The Netherlands: Tax Haven on Earth? An Analysis of Key Characteristics of the Dutch Corporate Tax System

Transcription

1 Master Thesis International Business Taxation The Netherlands: Tax Haven on Earth? An Analysis of Key Characteristics of the Dutch Corporate Tax System Inssaf Maatougui Supervisor Dr. Carla de Pietro Academic Year

2 Tilburg University Tilburg School of Law Master thesis International Business Taxation Track: International Business Tax Law The Netherlands: Tax Haven on Earth? An Analysis of Key Characteristics of the Dutch Corporate Tax System Inssaf Maatougui ANR Supervisor Dr. Carla de Pietro Exam Committee Prof. Dr. S.A. Stevens 19 June 2017

3 Table of Contents Preface..i Abstract ii Abbreviations and Acronyms....iii 1 Introduction: An Analysis of the Dutch Corporate Tax System Reason and Motivation for this Research The Netherlands: a Tax Haven? The Concept of Tax Haven The Dutch Corporate Tax system The EU Fight against Aggressive Tax Planning The Importance of EU Developments Aggressive Tax Planning The Underlying Problem Anti Tax Avoidance Measures in the EU Transparency is Key Research Question and Scope Research Question Sub Research Questions Research Design Delimitations Methodology 9 2 The Tax Haven Concept Introduction: The Need for a Clear Definition of a Tax Haven Defining a Tax Haven. 11

4 2.2.1 Factors Identifying a Tax Haven Aggressive Tax Planning Code of Conduct Group for Business Taxation Secrecy Jurisdictions A Matter of Opinion Key Factors for Identifying a Tax Haven In Conclusion: A Basis for the Following Analysis Establishing a Benchmark: EU Developments Introduction: Establishing Standards Against Tax Avoidance Tax Competition in the Internal Market The Internal Market Fundamental Freedoms The Prohibition of State Aid The Concept of Abuse Tax Competition Within the Internal Market Positive Integration Anti Tax Avoidance Directive Interest Deduction Limitation General Anti Abuse Rule Controlled Foreign Company Rules Hybrid Mismatches: Within the EU Hybrid Mismatches: With third Countries Transparency: A Solution to all Problems? Tax Transparency Package...27

5 3.4.2 Country-by-Country Reporting EU Measures: Object and Purpose Anti Tax Avoidance Directive Tax Transparency In Conclusion: EU Standards against Tax Avoidance An Analysis: Key Characteristics of the Dutch Corporate Tax System Introduction: Analysing a Corporate Tax System The Netherlands: Key Characteristics of its Corporate Tax System The Innovation Box The Participation Exemption Article 13 DCITA Motive Test Asset Test Effective Tax Rate Test Rationale behind the Participation Exemption Withholding Tax Rules Withholding Taxes on Dividends Exemption The Dutch Cooperative Foreign Substantial Interest Rules Withholding Taxes on interest and Royalty Payments Tax treaty Network Tax Treaty Advantages: Object and Purpose Recent Developments...38

6 4.7 The Ruling Practice The Dutch Ruling Practice: Object and Purpose Substance Requirements Current Developments and Amendments in the Netherlands The Innovation Box The Treatment of Holding Companies The Dutch Cooperative and Dividend Withholding Taxes Relevant Substance The Ruling Practice Country-by-Country Reporting EU Influences: Substantial Amendments to the Dutch Corporate tax System Previous Reports: An Evaluation The European Commission: Aggressive Tax Planning Indicators Oxfam-Novib In Conclusion: An Assessment of the Dutch Corporate Tax System Benchmark Identifying a Tax Haven Conclusion and Recommendations Answering the Research Question A Suiting Definition: Key Factors An EU Benchmark and Implementation Requirements The Netherlands: Tax haven on Earth? Recommendations for the Dutch Corporate Income Tax System Final Reflections...50

7 5.6.1 (C)CCTB? The underlying Problem...51 Bibliography...I Annex I Model Aggressive Tax Planning Structures IV Annex II Aggressive Tax Planning Structures V Annex III Time Span BEPS Developments in the EU VI

8 Preface With this Master s thesis I conclude my International Business Taxation LL.M curriculum, which has not only been an educational one, but a challenging one as well. Times are changing rapidly and logically, taxation is changing along, trying to keep up with the economically integrated and global world of today. During this program at Tilburg University, challenging international developments in the field of taxation have been brought in a refreshing way, providing a lively discussion platform for academically, politically and socially relevant issues. With this thesis, I would like to combine these international developments with my Dutch background and tackle the controversial concept of tax havens in a fiscal environment focused on countering tax avoidance. i

9 Abstract Taking into consideration the increasing attention for countering tax avoidance and aggressive tax planning within the EU, while EU Member States are simultaneously offering tax incentives with the aim of attracting foreign investors, the question comes up whether the Netherlands, known for having a highly competitive fiscal climate at place, is a tax haven. After clarifying the tax haven concept, an EU benchmark is established against which key characteristics of the Dutch corporate tax system are assessed. Although recommendations can be made for further aligning the Dutch corporate tax system with the current fiscal environment, the Netherlands is not considered a tax haven. ii

10 Abbreviations and Acronyms ATAD ATAP ATP BEPS CIT CbC DCITA EU GNI Anti Tax Avoidance Directive Anti Tax Avoidance Package Aggressive Tax Planning Base Erosion and Profit Shifting Corporate Income Tax Country-by-Country Dutch Corporate Income Tax Act European Union Gross National Income G20 Group of 20 1 MLI MNE NGO OECD SME TEU TFEU US V-N WFR Multilateral instrument Multinational enterprise Non-governmental organisation Organisation for Economic Cooperation and Development Small and medium-sized enterprise Treaty of the European Union Treaty on the Functioning of the European Union United States (of America) Vakstudie-Nieuws, Dutch legal magazine Weekblad Fiscaal Recht, Dutch legal magazine 1 Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Korea, Turkey, the United Kingdom, the United States and the European Union. iii

11 1 Introduction: An Analysis of the Dutch Corporate Tax System In the last decade, the Netherlands has been increasingly associated with the term tax haven by foreign politicians, the media 2 and various organizations, such as Oxfam-Novib 3. The reaction of the Dutch government on conclusions that the Netherlands is a tax haven mostly consists of criticism and outrage. An example is the speech of former US president Obama in 2009, in which he addressed his frustration with regard to US multinational enterprises (MNEs) with enormous profits, using tax havens to avoid US taxation. Obama eventually put the Netherlands on a list of tax havens, in which the Netherlands was stated as one of the three most used low-taxed countries (along with Ireland and Bermuda) by US MNEs. This list resulted in huge criticism and strong pressure from the Dutch government, which led to Obama withdrawing the whole list. Since this event, Dutch politicians have been resolute in denying any reference to the Netherlands as a tax haven. In recent years a slight shift in this attitude can be noticed, which seems to be an influence of increasing attention for tax avoidance through Base Erosion and Profit Shifting (BEPS). Although the Dutch government will continue to deny any reference with the term tax haven, there seems to be an acknowledgement of the fact that the Dutch tax legislation needs to be amended and actual measures have been taken against tax avoidance. 1.1 Reason and Motivation for this Research Reports concluding that the Netherlands is a tax haven mostly focus on specific tax incentives which the Netherlands put in place with the aim of improving its business and investment climate. Taking into consideration the fact that the Netherlands has an immense set of corporate income tax rules at place, including a corporate tax rate of 25%, it is not clear to me how this country can be seen as a tax haven. It is clear that certain parties see the Netherlands as a tax haven, while other parties, including the Dutch government, will deny this firmly. Reports are criticized for not being objective and ignoring the rationale behind the tax incentives. Is it possible that these reports are lacking of an in-depth knowledge of the Dutch corporate tax system? Could these different conclusions be a consequence of the lack of a generally accepted definition of a tax haven? Where lies the line between fair competition, which has many positive effects, and harmful tax competition? These questions, in conjunction with an increasing recent attention for tax avoidance, triggered my motivation for analysing the Dutch corporate taxation and hopefully removing the doubts and uncertainties around qualifications of this EU member state as a tax haven. The main objective of this research is to analyse the main characteristics of the Dutch corporate tax system, in the light of recent EU developments, in order to conclude whether the Netherlands is a tax haven. One of the aims of the EU is fair competition between its member states, although it is not clear where the line between fair and harmful competition lies. The EU has taken several measures against tax avoidance, aiming to create a level playing field within the internal market. Moreover, by the introduction of a blacklist with tax havens, the EU is targeting the tax haven concept around the world. Therefore, in order to conclude whether the Netherlands, as an EU member state, is a tax haven, it is necessary to take into consideration the relevant EU standards. The starting point of this analysis is to establish a definition for the term tax haven. On the basis of this definition, key characteristics of the Dutch corporate tax system will be analysed in order to conclude whether the Netherlands is a tax haven. In addition, the Netherlands recent amendments to its tax 2 Nederland Belastingparadijs, Zembla documentary on February 8, The Netherlands is a top EU tax haven, Commission data shows Oxfam International, 23 May

12 legislation against tax avoidance will be addressed, considering the great recent attention for tax avoidance within the EU. EU standards in this respect will be elaborated upon in order to create a benchmark against which the Dutch corporate tax system and its recent developments can be assessed. 1.2 The Netherlands: a Tax Haven? The Concept of Tax Haven The concept tax haven seems not to be a clearly defined one, which is illustrated by different results and conclusions in reports on tax havens. In a global economy, the tax system of a single tax jurisdiction has a cross-border influence. The Panama Papers, the famous documents leaked from Panamanian law firm Mossack Fonseca, illustrate the immense role of tax havens in tax fraud, tax evasion and tax avoidance practices. 4 The focus of this study concerns the use of tax havens for tax avoidance practices. The main problem with regard to reports concerning tax havens is the lack of a clear and generally accepted definition of the term tax haven. As a consequence, different reports result in different conclusions with regard to the Netherlands as a tax haven. An example of a definition of a tax haven is the one given in an OECD report on harmful tax practices. 5 This definition consists of four characteristics which should help identify a tax haven. The first characteristic is no or low nominal taxes, which means that a jurisdiction might be harmful in the case that the effective tax rate is zero or much lower than the statutory rate. Another characteristic of a tax haven according to the OECD is the lack of exchange of financial and bank information. Furthermore, the lack of transparency, resulting in difficulties in knowing the exact effective tax rate of the relevant country, indicates a tax haven. The last characteristic is the lack of substantial activities in the relevant country, which indicates that the relevant country includes tax incentives in order to attract investments solely for tax advantages. Another definition of a tax haven is given by the Whistleblower Justice Network: a country (or territory) whose laws make the country attractive as a tax shelter for foreign money. 6 Furthermore, the Cambridge Dictionary simply describes a tax haven as a place where people pay less tax than they would pay if they lived in their own country. These definitions of a tax haven are clearly different from the definition given by the OECD. It is clear that there are different points of view on the exact meaning of a tax haven. Moreover, the definitions given to the concept of tax haven differ depending on the type of research, report or the objective thereof. Therefore, before analysing the Dutch corporate tax system, it is necessary to elaborate upon this concept in order to establish a definition which suits the objective of this study. This defined concept will serve as a basis for further analysis and for drawing a final conclusion The Dutch Corporate Tax System Despite the fact that The Netherlands has an immense set of taxation rules at place, including a corporate income tax rate of 25%, it has been accused of being a tax haven on multiple occasions. According to Oxfam, The Netherlands is a top EU tax haven for corporations. 7 Due to its favourable investment climate, the Netherlands attracts investors and businesses from all over the world. The Dutch investment climate is 4 (12 May 2017). 5 OECD (1998), Harmful Tax Competition: an Emerging Global Issue (p.23). 6 See (12 May 2017). 7 The Netherlands is a top EU tax haven, Commission data shows Oxfam International, 23 May

13 generally seen as a consequence of tax incentives for MNEs and has a favourable effect on the employment rate and economic growth. However, another consequence of the use of tax advantages is the decrease in tax revenues. Moreover, the use of letter box companies without any or with very small substance in the Netherlands, leads to tax avoidance in other countries without the desired impact on the level of employment and economic growth in the Netherlands. The major question in this respect is whether The Netherlands is competing in a fair way, or in the contrary, distorting the fair competition within the internal market by introducing tax measures in favour of MNE s, thus competing in a harmful way. This question underlines the grey line between fair competition and harmful tax competition in a globalizing economy, including the internal market of the EU. Furthermore, certain reports concluding that the Netherlands is a tax haven are conducted from a certain point of view that may not always be objective, e.g. reports concluded by NGOs or by MNEs. In order to draw a solid conclusion, an objective assessment of key characteristics of the corporate tax system in the Netherlands is required, accompanied with an elaboration on recent EU developments in the field of taxation. Therefore, the main purpose of this study is to provide an insight into the Dutch corporate tax system, in order to assess whether the Netherlands is a tax haven. Certain characteristics of the Dutch corporate tax system repeatedly come up in reports on the Netherlands as a tax haven. These are the same characteristics which are pointed out by Dutch politics as important aspects of the Netherlands investment climate. In order to establish whether these characteristics indicate that the Netherlands is a tax haven, the following key characteristics of the Dutch corporate tax system will be assessed: i) The innovation box. The Dutch innovation box regime aims to stimulate companies investing in technical innovation. Profits deriving from intangibles that qualify for the innovation box regime are taxed at a reduced corporate income tax rate of 5%. Taking into consideration the regular corporate income tax rate of 25% applicable to taxable profits above EUR , the innovation box regime forms a tax incentive which contributes to the Dutch investment climate. The main question in this respect is whether the Netherlands is competing fairly by ii) The treatment of holding companies. This characteristic focuses on three aspects of the Dutch corporate tax system. Firstly, the Dutch participation exemption as laid down in Article 13 of the Dutch Corporate Income Tax Act (DCITA) is an important part of the Netherland s treatment of holding companies. The current Dutch corporate income tax rates are 20% for the taxpayer s first EUR 200,000 of taxable income and 25% for any taxable income in excess of this amount. The Dutch participation exemption however provides a full exemption from Dutch corporate income tax for dividends and/or capital gains or losses derived from qualifying shareholdings. The purpose of the participation exemption is avoidance of double taxation when dividends are distributed from the subsidiary to the parent company. However, the Dutch participation exemption is also one of the reasons for foreign companies to structure their business through the Netherlands by establishing a Dutch holding company as their European head office. Secondly, the withholding taxes on dividends, interest and royalties will be assessed. The Netherlands is known for its favourable tax treatment of foreign owned companies, due to the lack of withholding taxes on interest and royalties. Moreover, due to the Netherlands extensive treaty network, a full or partial reduction of withholding tax on dividends generally applies. Especially for holding companies these advantages, in combination with the participation exemption, are attractive. Therefore, the Dutch treaty network is also part of the treatment of holding companies in the Netherlands and will be part of the assessment of the Dutch corporate tax system. 3

