Since 2021, the Netherlands has imposed a tax on interest and royalty payments from subsidiaries of multinationals to sister companies in tax havens. Over the past two years, this measure has generated more than €50 million, which is considered a positive financial development. Initially, it was expected that due to this withholding tax, companies would forego such payments to avoid tax avoidance.
Unexpected returns
Outgoing State Secretary Marnix van Rij (in charge of taxation and member of the CDA) has reported in a letter to the House of Representatives the unexpected proceeds from the withholding tax on interest and royalties. In this letter he also reported on progress in the fight against tax avoidance by multinationals.
However, Van Rij is cautious and does not assume that the withholding tax will continue to generate a lot of income permanently. He expects companies to adjust their structures to completely stop questionable payments to tax havens. Despite the unexpected income, he emphasizes that the effects of the withholding tax are clearly noticeable.
The amount of interest payments to ‘low-tax jurisdictions’ fell from 4.8 billion euros in 2018 to 1.2 billion euros last year. The decline in royalty payments is even greater, from 32.5 billion euros in 2019 to 500 million euros in 2022. This decline can largely be attributed to Alphabet, Google’s parent company, which stopped sending billions in royalties through the Netherlands in 2020 to Bermuda.
The largest flow of money from the Netherlands to tax havens last year consisted of dividends, but even this flow had already halved to 4.8 billion euros in 2022 compared to 2021. From next year, the Netherlands will also levy a withholding tax on dividends that go to countries that have little or not levy taxes, or where the tax authorities suspect abuse.
Difficult to measure
Transactions to conduit countries such as Ireland, Luxembourg and Singapore raise suspicions of abuse. Van Rij notes with satisfaction that money flows to these countries have not increased since the introduction of withholding tax on interest and royalty payments to tax havens. There appears to have been no mention of the dreaded “waterbed effect.”
Non-governmental organizations have repeatedly mentioned the Netherlands as a conduit country or tax haven in their investigations into tax avoidance. Van Rij notes that measuring the extent of tax avoidance is difficult and sometimes involves incorrect assumptions. Moreover, the definition of tax avoidance is not clear.
No further recommendations
Van Rij attributes the results of a recent study by the Tax Justice Network, which found that the Netherlands is responsible for almost $51 billion in lost tax revenue for other countries, to this complexity. He notes that the Netherlands has not received any further recommendations from the European Commission regarding tax avoidance and that the IMF is satisfied with the steps taken to tackle avoidance. However, this does not mean that nothing more needs to be done, says Van Rij.
He reports that an investigation is underway into companies that were consistently loss-making and did not pay corporate tax during the period 2010-2019. This research covers 50,000 companies that are subject to corporate tax, excluding start-ups. Van Rij expects the results of this research before the end of the year.