted, presumably because of its 2,5% Islamic property tax (zakat), which applies only to companies owned by Saudis or residents of other Arab Gulf States. As a fierce critic of Dutch tax practices, non-governmental organization Oxfam has for years been creating waves, stating that the Netherlands does not meet the criteria of ‘fair taxation’ as set by the EU itself. The European Parliament in 2017 intended to formally declare the Netherlands a tax haven, but the report in the end got blocked by Dutch MEPs. According to the Secretary of State for the Exchequer, Menno Snel, this new blacklist shows he is “serious about our fi ght against tax evasion.” But when it comes to the ever-grey area of offshore taxing, it remains to be seen if this is really true.