Dismantle Dutch fiscal shelters

In a press release from 9 August, the Dutch Central Bank (De Nederlandsche Bank, DNB) announced with pride that the Netherlands topped the IMF’s world ranking for foreign direct investment. The total of incoming direct investment was as much as 3,000 billion dollars, while outgoing direct investment amounted to 3,700 billion dollars in 2009, the equivalent of 377% and 465% of the GNP, respectively. The United States, a country with a national income of more than 14,000 billion dollars, was second on the list with incoming and outgoing direct investment amounting to 2,300 and 3,500 billion dollars, respectively, 16% and 25% of the GNP in 2009. Thus, the ratio of foreign direct investment to total GNP in the Netherlands is 20 times larger than in the US.

This should not inspire pride but should provoke critical questions on the part of the DNB, particularly in times of financial instability. This is not news either. The IMF and the Bank for International Settlements, the central bank for central banks, also have lists of other worldwide capital movements. Countries like the Netherlands, Switzerland, the Cayman Islands, Ireland and Luxemburg always score within the top ten in areas of largest incoming and outgoing portfolio investments and interbank loans. According to the IMF, exorbitant financial movements are defining criteria for an ‘offshore financial centre’, a term that emphasises that financial movements involving non-residents are many times larger than the national economy would justify. These small economies with financial abnormalities form links in a chain of financial centres that make it possible for multinational corporations, banks and hedge funds to pump unimaginable streams of capital around the world. These financial movements are unrelated to any real economic activities in the country where they are entered in the books. The incoming and outgoing financial movements take place to a large extent in empty shells, better known as ‘mailbox companies’. The Netherlands has an estimated 20,000 of these. The most important aim behind them is to avoid tax obligations and circumvent regulation.

International institutions such as the OECD and the IMF have been busy for years attempting to contain the expansion of this shadow world. Until now, with little success. Between the ICT crash of 2000 and the beginning of the credit crisis, financial movements in this hidden circuit did nothing but increase. Investment banks and hedge funds that issue and trade products on a large scale outside regulated frameworks are part of this. One example is the Dutch branch of Lehman Brothers, which just before the bank crashed in 2008, received authorisation to issue debts in the amount of 100 billion euro, covered by complex products forbidden in the US. The Dutch branch did not cause the crash of Lehman Brothers, but it was a crucial link enabling the bank to amass so many debts and use chicanery.

Lehman Brothers should have been the proverbial canary in the mine for the DNB and the Dutch Ministry of Finance. Tolerating such large and uncontrollable financial movements, whether they be direct investments, portfolio investments or interbank loans, endangers the stability of the financial system. This is why it is incomprehensible that, in a period of complex and sensitive debt crises in Europe, the DNB proudly presents to the public the non-news that the Netherlands is an important link in a network permitting large multinationals, banks, and remarkably, a Gaddafi, to avoid their tax obligations. While everyone is tightening their belt, those who can best bear setbacks remain unaffected and crucial decisions undermine the legitimacy of the tax regime.

The DNB should be asking critical questions about the haven from both taxation and regulations that was created in the Amsterdam business district Zuidas by a small army of 15,000 tax specialists, notaries and lawyers. In contrast to tax yields of a billion euro in the Netherlands, a wealth of tax income seeps away elsewhere. Figures about the role of individual tax havens are difficult to come up with, but the NGO Christian Aid calculated in 2008 that solely developing countries annually miss tax yields of 160 billion euro, in contrast to total movements of development aid amounting to 100 billion.

The Netherlands should not wish to profit from this parasitic sector. What we win in taxes and see disappearing into the well filled pockets of a small group does not compensate for the costs of financial instability and taxation losses elsewhere. The financial haven in Zuidas Amsterdam is a Sword of Damocles hanging above the reputation of the Netherlands generally and the much more substantial remainder of the Dutch financial sector particularly. Recently, the Netherlands played a questionable role in a little film on the website of the New York Times. No tulips, joints and windmills as the subject of the film, but the role of the Netherlands as a robbers’ den for US American multinationals escaping their tax obligations in their own country. The DNB, as an independent advisory body with the task of guaranteeing financial stability, would do better to advise the Minister of Finance to put an end to this stain on the Dutch financial blazon.

Rodrigo Fernandez works for the University of Amsterdam as a financial geographer and is an associate researcher with SOMO (Centre for Research on Multinational Corporations). Katrin McGauran is a researcher with SOMO. SOMO is part of Tax Justice Nederland.

A shortened version of this article was published in the Dutch daily newspaper NRC on 20th of August 2011