Taxation and development
It is little know that around the turn of the millennium, the Dutch Finance Ministry created a secret group of high-ranking tax officials called the Barbapapa group. You may wonder, is this really about Barbapapa, that friendly pink creature that can take any shape? Did it have a secret fan club in the Dutch Ministry of Finance? Indeed, that Barbapapa. But it wasn’t a fan club.
The Barbapapa group had to change the shape of the Netherlands special tax rules for multinationals. It had to transform them in such a way that the Netherlands would not look like a corporate tax haven anymore, while preserving the tax advantages themselves as much as possible. So they whispered “Clickety Click, Barba Trick!” and made it look like the Netherlands had cleaned up its act.
Yet the tax advantages were still there. The Netherlands Foreign Investment Agency continued to lure multinationals with “features beneficial in international tax planning”. On its website, the agency posted a quote from Sun Microsystems that said it all. “Let’s face it: ask foreign companies why they’re really located here, and nearly everyone will reply that it’s because of the favorable tax ruling. (…).”
You might think that I made this up, but it’s all real. Except, perhaps, that they whispered “Clickety Click, Barba Trick”. So what happened? When the OECD came up with criteria to identify harmful tax regimes in 1998, it didn’t look good for the Netherlands. A year later, the EU had identified 66 harmful tax practices of member states, of which 10 in the Netherlands – more than in any other member state. Something had to be done.
The main problem was the Dutch system of tax rulings. Multinationals could choose from a range of standard formulas to calculate their taxable profits in the Netherlands. For example, if they used a Dutch conduit company to pass on a few millions of loans from one affiliate to another, they could apply for a ruling that fixed the conduit’s taxable profits at 0.06% of those loans. Such standard formulas don’t chime with internationally accepted principles and might lead to artificially low profit margins.
The Barbapapa group quickly transformed the tax ruling practice. In 2001, the Netherlands introduced a new system without standard rulings. A former tax professional told me that it took some time before the first new-style rulings were issued, and everyone was curious what they would look like. Would the sweetheart deals be over? Eventually then it turned out that under the new system, profit margins were even lower than before. “Clickety Click, Barba Trick!”
Read what happened next in the following blog: Fiscal Apartheid