Dutch tax avoidance harms developing countries

by Dan Dulvac

ActionAid, an NGO which works on tax justice issues in 25 countries, has organised last month a series of 3 bus tours in Amsterdam to raise awareness and spark anger about how the tax avoidance system contributes to injustice, poverty and inequality. The old double-decker red bus, which continues the trend started in the City of London, stopped in several hotspots in Amsterdam. A panel of experts explained the role of different organisations in facilitating tax avoidance. According to them, these tall and grey buildings play a profound role in this system of tax avoidance.

Gijs Verbraak, tax policy adviser for ActionAid, who has nominated the Dutch government as the biggest Tax Topper, explains to us the Netherlands’ role within the system. “The Dutch government is facilitating tax avoidance on an industrial scale”, he told us. Multinational organisations use mailbox companies to access favourable conditions offered by the Dutch government for the sole purpose of shifting large amounts of money via the Netherlands for tax purposes.

Gijs Verbraak, tax policy adviser ActionAid
Gijs Verbraak, tax policy adviser ActionAid

Mailbox companies are easy to register and the requirements are of such a low standard that no real economic activity in the Netherlands is required. The scale of the operation is staggering and has increased significantly in the last years. Around 14 000 mailbox companies are registered here, amounting to 80% of the total foreign direct investment in the Netherlands.

“There is a lot of resistance in the parliament to change the system”, explained Gijs Verbraak. “The majority believes that we should facilitate the system and defend it as a good business plan for international companies, but in fact we attract a lot of mailbox companies used by multinationals to reroute their investments via the Netherlands and engage in tax avoidance. And of course this has to stop”.

Tax avoidance is especially detrimental for developing countries. One striking example is described in an earlier ActionAid report on the Australian uranium mining company, Paladin Energy Ltd., which owns on a number of mines in Africa, among which the biggest is Kayelekera, in the Republic of Malawi. Instead of creating a company with its own equity, Kayelekera has been thinly capitalised, set up mainly on debt. The Australian company provides a loan for the Malawian mine.

Over such a loan they own interest payment. Normally, withholding tax would apply in Malawi, but a mailbox company (Paladin Netherlands BV) has been set up in the Netherlands to access favourable tax treaties conditions. Accordingly, no tax is paid on interest payments, nor does the Netherlands levy withholding taxes on flowing interest payments. A similar scheme has been used for withholding taxes on large payments made for management fees between Paladin Netherlands BV and its Australian parent company. As a result, Paladin took a tax-free route, which resulted in a tax revenue loss of US$27.5 million in Malawi. Although this may not seem like much for developed countries, in Malawi it is the equivalent of roughly 5400 annual salaries of a doctor; a much needed resource for a country with an HIV rate of 10% and life expectancy of 55.

Paladin’s response revolves around the freedom of creating a commercial strategy which maximises profit and the legality of forming such a special purpose vehicle (SPV) in the Netherlands, dismissing the unequal footing of poorer countries in negotiating their tax deals. The Dutch company acts as an international holding and financing vehicle for other intra-group companies, including the Kayelekera mine, and it was established “for a range of commercial, legal and regulatory reasons”.

Although the Netherlands has taken a number of actions to make its treaties more equitable, a number of problems still remain. “If we talk about global solutions”, said Gijs Verbraak, “the Dutch government is unfortunately not a proponent of a mandate to the UN to solve this problem in a democratic manner. Instead, it supports the OECD Base Erosion and Profit Shifting project, which is just fiddling with the system, but not really tackling the root causes”.

ActionAid helps pressure the Dutch government to take a progressive stance and ask for a democratic process on which also developing countries have an equal say in what the problem really is and how it should be solved.

The image created is that the Netherlands mainly profits from this system. In reality, it also stands to lose, as Dutch multinational companies use favourable fiscal conditions offered via Belgium, Ireland or other tax havens to avoid paying taxes in the Netherlands. What countries engaged in a ‘race to the bottom’ really do, is shift the tax burden from companies to citizens.


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