Tax Research UK

SOMO in the Netherlands has issued the following note in response to the Dutch furore at being described as a tax haven by the USA:

The White House press briefing announcing measures against tax avoidance and tax havens, published on 4 May 2009, originally contained the following sentence: ‘Nearly one-third of all foreign profits reported by U.S. corporations in 2003 came from just three small, low-tax countries: Bermuda, the Netherlands, and Ireland.’ The sentence was included as a bullet point in the introduction. The next day, after efforts by the Royal Netherlands Embassy in Washington, this sentence was removed from the introduction of the briefing and explained as a misunderstanding. (See here)  Earlier this month, the Dutch network Tax Justice NL published a comment on the matter .

We have now been able to identify the source of the information in the sentence, which was not mentioned in the White House document. The data on foreign profits of US corporations are based on tax returns filed by the corporations themselves, presented in a figure in a 2007 discussion paper by K.A. Clausing and R.S. Avi-Yonah. (See here , figure 2). Although the Netherlands may not qualify as a typical low-tax country (it has low effective tax rates for specific types of corporate financing activities only), the 2003 US tax return data show that foreign profits of US corporations in the Netherlands were almost 13% of the total. This puts the Netherlands in the first place for that year, before Ireland and Bermuda. So the figures themselves were not a misunderstanding, and they have been published before – only in a less politically sensitive context.

What this clearly shows is that the Dutch conform to another tax haven principle: always denying the truth.

Richard Murphy Netherlands, Tax Havens, Tax avoidance, USA

The US publication The Hill has reported:

The White House on Monday angered the Dutch Embassy by lumping the Netherlands in with a group of "low-tax countries" some corporations use to avoid paying U.S. taxes.

Ambassador Renee Jones-Bos reached out to both the White House and the Treasury Department to express her displeasure with a fact sheet released by the administration that said "nearly one-third of all foreign profits reported by U.S. corporations in 2003 came from just three small, low-tax countries: Bermuda, the Netherlands and Ireland."

The fact sheet was released in connection with the administration’s announcement Monday of policies intended to close tax havens.
"We were greatly surprised to see The Netherlands appear in this paper, because we are working together with the U.S. - also in a G20 framework - in dealing with countries that have bank secrecy or are non-transparent," spokesman Floris van Hövell. "The Netherlands shares tax-related information with the U.S. without reservation."

This is absolute nonsense. The Netherlands is a tax haven. There are two reasons. First, whilst it is not a secrecy jurisdiction i.e. a place that intentionally creates regulation for the primary benefit and use of those not resident in their geographical domain that is designed to undermine the legislation or regulation of another jurisdiction and that, in addition, creates a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so, it is does undoubtedly fulfil the first part of this criteria. It is brazenly seeking to artificially reallocate profits to its domain. In the process it is seeking to subvert tax compliance.  Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.

So it may be cooperating against secrecy jurisdictions. That does not matter. It is still a tax pariah, like Ireland and Bermuda, and is rightly identified as such by the USA.

The moral is this: there’s always more than one way to abuse. The Dutch had better take notice.

Richard Murphy Bermuda, Netherlands, Tax Havens, USA

Reuters has reported that:

Brit Insurance [has] said it [it] planning to move its tax base to the Netherlands and that it would put detailed proposals to shareholders in the coming months.

Here we go again is the obvious reaction.

The Treasury is taking steps (quite illogical steps in my opinion) to change the UK tax code to appease corporations on the basis that there is a valid model of tax competition in existence in the world when it is glaringly obvious that is not true, and despite that here we have another lemming fleeing over the edge to a small location without the financial muscle (and in this case I am quite sure, without the inclination) to bail it out when all goes wrong leaving policy holders exposed to risk for the sake of a few pence off the tax rate.

So why is the Netherlands a tax haven? I and my co-authors largely answered this question in this publication, but let’s summarise why. First, although it’s headline tax rate is 25.5% it has numerous deliberate loopholes in its tax system that allow companies to avoid tax. In particular it deliberately offers companies who would not otherwise seek to be resident within its territory the means to reduce their tax charges on interest, royalties, dividend and capital gains income
from foreign subsidiaries.

