Tax climate in the Netherlands: many benefits, few risks
Can the Netherlands rightfully be accused of being a tax haven? According to most lists and criteria it is not, but the discussion keeps flaring up and the media love it. UvA professor Applied Economics Barbara Baarsma is also director of SEO Economic Research (SEO).
With SEO colleagues Marco Kerste and Jarst Weda she wrote the book “Letterbox companies. The impact of special financial institutions in the Dutch economy”, which follows SEO research “Out of the shadow of banking” from 2013. Baarsma: ‘We want to feed the policy debate on the Dutch tax regime with all the available information based on the latest insights and data, since it is likely to continue for some time.’
First it is important to know what exactly is a special financial institution (in Dutch: BFI). These BFIs are generally known as letterbox companies that move capital between business units in different countries with the aim of preventing double taxation. Baarsma: ‘That's a clear and understandable motive, especially for a country as the Netherlands with such a strong focus on international trade. The downside is that BFIs can also be used to pay very little to no taxes at all. In the book we show for which part of the dividend, interest and royalty streams this so called tax avoidance can apply. Although in itself it is legal, you could be furrowing your brow because it definitely goes against the spirit of the applicable law. But even this discussion depends on your moral perspective; what percentage of taxation do you consider low?’
So the book provides insight into the most recent data on letterbox companies. Like what they bring to the Dutch economy (€ 2.2 to € 3.7 billion per year and 7,600 to 14,700 jobs, with the BFIs themselves and with businesses that work for them). Baarsma: ‘There are benefits to a favourable tax climate and there are also disadvantages. The biggest risk is reputational damage. Developing countries miss out on tax income when capital moves out of the country using BFIs. Depending on what you call a developing country, these countries missed an average of € 180 to € 810 million per year in tax revenue over the past three years.’
Tightening the reins in the current Dutch tax practice is no solution to tax evasion, says Baarsma. ‘If the Netherlands become less attractive, other countries will fill the gap and the dividend, interest and royalty streams will just move. This is already evident from the example of Starbucks. This coffee chain moved its European headquarters from Amsterdam to London, under the pressure of bad publicity about tax avoidance in the UK. That means less income and employment for the Netherlands, but it doesn’t mean more taxes are being paid in England. But it may be that you feel more comfortable as a country to limit the risk of tax avoidance. That morality may well be worth something.’
According to Baarsma there are more countries pursuing a favourable tax climate. ‘England is full in the game. The Netherlands is still quite unique with their rulings; agreements with the tax authorities that give certainty about tax obligations in advance. More countries have such a ruling practice, but traditionally it has worked effectively in the Netherlands. The Dutch tax environment is still attractive for multinational companies compared to most other countries, but England, Ireland and Luxembourg are serious competitors.’ England is accused of luring Starbucks to London with very favourable tax agreements.
As director and researcher of SEO – an organisation that does economic research commissioned by governments, private parties and regulators - Baarsma deals with a wide range of topics besides tax regimes; from logistics to health care, and from the financial sector to the postal market. ‘When it comes to economics, I am an omnivore. My role is to take a critical look from an economics perspective at the dynamics between markets and the government, at the effect of laws and regulations, and everything is based on facts and not on a moral or political perspective. Until now, letterbox companies have often been studied from a moral perspective: it is good or bad? I believe it’s our role to deliver the facts.’
Baarsma says SEO is at the cutting edge of science and commerce. ‘We receive no subsidies while doing independent research. We subsidize our scientific activities out of the results for commissioned research. Science for SEO works both ways. We translate scientific knowledge into applied economic research reports and other products for our customers. We also produce scientific articles, often based on our commissioned research. With this book on letterbox companies we feed the public debate, but we will also write a scientific paper. That’s how we will have our method of identifying tax avoidance peer reviewed’, says Baarsma.