The Netherlands is an attractive option for international companies but not always for the right reasons, says Ed de Groot
Tax avoidance by international companies and extremely rich private individuals has been much criticised lately, and rightly so. At a time when European citizens are suffering the consequences of cutbacks and tax hikes, this freedom from tax at the top is intolerable.
What is more, the economic damage is enormous. The Paris-based think-tank OECD points out that the ever-decreasing tax demands on bigger companies is having a disastrous effect on small, local companies who have to pay full wack. The Starbucks affair in Britain is a good example. How is a small coffee place going to compete if the Starbucks down the road doesn’t have to pay tax on profits because all the profits are being transferred to the company’s head office in the Netherlands?
Last week, broadcaster VPRO’s documentary series Tegenlicht showed how the Netherlands functions as an important hub for gigantic international capital streams, €800bn in 2011 alone. Instead of turning a blind eye we should be tackling the wrongdoings which underlie these operations, unilaterally if we have to. At the same time, the Starbucks example shows the Netherlands is not always the villain of the piece.
The fact that Starbucks doesn’t declare profits in Britain is not the fault of the Netherlands but of the British tax office. It should never have agreed to the prohibitively high royalty payments which are pushing the English Starbucks branches into the red. There is nothing to stop the British authorities from demanding a different arrangement. Nor do the Netherlands and Starbucks have a ‘secret deal’ about the tariff paid by the company, as a Starbucks top executive maintained during a hearing in the House of Commons.
It is true the Dutch tax office cannot make public how much a company or private person pays in tax. But there is nothing to stop anyone, including Starbucks, telling the world themselves. The Dutch tax authorities never make deals on tariffs, by the way. The tax on profits is fixed at 25%. The only thing the tax office does is to inform companies beforehand of the fiscal and legal structures that are allowed. Companies are free to publicise these too.
The hearing, and the stream of articles about the Netherlands in the British press, show a pronounced selective memory loss. After all, London is very busy copying the Dutch network of tax treaties and filling its empty office space with companies from Amsterdam business district the Zuidas. It has all the fiscal facilities of the Netherlands and a zero tariff on dividend to boot. This is 15% in the Netherlands, which brings in around €2.5bn. And what about the tax exemption it grants oil sheiks and Russian oligarchs?
This doesn’t mean we should lean back and do nothing. There are abuses we have to tackle. The Netherlands is home to many thousands of letterbox companies whose added value is doubtful to say the least. It’s not easy to separate the good from the bad: many big employers in the Netherlands started life as a ‘financial holding’ (‘letterbox’). The next SEO Economic Research report will shed some light on this.
But we need to be clear: companies whose only interest lies in fiscal advantages should be tackled step by step. The same goes for the fiscal constructions which pump companies full of tax deductible debt.
What is needed most is a thorough renovation of the rickety international fiscal system. Its plethora of tariffs and tax base variability is, after all, the playground of all those highly paid tax advisers. If interest is deductible in country A and country B doesn’t tax dividend payments, it won’t take long before a construction is devised which pumps country A full of debt and country B into the dividend paying country.
Fortunately more and more countries seem to be willing to change this, through the OECD and a European action plan against tax avoidance. The Netherlands should be at the forefront of this movement. And finally, the initiative to re-evaluate out fiscal systems with regard to the interests of developing countries needs to be realised as soon as possible.
A fairer international fiscal system will not harm the Netherlands. It will never win the race to the bottom which we’re seeing now anyway. A fairer system will make international businesses aware of the real advantages. Which country offers a good infrastructure, a good knowledge of languages, a big treaty network and reliable institutions? Which offers good living conditions, legal security and stability? The Netherlands has everything needed to win that race. A dodgy international reputation will only undermine its true benefits.
Ed de Groot is fiscal spokesman for Labour
This article appeared earlier in the Volkskrant
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