This is largely through an arrangement they call a ‘participation exemption’ that exempts dividends and capital gains from subsidiary companies abroad from corporate income tax in the Netherlands. A second reason is the unusually large Double Taxation Treaty (DTT) network that substantially reduces withholding taxes on dividend, interest and royalty payments between treaty countries and the Netherlands which in combination with the participation exemption means that investment income enjoys very low rates of tax in the Netherlands. A third reason is the advance tax ruling system that gives certainty to
multinationals about how the income of their Dutch subsidiaries will be taxed.

Other reasons include new rules designed to attract group finance companies (in company banks, by any other name) which will also enjoy low tax rates in the Netherlands.

As a result it is thought that at least 20,000 ‘mailbox’ companies use the Netherlands as a tax haven – little short of places like Jersey and probably with more money involved.

It deserves to be on any tax haven list as a result.

Richard Murphy Corporation Tax, Netherlands, Tax Havens, Tax avoidance

KPMG has published its latest survey on the UK’s tax competitiveness.

It’s message is clear: it says the UK is slipping behind.

But look who it compares us to:

Let’s be blunt: Ireland, Luxembourg and the Netherlands are all small states who are tax havens. It’s an impossible business model for the UK to emulate. It’s also like asking us to move in the direction of Iceland. This is, to be blunt, economic madness.

Sue Bonney of KPMG says in the report that:

At a time when both the state and business are having to work closely in an unprecedented way to help us through the credit crunch, perhaps the feeling that we are all in this together will lead to increased mutual understanding and a better working relationship in the future.

She quite clearly does not understand the term “we”.

Alex Cobham of Christian Aid does (see earlier today).

We don’t want to be a tax haven. We know the harm they cause. We suffer the impact. KPMG may not. We do. That’s my point. That’s why they are so wrong. That’s why they’re the last people to help reform the tax system, economy or anything else right now.

Richard Murphy Corporation Tax, Ireland, KPMG, Netherlands, Tax management

I haven’t written about Bono for a while, although what I have written about him remains among the regularly read pages on this blog.

It’s time I did so again. There’s good reason. I know the messages of tax justice have reached the man. I know how they got there. And in the last couple of days I’ve had my attention drawn to an article about a talk he gave in Ireland made after those messages should have reached him. So I know he’s ignoring the issue.

So I’ve bided my time. I’ve been patient. And now I’m fed up with the hypocrisy of the man.

To give the background, Ireland changed its tax laws in 2006 so that the earnings of artists fell within the tax net if they exceeded Euros 250,000 a year. Extraordinarily, they had been exempt whatever the amount until then. For 99% of all artists this did not, of course, have any impact on their tax affairs. For Bono and his U2 colleagues it did. The royalties from their recordings and use of their music will be considered the income of artists in Irish tax law. You can be sure they exceed Euros 250,000 a year. And from 2007 Ireland planned to tax them. Bono and his U2 colleagues were clearly unhappy at the change, and despite the fact that they could have kept them in an Irish company and have paid no more than 12.5% tax as a result this was not good enough for them. They did instead shift the place in which they recorded their royalties as being earned to the Netherlands. As a result they cut the potential tax they might pay to no more 5%, because that’s what the Netherlands allows.

Let me be unambiguous about what this represented: it was classic tax avoidance. The relocation to the Netherlands is wholly artificial. The Netherlands has had nothing to do with the income that will have been recorded as having arisen there. It is simply offering a classic tax haven opportunity. It is abusive as I have shown in work I have done (with colleagues at SOMO) on the Netherlands’ role as a tax haven.

I wrote this about what Bono did in 2006:

Where does this leave Bono? Seriously out of step I’m afraid. In fact, well outside the development agenda. The tax havens he uses undermine development. They divert income from developing countries. They ensure tax is not paid in them. They facilitate capital flight from those developing counties. As Raymond Baker has shown, tax avoidance driven capital flight costs developing countries ten times their aid receipts.

Bono is endorsing this. His credibility is in tatters.

But he has a choice. He could pay tax. This is an option he can afford. But it’s more important than that: it’s his duty.

