The Netherlands: a tax haven

Presentation at CREA’s Real World Economics

University of Amsterdam

By Katrin McGauran (SOMO)

26 March 2013

Content: Why bother with tax? Context Tax avoidance mechanisms: profit shifting How is it done? Transfer (mis)pricing The legal structure of tax planning: using conduit entities The Netherlands: a conduit tax haven Examples: SABMiller and Barrick Gold Corporation The quick fix: national counter measures Broader policy solutions: unitary taxation

Why bother with tax? Taxation is an issue that lies at the heart of economic

justice, especially in times of financial crisis Regressive or progressive nature of tax systems

determines how wealth is distributed and who carries the burden of austerity.

Fair and effective tax collection is essential for:– raising the revenue to deliver services that citizens need– redistributing wealth within society to address poverty and

inequality– representation: builds accountability of governments to citizens– repricing: limiting public ‘bads’; encouraging public ‘goods’– http://www.tackletaxhavens.com/

Tax avoidance vs. tax evasion

Tax avoidance: – legal utilisation of the tax regime to one's own advantage to

reduce the amount of tax payable by means that are within the letter of the law

Tax evasion or tax fraud: – illegal methods to pay less tax, e.g. declaring less income, profits

or gains than actually earned or overstating deductions

Political reality:– A practice is only illegal when it is prosecuted: vested interests

and lack of resources of revenue authorities

Context: competition and national law Since the late 1970s, capital and investments have become

increasingly mobile and corporations globally integrated: majority of trade today takes place within groups of corporations

Nation states have come into increased competition with each other to attract FDI– Race to the bottom of corporate tax rates

Governance gap in taxation of international business operations – Companies use loopholes– Industry of professional tax lawyers and accountants developed

over the past 50 years

Statutory Corporate Income Tax Rates (IMF, 2012)1996-2007 (32% - 21%)

Corporate Taxes as Share of Total Taxes (IMF, 2012)

Asia Asia

Latin America

Africa

Europe

Tax avoidance by profit shifting

There are as many tax avoidance techniques as there are legal loopholes

They all shift profit or income from high to low tax jurisdictions through intra-group trading (using payments of royalties, service/management fees, interests, loans, dividends)

Tax avoided is often the withholding tax (WHT) at source (through tax treaty shopping)

Average tax loss through transfer mispricing (2001-2010)

Source: GFI 2012, p.36-37

Country Average annual illicit financial outflow (average for 2001-2010 US$ million) – GFI 2012

Cumulative illicit financial flows between 1990-2008 (US$ million) – UNDP 2011

Illicit flows as % of GDP, average 1990-2008 – UNDP 2011

Capital flight US$ million, 1970-2010 – Boyce and Ndikumana 2012

Average annual loss due to trade mispricing (2002-2006)in million US$

Egypt 3,099 Not included Not included Not included 1,772

Ethiopia 1,685 8,354 3.57% 24,900 635

Uganda 680 8,757 6.36% 8,400 59

Mali 289 1,657 3.00%   1,002

Mozambique 85 3,773 8.90% 20,700 199

Senegal 1 334 2.03%   2

How is it done? Transfer (mis)pricing Prices are manipulated so as to make profit or losses where

it best suits them regarding tax rates (reducing ‘taxable base’)

Subsidiaries in operating companies pay high fees to related subsidiaries in low-tax jurisdictions

This often applies to intangible goods, e.g. management, administrative, technical services or royalties

When the transaction is not at arm’s length prices, this constitutes transfer mispricing

New York Times video:http://video.nytimes.com/video/2011/06/19/business/100000000870844/inside-the-accountants-

playbook.html?hp%20(video

The legal structure of tax planning: using conduit entities

Holding/conduit companies are used: To limit withholding taxes on passive income or payments in countries of operation.To convert income for tax reasons.To finance subsidiaries within a group from the groupTo manage intellectual property (receive payments and profits within a group)

OECD, ‘Addressing Base Erosion & Profit Shifting‘2013, page 74, http://www.oecd.org/tax/beps.htm

The Netherlands: a conduit tax haven Ratio of foreign direct investment to total GNP in the

Netherlands is 20 times larger than in the US

The Netherlands offers an attractive fiscal regime for international foreign direct investment flows through a bilateral tax and investment treaty network and tax favourable domestic rules

FDI flow through the Netherlands

1. Facilitating inflow of untaxed or low-taxed capital

2. Reducing the tax rate in the Netherlands

3. Facilitating outflow Type of payments routed through the Netherlands:

1. royalties

2. Intellectual Property (IP) rights (fees paid for using licences or brand names)

3. interest payments / loans

4. The Netherlands is also used to avoid capital gains tax resulting from the sale of subsidiaries

SABMiller: royalties through Holland Local brands sold by SABMiller’s subsidiaries in developing

countries owned by Rotterdam-based SABMiller International BV Dutch BV takes advantage tax rules offered by the Netherlands

that enables companies to pay next to no tax on the royalties they earn: SABMiller International BV has negotiated a deal worth tens of millions of pounds in reduced taxes.

The six SABMiller companies in Africa paid this Dutch company £25 million in royalties in one year, the total can be expected to be £43 million.