14 iii) The ruling practice. Lastly, one of the key characteristics of the Dutch corporate tax system is the possibility to discuss the tax consequences of certain operations or transactions in advance. An advance approval can be obtained from the Dutch tax authorities in the form of an Advance Pricing Agreement or an Advance Tax Ruling. These rulings are binding for both the taxpayer and the Dutch tax authorities. Reports on the Netherlands as a tax haven usually mention the above elements as harmful tax competition due to many advantages for certain groups of companies. Therefore, this study focuses on analysing these key characteristics of the Dutch corporate tax system. The purpose of this analysis is to elaborate on the practical effect of, as well as the rationale behind these regulations. Based on this analysis, a conclusion can be drawn as to whether these elements form sound reasons for considering the Netherlands as a tax haven. 1.3 The EU Fight against Aggressive Tax Planning The Importance of EU Developments Nowadays, most sovereign tax jurisdictions not only accept, but also encourage the fact that they have to join forces and work together in order to combat tax avoidance and tax evasion. One of the many results of this cross-border cooperation is the OECD s BEPS Report as published in February This report and all the following related reports seem to have at least one common factor: tax havens are unwanted means of tax avoidance, tax evasion and money laundering and should therefore be abolished. Based on these developments, the EU is implementing measures against tax avoidance as well. In a study requested by the European Parliament s Committee on budgetary Control, the conclusion was drawn that the use of tax havens has a negative impact on EU revenues by reducing the GNI of the member states. Many jurisdictions have harmful tax practices at place, including EU member states and territories that are currently and historically associated with them. The study also concludes that the inclusion of jurisdictions on tax haven lists often depends on political considerations. 9 A development which illustrates well that the subject tax havens is a sensitive one and that tax havens are not tolerated in the current fiscal environment, is the drafting of an EU blacklist of tax havens, which is expected to be finalized in September Through this list, the EU hopes to make a next step in its joint fight against the global challenge of tax avoidance. Although there are noises of criticism with regard to the chosen criteria for identifying tax havens, the EU is clearly targeting tax havens in this fight, or at least its own definition of tax havens. Evidently, reports on the Netherlands being a tax haven do not seem to be in line with these EU developments. Should the Netherlands be worried for criticism on its contradictive behaviour, while participating in the creation of this blacklist of tax havens? Moreover, several EU measures against tax avoidance have been taken which will affect the key characteristics of the Dutch corporate tax system, as mentioned in the previous paragraph. Besides the agreement on an Anti Tax Avoidance Package (ATAP) with various measures that will have to be implemented in the Dutch legislation, the European Commission has presented a Tax Transparency 8 OECD (2013), Addressing Base Erosion and Profit Shifting, OECD Publishing. ( ). 9 Blomeyer & Sanz, Study on European initiatives on eliminating tax havens and offshore financial transactions and the impact of these constructions on the Union s own resources and budget, 15 April ( ). 4

15 Package. This package aims to fight tax avoidance by increasing the transparency between member states and it includes measures on the automatic exchange of member states tax rulings. An important question in this respect is to what extent the Netherlands is complying with these new standards. The participation exemption, the low withholding tax rates and the ruling practice are considered to be important elements of the Netherlands investment climate, which attract foreign investors and companies. The Netherlands highly values these characteristics of its corporate tax system, while on the other hand it has to comply with the minimum rules against tax avoidance as established on EU-level. Especially taking into consideration the above mentioned EU developments, it is highly relevant to assess whether the Netherlands is indeed a tax haven or not. Tax havens are not tolerated in the current fiscal environment (within the EU) and measures against tax avoidance are becoming an essential part of the Member States corporate tax systems. The minimum rules in the ATAD, combined with the measures in the field of tax transparency within the EU, will bring changes to the before mentioned key characteristics of the Netherlands corporate tax system. A key question is whether the Dutch corporate tax system is in line with the object and purpose of these EU measures. Therefore, these new standards should be taken into consideration while analysing the Dutch corporate tax system in order to determine whether the Netherlands is a tax haven Aggressive Tax Planning In 2012, the European Commission introduced the concept of aggressive tax planning in its Recommendation on aggressive tax planning. According to the European Commission, aggressive tax planning consists in taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability. It may result in double deductions (e.g. the same cost is deducted both in the state of source and residence) and double non-taxation (e.g. income which is not taxed in the source state is exempt in the state of residence). 10 Taxpayers acting not in line with the object and purpose of the applicable law by making use of tax incentives through certain schemes or structures, while (possibly) having no or limited economic substance, is also seen as aggressive tax planning. Aggressive tax planning may lead to double nontaxation or arbitrary tax rates in the member states and has as characteristic that although certain arrangements are legal according to the letter of the law, they are not in line with the spirit of the law. Taking advantage of disparities between member states or technical aspects of a tax system with the purpose of reducing the tax liability (e.g. double dipping; a double deduction of deductible expenses) is also seen as aggressive tax planning. In general, tax planning is not considered as harmful within the EU. It is a right of every enterprise to take tax considerations into account when planning its business structure. However, it is not clear where the line between legitimate tax planning and aggressive tax planning (leading to tax avoidance) lies. What is clear at the moment is that aggressive tax planning is not accepted within the EU and measures have been and will be taken against it. The grey line between tax avoidance and legitimate tax planning emphasizes the contradiction of EU member states establishing tax incentives with the aim of attracting foreign investments and in the same time implementing measures against tax avoidance. However, these contradictive developments can be reconciled by one of the main objectives of the EU internal market: fair tax competition between the member states. Member states may be competitive, but they should take into account international and EU tax standards with regard to anti-abuse rules and transparency. 10 See the European Commission Recommendation on aggressive tax planning, 6 December 2012, COM (2012) 8806 final, s. 3.2, p. 4. 5

16 1.3.3 The Underlying Problem Member states continue to introduce tax incentives in order to attract foreign investments, while at the same time they introduce measures to combat aggressive tax planning by MNEs and protect their tax base. A relevant concept in this respect is that of tax competition in the internal market. In principle, Member States are free to design their tax systems within the lines of EU law. Due to the fiscal sovereignty of states in a globalizing economy, restrictions and disparities are at place. Restrictions in the internal market are assessed by the European Court of Justice, which leads to states removing these restrictions from their tax systems. However, the European Court of Justice cannot order states to design their tax system in a way that no disparities are at place. Disparities can only be combatted by positive integration, e.g. by the European Commission agreeing on a Directive. At the moment, the international tax systems of sovereign states altogether distort the functioning of the globalizing economy, including the EU s internal market. These market distortions caused by obstacles and disparities are a consequence of the fiscal sovereignty of states in a globalizing economy. De Wilde describes that international tax systems are based on allocation formula s from the past century and seem to be outdated due to the enormous changes in the world, e.g. globalization, European integration and the rise of MNE s. In his view, the separate entity approach (under which each separate group company or permanent establishment is considered a single tax payer) needs to be let go in favour of a unitary business approach. 11 Other authors argue that the current tax policy debates requires a redefinition of allocation mechanisms for international taxation, e.g. the principle of origin. 12 However, at the moment, these far-reaching solutions to the underlying problem are being ignored, while other measures are being taken against aggressive tax planning and tax avoidance practices. The most important developments in this field within the EU are the introduction of the earlier mentioned ATAP and the Tax Transparency Package by the European Commission. These developments will have large impacts on the corporate tax systems of the EU member states and serve as minimum standards against tax avoidance within the EU. Therefore, these developments are essential for establishing a benchmark against which the Dutch corporate tax system can be assessed Anti Tax Avoidance Measures in the EU In June 2016, the European Commission agreed on a Council directive laying down rules against tax avoidance practices that effect the functioning of the internal market of the EU, better known as the Anti- Tax Avoidance Directive (ATAD). 13 The ATAD is inspired by several BEPS action points and concerns specific items like interest deductibility, exit taxation, a general anti-avoidance rule (GAAR), controlled foreign company (CFC) rules and hybrid mismatches. The goal of the ATAD is to end cross-border tax avoidance, base erosion and profit shifting and to ensure a coordinated approach to BEPS within the EU. The difference with the BEPS Action Plan is the fact that it consists of binding rules that have to be implemented in the laws of all EU member states. This means that these measures will be implemented in the Dutch corporate tax system as well, which makes them an essential part of the key characteristics of the Dutch system. One of the measures that will impact the Dutch corporate tax system is a hybrid mismatch rule, introduced in the ATAD, with the aim of combatting tax avoidance by profiting from disparities between the 11 M.F. De Wilde - Some Thoughts on a Fair Allocation of Corporate Tax in a Globalizing Economy, Intertax, Volume 38, Issue See E.C.C.M. Kemmeren, Principle of Origin in Tax Conventions, Dongen: Pijnenburg, 2001 and S.A. Stevens, The Duty of Countries and Enterprises to Pay Their Fair Share, Intertax, Issue 11 (2014). 13 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market. 6

17 (member) states. A hybrid mismatch occurs when two countries give a different qualification to the same entity or instrument. The result of this rule is that when an expense is deducted twice, the deduction may only be allowed in the source member state. On the other hand, in the case that an expense is deducted in one member state while it is not included in the other, the member state of the payer will deny the deduction of this payment. The scope of the rules on hybrid mismatches was initially limited to mismatches between member states. However, in February 2017 an agreement has been reached on the ATAD II, a follow-up for the ATAD. Where the ATAD includes rules on hybrid mismatches between member states, ATAD II adds rules on mismatches with third countries. These measures are particularly relevant for structures that use hybrid entities or hybrid instruments to avoid taxation. As mentioned in the above, it is clear that member states are working together against tax avoidance. It should however not be forgotten that these practices are partly caused by aggressive tax competition by member states themselves. The term aggressive tax competition focuses on states putting tax incentives in place in order to attract businesses and investors in an aggressive way. An essential part of the EU fight against tax avoidance is formed by measures on an increased tax transparency. Without transparency, there cannot be a full knowledge of hybrid mismatches e.g., which undermines the efficiency of legislation against hybrid mismatches. Therefore, it is important to include in the analysis recent EU measures in the field of tax transparency Transparency is Key Another measure in the fight against corporate tax avoidance is the presentation of a Tax Transparency Package by the European Commission in March The goal of this package is to combat tax evasion and avoidance by increasing the transparency between member states. Therefore, a key element of the package is a proposal that EU member states must automatically exchange information on their tax rulings. In order to assess whether harmful tax practices are at place, it is necessary to comply with international transparency standards. Moreover, in order to assess whether the Netherlands is a tax haven, it is of great importance to what extent the Netherlands complies with such standards. The ATAD and the Tax Transparency Package are key elements in the current fight against tax avoidance within the EU. For an extensive description of the ATAD and the Tax Transparency Package, a reference is made to Chapter 3. As the Netherlands is amending tax legislation with the purpose of combatting tax avoidance, it is important to know whether these efforts are sufficient. Therefore, the measures on EU level will be elaborated upon throughout this thesis in order to establish a benchmark for the analysis of the Dutch corporate tax system. In Chapter 4, key characteristics of the Dutch corporate tax system will be assessed against this EU benchmark before finally concluding whether the Netherlands is a tax haven. 1.4 Research Question and Scope Research Question The purpose of this research is to analyse the above mentioned characteristics of the Dutch corporate tax system in the light of recent EU tax developments, in order to conclude whether the Netherlands is a tax haven. Based on the introduction in the previous paragraphs, the following main research question can be established: Is the Netherlands a tax haven based on the key characteristics of its corporate tax system, taking into consideration relevant recent tax developments in the European Union? 7

18 1.4.2 Sub Research Questions In order to come to a conclusion with regard to the main research question, the following sub research questions will be answered throughout this thesis: (i) What does the concept tax haven entail? Before analysing whether there is a tax haven, a clear understanding of the concept tax haven is necessary. The answer to this question will form the basis for an analysis of the Dutch corporate tax system. (ii) What are the developments in the field of tax avoidance in the EU and what are the EU standards for anti-tax avoidance measures by Member States? EU developments in the field of aggressive tax planning and tax avoidance have led to certain standards with regard to measures against these practices. The answer to this question will lay down these standards, forming a benchmark against which the Dutch corporate tax system and its developments can be assessed. (iii) To what extent do the key characteristics of the Dutch corporate tax system indicate that the Netherlands is a tax haven? This question will lead to an answer of the first part of the main research question. While answering this question, key characteristics of the Dutch corporate tax system will be analysed based on the answers to the previous questions. (iv) Has the Netherlands included any measures in its domestic law which combat tax avoidance and to what extent should the Netherlands increase its efforts in this respect? Once the key characteristics of the Dutch corporate tax system have been analysed, it is important to address the current developments in and amendments to this system. Following to EU implementation requirements and agreements, the Netherlands is amending its corporate tax system. In the light of EU standards for anti-tax avoidance measures, as addressed in the second sub research question, the Netherlands efforts to combat tax avoidance will be assessed. Are these measure sufficient or should the Netherlands increase its efforts in this respect? Research Design The aim of this study is to elaborate on and finally answer the main research question. In order to answer this question and the sub research questions appropriately, the research for this study will take place according to the following structure. In Chapter 2, the concept of tax haven will be elaborated upon by critically discussing different characteristics and definitions of tax havens. The purpose of this chapter is to establish a definition of the term tax haven for the purpose of analysing the Dutch corporate tax system. Any reference to a tax haven in the following chapters will be based on this definition. Furthermore, EU developments with regard to aggressive tax planning and tax avoidance will be addressed in Chapter 3. These developments have led to certain standards in the EU to combat tax avoidance practices. The Netherlands is amending its legislation based on these standards and in order to analyse its efforts, these developments will be used to establish a benchmark for the research in the following chapter. Chapter 4 contains the main objective of this research, i.e. the analysis of the Dutch corporate tax system in order to assess whether the Netherlands is a tax haven. This analysis is based on the definition of a tax haven as established in Chapter 2. Based on the EU benchmark which is established in Chapter 3, recent developments in and amendments to the Dutch corporate tax system will furthermore be evaluated. 8

