Five years ago the Obama administration named the Netherlands as one of three low-tax countries (along with Ireland and Bermuda) that had allowed US multinational corporations to pay just €16bn in tax on €700bn of earnings, which converts to a rate of just under 2.3%. It prompted splutterings of outrage from the Dutch embassy in Washington and the Americans meekly withdrew the accusation. But the bad smell lingered like a week-old herring.
Since then Dutch ministers have been resolute in shutting down any mention of the h-word. The defence against Obama’s declaration was that corporation tax is transparent and set at 25.5%, which puts the country in the medium tax bracket. What it omitted to mention was the Dutch tax administration’s habit of drawing up generous pre-nuptial agreements with multinational firms to entice them to relocate to the Netherlands.
The benefits on both sides are obvious: the company cuts a hefty slice from its tax bill, while the Dutch nation nets a small income with little or no extra burden on its infrastructure. All countries have tax incentives to attract foreign investment, but the Dutch have been unusually prolific: a report by the economic institute SEO in 2013 concluded that €278bn flowed through Dutch-based shell companies every year.
And the system is more opaque than transparent, since many of these companies take the form of Special Financial Instruments, which are not publicly registered. Last year the combined assets of the 14,400 SFIs amounted to €3.5 trillion.
But since the global financial crisis the Netherlands’ tax arrangements have come under scrutiny from the European Commission. Two years ago Brussels drafted plans to require member states to outlaw letterbox firms, which were siphoning €150bn out of the region every year – the equivalent of the EU’s entire budget.
That doesn’t include the tax lost through the cut-throat competition between jurisdictions in the eurozone. Financial research institution Somo found that 19 of Portugal’s 20 largest multinational firms were registered in the Netherlands for tax purposes, putting €2.5 billion of profits beyond the reach of the Portuguese exchequer.
Systematically depriving another country in the same currency zone of tax revenues is akin to cutting off your nose to make your face more efficient. Yet when Portugal’s domestic debt ballooned after 2008 and it sought bailouts from countries such as the Netherlands, Dutch commentators and politicians queued up to denounce the supposedly feckless Portuguese.
Such lack of humility and self-examination does not bode well as Europe tries to harmonise its members’ tax regimes. Two weeks ago the European Commission ruled that a deal between the Netherlands and Starbucks, which allowed the coffee chain to put nearly €20bn of profits out of reach of the tax authorities, amounted to illegal state aid.
The Dutch government threw up its arms in horror, insisting the deal complied with international tax laws and the commission, not it, was at fault. Thus we had the bizarre spectacle of ministers in The Hague protesting against a decision that allows it to claim up to €30m in back taxes from a multinational company.
Old habits, it seems, die hard. This week NRC revealed that Dutch bank ING was heavily involved in drafting a law that created a tax break for a new type of financial security known as contingent convertibles, or cocos. Cocos are a hybrid financial vehicle devised to shore up banks’ equity reserves in times of crisis. They function like bonds, but can be converted into share capital if a pre-set threshold is reached.
The banks argued that these instruments should be tax deductible in order to bring the Netherlands into line with other jurisdictions. But there was a problem: if the exemption applied solely to banks, there was a high risk that Brussels would class it as state aid for financial institutions and veto it. The Dutch financial regulator AFM had already ruled that cocos were unsuitable for most ordinary investors because of their complexity.
Finance minister Jeroen Dijsselbloem brought in the measure last June, bringing the banks €350m a year in tax relief. It took the form of an amendment to the Finance Act rather than a separate law, meaning it did not have to be vetted by the Council of State.
Documents published by NRC show how ING, together with former finance minister Gerrit Zalm, now chairman of the nationalised bank ABN Amro, made several revisions to the draft law, including removing any reference to financial institutions. The suspicion is that the government and the banks were colluding to put Brussels off the scent.
Economist Sweder van Wijnbergen told NRC: ‘If there is any suggestion of state aid it has to be reported to the European Commission. These documents show that this suggestion existed, Dijsselbloem knew about it and sought a wording, in co-operation with the banks, that would steer the commission off course.’
In the immediate aftermath of the banking crisis the Dutch government was in the vanguard of nations calling for more stringent financial regulation within the European Union. Dijsselbloem, in his role as chair of the group of eurozone finance ministers, was praised in Brussels for his firm handling of the Greek debt crisis.
But back home in The Hague his ministry facilitates the kind of virtuoso accounting that would make a Greek restaurateur salivate. If the Netherlands wants to be taken seriously as one of Europe’s leading financial nations, it needs to practice tax compliance as well as preach it.
Gordon Darroch is a British journalist living in The Hague. This column was first published on his blog Words for Press.