This corresponds to an estimated tax loss to African countries of £10 million

SAB Miller: loans through Mauritius SAB Miller Ghana received a loan of about €10 million

from Mubex, a SAB Miller subsidiary in Mauritius. The interest payments on this loan wiped out a lot of

the profits from the Ghana subsidiary each year, lessening the profit that the Ghana government can tax by about €500.000.

Since Mauritius has a capital gains tax of 0%, this money is now earned by the SAB Miller group, and taxed (at 0%) so it is essentially earned tax-free and can be freely transferred to another country

Source:

• Barrick Gold’s Dutch holding company channels loans worth USD 175.4 million from a subsidiary in Barbados (Barbados Corp.) to its Argentinean subsidiary (Argentina S.A.): It is likely that the company uses the Netherlands to avoid WHT on interest.

• If the Barbados entity would loan money directly to its Argentinean subsidiary, a 35% WHT on interest payments would apply on all outgoing payments in Argentina (no taxation treaty exists with Barbados ).

• Under the Dutch-Argentinean DTT, this tax is reduced to 12%. Although the Argentina-Canada DTT also stipulates a lower WHT rate on interest (12.5%), payment directly to Canada would result in income tax paid by the Canadian parent.

• This interest income is taxed very little in the Netherlands: although interest income from Argentina is subject to tax, the interest payments to Barbados are tax deductible. The company therefore pays a relatively small amount of corporate income tax in the Netherlands (USD14.278) after the payments to Barbados have been deducted.

• As the tax haven Barbados also does not levy tax on interest between foreign corporations , the interest gains probably remain largely untaxed

• Assuming an interest rate of 5%, simple extrapolation provides the following picture:

175.400.000 Loan

8.770.000 Interest (5%)

3.069.500 WHT on interest (35%)

1.052.400 DTT WHT rate (12%)

2.017.100- Difference (revenue loss)

10.085.500- Revenue loss 5 years

Other forms of tax avoidance Thin capitalisation (financing through intra-group loans

instead of equity)– Used to lower the taxable base of a subsidiary by letting it pay a

high (tax-deductible) interest on loans from another group company.

Round-tripping (local investor uses foreign holding company)– investing in your own country through an offshore holding company,

thereby enjoying benefits from being a ‘foreign investor’ (legal protection, tax holidays)

– Much practiced in China through Hong Kong or British Virgin Islands based holding companies, each region has its own round-tripping tax haven

Tax Strategies Countermeasures

Trade tax Mispricing Arm’s length rules

Source CIT Mispricing

Debt financing

Royalties & fees

Hybrid capital

Arm’s length rules

Thin cap rules, WHT

WHT

Foreign tax credit

WHT Conduits

Hybrid entities

Beneficial ownership

Foreign tax credit

Residence CIT Holdings (deferral)

Holdings (mixing)

CFC rules

Tax avoidance strategies and counter measures

Policy solutions Unitary taxation

– global profits of a multinational are “apportioned out” to different countries according to the genuine economic substance of what it does in each place. Each country can then tax its share of global profits at its own rate.

– Criteria: allocation of profits, reflecting the location of sales (including e.g. clicks on Google advertising links), workers engaged in production (e.g. of software) and physical assets (e.g. Amazon’s warehouses, or Apple stores).

Literature: Sol Picciotto (UK), Avi Yonah (US)– Towards Unitary Taxation of Transnational Corporations– http://www.taxjustice.net/cms/upload/pdf/Towards_Unitary_Taxation_1-1.pdf

– Unitary Taxation: Our Responses To The Critics– http://www.taxjustice.net/cms/upload/pdf/Unitary_Taxation_Responses-1.pdf

Elements of unitary taxation

1. Combined Report: any taxable business part of an MNC should submit, in addition to its own tax return, a Combined Report: consolidated worldwide accounts of the corporate group of which it forms a part. Such accounts should eliminate all internal transfers, especially involving intermediaries located in tax havens.

2. Formulary Apportionment: of the worldwide profit on the basis of economic criteria (sales, resources, staff). Can also apply Advance Pricing Agreement on tax base and rate beforehand.

OECD Transfer Pricing Guidelines (formulaic profit apportionment) 1. `Transactional net margin method’ (TNMM)

authorises attribution of net profit by applying an appropriate rate of profit in relation to a suitable base, e.g. costs, assets or sales.

2. Where the related entities are closely integrated, or both make `unique’ contributions, the Guidelines authorise a `profit-split’. This method involves apportioning the combined profits according to one or more `allocation keys’. These can be based on assets or capital employed, costs, headcount, or sales.

Moving towards UT? Regional groupings are beginning to recognise the

need for closer coordination or harmonisation of corporate taxation: East African Community and ASEAN.

European Commission has spent ten years developing a proposal for a Common Consolidated Corporate Tax Base (CCCTB). Draft directive tabled in 2011, approved in March 2012. Now under consideration by the Council of Ministers.

BEPS (Base Erosion and Profit Shifting) project should include serious consideration of UT.

A case for UT: It is possible for individual states to move towards a unitary approach

now. A major step forward would be the adoption of the EU’s CCCTB

proposal, although it should include the requirement of a combined report (see point 3).

Political support through a forum such as the G20 would make it unstoppable.

Some states would resist, particularly the tax havens, but their agreement is not necessary.

They would eventually find it better to join, as once their tax avoidance and evasion services business dries up, they would benefit more from taxing the people and business activities actually within their borders, than trying to live from helping people to evade other countries’ laws.