And now I learn that he has sought to defend his actions. According to Irish broadcaster RTE’s web site in November 2007:

Bono defended the decision by U2 to move part of the band’s business from Ireland to the Netherlands to reduce his tax bill and the tax bill of the other band members. Bono was speaking at University College Cork, where he attended a meeting of the Irish Government’s Hunger Task Force, of which he’s a member.

He said Ireland’s prosperity had been achieved through tax innovation and it would be churlish to criticise U2 for being innovative in relation to their tax affairs when that’s what people were encouraged to do and that’s what made the country prosperous.

He said U2 paid taxes not only to the letter of the law but to the spirit of the law too.

The singer said anybody who knew him would know that he wouldn’t ask anyone to do something which he wasn’t prepared to do himself. Around the world he said he had been asking governments to increase their spend on Third World aid by something like 0.2% and he was sure nobody was seriously suggesting that U2 weren’t up to that too.

As bad, he apparently said:

African countries were seeking to replicate the success of the Irish economy because Ireland had come from further behind than any other country in modern history to achieve the levels of prosperity currently being enjoyed.

I thought the man hypocritical before reading this. Having read it I’ll be more blunt: he’s either very stupid or thinks we are. It’s just possible it’s the first: on this video he claims not to be into tax havens when he obviously is. But I doubt this option. I just think he’s representing things as he’d like us to see them. That’s the second option. There are several reasons.

First, Ireland did not build its prosperity on the basis of tax innovation. That’s not possible. Ireland built its innovation on three things. The first was the fact that the EU gave it more grants per head of population than anywhere else. Throughout the 1980s Ireland was one big EU building project (I was there at the time). Second, Ireland happened to have a mass of well educated young people to exploit this situation, paid for by the state (that’s taxation, to you and me). Third, it attracted inward investment not just through low tax rates (although they helped) but by paying massive grants as well. That was only possible because the EU was paying most of its other bills. As a vote of thanks Ireland then went out of its way to steal the taxation revenues of those countries that had just funded the creation of the infrastructure that was the essential prerequisite of the modern Irish economy, all paid for by the state and none of it by private money.

Next, let’s consider this ‘innovation’. What does this mean apart from the fact some people, wealthy and powerful, can game the system, whilst others, poorer and less politically connected, cannot? Is this the sort of innovation Bono wants others to emulate?

What is certain is that if Ireland has done anything with regard tax innovation it has been to demonstrate how to use other people’s tax revenue. That’s not a sustainable tax policy or economic policy, as I suspect some are now realising. No wonder the EU referendum there today is on a knife edge.

In that context let’s also be clear about the innovation that U2 are showing with regard to management of their tax affairs: they’re denying (albeit, legitimately) tax revenues to a state: in this case their own. The action may be typically Irish. It remains wholly unacceptable all the same.

And if this man really thinks that increasing his own charitable contribution by 0.2% is equivalent to the same sacrifice when made by a government that has also to educate its population, provide for their medical well being, ensure there is a social safety net, defend the state, provide law and order, and all the other things government must do, and that out of a budget constrained in a way that Bono will now never know or understand then he is a fool. He has income many times in excess of any person’s need. A government has not. His analogy is offensive.

Bono has shown his true colours: he is part of a libertarian elite who treat government with contempt and who think they can act beyond its constraint and yet are more than happy to suggest what it might do, believing that their wealth gives them a right not just to be heard, but to be heeded.

But Bono has forsaken that right. He had a choice. He knew the options. He made the wrong choice. He is a man who is part of the problem of poverty creation, not a part of its solution. He supports the infrastructure that creates poverty, that facilitates the greatest shift of wealth from the poor to the rich the world has ever seen and that contributes to the deaths of hundreds of thousands of children a year. He may not do that directly: but his participation in and approval of the use of tax havens when he is aware of the damage they cause marks his conduct as being beyond the pale.

Let’s summarise: Bono is helping make poverty reality. It pains me to say so. But I sincerely believe it is true.

Richard Murphy Development, Ethics, Ireland, Netherlands, Tax Havens

The US is targeting the biggest tax havens in the world. The FT reports that:

A pledge by Democrats in Congress to crack down on tax avoidance and to pay for spending measures as they are approved has put the practices of a range of international companies under the spotlight.