19 Are the changes in the Netherlands sufficient in the light of the EU standards, or should additional changes be implemented? In the fifth and final chapter a conclusion will be drawn with regard to the main research question. Moreover, the meaning of recent developments and changes in the Dutch corporate tax system will be elaborated upon and if necessary, recommendations will be made in this respect Delimitations The following elements and delimitations should be considered in respect of the research for this study: (i) The descriptive analysis in this study will be based on Dutch domestic tax laws and the relevant EU measures and developments in the field of aggressive tax planning and tax avoidance; (ii) The analysis of EU measures and developments in the field of aggressive tax planning and tax avoidance will be limited to the measures which are relevant for the scope of this research: the Anti Tax Avoidance Package and the Tax Transparency Package. All other measures with regard to tax avoidance in the EU will not be addressed in this thesis, or will only be mentioned briefly; (iii) The concept of tax haven will be clarified for the purpose of this study and all references to a tax haven should be interpreted in line with this clarification, unless explicitly otherwise stated; (iv) This study focuses on three key characteristics of the Dutch corporate tax system in the light of recent developments in the EU and tax avoidance measures: the innovation box regime, the treatment of holding companies and the ruling practice. Therefore, other aspects of the Dutch corporate tax system will not be addressed. (v) The assessment of the main characteristics of the Dutch corporate tax system focuses on the object and purpose of the regulations. Therefore, the practical effects and consequences of the various Dutch measures will be elaborated upon briefly; (vi) As the Netherlands is an EU member state, this study focuses on EU the concepts of tax avoidance and aggressive tax planning. However, since the EU is an OECD member, relevant OECD developments will be mentioned as well when necessary. 1.5 Methodology In order to perform a research which will sufficiently support the conclusions drawn throughout this thesis, a suiting methodology should be considered. This thesis will mainly consist of descriptive research on current and future tax laws, regulations and reports. Furthermore, literature-based research is necessary in order define terms as tax haven and aggressive tax planning and in order to analyse the impact of key characteristics of the Dutch corporate tax system. 9

20 2 The Tax Haven Concept 2.1 Introduction: The Need for a Clear Definition of a Tax Haven The term tax haven has been widely used for several decades. Yet, there is no consensus as to the meaning of the term. In the previous century, the US Treasury s Gordon Report already concluded that there is no single, clear, objective test which permits the identification of a country as a tax haven. 14 More than twenty years later, this difficulty is suitably described by Mykola Orlov in 2004: Almost every work dealing with tax havens begins with the author acknowledging the practical impossibility of clearly defining a tax haven 15. Although in the meantime many works have been conducted on tax haven related subjects, the purpose of every research is different, resulting in still little consensus on a definition for the term. The above mentioned Gordon Report considers the following definition of a tax haven: the term tax haven may also be defined by a smell or reputation test: a country is a tax haven if it looks like one and if it is considered one by those who care. 16 This rather vague definition is motivated by the fact that usually the same jurisdictions appear repeatedly on lists of tax havens. This definition can be objected to for the reason that there are many jurisdictions with a solid tax system, yet having tax incentives at place for sound reasons. Based on this definition almost every country in the world can be identified as a tax haven from a certain point of view. The OECD applies another method of clarifying the concept of tax haven: confirming the difficulties of objectively defining a tax haven and subsequently establishing a list of factors for identifying a tax haven. The concept of a tax haven can be seen as a relative one, in the sense that almost every country can be labelled as a tax haven in relation to another country or situation. There is always a country with a more privileged tax regime at place in comparison with other jurisdictions. The OECD already concluded in 1987 that the complexity of modern national taxation systems, combined with greater capital mobility, has rendered practically every country in the world a potential tax haven from some type of taxation and regulation for residents of other countries. 17 In the past, a tax haven was seen as a neutral description for countries that offer attractive regimes with low taxes, aiming to attract financial services and other economic activities. It should be noted that the term tax haven has lost this neutrality, mainly due to the excessive use of this term in public debates that are politically sensitive. The term tax haven is over used by media and politics and associated with other negative terms such as tax base erosion, harmful tax competition and money laundering. Another factor of influence on this shift is the OECD s mentioning of tax havens as countries with harmful tax practices at place. 18 Since the term tax haven has become a controversial one, the term financial centre is occasionally used as a politically correct synonym for a tax haven. 14 Tax Havens and Their Use by United States Taxpayers An Overview, A Report to the Commissioner of Internal Revenue Submitted by Richard A. Gordon, Special Counsel for International Taxation (Gordon Report), 12 January 1981, cited in R. Palan, R. Murphy, and C. Chavagneux, Tax Havens: How Globalization Really Works, p. 21, Cornell University Press, M. Orlov, The Concept of Tax Haven: A Legal Analysis, Intertax, Volume 32, Issue Tax Havens and Their Use by United States Taxpayers An Overview, A Report to the Commissioner of Internal Revenue Submitted by Richard A. Gordon, Special Counsel for International Taxation (Gordon Report), 12 January 1981, p See OECD (1987) International Tax Avoidance and Tax Evasion: Four Related Studies (Paris). 18 See OECD (1998) Harmful Tax Competition: An Emerging Global Issue (Paris) and OECD (2000) Towards Global Tax Co- 10

21 In order to draw conclusions with regard to the research questions, establishing a definition of a tax haven for the purpose of this study is of great importance. In this chapter, an attempt is made to clarify the concept of tax haven for the purpose of analysing the Dutch corporate tax system. In order to reach this goal, it is necessary to address various definitions and points of view with regard to this concept. 2.2 Defining a Tax Haven Factors Identifying a Tax Haven According to the OECD, the necessary starting point to identify a tax haven is to ask whether a jurisdiction imposes no or only nominal taxes (generally or in special circumstances) and offers itself, or is perceived to offer itself, as a place to be used by non-residents to escape tax in their country of residence. Due to the difficulties recognized by the OECD in providing an objective definition of a tax haven, the OECD set out various factors to identify tax havens: 19 i) No or only nominal taxes (as a starting point); ii) Lack of effective exchange of information (e.g. secrecy rules); iii) Lack of transparency; iv) The absence of a requirement that the activity be substantial. The OECD argues that the first factor is a necessary condition for identifying a tax haven and could even be sufficient for this identification if combined with a jurisdiction offering or being perceived to offer itself as a place where non-residents can escape tax in their country of residence. In addition, the importance of the other factors referred to in the above depends on the particular context according to the OECD. In my view, the sole condition of a low corporate tax system fits with the classical image of a tax haven in the form of an offshore island with palm trees, clear blue beaches, companies with little or no substance and secrecy legislation at place. In a country as the Netherlands, the focus lies near the other three key factors laid down by the OECD. This is another image of tax havens in the form of richer countries with a solid nominal tax system but with exceptions and tax incentives at place for certain types of activities or companies. Another important element of a tax haven, especially taking into account the recent attention for anti-tax avoidance measures, is the lack of anti-abuse rules which are in line with international standards, e.g. the OECDs BEPS Report. The EU measures against aggressive tax planning, which will be addressed in the next chapter, certainly are solid examples of these internationally agreed upon measures against tax avoidance as well. Within the EU, no precise definition has been given to the term tax haven. However, there is certainly great attention for harmful tax practices and aggressive tax planning. Moreover, the EU is drafting a blacklist of tax havens by using certain criteria s which will help define a tax haven for the purpose of this thesis Aggressive Tax Planning In December 2015, the European Commission published a study on aggressive tax planning within the EU. 20 The aim of this study was to assess to what extent the member states facilitate aggressive tax operation (Paris). 19 OECD (1998), Harmful Tax Competition: An Emerging Global Issue (p. 23). Or see also ( ). 20 European Commission, Study on Structures of Aggressive Tax Planning and Indicators Final Report, Taxation Papers, 11

22 planning. The European Commission drew up a list of characteristics of harmful tax practices, which serve as indicators for determining whether a country makes it easy for companies to avoid taxation. In order to identify relevant aggressive tax planning indicators, the European Commission described seven aggressive tax planning structures which represent empirically proven channels for profit shifting. 21 In selecting the model aggressive tax planning indicators, the European Commission was inspired by the OECDs BEPS Report 22 as well as other tax literature. This has resulted in the following seven model aggressive tax planning structures: i) A hybrid financing structure; ii) A two-tiered IP structure with a cost-contribution arrangement; iii) A one-tiered IP structure with a cost-contribution arrangement; iv) An offshore loan structure; v) A hybrid entity structure; vi) An interest-free-loan structure; vii) A patent-box aggressive tax planning structure. 23 These aggressive tax planning structures are identified on the basis of the definition of aggressive tax planning, as set out by the European Commission in a previous recommendation. 24 In this recommendation, aggressive tax planning is defined as taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability. It may result in double deductions (e.g. the same cost is deducted both in the state of source and residence) and double non-taxation (e.g. income which is not taxed in the source state is exempt in the state of residence). On the basis of the above mentioned structures, the European Commission identified an amount of 33 aggressive tax planning indicators. The way these indicators facilitate aggressive tax planning can be active or passive. An active aggressive tax planning indicator is one which can directly promote or prompt an aggressive tax planning structure. Active indicators are providing a tax deduction on dividends paid, not taking deemed income into account from interest-free loans (in case of non-at arm s length transactions), having preferential tax treatment at place for income from intellectual property (IP), a nil corporate tax rate, excess profit rulings, and so on. On the other hand, a passive indicator means that it does not by itself promote or prompt any aggressive tax planning structure, but it is necessary in order to not block an aggressive tax planning structure. Examples of passive indicators for aggressive tax planning are providing unilateral rulings on the interest or royalty spread, allowing a group taxation with an acquisition holding company, no withholding tax on interest or royalty payments and so on. Finally, there is a third category named lack of anti-abuse aggressive tax planning indicators. This category refers to a lack of rules against tax avoidance. Indicators that belong in this category are the lack of controlled foreign company rules, the lack of interest limitation rules, the lack of a beneficial owner test for reduction Working Paper N The European Commission recognizes by the term profit shifting debt shifting, shifting of the location of intangible assets and intellectual property and partly strategic transfer pricing. Final Report, p OECD (2013): Addressing Base Erosion and Profit Shifting, Annex C, p. 73 and further. 23 These model aggressive tax planning structures will not be discussed in detail, as the focus in this chapter is on defining a tax haven. For a brief elaboration on each aggressive tax planning structure, a reference is made to Annex I. 24 December 6, 2012, Commission Recommendation on Aggressive Tax Planning, C(2012) 8806 final. 12

23 of withholding taxes and so on. 25 Divided into these three categories, the indicators were used by the European Commission to assess all member states tax systems. The assessment of the Netherlands tax system by the European Commission will be elaborated upon in Chapter 4. For now, it is important to decide whether this list of indicators can be of help in defining a tax haven for the purpose of analysing the key characteristics of the Dutch corporate tax system. Taking into account the purpose of this study, this list seems too detailed and extensive for the high-level analysis that will be conducted in the following chapters. Moreover, this list of aggressive tax planning indicators does not provide a definition of a tax haven, or at least clarify on the basis of which indicators a country is to be considered as a tax haven. However, these indicators could be useful when assessing certain specific tax measures, e.g. in order to select which measure should be investigated more extensively in order to assess its harmfulness Code of Conduct Group for Business taxation The EU Code of Conduct Group for Business Taxation is a group on the level of the Council of Ministers of the EU through which member states assess each other s tax systems in order to identify harmful tax measures. The Code of Conduct is a non-binding political commitment ( gentleman s agreement ) between the member states, which is becoming more and more important in the fight against tax avoidance within the EU. 26 The most recent development concerning tax havens is the drafting of a blacklist of tax havens by this same Code of Conduct. In November 2016, the EU Ministers of Finance agreed on criteria for identifying non-eu tax havens. The list is expected to be published in the second half of 2017 and certain countries have been given the opportunity to amend their tax system in order to avoid being listed as tax havens. Although the Code of Conduct has been criticized for only considering non-eu countries as tax havens, this development shows the lack of tolerance regarding tax havens in a globalizing fiscal environment. The Code of Conduct has also been criticized for the lack of transparency in their work and for insisting on the secrecy of their meetings, while demanding more tax transparency from possible tax havens as well as from the member states. The criteria for identifying tax havens, as agreed upon by the Council, are as follows: i) Jurisdictions that have preferential tax measures that could be considered harmful or that facilitate offshore structures to attract profits without any economic basis; ii) Jurisdictions that fail to take part in international standards for information exchange; iii) Jurisdictions that fail to implement the measures against tax avoidance, as recommended by the OECD. With regard to the first criterion mentioned above, the ministers could not agree on a zero or almost zero corporate tax rate being a measure which facilitates offshore structures. Besides its lack of transparency, the Code of Conduct has received some criticism for not adding countries with a tax rate of (almost) zero on the blacklist due to political influences and therefore for a lack of objectivity. Eventually it is decided that having a low or zero tax rate at place is an indicator which triggers further analysis as to whether the concerned jurisdiction should be added to the list. 25 See Appendix II for a list of all 33 aggressive tax planning indicators. 26 For an extensive analysis on the Code of Conduct for Business taxation, reference is made to: W. Bratton and J. McCahery, Tax Coordination and Tax Competition in the European Union: Evaluating the Code of Conduct on Business Taxation, 38 Common Market Law Review

