Tax, finance and development
Today, the Panama Papers shed some light on the tax avoidance via the Netherlands.
Uber, Pfizer, Boeing and many other US firms avoid taxes on their foreign operations using a Dutch limited partnership, a so-called closed CV (Commanditaire Venootschap). They use it to create a hybrid structure: the revenue authorities of the Netherlands and the US treat the CV in a different way. As a result, neither of them taxes the CV’s profits.
This brief FT video nicely explains how it works (from 1:30). Tax advisors are also eager to present the structure, see for example page 8 of this presentation with “planning options to consider” for US companies.
As if that isn’t bad enough, today Dutch newspapers reveal that Dutch closed CVs are also used in other tax dodging schemes. Shareholders based in tax havens that own shares of companies in certain Latin American countries can use them to avoid withholding taxes in those countries.
The newpapers describe how Juan Gonzalez and Leonardo Guarderas, two millionaires from Ecuador, hold shares in a large sugar company in their own country, via Panama, Malta and the Netherlands. Ecuador regards Malta and Panama as tax havens and therefore levies a withholding tax on dividends paid to these countries. However, in the hybrid structure set up by these millionaires, dividend payments would first pass through a Dutch closed CV. As a result, Ecuador treats the dividends as paid to the Netherlands, whereas the Netherlands treats them (for 99%) as paid directly to the CV’s foreign limited partner.
Apparently, the law firm Mossack Fonseca actively promotes structures like this. It explains to potential clients:
“The closed CV is often used in tax planning structures as a hybrid entity. […] For instance, although the Netherlands disregards the closed CV for tax purposes, other countries treat the closed CV as a regular legal entity. […] In practice, many Latin American clients make use of the possibilities of a closed CV […].”
Mossack “Panama Papers” Fonseca is not alone. MMG Trust also promotes the use of Dutch closed CVs to create mismatches with the tax systems of Latin American countries.
And that’s just one tax dodging scheme. Strik Attorneys at Law and Tax Advisors emphasize that the Dutch closed CV is “a highly popular international tax planning tool”, not least because of “its highly flexible character”, and outline two other “very common international tax planning structures in which a CV is used”.
Time has come for the Netherlands to put an end to this. It is hard to deny that Dutch tax legislation facilitates aggressive tax planning opportunities if these opportunities are actively promoted.
For one thing, the EU Anti-Tax Avoidance Directive, which is currently being negotiated under the Dutch EU presidency, must address hybrid structures between EU countries and third countries. This is still lacking in the current proposal.
Yet that is not enough. Even if the EU adopts a stronger directive that fully implements the OECD’s excellent 458 page action plan to tackle tax avoidance via hybrid structures, Juan Gonzalez and Leonardo Guarderas won’t care… because the OECD’s action plan does not cover their particular structure. (The structure doesn’t involve a double deduction, nor a deduction without a corresponding inclusion. A tweaked version of the OECD’s recommendation against so-called reverse hybrids might be needed here: restricting tax transparency of intermediate entities where the source country treats the entity as opaque. There is also an easier solution: prohibiting trust companies from managing CVs altogether.)
The Netherlands needs to tackle this itself. Time to act. End the abuse of Dutch limited partnerships!
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