“These multinationals avoid US taxation on their actual earnings by siphoning off revenues by sending payments through US tax treaty countries with low withholding rates, before they are forwarded on to the parent corporations,” a Democratic aide said.

This move targets ‘treaty shopping’ where profits, interest and royalties are all routed through countries that provide them with favourable treatment for tax and those self-same countries also have a strong network of tax treaties that allows the favourable treatment to flow through to the country of eventual ownership of the income streams in question.

Number 1 target has to be the Netherlands. It’s a flagrant abuser of the tax law or other nations and the EU, as I and my co-authors showed last year in the report we wrote for SOMO entitled “The Netherlands: a Tax Haven?”.

Others have noted today though that this will also hit the UK.

Quite right too. Tax law is there to be enforced. Corporations who abuse the rules shift the burden of tax onto others, and those others are either compliant companies or, more likely, ordinary people. This shifts the burden of tax down the income scale and as such this is regressive behaviour. Worse though, treaty shopping shows contempt for the rule of law and the role of democratic government. This undermines society as we know it.

That’s disastrous. As such this move is good news. The UK should reciprocate. The role of places like the Netherlands, Switzerland, Belgium, Luxembourg and Ireland in this abusive game should be exposed, and ended.

Richard Murphy Accounting, Economics, Ireland, Netherlands, Tax Havens, Tax avoidance, Tax compliance, Tax management

I was in action in the Irish press as well as that of the UK this last weekend. The Sunday Tribune ran a major feature on growing worldwide concerns about Ireland’s behaviour as a tax haven.

Two things struck me about this report. The first is the persistence of the Irish government in denying this glaringly obvious truth. Don’t they realise that there isn’t a tax official in any other country in the world who laughs at them behind their banks ever time they say things like this:

A spokesman for the Department of Finance emphatically insisted that Ireland wasn’t a tax haven. “The low rate of corporate tax is necessary to attract inward investment that would otherwise go elsewhere or would not occur at all, ” he said.

Pretty much by definition that makes you a tax haven.

The second is that I know that journalists ask me to comment for two reasons. The first is that I am Irish (I have dual nationality, to be precise). Second, there are no accountants in Ireland willing to talk about this issue. They’re all too frightened to do so. That’s one of the characteristics of a tax haven state. They are mighty oppressive.

And the Irish Mail on Sunday also featured a Tax Research inspired story - although as they have no web site I have no idea if my effort in supporting their report was rewarded with a quote. This is what they said though (care of Ireland on Line):

Semi-state companies avoid tax by using Dutch companies

Three semi-state companies have been legally able to avoid paying corporation tax here by moving more than €90m through the accounts of Dutch holding companies.

According to the Irish Mail on Sunday, the ESB, An Post and Aer Rianta have been using so-called mailbox companies in Amsterdam for nearly 10 years.

It maintains the ESB transferred more than €69m in profits to an Amsterdam-based holding company in the 1990s.

An Post set up AN Post BV in May 2002 and has been used to clear almost €18m in inter-company loans.

Aer Rianta, meanwhile, has put nearly €4m through the books of their mailbox company, Aer Rianta International Netherlands BV

Opposition parties have called for an investigation by Minister for Finance Brian Cowen and the Revenue Commissioners.

It seems the SOMO report continues to attract attention. Which is good news. The bad news is that this shows tax havens are now fighting each other in a ‘race to the bottom’.

Richard Murphy Ireland, Netherlands, Tax Havens

My Dutch colleagues have given me feedback on the reception of the report we co-authored for SOMO to which I referred yesterday.

The report, entitled ‘The Netherlands: A tax haven?‘ has been discussed in the Dutch parliament. As Francis Weyzig noted:

The finance minister questioned our report, which was to be expected, but he also stated that the group interest box should not be detrimental to countries that receive development aid, and if it would turn out that this is the case, he would certainly do something about it..

And as welcome:

Apart from our report, the problem of a race to the bottom was also mention several times in the discussion.

The report has, therefore, already established a benchmark for which the Dutch government can be held accountable. Which is good news.