24 Based on certified documents in hands of a Dutch financial magazine 27, it appears that only a handful of countries will be able anticipate in advance that they will not be added to the EU blacklist of tax havens. The Code of Conduct Group is at the moment investigating whether the USA, China and India should be added to the list. Developing countries will not be considered for the list, provided they are not a financial centre. The main purpose of the EU is that countries that might appear on the list will amend their tax system. No amendments will lead to sanctions from the side of the EU, although no agreement has yet been reached on the type of sanctions that will be imposed. At the moment, it is known that the levy of a withholding tax on interest and royalties has been discussed as a possible sanction for countries not agreeing to amend their harmful tax systems Secrecy Jurisdictions Aside from the EU and OECD, numerous other organizations have written about tax havens. The Tax Justice Network 28 is one of those organizations and has defined a tax haven as follows: A tax haven is any country or territory that promotes laws with the intent that they may be used to avoid or evade taxes which may be due in another country under that other country s laws. The low tax rates offered by tax havens are key to their business model, but unless they also promote laws that assist a person to take advantage of them the low tax rate in itself may not be of much attraction. Secrecy is the key product that assists the use of low tax rates, hence the now more precisely defined term secrecy jurisdiction that is replacing the term tax haven in technical use. 29 The Tax Justice Network s Financial Secrecy Index aims to provide an objective, politically neutral ranking of jurisdictions based on their secrecy and the scale of their offshore financial activities. According to the Tax Justice Network, secrecy jurisdictions is a term used as an alternative to the more widely used term tax havens. In their view, traditional stereotypes of tax havens, such as the image of a small, palm-fringed island, are misconceived. They support this reasoning by a ranking which includes multiple rich OECD countries in the top, including the Netherlands on number Although a tax haven can appear in many forms and can have different characteristics, it is clear that a lack of transparency is definitely an essential factor in identifying a tax haven. The Tax Justice Network provides a general definition which focuses on the lack of transparency. However, for the purpose of this thesis this definition may not be comprehensive. For the purpose of analysing the Dutch corporate tax system, more specific elements of a tax haven should be included in order to identify a tax haven. 27 Veel kandidaten voor Europese zwarte lijst van belastingparadijzen, Financieel Dagblad (Dutch financial magazine), 7 June (7 June 2017). 28 The Tax Justice Network is an independent international network, initiated by eight NGOs: Oxfam Novib, Oikos, SOMO, Cordaid, Both Ends, Max van der Stoel Foundation, Transnational Institute and Action Aid. 29 J. Christensen, R. Murphy, Tax us if you can second edition, Tax Justice Network, Financial Secrecy Index 2015 Results. See ( ). 14

25 2.2.5 A Matter of Opinion Palan, Murphy and Chavagneux made an effort to provide an objective definition of tax havens, by using typical characteristics of tax havens. Aside from certain mentioned exceptions, the authors conclude that a tax haven should have the following characteristics: 31 i) Low or nil taxation (for non-residents); ii) Secrecy provisions (for offshore clients); and iii) Light and flexible incorporation possibilities of local subsidiaries. The authors go on to mention that based on the above characteristics, aside from the secrecy provisions, almost all developed countries would be a tax haven. In order to narrow their focus to the aim of their work, the authors decide that the definition of a tax haven is inevitably subjective. Continuing, they define tax havens as jurisdictions that deliberately create legislation to ease transactions undertaken by people who are not resident in their domains, with a purpose of avoiding taxation and/or regulations, which they facilitate by providing a legally backed veil of secrecy to obscure the beneficiaries of those transactions. Having provided this definition, the authors accept that the conclusion as to whether a country is a tax haven or not to be a matter of opinion Key Factors for Identifying a Tax Haven Due to the difficulty of providing a clear definition of a tax haven and the different characteristics a tax haven can have, it seems useful to follow the example of the OECD and compile a list of key factors for identifying a tax haven. The OECDs list, as addressed in the previous paragraph, is not an extensive one, yet consists of recurring characteristics of tax havens. Taking the purpose of this study into account, it is however justified to make an amendment to the OECD list. This amendment is necessary in order to focus on the aim of the analysis to be conducted in the following chapters. As made clear in the previous paragraph, tax haven jurisdictions can have different characteristics, thus making it difficult to provide an objective definition of a tax haven that would be generally accepted. Yet, it seems clear that secrecy provisions, a lack of effective exchange of information and a lack of transparency are strongly recurring characteristics of a tax haven. Moreover, no or low taxes (for certain types of activities or companies) seems to be a generally accepted and recurring characteristic of a tax haven. Aside from these characteristics, the OECD list of factors for identifying a tax haven also contains the lack of requirements that activities must be substantial. Countries that have tax incentives at place, without requiring any form of substance in the jurisdiction, attract companies that want to escape from taxation in their own country, without having to move their activities to the other. This lack of effective substance requirements therefore is a factor for identifying a tax haven. Taking into account the EU Aggressive Tax Planning indicators 33, one last factor should be added to this list: the lack of effective (general) anti-abuse rules against tax avoidance that are in line with international standards, such as the OECDs BEPS Reports. In its report on Aggressive Tax Planning indicators, the European Commission specifically mentioned a separate category named lack of anti-abuse aggressive tax planning indicators. This category refers to a lack of rules against tax avoidance, e.g. controlled foreign company rules and 31 R. Palan, R. Murphy, and C. Chavagneux, Tax Havens: How Globalization Really Works, p. 44, Cornell University Press, R. Palan, R. Murphy, and C. Chavagneux, Tax Havens: How Globalization Really Works, p. 44, Cornell University Press, European Commission, Study on Structures of Aggressive Tax Planning and Indicators Final Report, Taxation Papers, Working Paper N

26 interest limitation rules. 34 Taking into account the recent attention for and increasing importance of antiabuse rules, this forms a sound addition to the list of factors for identifying a tax haven. Based on the above, the key factors for identifying a tax haven for the purpose of analysing the Dutch corporate tax system in this study are as follows: i) No or only nominal taxes (for certain types of activities or companies); ii) iii) iv) Tax advantages are given without any requirement of real economic activity and substantial presence in the jurisdiction giving those advantages; Lack of effective exchange of information and transparency; Lack of effective (general) anti-abuse rules against tax avoidance that are in line with international standards, such as the OECDs BEPS Reports. For the purpose of identifying a tax haven, the corporate tax system should be assessed by taking all the above factors into consideration. The importance of each separate key factor depends on the context and the characteristics of the tax system. No or only nominal taxes for certain types of activities or companies cannot be the determining factor in this analysis. This first factor should at least be accompanied by one of the three other key factors in order to define a tax haven, because in combination with requirements of real economic activity, substantial presence and effective anti-abuse rules, tax advantages in the form of a lower tax rate are not considered to be harmful. The second factor (lack of effective exchange of information and transparency), on the other hand, could immediately lead to defining a country as a tax haven. As mentioned in the various points of view in the previous paragraph, this characteristic of a tax haven is a strongly recurring one. The importance of effective exchange of information and tax transparency will be elaborated on in the following chapter, as it is partly an influence of the anti-tax avoidance measures in the EU. The elements of effective exchange of information and tax transparency are closely related and are therefore incorporated into one key factor of a tax haven. Finally, in a time of globalization and economic integration, anti-abuse rules are an essential tool for countering tax avoidance which cannot be missed in a tax system, especially if it as an EU member state. Therefore, a lack of effective anti-abuse rules that are in line with international standards is a factor of a tax haven. In order to establish a benchmark for these international standards, the EU anti-tax avoidance measures will be addressed in Chapter In Conclusion: a Basis for the Following Analysis The key factors for identifying a tax haven as described in the above serve as a basis for the following chapters. Before analysing the Dutch corporate tax system in Chapter 4, EU developments in the fight against aggressive tax planning and tax avoidance will be addressed in Chapter 3. These developments will help establish a benchmark for analysing the Dutch corporate tax system. While establishing this benchmark and later on analysing the Dutch tax system, numerous references will be made to the term tax haven. Unless specifically otherwise indicated, this will refer to the meaning as provided in the previous paragraph. On the basis of the above key factors, a conclusion will be drawn as to whether the Netherlands, based on an assessment of key characteristics of its corporate tax system, can be identified as a tax haven. These factors are in line with the focus of this study on a richer country possibly facilitating tax avoidance practices, instead of the classical tax haven idea of an island with palm trees and secrecy provisions. It 34 See Appendix II for a list of all 33 aggressive tax planning indicators. 16

27 should be noted that the last factor refers to anti-abuse rules against tax avoidance that are primarily in line with EU standards. The factor mentions international standards, such as the OECDs BEPS Reports, as these are important, generally accepted standards within the EU. Moreover, the EU is an important member of the OECD which advocates the implementation of measures against tax avoidance globally. However, for the purpose of the analysis of the Dutch corporate tax system, OECD standards should be neglected to the extent that they are not in line with EU law or standards. These EU standards will be elaborated on in the following chapter with the purpose of establishing a benchmark for further analysis. 17

28 3 Establishing a Benchmark: EU Developments 3.1 Introduction: Establishing EU Standards Against Tax Avoidance Having determined the factors for identifying a tax haven, it is important to establish a benchmark against which the Dutch corporate tax system can be assessed. The importance of this benchmark can be linked to the factors for identifying a tax haven, particularly the lack of effective exchange of information, tax transparency and effective anti-abuse rules that are in line with international standards. While the OECDs BEPS Reports are mentioned as an example of such standards, it is necessary to establish a benchmark containing EU standards, as OECD measures are not necessarily in line with EU law. Moreover, the purpose of this research is to determine whether the Netherlands is a tax haven and the Netherlands is an EU member state, taking into consideration recent EU standards against aggressive tax planning and tax avoidance is inevitable. This is in line with the fact that this study does not aim to analyse the idea of a classical tax haven island, but rather focuses on an EU member state possibly facilitating tax avoidance practices. Tax havens are known to stimulate illegal practices and promote international crime, which again affects the legal and financial environment of member states that will have to prevent these practices. Tax havens also encourage tax evasion, which leads to increased public funding to tackle these practices. Mainly of relevance for the scope of this research, is the fact that tax havens encourage tax avoidance. According to a study conducted for the European Parliament 35 (Study), the increasing use of tax havens implies that improvements in the investment climate of EU member states will lead to lower benefits to their economy and state resources than they might expect. MNEs make use of transfer pricing strategies and various holding structures in and around tax havens, which helps them invest in an EU member state with a strong investment climate while not contributing to its tax income in a substantial way. An example of such a structure is the famous Starbucks case. 36 The Study concludes that potential benefits of the use of tax havens on the investment climate are outweighed by their disadvantages. The use of tax havens has a negative impact on EU revenues, as it leads to a decrease of member states GNI. Moreover, these lower tax revenues are likely to negatively impact the willingness of member states to increase or maintain their contributions to the EU. Also, the fact that MNEs have more possibilities to engage in aggressive tax planning and tax avoidance by the use of tax havens, gives them large advantages over small companies. This undermines the various EU efforts to develop and stimulate sectors of small and medium enterprises (SMEs). Finally, the Study concludes that due to a lack of consensus on eliminating tax havens, internationally and within the EU, it is not clear whether this can ever be fully achieved. However, the EU has the power to influence the behaviour of its 35 Blomeyer & Sanz, Study on European initiatives on eliminating tax havens and offshore financial transactions and the impact of these constructions on the Union s own resources and budget, 15 April ( ). 36 Starbucks has been reporting annual losses to the tax authorities in the UK, while based on the information in hands of investors and analysts a very profitable business was shown. The uninterrupted yearly losses were justified on the basis of various payments from the UK subsidiary to other group companies, one of which was based in the Netherlands (which also made royalty payments that eroded the Dutch tax base). The European Commission decided that Starbucks received forbidden state aid from the Netherlands through an APA. (Kemmeren, The Netherlands: Fiscal unity, Groupe Steria s per-element approach and currency losses relating to a non-resident subsidiary (C-399/16(X NV)); Starbucks and State aid (T-760/15 and T- 636/16), 11 February 2017, p

29 citizens and the businesses operating in the EU in order to mitigate or even remove the harmful effects of tax havens. 37 Clearly, the EU is targeting tax havens by drafting a blacklist of tax havens and pressuring tax jurisdictions that are considered to be a tax haven into amending their tax systems. It should be noted that the EU does not have any means to amend the legislation of third countries. However, the political pressure on the appearance of a country in an EU blacklist may be large, not to mention possible sanctions of the EU in the form of the levy of withholding taxes on interest and royalties in the member states, for example. For a further explanation on this blacklist, a reference is made to paragraph This interesting development does not concern the main issue of this study, as it focuses on tax havens outside the EU. However, it is highly relevant that the EU is showing this signal of targeting tax havens to the world. Aside from third country tax havens, EU member states can also have tax incentives at place which lead to a lower tax revenue on EU level, but also in (developing) third countries, through harmful tax competition. This concerns the main issue in this study, as its focus lies on these incentives, leading to tax avoidance and aggressive tax planning. When analysing whether the Netherlands is a tax haven, an important question is whether the Netherlands is competing fairly within the EU internal market. This brings us to the concept of tax competition within the EU internal market. 3.2 Tax competition in the internal market The Internal Market On the basis of Article 3(3) TEU, the EU shall establish an internal market. In 1958, the common market created by the Treaty of Rome was aimed at eliminating trade barriers between Member States, increasing economic prosperity and contributing to an ever closer union among the peoples of Europe. According to the current Article 26(2) TFEU, the internal market shall comprise an area without internal frontiers in which free movement of goods, persons, services and capital is ensured in line with the provisions of the Treaties. These are the four fundamental freedoms, which will be addressed below. The internal market is a main feature of the EU and assures the above described free movements and fair competition by eliminating market distortions. Member States are free to regulate direct taxation matters as long as no EU legislation or coordination (positive integration) is available in a certain field, with the exception of matters of which the competence has been moved to the hands of the EU, such as matters on the customs union. However, this national tax sovereignty is restricted by negative integration (market integration), i.e. by prohibitions in the TFEU, consisting of the fundamental freedoms and the rules on competition within the internal market, of which the prohibition of state aid is the most important. This means that although in the absence of EU legislation or other positive integration the design of direct taxation lies in the hands of the member States, they may not have tax legislation or practices at place which are not in line with these treaty rules. These consequences illustrate a certain interaction between positive policy integration and negative market integration in the EU. In the field of direct taxation, positive integration depends on Article 115 TFEU, which requires unanimity for harmonisation of direct tax matters. With (at the moment) 28 member States, it is obvious that consensus on harmonising direct tax matters can be difficult to reach. Two important exceptions to the 37 Blomeyer & Sanz, Study on European initiatives on eliminating tax havens and offshore financial transactions and the impact of these constructions on the Union s own resources and budget, 15 April 2013, p ( ). 19

