The Dutch government has publicly reassured international investors that it regards shifting profits to lower-tax jurisdictions as an acceptable corporate tax-planning strategy, and that unlike other countries it will not make any unilateral changes to taxation of international companies.
The promise was made in an open letter sent last week by the Dutch Finance Minister to the Dutch Parliament, which is currently debating the country’s business tax policy. The letter explicitly concedes that setting up or shifting real economic activities to lower-taxed jurisdictions is a legitimate way of reducing taxes. Dutch tax laws, it said, have sufficient safeguards to protect against profit-shifting that has no real economic substance.
The letter also accepted that allocating a group’s profits between its operations in different jurisdictions, based on the transfer pricing rules and the arm’s length principle, is perfectly legitimate. The fact that these rules can produce a range of outcomes is unavoidable, he said.
The Netherlands government is well aware that multinationals often use Dutch holding or intermediate companies to reduce foreign withholding taxes. The country’s central bank estimates that multinationals such as Merck, Dell, Yahoo and Google channelled a total of EUR10.2 trillion through 14,300 Dutch brass plate companies and trust firms in 2010, on its way to low-tax jurisdictions, using techniques such as the now-famous ‘Dutch Sandwich’. But the Minister’s letter defends the country’s tax practices, claiming that its extensive tax treaty network prevents the improper use of intermediates, while promoting investment in otherwise unattractive countries.
The letter affirms the Dutch government’s welcoming attitude to foreign investors. It promises to develop its tax policy only by international discussions with bodies such as the OECD. This comment is clearly aimed at other G20 countries such as France and the UK that have announced, or threatened, unilateral action to block corporate tax-planning.
The parliamentary debate is led by the Labour Party, one of the partners in the coalition government. Some politicians in the party believe the Netherlands’ international tax policy is a ‘stain on its reputation’ and should be reformed.