Francis Weyzig

Tax, finance and development

Will this time be different?

While the Duth government was blocking EU measures against harmful hybrid financing structures, it continued with tax innovation. In 2010, it lowered the preferential rate of the patent box from 10% to 5%, broadened the scope of qualifying income, and changed the name to innovation box. Moreover, it lifted several restrictions, such as a limit on favourably treated profits of 4 times R&D expenses. These new innovations turned the relatively innocent patent box into a dangerous tax avoidance tool.

Wiecher Munting, one of the public officials who developed the Dutch innovation box, later became partner of a tax firm advising companies how they can take advantage of it. A promotional document of the tax firm explains: “(…) hurdles and restrictions of the [Dutch Innovation Box]’s predecessor have been abolished, and the scope of eligible R&D activities has been extended significantly. And last but not least, the [Dutch Innovation Box] allows for outsourcing of R&D activities to a reasonable extent.”

This reminds of KPMG’s Jonathan Bridges, who was seconded to the UK Treasury to help design the UK patent box. Strikingly, in the UK there was a lot of controversy about this revolving door, but in the Netherlands there was none.

When in 2014 the OECD was about to end harmful aspects of patent and innovation boxes, the Netherlands put up another fight, determined as it was to defend its tax haven features. Together with the UK, Luxembourg and Spain, it blocked a strong outcome, and in the end OECD members agreed on a weak compromise that does not eliminate all opportunities for abuse. Similar to the phasing out of the harmful Group Financing Activities regime, the Netherlands provides a generous 5-year transition period for existing beneficiaries of the innovation box, who can continue to exploit opportunities for abuse until mid-2021.

Meanwhile, an even more stunning tax avoidance trick remains largely untouched. The Finance Ministry’s Barbapapa group had renewed the system of Dutch excess profit rulings, also called informal capital rulings, and this is still in place. Dutch excess profit rulings are advance agreements about deductions for patents and other intellectual property transferred to the Netherlands, even if these deductions are not offset by an exit tax in the origin country. This can lead to huge cases of double non-taxation.

Indeed, tax advisors from Baker & McKenzie suggest double non-taxation is the whole purpose: “If the amounts involved are substantial, we advice to request (…) a private tax ruling. (…) Obviously, the above would only be interesting to the extent that the informal capital” – that is, the transfer of intellectual property – “does not result in an income pick up” – meaning a tax charge – “in the foreign jurisdiction.”

To summmarize the last four blog posts, thanks to its innovative spirit, the Netherlands has repeatedly found new ways to provide aggressive tax advantages to large multinationals, while denying them to smaller companies. Twenty years ago it introduced the Group Financing Activities regime, then it tried the group interest box and allowed double non-taxation via hybrid financing, next it created a harmful innovation box, and it issued informal capital rulings throughout the whole period. On top of that, it also allows aggressive hybrid structures involving Dutch limited partnerships.

Back in 1999, the EU found that the Netherlands had more harmful tax regimes than any other member state. Despite all the changes, in 2016, a new EU study finds that the Netherlands still has more tax rules facilitating aggressive tax planning than any other member state.

The question is what will happen now. Will the Netherlands continue to get away with introducing new tax loopholes for multinationals when old ones become untenable? Or will this time be different?



This entry was posted on October 23, 2016 by in English posts.
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