30 unanimity requirement are possible in direct tax matters. These exceptions are the prohibition of state aid to undertaking, with an authority for the European Commission (judicial review by the ECJ) to assess the measures, and Article 116 TFEU, allowing for the adoption of directives by qualified majority in the case of market distortions by disparities between the Member States. Below, the main features of the internal market, in the sense of positive and negative integration, are briefly addressed Fundamental Freedoms With regard to direct taxation, the fundamental freedoms cover the most important part of negative market integration, prohibiting all differences in taxation between domestic situations and comparable crossborder situations. The four freedoms consist of the free movement of goods, persons, services and capital. For the purpose of direct taxation matters, the most important freedoms are the free movement of capital and the free movement of persons, consisting of the free movement of workers and the freedom of establishment. Despite the introduction of the EU citizenship, consisting of the free movement of natural person without any economic activity, reference is made to the four freedoms. The four freedoms in essence consist of two basic rights: the right of market access and the prohibition of discrimination based on nationality or origin. The right of market access implies that measures without distinction or discrimination (obstacles) may be prohibited if free movement is blocked and no justification is at place. The ECJ has developed the assessment of the freedoms and over time, the decisive comparison has become that between the cross-border situation and a comparable domestic situation, thus focusing on the restriction of free movement within the internal market. In deciding whether prohibited discrimination or a restriction is at place, the ECJ asks the following questions: i) Does the taxpayer have access to the treaty? ii) If so, is there discrimination or a restriction in the sense of one of the fundamental freedoms of the treaty? iii) If so, is there a justification (the rule of reason, justifications on the basis of the treaty and as accepted by the ECJ)? iv) If so, can the just goal be reached by this measure? v) If so, is the measure proportionate; are there no other less restrictive alternatives at place? In line with the purpose of this study, the developments in the field of the fundamental freedoms are not addressed extensively The Prohibition of State Aid Aside from the fundamental freedoms, negative integration within the internal market takes place in the form of the prohibition of cartel agreements, abuse of dominant market positions and state aid to undertakings. Taking into consideration the purpose of this study, only the prohibition of state aid will be addressed briefly, as state aid can take place in the form of tax breaks and incentives. The TFEU specifically prohibits (potential) market distortion in the form of the provision of state aid to specific undertakings or specific productions in any form. 38 This form of negative integration is also a main feature of the internal market 38 Article 107 & 108 TFEU. 20

31 The European Commission presented its Notice on the application of the State-aid rules to measures relating to direct business taxation in 1998, 39 explaining the application of Article 107 TFEU in tax matters. According to the European Commission, Article 107 TFEU sets out the following four cumulative conditions for identifying state aid in national (tax) matters: i) Favourable treatment: the relevant national measures grants an advantage to the undertaking, which relieves the undertaking from charges that would have been normally born from their budgets when applying the general system of the rules, without this advantage being justified by the nature or general scheme of the system. 40 ii) Of certain undertakings: the selectivity criterion, which is usually the most debated and decisive condition. iii) Through state resources: the advantage must be granted by the state or through state resources. iv) Affecting competition and trade between member states. The European Commission is the only authority (subject to review by the ECJ) to the assessment of measures possibly containing state aid to undertakings. The European Commission has the power to prohibit or order the rollback of tax measures. In addition, the aim is always to order the undoing of the advantage if it considers the measure not to be in line with Article 107 TFEU, thus restoring the level playing field in the internal market. State aid is not considered present in general reductions or other incentives with the aim of promoting research and development, environmental protection and employee training. However, state aid is considered present if such advantage is limited to a certain geographical region or to certain sectors of economic activity, e.g. only offshore companies. Also, individual rulings by tax authorities do not constitute state aid to the extent that they are solely interpretations and applications of general tax rules in specific situations. However, tax rulings may become state aid to the extent that they depart from the general rules on the basis of other than objective and public criteria. State aid is obviously not within the scope of the analysis to be conducted in the following chapter. However, it is part of the concept of competition within the internal market and is therefore relevant when providing a background for EU measures against harmful practices The Concept of Abuse The function of state aid in connection with the fundamental freedoms as a form of negative market integration brings us to the concept of abuse. While the fundamental freedoms are an important part of this market integration, the prohibition of state aid to undertakings is also highly relevant, aiming at fair competition within the internal market. Aside from the exceptions in the above, Member States are free to design their direct tax systems as they like. The increased mobility that comes with the internal market and the growing globalisation in general have resulted in a sharp increase in tax competition between (Member) States. In order to protect erosion of their tax base, Member States tend to include anti-abuse rules. As tax avoiders are not excluded from the scope of the fundamental freedoms, the question that comes up is how these anti-abuse rules can be reconciled with the fundamental freedoms. Are Member States allowed to introduce measures restricting the free movement of these tax avoiders? 39 Commission Notice of 11 November 1998, No. IP/98/ ECJ, C-173/73, Italy v. Commission (1974). 21

32 At the moment, the need to prevent abuse is fully accepted by the ECJ as a rule of reason, although it was not the case from the beginning that Member States could successfully rely on this justification. According to the ECJ, every cross-border case has to be judged on its individual merits in order to determine whether this justification applies. Furthermore, restrictions based on countering abuse are only justified in the case of wholly artificial arrangements which do not reflect economic reality. A wholly artificial arrangement exists if there is an intent to obtain advantages not intended for the economic operator involved and the granting of those advantages would not be in line with the object and purpose of the relevant law. However, Member States may not restrict the use of low tax jurisdictions or other abuse in the case that the economic activity is genuine. 41 This illustrates that tax competition is an intrinsic part of the internal market, meaning that taxpayers taking into consideration tax consequences and seeking the most profitable and efficient tax jurisdiction for their activity are not considered abusive, as long as the arrangement reflects economic reality Tax Competition within the Internal Market Tax competition between Member States is one of the main features of the internal market. Tax competition between Member States can result in a form of harmonisation of direct tax matters. By way of offering competitive legislation, Member States tend to favour foreign investors with the aim of attracting economic activity, employment and economic growth from other Member States, as well as third countries. This tax competition between Member States leads to harmonisation in the sense that other Member States cannot afford to diverge significantly from their neighbour s competitive tax incentives, especially considering the mobility of economic activity in the internal market and today s increasing globalisation and economic integration. Economic activity can be easily moved to a Member State that is considered more efficient in taxation matters and legislators consider keeping up with other Member States in this field as a necessity. Moreover, tax competition can lead to more efficiency in tax policy and the use of state resources. However, tax competition can also have negative aspects, as unfair or harmful tax competition can lead to tax base erosion and a race to the bottom. More importantly, it can distort the internal market as a result of fiscal motives rather than economic ones determining business decisions. 42 This may result in a loss of tax revenue on EU level, while benefitting mainly the already wealthy, mobile corporations at the cost of tax payers that are less mobile, such as employees and SMEs. In contrary to the harmonised indirect tax system, the harmonisation of direct tax matters within the EU is a highly sensitive political topic, as tax sovereignty is a main part of every state s national sovereignty. The right to vote on (direct) tax legislation is one of the most basic rights of any parliament and within the EU, the European Parliament at the moment cannot take the place of the national parliaments. Under influence of difficulties in positive tax integration due to the unanimity requirement of Article 115 TFEU, the European Commission turned to a soft law approach, using non-binding political agreements such as recommendations 43. This development resulted into Codes of Conducts (political gentleman s agreements) such as the Code of Conduct for Business Taxation, as addressed in the previous chapter. This soft law approach is aimed at reaching political agreements and producing peer pressure and coordination of national tax policies, with the focus on banning harmful tax competition. 44 In 1997, the European 41 ECJ, C-196/04, Cadbury Schweppes (2006). 42 B.J. Kiekebeld, Harmful tax competition in the European Union Code of Conduct, countermeasures and EU law, Kluwer: EFS Brochure Series (2004) p See Article 288 TFEU. 44 B.J.M. Terra & P.J. Wattel, European Tax Law (student edition), Deventer: Kluwer (2012), p

33 Commission communicated its ideas in countering harmful tax competition in a paper 45, announcing various initiatives, including the introduction of this non-binding Code of Conduct for Business taxation. The Code of Conduct defined harmful tax measures as measures (including administrative practices) which affect or may affect in a significant way the location of business activity in the Community and which provide for a significantly lower effective tax rate than the general tax system of the member State concerned. This criterion departs from a benchmark system, which brings the issue of what the general or benchmark system is. Important characteristics for assessing the harmfulness of tax measures according to the Code of Conduct can be summarised as follows: i) Non-discrimination, focusing on tax measures that only benefit non-resident investors; ii) Lack of tax transparency; and iii) Lack of substance, focusing on the application of tax incentives to schemes without any real economic presence. Since 2003, the Code of Conduct Group has become an important part of EU direct tax policy. The Code of Conduct is routinely assessing national tax measures. Tasks of the Code of Conduct consist of the monitoring of standstill (no new harmful measures may be introduced and previously rolled-back measures may not be re-introduced), the monitoring of the implementation of rollback of harmful tax measures and the assessment of planned measures submitted to it by Member States for scrutiny, as well as objections of other Member States to these measures. It should be noted that the fact that a certain tax incentive has gained consent from the European Commission with regard to the state aid rules, does not mean that it is also acceptable under the Code of Conduct criteria for harmful tax competition. This is a consequence of the fact that the state aid criteria, particularly the selectivity criterion, may partly overlap with the criteria for harmful tax competition, but they are not identical. 46 Although the work of the Code of Conduct provides insight into the concept of harmful competition, the line between fair and harmful competition remains grey. Taking into consideration the above described clarification by the Code of Conduct, it remains unclear what the benchmark or general system of a Member State is, or what anti-abuse rules are effective. Therefore, in this chapter, a benchmark will be established based on recent EU developments in the field of tax avoidance. This benchmark will serve as a clarification of the factors for identifying a tax haven, against which the Dutch corporate tax system can be assessed. Moreover, this benchmark will help clarify the concept of effective exchange of information, tax transparency and anti-abuse rules that are in line with international standards. In conjunction with the concept of fair competition within the internal market, the above clarification of harmful tax competition serves as a background for the more recent EU developments focusing on countering aggressive tax planning and tax avoidance. A tax haven facilitating tax avoidance practices is not in line with the concept of fair competition within the internal market and in this respect, the use of an EU benchmark is justified. Based on the above, taking EU standards into consideration is inevitable when assessing the corporate tax system of an EU Member State Positive Integration Although state aid and discrimination are not detected, fair competition in the internal market can be distorted as a result of disparities between Member States domestic legislation and practices. In the case of market distortions as a consequence of these disparities, Article 116 TFEU sees to the adoption by a 45 European Commission, Towards Tax Co-ordination in the European Union, COM(97) B.J.M. Terra & P.J. Wattel, European Tax Law (student edition), Deventer: Kluwer (2012), p

34 qualified majority of directives necessary for eliminating such market distortions. Article 116 TFEU functions as a safety net on the basis of which the EU can eliminate serious market distortions without needing the earlier mentioned unanimity of Article 115 TFEU. Harmonisation through the adoption of directives is a form of positive integration, which is a main feature of the internal market. Aside from the drafting of the earlier mentioned blacklist of tax havens and state aid actions by the European Commission, the recent focus within the EU lies on various measures against aggressive tax planning and tax avoidance practices in its member states, consisting of (the amendment of) directives and soft law agreements. In this respect, two main recent developments within the EU concern the publishing of an Anti Tax Avoidance Package and a Tax Transparency Package. At the moment, these measures are being implemented by the Member States and are considered to be the new EU standards against tax avoidance. Based on the standards that can be derived from these measures and developments, a benchmark can be established against which the Dutch corporate tax system can be assessed. In the following paragraph the ATAD is addressed by explaining the measures taken against tax avoidance. 3.3 Anti Tax Avoidance Directive As introduced in the first chapter, the ATAD is inspired by several BEPS Action points and concerns specific minimum anti-tax avoidance rules. In 2015, the debate on BEPS has reached the highest political level, resulting in concrete action plans for OECD countries and several non-oecd-countries. Logically, these BEPS developments are a major issue on the agenda of the EU as well. The OECD and G20 countries are leading the debates on how to approach BEPS and other tax avoidance practices and the EU is not wasting time and implementing anti-tax avoidance measures as we speak. The aim of the ATAD is to ensure a consistent implementation of various anti-avoidance rules and in this sense, the directive can be seen as creating a level playing field within the EU. The ATAD provides for a minimum level of protection, which means that member states can choose to implement additional or stricter anti-avoidance rules. One of the provisions in the ATAD contains minimum rules on exit taxation within the EU. While in the past certain forms of exit taxation have been considered not to be in line with EU law, in this directive the European Commission has introduced an exit taxation itself. In essence, when assets are transferred abroad, exit taxation is due on the difference between the value of the assets for tax purposes and the fair market value. Since the Netherlands already has solid rules on exit taxation at place that comply with the minimum rules in the ATAD, this part of the ATAD will not lead to substantial changes in its legislation. Therefore, the minimum rules on exit taxation within the EU, as laid down in Article 5 ATAD, will not be further addressed. Conversely, the minimum standards on interest deductibility, a General Anti-Abuse Rule (GAAR), controlled foreign company (CFC) rules and hybrid mismatches, will lead to substantial changes in the Dutch corporate tax system and will be addressed separately Interest Deduction Limitation The first minimum rule in the ATAD is an earnings stripping rule that limits the deductibility of interest, as laid down in Article 4 ATAD. This rule is based on BEPS Action 4 and limits the deduction of net borrowing costs of the higher of: OECD (2015), Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. 24

