Much less money to tax havens, much more to the UK

• Gidi Pols

  editor Economics

Dutch BVs are still important hubs of global money flows, but surprisingly enough, more and more of that money is flowing to the United Kingdom. This is evident from a recent letter to Parliament on tackling tax avoidance.

This concerns billions that multinationals move between subsidiaries in different countries, in the form of profit distributions, interest on internal loans or compensation for trademark rights (royalties). This kind of internal money shuffling can be a form of tax avoidance, where multinationals ultimately want to spend the money in a country with the lowest possible profit tax.

In previous years, Dutch BVs always transferred around 20 to 25 billion euros to British sister companies, but last year this tripled. This means that an extra 50 billion will go to the United Kingdom. In both years, that money comes from approximately 180 Dutch companies and institutions.

“That is a high amount, there must be something special going on,” says Tilburg tax professor Arjan Lejour.

Both the Ministry of Finance and De Nederlandsche Bank (DNB), where the figures come from, do not know what causes the increase.

“A number of possible reasons are conceivable,” a DNB spokesperson said. For example, an increased interdependence between the two countries, because more money is also coming from the UK to the Netherlands, although this amounts to ‘only’ an additional 17 billion euros. “A second option, for example, could be increased profits from Dutch subsidiaries to UK-based parent companies.”

“Shell’s move could well play a role,” says Professor Lejour. That oil company moved its headquarters from The Hague to London at the end of 2021. As a result, a significant internal flow of money may have started from the Netherlands to the United Kingdom by 2022.

But no matter how big Shell is, it does not seem sufficient to explain the entire increase of 50 billion. The latest annual report of the now British company shows that the head office collects ‘only’ 20 billion in dividends from its subsidiaries. So taking that move into account, a huge amount remains.

“It may also be an indication that the United Kingdom has become an intermediary to allow profits to flow to Bermuda, for example,” says Leiden tax law professor Jan van de Streek.

The Netherlands introduced a new tax in 2021, the so-called withholding tax. As a result, companies now have to pay money when they transfer interest and royalties to subsidiaries in tax havens. “But that tax does not apply to money flows to the UK,” says Van de Streek. “And there, for example, they do not levy tax on dividend payments to subsidiaries in countries without profit tax.”

According to the Leiden tax professor, it could be that a few large companies have diverted their cash flow from the Netherlands via the UK.

“But even if that indicates a new tax route, 30 billion is still very high,” says Lejour. By comparison, even Google ‘only’ channeled around 20 to 25 billion euros per year and that company was known for years as the largest user of the Dutch route.

The letter to Parliament also shows that less money has gone directly from the Netherlands to tax havens in recent years. “The effects of the withholding tax appear to be manifesting themselves permanently,” State Secretary Marnix van Rij writes in the letter. He emphasizes that outward flows to ‘low-tax jurisdictions’ (read: tax havens) have decreased from 38 billion euros in 2019 to 6 billion in 2022.

He does leave out a nuance. The decline is mainly due to Google’s change in direction. Due to new legislation in the US and Ireland, the internet giant stopped the route via the Netherlands to tax haven Bermuda in 2019. This effect is immediately visible in the figures: the outgoing flow will already drop from 38 to 6 billion in 2020. That is already a year before the withholding tax was introduced in the Netherlands.

The fact that companies still send money from the Netherlands to countries such as Bermuda, Anguilla or Barbados no longer means that those companies pay no tax at all. After all, they now have to pay tax in the Netherlands on the outgoing money. In recent years, this withholding tax has generated approximately 55 million euros per year for the treasury.