Richard Murphy Netherlands, Tax avoidance

I guess it’s fairly obvious that there is a short answer to the above question. It is ‘yes’. The Netherlands is a notorious tax haven.

Equally, those who know me also know that whilst I’m happy to draw unambiguous conclusions, I like to do so in the basis of reasoned argument. This is a case in point. I’m pleased to say that a report with the above title has just been published by Dutch NGO SOMO. It has been co-authored by Michiel van Dijk, Francis Weyzig and me. I must add, I’m rightly last on that list. My co-authors did much of the work on this report, and a good job they’ve made of it too.

As the report says:

This report investigates the extent to which the Netherlands can be regarded as a tax haven. All the empirical evidence indicates that the Netherlands is a tax haven. This is because it deliberately offers companies who would not otherwise seek to be resident within its territory the means to reduce their tax charges on interest, royalties, dividends and capital gains income from subsidiary companies.

And as it continues:

As a consequence, the Netherlands hosts nearly 20,000 so-called ‘mailbox companies’ which do not have a substantial commercial presence. The data indicate every year more new mailbox companies are established, in particular during the period 2003-2006.

The report notes:

The[se companies] mainly function as conduits for dividend, royalty and interest payments. It has been found that out of the 42,072 financial holding companies registered in the Netherlands for which information on the (ultimate) parent was available, 5,830 are managed by trust companies. Of these mailbox companies, 43% have a parent in a tax haven jurisdiction such as the Netherlands Antilles, Switzerland, Cyprus, the British Virgin Islands or the Cayman Islands. Hence there is a clear link to tax havens for conduit structures.

The reports conclusions are, I think, worth reproducing in full:

• The Netherlands must put an end to harmful tax policies and stop being a bridge between tax havens and other countries as soon as possible. The Netherlands needs to review its taxation policies in the interests of the world community at large. They should be revised to ensure that a level playing field is created where each country receives the fair taxation due to it as a result of the commercial activities undertaken within its borders.

• However, tax havens are a global problem which requires a global solution, and the Netherlands putting an end to its harmful tax policies is a necessary but not sufficient step. Hence it is important that the Netherlands also actively puts pressure on other OECD countries to follow suit.

• The Dutch government should commission an official research on the Netherlands as a tax haven. This SOMO report is the first comprehensive report on this issue and a more detailed study, including a more quantitative analysis,would be desirable.

• The Dutch Central Bank (DNB) should regularly publish statistical information on SFIs.

• To support transparency, a new mandatory International Accounting Standard should be adopted that requires multinationals to provide detailed financial information on subsidiaries.

• All relevant actors, including corporations, government, civil society organisations, consultants, and analysts, should recognise refraining from tax avoidance as a core element of Corporate Social Responsibility (CSR). Issues such as a multinational’s presence in tax havens and the use of mailbox companies do not require fiscal expertise and can easily be assessed by any organisation. In the end, such measures are perceived to be in the interests of multinational corporations themselves as well.

Richard Murphy Netherlands, Tax Havens, Tax avoidance, Trusts

I mentioned I’ve been doing a fair amount of work for the conventional printed media of late: today brings publication of another report in which I have had a research role.

Global Witness have produced a report on the activities of Mittal Steel in Liberia. These are extraordinary. In 2005 Mittal took over iron ore concessions in that country under an agreement that includes tax holidays, unregulated transfer prices, the use of a Cypriot tax haven holding company, the use of Swiss and Dutch tax participation exemptions to preserve low tax rates and the benefits of the tax holiday and a wide range of management issues within Liberia itself that make the report quite compelling reading.

I stress, Mittal has done nothing wrong. But what is significant is that Mittal did nothing to help Liberia either. They have said that the deal they signed was the one they were presented with. But in that case we think that Mittal should have pointed out the numerous faults and defects in the concession that was offered so that this became a fair deal for both parties. That’s the least we would have expected of a company that claims in its social responsibility report that it:

“recognise[s] that our actions impact the people we employ, the communities and countries within which we work and society as a whole … We seek to ensure that all major business decisions are driven as much
by social considerations as by economic ones.”

The evidence in the report does not support that claim.

The full report is available here.

Richard Murphy Netherlands, Tax Havens, Tax management