35 i) 30% of the EBITDA 48 ; and ii) An amount of EUR 3 million. The net borrowing costs are defined as the net balance of the taxpayer s interest expenses, or economically equivalent costs and expenses incurred in connection with the raising of finance on the one hand, and the taxpayer s taxable interest income and equivalent income on the other. Interesting about this rule is that it does not distinguish between third party and related party interest and it therefore is a general interest deduction limitation rule. Furthermore, several exceptions and options are at place for the Member States. For example, an exception is made in the case that the tax payer is a standalone entity or can demonstrate that his debt to equity ratio is in line with or higher than the ratio of the worldwide group. In principle, member states must implement this rule before 1 January However, they have the possibility to postpone the implementation of the interest deduction limitation rule to no later than 1 January 2014, provided they already have national rules preventing base erosion and profit shifting in place, which are equally effective to the interest deduction limitation rule as included in the ATAD. Despite the fact that the Netherlands has solid interest deduction limitation rules at place which would most likely qualify as equally effective to Article 4 ATAD, the Dutch Ministry of Finance has announced that the Netherlands will not opt for this possibility to postpone. This means that The Netherlands will most likely implement this rule before 1 January 2019 in its legislation. Moreover, it is expected that after the implementation of this earnings stripping rule in Dutch legislation, certain specific interest deduction limitations will be removed due to overlaps with the earnings stripping rule General Anti Abuse Rule The GAAR, as laid down in Article 6 ATAD, aims to ignore arrangements (or series of arrangements) which have been put in place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law and are not genuine. In addition, an arrangement or series of arrangements shall be regarded as non-genuine to the extent that they are not put in place for valid commercial reasons which reflect economic reality. In addition, member states may apply penalties when a GAAR is applied. 49 The GAAR in the ATAD is similar to the GAAR which is currently at place in the Parent-Subsidiary Directive, so it is not a complete new rule for the member states Controlled Foreign Company rules Since currently the Netherlands does not have CFC rules at place, Article 7 ATAD will have a large impact on the Dutch corporate tax system. The CFC rule in the ATAD is based on the outcome of BEPS Action 4 and aims to tax undistributed passive income of low-taxed controlled foreign companies. 50 Application of the CFC rule in the ATAD results in a recognition of taxable income at the level of the EU parent company before its foreign subsidiary, the CFC, makes any distribution to this parent company. In Article 7 ATAD, a foreign subsidiary or permanent establishment is a CFC if: i) The taxpayer holds directly or indirectly 50 percent of the voting rights, capital and/or profit rights of the entity; and 48 Earnings Before Interest, Tax, Depreciation and Amortization. 49 Preamble, ATAD. 50 OECD (2015), Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. 25

36 ii) The actual corporate tax paid on its profits by that entity or permanent establishment is lower than 50 percent of the tax that would have been paid on that profit in the parent company s EU country of residence. Article 7 ATAD lays down two options for the CFCs income inclusion, from which member states may choose one to implement in their legislation: i) The first option (Option A) includes non-distributed income derived from defined passive sources (interest, royalties, dividends, income from the disposal of shares, income from financial leasing, income from financial activities such as banking and insurance and lastly income from invoicing companies that earn sales and services income from goods and services purchased from and sold to associated enterprises and add little or no value); ii) The second option (Option B) is a general one and includes the non-distributed income of the entity or permanent establishment arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage. For the purpose of this option, an arrangement or a series thereof shall be regarded as non-genuine to the extent that the entity or permanent establishment would not own the assets or would not have undertaken the risks which generate the income if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the CFCs income. In the case of Option A, a mandatory exception must be implemented in the case of CFCs in EU or EEA 51 member states that carry on a substantive activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances. In the case of CFCs in third countries, this exception is optional for the member states. For Option B, the member states may choose to include an exception in their legislation for CFCs with accounting profits of nor more that EUR and non-trading income of no more than EUR , or with accounting profits of no more than 10 percent of their operating costs for the tax period. According to Article 8 ATAD, a relief of double taxation is at place through a credit for the underlying tax paid by the CFC. As mentioned before, the ATAD lays down minimum rules and the CFC rule is a de minimis rule as well. Member states may choose for a stricter implementation of the CFC rule. However, they should keep in mind that the rule may not consist a breach of the freedom of establishment in intra-eu or EEA situations Hybrid mismatches: within the EU Finally, the ATAD provides for rules concerning hybrid mismatches. Hybrid mismatches are situations in which an entity or a financial instrument is qualified differently in two member states. Article 9 ATAD aims to eliminate these mismatches that are a result of different legal characterization of a financial instrument or entity between member states. Through the hybrid mismatch rules outcomes where there is a double deduction or a deduction without an income inclusion caused by such hybrid mismatches are prevented. Application of these rules leads to the denial of the deduction of a payment by a member state in case of double deduction. In the case of a deduction without income inclusion, the member state of the payer should deny the deduction. The ATAD measures as discussed in the above must be implemented before 2019 and must apply as from 1 January In the ATAD, two exceptions are made for this implementation deadline. Member States 51 European Economic Area, consisting of the EU member states and Norway, Iceland and Liechtenstein. 26

37 may opt for a later implementation of the interest deduction rule no later than 31 December As mentioned in the above, it is highly expected that the Netherlands will implement the interest deduction rule before 1 January With regard to the GAAR, CGC legislation and hybrid mismatch measures (between EU member states), an implementation date of no later than 31 December 2018 is expected Hybrid mismatches: with third countries The scope of the rules on hybrid mismatches in the ATAD was limited to mismatches between member states. However, in February 2017 an agreement has been reached on the ATAD II, a follow-up for the ATAD. Where ATAD I includes rules on hybrid mismatches between member states, ATAD II adds rules on mismatches with third countries. These measures are relevant for structures that use hybrid entities (such as the Dutch CV) or hybrid instruments. On the first hand, Member States did not reach an agreement on the implementation date of the ATAD II measures. The implementation date originally aligned with the ATAD I (1 January 2019, with exceptions). However, certain member states argued that the initial implementation date would prove difficult to hold as significant changes would have to be made into national legislation. Eventually, a compromise was made whereby the implementation deadline of the rules regarding reverse hybrid mismatches has been extended to 1 January These hybrid mismatch rules (and the other measures mentioned above) will have a large impact on the Netherlands tax system. For an elaboration on the Netherlands expected changes in its corporate tax system due to the above measures, including the Netherlands position on implementation dates and choices, a reference is made to Chapter Transparency: the solution to all problems? According to the European Commission, tax transparency is an essential element in combatting tax avoidance. In general, member states realize that it is in their own interest to phase out secrecy jurisdictions and increase tax transparency. In the words of Alfred de Zayas, an American law professor: Once you have transparency, the tax havens are useless, but the problem is the secrecy jurisdictions. However, it should be kept in mind that transparency should be accompanied with effective anti-abuse rules. Without the actual anti-tax avoidance measures, which will actually amend the harmful aspects of corporate tax systems, the increased transparency will not serve its purpose. Although tax transparency is not the solution to all problems, it certainly is essential in the fight against tax avoidance Tax Transparency Package On 18 March 2015, the European Commission presented a package of measures with the aim of boosting tax transparency within the EU. The key element of this Tax Transparency Package is to introduce the automatic exchange of information between member states on their tax rulings. Furthermore, the package contains plans on the assessment of new transparency requirements for companies and on reviewing the Code of Conduct for Business Taxation for its lack of transparency and effectiveness. For the purpose of this research, the focus is on the automatic exchange of tax rulings. As from 1 January 2017, the tax authorities of EU Member States are obliged to exchange information concerning cross-border rulings and transfer pricing agreements with each other automatically. This creates greater fiscal transparency for the purpose of countering tax avoidance. The Netherlands has laid down rules for the automatic exchange of rulings further to the EU required implementations, as well as the OECD s BEPS Action 5. Consequently, rulings have to be exchanged as from 1 January 2017 with both EU Member States and OECD countries. The EU ruling exchange measures have entered into force 27

38 on 1 January 2017 in the Netherlands and at the moment the Dutch tax authorities are collecting details on relevant rulings. The measures apply to cross-border rulings and prior agreements concerning transfer prices that were concluded, amended or renewed since This also applies to agreements that no longer apply, but which were concluded after 1 January For any rulings that were concluded before 1 April 2016 a lowered limit applies: only information concerning rulings and transfer pricing agreements that were concluded with companies with net worldwide group turnover exceeding EUR 40 million need to be exchanged. The reason for this lowered limit is to proportionately not increase the administrative burden. Taxpayers do not have to be informed individually about the exchange of information. However, the member states do not have to provide information if such would reveal a commercial, industrial or professional privilege, or if such is opposed by the public order of the national state Country-by-Country reporting In May 2016, the ECOFIN 52 voted unanimously agreed on amending the EU directive on exchange of information. 53 These amendments are an implementation of the OECDs BEPS Action 13 on Country-by- Country reporting and were part of the European Commission s Anti Tax Avoidance Package (which also contained the Anti Tax Avoidance Directive). The aim of these amendments is, as described by the ECOFIN, to prevent multinationals from exploiting the technicalities of the tax systems, in order to reduce or avoid their tax liabilities. The amended directive requires MNEs to report information on their capital, earnings, paid taxes, profits, tangible assets and the number of employees one a country-by-county basis. The required information must be reported for fiscal years starting on or after 1 January 2016 and must be directed to the tax authorities of the member state where the group s ultimate parent company resides for tax purposes. In the case that the ultimate parent company is not resident in the EU, the report must be filed by a surrogate parent or an EU based subsidiary. Member states have the option to defer the obligation of additional filing for fiscal years starting on or after 1 January 2016, to fiscal years starting on or after 1 January All EU member states have implemented these changes and are currently collecting reports in order to start the exchange of the reports in According to the EUs CbC reporting requirements, EU-headquarter groups with a consolidated group revenue of more than EUR 750 million must file a CbC report. Furthermore, medium and large-sized subsidiaries and branches that are part of a group with a non-eu headquarter and a consolidated revenue of more than EUR 750 million, must file a CbC report as well. Subsequently, the collected date is public and must be exchanged with all other EU member states (and with certain jurisdictions which are regarded by the European Commission as having inadequate tax governance). 3.5 EU Measures: Object and Purpose As made clear in the above, EU measures will lead to significant changes in the Dutch corporate tax system due to the implementation requirements. Now that the specific measures have been addressed, it is even more important to lay down the object and purpose of these measures. In order to analyse whether the Dutch corporate tax system is in line with the new standards against tax avoidance within the EU, it is highly relevant to assess whether the Dutch legislation is in line with their object and purpose. 52 The Economic and Financial Affairs Council of the European Union, made up of the Finance Ministers of all EU member states. 53 Council Directive 2011/16/EU on the administrative cooperation in the field of taxation, 15 February

39 3.5.1 Anti Tax Avoidance Directive In the ATAD preamble, it is explicitly mentioned that the scope of the directive is to stimulate effective taxation within the internal market by adopting measures against aggressive tax planning that are consistent with the OECD BEPS conclusions. The choice is made to pursue this scope by means of a Directive, since it fits best to a uniform, coordinated application of the OECDs recommendations. The aim of this uniform and coordinated application is to create a minimum level of protection for national corporate tax systems against tax avoidance practices across the Union. 54 In the preamble it is also stated that the measures should be extended to permanent establishments from foreign companies, as they are considered to be part of the internal market as well. 55 Finally, the measures in the ATAD should not lead to double taxation, as this would hinder the functioning of the internal market. Therefore, if a single item of income is taxed more than once, according to the ATAD, member states must grant relief for the taxes already paid in other member states. 56 This means that the prevention of double taxation is also one of the objects of the ATAD Tax Transparency Firstly, the primary objective of tax transparency of rulings is to ensure that member states have the information they need to react to profit shifting in an efficient way and to prevent their tax bases against erosion. The European Commission presented the Tax Transparency Package as a tool in the fight against tax avoidance and evasion, with the purpose of creating a socially and economically more efficient internal market. This fight against tax avoidance and evasion is mainly focused on MNEs minimizing their tax liability through aggressive tax planning. According to the European Commission, the member states cannot fight these practices by only putting national measures at place, as corporate tax avoidance is a global issue and aggressive tax planners make use of complex, cross-border techniques to avoid taxation. Moreover, member states set up tax incentives with the aim of attracting MNEs to (artificially) shift profits to their jurisdiction. Therefore, in order to re-establish the link between taxation and real economic activity, the European Commission sees tax transparency as a high priority in its fight against tax avoidance. 57 According to the European Commission, the member states can only address this issue effectively by agreeing to take common action and therefore, improving administrative cooperation between member states tax administrations is a key objective of the Commission s strategy. 58 Tax rulings are not considered as problematic in themselves within the EU and many member states tend to issue them. However, it is considered an issue if a tax ruling provides a preferential treatment to certain companies or facilitates aggressive tax planning. A ruling providing a tax payer with a low effective tax rate e.g., leading to companies artificially shifting their profits to this jurisdiction and leading to revenue losses in other member states. These practices bring the exact opposite of a level playing field within the internal market and should therefore be abolished. Tax transparency between the member states on their advance agreements with taxpayers is an important means in this regard. Secondly, the CbC reporting within the EU is a step towards greater transparency and a more effective exchange of information within the EU. The European Commission aims to ensure fair taxation, meaning 54 Council Directive 2016/1164/EU, 12 July 2016, OJ L 193, Preamble, par Council Directive 2016/1164/EU, 12 July 2016, OJ L 193, Preamble, par Council Directive 2016/1164/EU, 12 July 2016, OJ L 193, Preamble, par European Commission Fact Sheet, Combatting corporate tax avoidance: Commission presents Tax Transparency, Brussels, 18 March (7 June 2017). 58 Proposal for a Council Directive 2015/0068, 18 March 2015, COM (2015) 135 final, p

