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New tax treaty policy puts developing countries at a disadvantage

New tax treaty policy puts developing countries at a disadvantage

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20 April 2011

The Netherlands should only sign tax treaties with developing countries if these are geared towards supporting development. This is one of the recommendations made by Tax Justice Nederland (TJ-NL) to the Dutch Lower House of Parliament. Parliament will be debating the Tax Treaty Policy Memorandum on 28 April. As long as foreign corporations continue to use the Netherlands to avoid tax in developing countries, these countries will not benefit. The TJ-NL Alliance, of which SOMO forms a part, and Fair Politics met with members of Parliament at the end of March to discuss Fair Taxes during an expert meeting.

The Netherlands has an attractive business climate, even for businesses with a limited presence in the country. So attractive that the Netherlands even makes tax avoidance possible, and it can be seen as an intermediary tax haven for foreign corporations. This enables foreign corporations in developing countries, for example, to avoid higher taxes by establishing their head offices in the Netherlands, on paper. The Netherlands wants to establish lower withholding taxes in tax treaties on royalties paid from developing countries. Multinationals use these loopholes to channel their profits through the Netherlands on to real tax havens, such as the British Virgin Islands.

Missing out on income

As a result of these treaties, developing countries – where tax systems operate less effectively – miss out on major income. In an article in the Dutch ‘Tijdschrift voor Fiscaal Recht’ in response to the policy memorandum, Prof. Dr. Geerten Michielse, professor of tax law and IMF adviser, provides a clear example of this. A Canadian mining company invested in a large mining area in Mongolia, via a subsidiary of the British Virgin Islands. Once the contracts were signed, the subsidiary sold all its shares in the Mongolian project to a Dutch group company. Mongolia has withholding tax of 20%, the Netherlands-Mongolian tax treaty assumes withholding tax of 0%. Mongolia has seen its income evaporate. “The Netherlands increasingly has an image of positioning itself to be able to facilitate, from a tax point of view, the international business community in its future investments in developing countries,” says Michielse. The policy memorandum indicates that the Netherlands wishes to enter into tax treaties with more developing countries.

Vendrik motion

In 2009, the Dutch Lower House of Parliament accepted the Vendrik motion(opens in new window) , which calls on the government to examine the tax system in the context of tax avoidance to the detriment of developing countries. Tax Justice Nederland(opens in new window) and Fair Politics(opens in new window) are again urging the government to do so. For the time being, the Minister does not see any point to this, because the international interweaving of the tax system means that a Dutch investigation would not be of much use. “Measures to be taken unilaterally by the Netherlands to limit tax avoidance, … , and moreover are damaging to our real economy,” Minister Frans Weekers told the Lower House in December 2010.

“International regulations are also needed. But this is a poor argument for not examining tax systems at the national level, and if necessary amending them to prevent avoidance,” says SOMO researcher Katrin McGauran. “The example of Professor Michielse and the SABMiller study by Action Aid UK – presented by NiZA during the expert meeting – show that these are not incidental cases, but are daily ‘tax planning’ practices which Dutch tax consultants have been offering for decades already.”

Less tax competition, more transparency

TJ-NL has also made several recommendations to the Lower House. In order to contribute to greater transparency in money flows, corporations should present their annual figures on a country-by-country basis, rather than consolidated annual accounts, as is currently the case.

Progress would appear to be possible in this area, as the Council of Ministers of the European Union ruled in favour of such ‘country-by-country reporting’ in mid-March, albeit only for the mining sector for the time being. This obligation already applies to mining corporations in the United States.

The social debate about the Netherlands as a tax haven was initiated after several Dutch social organisations brought the theme to public attention in a series of conferences. After SOMO published the report The Netherlands: a Tax Haven? At the end of 2006, which was covered in various key media, Tax Justice Nederland was established in 2007.