40 that taxation takes place where economic value is created and where the economic activity is actually carried out. Due to the current fiscal environment, with complex tax rules and secrecy at place, MNEs are able to exploit loopholes and mismatches in tax systems within the EU. Especially since the publishing of the Panama Papers and the intensive public debate on tax avoidance and evasion practices, the European commission sees fit to respond with the demanded transparency in tax matters. By doing this, the fair competitiveness of EU companies is safeguarded as well. Aside from more tax transparency and effective exchange of information within the EU, the European Commission also addresses the CbC requirements to certain third countries that do not respect good governance. These so-called problematic tax jurisdictions are pointed out based on a list with criteria for good governance. Furthermore, it should be noted that the EU mainly targets MNEs with its recent measures against tax avoidance. Clearly, this is justified due to the fact that SMEs do not have the same means or possibility to avoid taxes, due to the size and nature of their companies: Unlike small and medium sized undertakings (SMEs) or individual taxpayers, MNEs are capable of taking advantage of loopholes in domestic and international tax laws enabling them to shift profits from one country to the next in order to reduce their tax bill. 59 With the objective of achieving further public transparency on corporate income taxes to be executed by MNEs and promoting a greater disclosure of tax-related information, the purpose of this initiative is: 1) to geographically align corporate income taxes with actual economic activity; 2) to foster corporate responsibility to contribute to welfare through taxes and 3) to promote fairer tax competition in the EU through an informed democratic debate on how to remedy market and regulatory shortcomings In Conclusion: EU Standards against Tax Avoidance Anti-tax avoidance rules are much needed in the current fiscal environment, yet pointless without effective exchange of information and tax transparency. Based on the above, it seems that the EU is taking major steps in the right direction with regard to combatting tax avoidance and aggressive tax planning. It is clear that several measures on different aspects of aggressive tax planning have been taken in the EU in order to counter tax avoidance. Moreover, effective exchange of information and tax transparency are becoming more and more important, as appears from the above addressed points on the EU agenda. These measures and developments bring several new regulations which have to be implemented in the Netherlands within the next few years. More importantly, they are based on certain objectives, on the basis of which the following benchmark can be established: i) Stimulation of effective taxation within the internal market by adopting measures against aggressive tax planning that are consistent with the OECD BEPS conclusions; 61 ii) As corporate tax avoidance is a global issue, tax transparency and administrative cooperation between Member States tax administrations is a high priority in the fight against tax avoidance (also creating a level playing field within the internal market); 59 Impact assessment assessing the potential for further transparency on income tax information, accompanying the proposal for amending Directive 2013/34/EU, COM(2016) 198 final. 60 Ibid. 61 Although the OECDs BEPS Reports are of importance within the EU, it should be noted that no reference is made to OECD measures that are not in line with EU law. 30

41 iii) The promotion of a fair taxation and fair competition, meaning that taxation should take place where the value is created and the activity is carried out; iv) The fight against tax avoidance focuses on MNEs, as unlike SMEs and individual taxpayers, MNEs are capable of international tax avoidance; v) Targeting third countries with bad governance with the objective of further public transparency on corporate income taxes of MNEs; 62 vi) Prevention of double taxation: measures against tax avoidance may not lead to double taxation. It is clear that the Netherlands is amending or will amend its corporate tax system due to the addressed EU implementation requirements. However, are the key characteristics of its corporate tax system in line with the object and purpose of these EU developments? Moreover, is the Netherlands a tax haven on the basis of these key characteristics? In the following chapter, key characteristics of the Dutch corporate tax system and relevant recent developments in the Netherlands will be addressed. Subsequently, the benchmark established in the above will be used to assess the system and finally conclude whether the Netherlands can be identified as a tax haven. 62 Targeting is quoted as obviously, the EU does not have the means to change tax practices of third countries. However, by pressuring them into changing certain harmful practices, e.g. by peer pressure or sanctions as the levy of withholding taxes on interest and royalties, this goal of global tax transparency can be achieved. 31

42 4 An Analysis: Key Characteristics of the Dutch Corporate Tax System 4.1 Introduction: Analysing a Corporate Tax System The analysis conducted in the previous chapters had the purpose of firstly, determining the factors for identifying a tax haven and secondly, establishing a benchmark against which the Dutch corporate tax system can be assessed. In order to answer the research question, it is now necessary to get an insight in the Dutch corporate tax system by addressing its key characteristics. Aside from a brief description of these characteristics and their effects, this study focuses on their object and purpose and on the rationale behind the introduction of these characteristics in the Dutch system. Firstly, the choice for three key characteristics of the Dutch corporate tax system is explained and motivated. Subsequently, the separate characteristics of the system will be addressed, taking into consideration recent developments and (expected) changes in the field of tax avoidance. Finally, the addressed characteristics and developments are assessed against the benchmark established in the previous chapter and subsequently analysed, while taking into consideration the factors of identifying a tax haven. 4.2 The Netherlands: Key Characteristics of its Corporate Tax System In general, the Netherlands corporate tax system is seen as a highly competitive fiscal climate, aiming to attract foreign businesses and investors. However, some parties tend to go a few steps further and argue that it is considered a top EU tax haven. 63 The Dutch corporate income tax system is a classical tax system, meaning that the profit earned by the company is calculated irrespective of distributions to shareholders. The shareholders are taxed separately upon the distribution of the profits. The corporate income tax rate is 25%, with a lower rate of 20% for taxable income up to EUR The 2017 Dutch Tax Package includes a gradual increase of the first bracket to EUR in 2018, EUR in 2020 and EUR in The Netherlands has an immense set of corporate taxation rules at place in the Dutch Corporate Income Tax Act (DCITA), including several anti-abuse rules. Furthermore, case law of the Dutch Supreme Court (Hoge Raad) and tax rulings issued by the ruling team of the Dutch tax authorities play an important role in the application and interpretation of the tax laws. Interestingly, the same characteristics of the Dutch corporate tax system that are seen as key aspects of the competitive investment climate in the Netherlands by some, are considered as harmful tax practices facilitating tax avoidance by others. Moreover, reports on tax havens mostly refer to these characteristics when concluding that the Netherlands is a tax haven. Therefore, the following characteristics will be assessed in order to determine whether the Netherlands is a tax haven: i) The innovation box; ii) The treatment of (intermediary) holding companies in the Netherlands (focusing on 1) the participation exemption, 2) withholding taxes on dividends, interest and royalties and 3) the Dutch treaty network); iii) The ruling practice. 63 E.g. Oxfam Novib, see paragraph

43 Before addressing recent developments and making the assessment, the above mentioned characteristics of the Dutch corporate tax system will be elaborated upon below. 4.3 The Innovation Box In 2007, the Dutch innovation box regime was introduced. The main purpose of the innovation box regime is stimulating technical innovation and R&D activities in the Netherlands. In this regime, profits derived from qualifying intangible assets are taxed at an effective tax rate of 5% instead of the usual 20 or 25%. As of 1 January 2017, the Netherlands enacted its new innovation box regime that is line with the outcomes of the OECDs BEPS Action Plan 5, which focuses on a certain level of substance. 64 The amended innovation box regime led to all existing innovation box rulings with the tax authorities being cancelled as from January The new regime follow the OECDs so-called nexus approach, according to which qualifying profits that may benefit from the innovation box regime are lower when R&D is (partly) outsourced to group companies. Furthermore, a distinction between small and large taxpayers is applicable in the new innovation box regime. Small taxpayers are taxpayers with a five year average turnover from qualifying IP below EUR 7.5 million and a total turnover over five years below EUR 50 million. A taxpayer exceeding these harbours qualify as large taxpayers. In addition to an R&D statement, which is needed for all taxpayers wishing to qualify for the innovation box regime, large taxpayers must additionally have patents, exclusive licenses, software programs, plant breeders rights or pharmaceutical certifications. The amended innovation box regime seems to bring relatively limited changes for small taxpayers, while larger companies face stricter conditions for application of the regime. The effect of these amendments is mainly the fact that it will become more difficult for large taxpayers to apply for the innovation box regime. 4.4 The Participation Exemption Article 13 DCITA When all conditions for the participation exemption are met, a Dutch company or branch of a foreign company is exempt from DCIT on all benefits connected with a qualifying shareholding. These benefits include cash dividends, dividends in kind, bonus shares, hidden profit distributions, capital gains and currency exchange results. The participation also covers all losses connecting with a qualifying shareholding, meaning that losses would not be deductible when the participation is applied. The Dutch participation exemption applies if the following conditions are met: - the participation is a non-transparent entity for Dutch tax purposes and has a capital divided into shares (or divided in another similar way); and - a Dutch tax resident company owns at least 5% of the nominal issued and paid-up share capital of the participation (the qualifying shareholding); provided that 64 OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. 33

44 - the participation is not intended to be held or deemed to be held as a portfolio investment by the parent company (the motive test ); or - the assets of the participation directly and indirectly generally consist of less than 50% of lowtaxed free portfolio investments under Dutch principles (the asset test ); or - the participation is subject to tax, which results in a realistic levy according to Dutch tax standards (the effective tax rate test ) Motive test With regard to the motive test, shares in a participation are deemed to be held as a portfolio investment in the case that: i) more than 50% of the participation s assets consists of shareholdings that are smaller than 5% (based on the fair market value); or ii) the function of the participation and its lower tier participations predominantly, i.e. more than 50%, consists of passive intra-group financing, licensing or leasing activities. When the above conditions are met, consequence is that the participation exemption does not apply. Reason for this condition is that the participation is intended for companies with active business activities and not for companies holding participations as a portfolio investment. In case a participation is both passively investing and actively conducting business activities, the decisive factor is the predominant intention of the shareholder. In determining the predominant intention, several circumstances should be taken into account, e.g. the scale of the activities, the volume of the assets and the amount of gross return Asset test The asset test is met, thus leading to the application of the participation exemption, if the participation directly or indirectly does not have generally more than 50% of low-taxed free portfolio investments (as determined in Dutch tax rules). 66 A shareholding of 5% or more held by a participation in a company is not taken into account for the purpose of the asset test. Instead, the assets held by these (in)direct subsidiaries of the participation are directly taken into account on a pro rata basis, depending on the percentage of shareholding. Furthermore, portfolio investments from which the benefits are sufficiently taxed will not be considered low taxed. A portfolio investment is deemed to be sufficiently taxed if its benefits are subject to an effective tax rate of at least 10% Effective tax rate test If the motive test and the asset test are not met, the participation exemption may still apply in the case that a direct participation is taxed at a tax rate of at least 10% over a taxable basis which is comparable to the Dutch taxable basis. This effective tax rate over a taxable base according to Dutch tax standards is regarded as reasonable Rationale behind the Participation Exemption Having laid down the general conditions of the participation exemption, it is important to understand the rationale behind the provision. The rationale behind the introduction of a participation exemption by the 65 Article 13, paragraph 9-10 DCITA. 66 Article 13, paragraph 11 DCITA. 67 Article 13, paragraph 13 and 15 DCITA. 34

45 Dutch legislator is the aim to avoid double taxation when profits of a subsidiary are distributed to the parent company. The Netherlands applies a tax system of capital import neutrality, aiming to achieve a level-playing field for Dutch companies operating abroad. This level-playing field is achieved when Dutch companies operating abroad are subject to the foreign corporate income tax, without having to pay additional taxes in the Netherlands (i.e. the exact opposite effect of the tax credit, applied in systems with. These companies can fairly compete with other comparable companies in the state of source. The participation exemption is not regarded as a tax privilege, but is rather a cornerstone of the Dutch corporate tax law. Following implementations of the Parent-Subsidiary Directive, the participation exemption also applies to dividends received from a qualifying shareholding in a subsidiary in another Member State. Since 2015, an anti-abuse rule applies following to this Directive, targeting cross-border hybrid loans with the aim of neutralising double non-taxation. According to this anti-abuse rule, the Member State of the parent company must tax profits distributed by the subsidiary in the other Member State to the extent that those profits are deductible by the subsidiary. Furthermore, a GAAR has been included in the Directive since According to the GAAR, benefits of the Directive shall not be granted with regard to arrangements with the main purpose or one of the main purposes to obtain a tax advantage that defeats the object and purpose of the Directive. Furthermore, this GAAR is formulated as a de minimis rule, meaning that Member States may apply stricter national rules. 4.5 Withholding Tax Rules Withholding taxes on dividends Dividends distributed by Dutch tax resident legal entities with a capital divided into shares (e.g. a N.V., a B.V. or an open partnership) are in principle subject to Dutch dividend withholding tax (dividend withholding tax) against a rate of 15% Exemption The DWHTA provides for an exemption on dividend withholding tax for Dutch tax resident entities. This means that no dividend withholding tax is levied on dividend distributions between Dutch tax resident entities in the case that the participation exemption applies for the Dutch tax resident parent company on the investments in the Dutch tax resident subsidiary. This exemption also applies when both Dutch tax resident entities are part of the same fiscal unity. In addition, based on the Dutch implementation of the Parent Subsidiary Directive, no dividend withholding tax is levied in case the beneficial owner of a dividend is a resident of another EU member state. For this additional exemption, the following requirements must be met: i) the beneficial owner of the dividend has an interest in the Dutch tax resident legal entity that should have qualified for the participation exemption in case the beneficial owner was a Dutch tax resident; ii) the beneficial owner is not considered in the EU country of tax residence to be a tax resident of a third country, based on a double tax convention with this country. Furthermore, the inclusion of the earlier mentioned GAAR in the Directive in 2015 was aimed at targeting abuse of the above exemption. According to the GAAR, benefits of the Directive shall not be granted with regard to arrangements with the main purpose or one of the main purposes to obtain a tax advantage that defeats the object and purpose of the Directive. 35

46 The Dutch cooperative As a general rule, a Dutch cooperative in a business driven structure is not subject to dividend withholding tax. An exception to this general rule applies in case: i) the cooperative is considered to have a capital divided into shares; or ii) the cooperative owns shares, profit rights or receivables which qualify as equity for tax purposes with (one of) the main purpose(s) of avoiding dividend withholding tax or personal income tax and the structure qualifies as artificial. A structure does not qualify as artificial in the case that i) the cooperative has a real economic function, or ii) the membership interest can be allocated to the active business assets of the foreign shareholder. The cooperative is a widely used vehicle for holding and financial activities in the Netherlands and is often criticized for its privileged treatment in the DDWT Foreign substantial interest rules The DCITA includes an anti-abuse provision covering foreign shareholders with a substantial interest in a Dutch resident company or cooperative. Following to the amendments to the Parent Subsidiary Directive, this provision is amended as from The Dutch foreign substantial interest rules apply to capital gains as well as dividends (including not at arm s length interest paid to the foreign substantial shareholder). Following the amendments as from 2016, foreign shareholders or members shall be taxed in the Netherlands in the case that the primary objective or one of the primary objectives for holding the substantial interest is to avoid dividend withholding tax or personal income tax in the Netherlands, while using an artificial arrangement. Furthermore, arrangements are considered to be artificial to the extent that they are not put in place for valid commercial reasons which reflect economic reality. To clarify this rather vague condition, the Dutch legislator chose to clarify certain safe harbour situations, focusing on substance requirements active business activities, in which an arrangement is not considered to be artificial Withholding Taxes on Interest and Royalty Payments Another characteristic of the Dutch corporate tax system is that as a rule, the Netherlands does not levy withholding taxes on at arm s length interest and royalty payments. However, interest and royalty payments exceeding an arm s length amount of interest could be treated as a deemed dividend and therefore, be subject to dividend withholding tax. The lack of withholding taxes on interest and royalty payments is based on the prevention of double taxation and the Netherlands system of capital import neutrality. 4.6 Tax Treaty Network Tax treaty advantages: Object and Purpose The earlier mentioned 15% dividend withholding tax rate in the Netherlands is often reduced, potentially down to 0, under the tax treaties negotiated by the Netherlands. The extensive tax treaty network of the Netherlands is generally seen as a main feature of the Dutch investment climate, while by some parties it is considered harmful competition by the Netherlands. In this respect, the question comes up why an extensive treaty network might be harmful. The main purpose of tax treaties is to reduce double taxation, and additionally to prevent tax evasion and avoidance. Furthermore, in terms of EU law, Member States 36

47 are free to negotiate and conclude double tax conventions to the extent that they do not cross the fundamental freedoms. However, MNEs tend to channel their investments through intermediary holding companies formed in tax efficient jurisdictions, with the aim of treaty shopping. Although the Netherlands and other countries that design such favourable regimes have the aim of attracting investments in companies which are an active business, it occurs that holding companies are set up solely for tax advantages in a certain jurisdiction that is different than the one in which the actual investments are located. This company is in fact serving as a shell company, with the purpose of reducing withholding taxes on dividend payments and/or capital gains. Countries with an extensive and beneficial treaty network, such as the Netherlands, are therefore sometimes described as conduit countries. Figure 1 illustrates how holding shell companies may be used for (aggressive) tax planning purposes. Figure 1: The role of holding shell companies 68 In essence, tax treaties concluded between two countries are abused for tax advantages, crossing the object and purpose of the convention. Does this make extensive treaty networks harmful? In tax treaty negotiations, source countries (with a capital import neutrality system) usually reduce their withholding tax rate on dividends to a low tax rate or even 0, aiming to attract foreign investments in their country. It seems like overkill when labelling all beneficial double tax conventions as harmful, considering their sound main purpose of reducing double taxation. It seems more just to expect from countries and especially EU Member States to take into consideration the concept of abuse when negotiating new treaties and bring their tax treaty network in line with international standards on anti-abuse legislation. 68 Source: Blomeyer & Sanz, Study on European initiatives on eliminating tax havens and offshore financial transactions and the impact of these constructions on the Union s own resources and budget, 15 April 2013, p ( ). 37

48 This expectation is nowadays reality: it is generally accepted within the EU that tax treaties should include effective anti-abuse rules that are in line with international standards Recent Developments On 7 June 2017, representatives of 68 jurisdictions, including the Netherlands, came together to sign the OECDs multilateral instrument (MLI). The MLI was introduced as part of the BEPS project and a number of eight additional jurisdictions have expressed an intention to sign. The MLI leads to the implementation of tax treaty measures which will amend an existing network of more than a thousand double tax conventions. Further to BEPS recommendations 69, these implementations consist of, among others, measures against treaty abuse, including a principal purpose test and for certain jurisdictions also a limitation on benefits clause. Due to the purpose of this study, the MLI will not be further explained, but it is clearly a step in the right direction against the granting of treaty advantages in tax avoidance practices. The fact that the Netherlands has an extensive treaty network with agreed upon measures on the prevention of double taxation does not make its corporate tax system harmful. However, the granting of treaty advantages in tax avoidance schemes may be considered harmful and an MLI is a good solution for amending an extensive treaty network following to anti-abuse rules that are in line with international tax standards. It is clear that countries like the Netherlands will be affected highly by these developments due to the availability of intermediary structures seeking treaty benefits. This is however in line with the purpose of these developments: countering tax avoidance practices, in this case by not granting tax benefits to tax payers aim to abuse tax treaties solely for tax advantages. 4.7 The Ruling Practice The Ruling Practice: Object and Purpose The Netherlands is known for its open system of advance tax rulings (ATRs) and advance pricing agreements (APAs). Due to this system, companies which are active in The Netherlands are able to approach the tax authorities and obtain guidance in advance on the fiscal implications of the company s (or the group s) transactions in the Netherlands. Rulings are issued by the APA/ATR Team of the Dutch tax authorities. An ATR is treated as a binding advance opinion of the tax authorities, based on facts and circumstances which are specified in the ruling. The ruling is binding only with respect to the activities which are specified in the ruling. In general, rulings are provided for a period of five years. However, if the actual facts and circumstances deviate from those in the ruling, the ruling is cancelled. There is no formal procedure and rulings are free of charge. Furthermore, tax authorities do not issue rulings if a proposed structure obviously conflicts with domestic or international tax law or erodes the Dutch tax base. Under the APA practice, which was started in and amended in , companies may request to obtain a unilateral or bilateral agreement concerning transfer pricing in cross-border transactions between related companies. The APA regulations are directly based on the OECD Transfer Pricing Guidelines, thus focusing on application of the arm s length principle. The main purpose of the possibility to receive a tax ruling from the tax authorities is providing certainty about the fiscal consequences of certain transactions. It is not aimed at providing a tax favour that is not 69 OECD (2015), Developing a Multilateral Instrument to modify Bilateral Tax Treaties, Action Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. http//dx.doi.org/ / en. 70 Decree of 30 March 2001, IFZ2001/295M. 71 Decree of 14 November 2013, IFZ2013/184M. 38

49 available for other taxpayers. Moreover, the European Commission has confirmed that the Dutch ruling practice is a solid implementation of applicable Dutch tax law and regulations Substance Requirements In principle, the Dutch minimum substance requirements do not have to be met by all Dutch legal entities. However, substance requirements are highly relevant in case a Dutch taxpayer is engaged in inter-company financing, leasing and/or licensing activities. These companies are required to meet the substance requirements, as they could apply Dutch tax treaties. Not adhering to these requirement leads to a spontaneous exchange of information by the Netherlands to relevant foreign tax jurisdictions. Furthermore, companies that seek a tax ruling from the Dutch tax authorities must meet the minimum substance requirements. Meeting the substance requirements is an indication for a Dutch tax residency and is often used by tax authorities as an indication that the entity is a Dutch tax resident. The minimum substance requirements in the Netherlands are as follows: i) At least 50% of the statutory board members of the Dutch entity are tax resident in The Netherlands; ii) The Dutch tax resident board members have the required professional knowledge to fulfil their responsibilities including decision making with respect to the transactions to be entered into by the Dutch entity and execution thereof; iii) If employees are needed, these are employed by the Dutch entity; iv) Board decisions are taken in The Netherlands; v) The main bank accounts of the entity are in The Netherlands; vi) The accounts of the Dutch entity are made up in The Netherlands; vii) The office address of the entity is in The Netherlands; viii) The entity is not considered tax resident in any other country; ix) The entity has fulfilled in any case up to the date of assessment its declaration requirements in the field of Corporate Income Tax, Personal Income Tax, Value Added Tax and so on. x) The entity should maintain a sufficient level of equity, in accordance with its functions. 4.8 Current Developments and Amendments in the Netherlands The innovation box As mentioned in the above, as of 1 January 2017, the Netherlands enacted its new innovation box regime that is line with the outcomes of the OECDs BEPS Action Plan 5, which focuses on a certain level of substance. 72 It should be noted that from the beginning, the Dutch government has fully supported the objective of countering aggressive tax planning and removing innovation or patent boxes that facilitate profit shifting by replacement of patents with the sole reason of locating them in the most favourable tax jurisdiction. 73 By implementing this anti-abuse rule, the Netherlands is aligning a measure which is by some considered as harmful with the OECDs standards on countering tax avoidance. 72 OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris See Statement of the Netherlands on the draft Council Conclusions (Code of Conduct patent boxes), ECOFIN Council, Brussels, 9 December ( ). 39

50 4.8.2 Treatment of holding companies In November 2000, the Ecofin Council reached a so-called interim-agreement, providing for the conditional phasing-out of harmful tax measures. According to this agreement, tax schemes for holding companies must be labelled harmful in the case that exemptions of dividends from foreign subsidiaries are granted, while i) the profits out of which these dividends were paid were subject to a substantially lower taxation in the foreign state than in the holding company state. In addition, an escape was available if the holding company state had effective anti-abuse rules at place. 74 In essence, the treatment of holding companies in the Netherlands favourable due to the combination of the participation exemption, the lack of withholding taxes on interest and royalty payments and the extensive treaty network. Clearly, these favourable measures can be misused by tax planning MNEs seeking tax advantages without moving their economic activity. In the current fiscal environment, under influence of an increasing globalisation, it seems to boil down to having effective anti-abuse rules at place to counter this abuse Dutch cooperative and dividend withholding taxes As addressed in the previous paragraph, a Dutch cooperative in a business driven structure is not subject to dividend withholding tax. The cooperative is a widely used vehicle for holding and financial activities. The Netherlands is often criticized for its treatment of Dutch holding cooperatives. However, the Dutch Dividend Withholding Tax Act (DWTA) will be amended and the treatment of Dutch cooperatives will change before the end of On 16 May 2017, draft legislative amendments to the DWTA have been published and made available for public consultation until 13 June The main purpose of this draft proposal is to align the dividend withholding tax treatment of holding cooperatives and other Dutch tax resident entities with a capital divided into shares. Moreover, the introduction of a more extensive unilateral dividend withholding tax exemption is proposed, in combination with anti-abuse rules that are in line with BEPS Action Under anti-abuse rules an assessment should be made whether the interest in the withholding agent is held with the main purpose or one of the main purposes to avoid Dutch dividend withholding tax. This is a subjective test and should be assessed by determining whether the direct shareholder or member is interposed with the aim to obtain a better Dutch dividend withholding tax position. If this is the case, another objective test should be met: it should be determined whether the structure may be considered an artificial arrangement. A structure is not considered to be an artificial arrangement if it concerns an active investment structure. This would be the case if the immediate shareholder or member carries on an active business. Furthermore, if the immediate shareholder or member is an intermediate holding company that is considered to generate a more favourable dividend withholding tax position in comparison to the indirect shareholder carrying out an active business, it is required for the intermediate shareholder or member to adhere to a relevant substance condition for the anti-abuse rule not to apply. In the case that this required relevant substance is not met, the anti-abuse rule applies, with the consequence of the dividend distribution being subject to dividend withholding tax. 74 B.J.M. Terra & P.J. Wattel, European Tax Law (student edition), Deventer: Kluwer (2012), p OECD (2015), Preventing the granting of Treaty benefits in Inappropriate Circumstances, Action Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. 40

51 This relevant substance goes further than the regular substance requirements in the Netherlands (as addressed in paragraph 4.5.2). An immediate shareholder or member of the entity is considered to have relevant substance if a minimum of two new substance requirements is met, in addition to the current Dutch substance requirements: i) The company has at least EUR in payroll costs that are related to its activities; ii) The company has its own office space. If all the above requirements are met, the participation in the Dutch entity is deemed to be held with business reasons that reflect economic reality, which means that the principal purpose test is met and that the exemption for dividend withholding tax is applicable. The Dutch Ministry of Finance announced its anticipation that this proposal addresses the observations of the European Commission on the differential treatment of cooperatives, while maintaining a strong investment climate. Moreover, the Ministry of Finance anticipates the proposal to counter international tax avoidance through the use of Dutch cooperatives. 76 According to the published consultation document, the proposed amendments to the DWTA are expected to become effective as of 1 January Relevant Substance On 25 January 2017, a resolution was adopted in the Netherlands, requesting the government to draft a proposal to sharpen the substance requirements to combat empty letter box companies. The substance requirements in the Netherlands for certain types of companies and for concluding a tax ruling seem not be in line with the current fiscal environment, as no relevant substance is required. In an era of countering tax avoidance, substance should be relevant in relation to the company s activities and should not be based on directors and trusts managing large amounts of companies The Ruling Practice As addressed in the previous chapter, the tax authorities of EU Member States are obliged to exchange information concerning cross-border rulings and transfer pricing agreements with each other automatically since 1 January This creates greater fiscal transparency for the purpose of countering tax avoidance. The Netherlands has laid down rules for the automatic exchange of rulings further to the EU required implementations, as well as the OECD s BEPS Action 5. Consequently, rulings have to be exchanged as from 1 January 2017 with both EU Member States and OECD countries. A relevant difference is a slightly broader scope of a ruling for the EU exchange rules than for the OECD exchange rules. The EU ruling exchange measures have entered into force on 1 January 2017 in the Netherlands and at the moment the Dutch tax authorities are collecting the required information on relevant rulings. Taxpayers do not have to be informed individually about the exchange of information. However, the Netherlands does not have to provide information if such would reveal a commercial, industrial or professional privilege, or if such is opposed by the public order of the Dutch state. Due to a challenging administrative process, caused by the large amount of tax rulings issued in the Netherlands, the Netherlands has experienced some delay in the ruling exchange process. However, the Netherlands agreed with the implementation of EU ruling exchange measures and still supports all agreed upon measures. Moreover, the Netherlands intends to resolve the delay as soon as possible September 2016 letter of the Dutch Ministry of Finance on cooperatives and dividend withholding tax. 41

52 4.8.6 Country-by-country reporting Aside from the EU requirements on CbC reporting, the Netherlands also adheres to the OECD requirements based on the OECDs BEPS Action The OECDs BEPS Action 13 is slightly different from the EUs CbC reporting requirements, as it also contains requirements for filing a the less extensive Master file and Local file for groups with a revenue between EUR 50 million and EUR 750 million. Certain EU member states have announced that they will include these OECD requirements alongside the EUs CbC requirements. The Netherlands is one of these member states and currently, requirements of a Local file, a Master file and a CbC report on EU-level and on OECD-level have been implemented into Dutch legislation. The above developments regarding CbC reporting in case of the Netherlands can be summarized as follows: Consolidated group revenue (EUR) Requirements Deadline 0-50 million No No 50 million million A Master file and a Local file to be included in the taxpayer's administration million - The above mentioned Master and Local file; and - a CbC report for the entire group. If the parent jurisdiction has not yet implemented a CbC Report regulation and another group company is not designated to do so in its jurisdiction as a surrogate parent, the CBC Report should be filed with the Dutch tax authorities Filing deadline 2016 Dutch corporate income tax return 31 December 2017 (i.e., one year after the end of the fiscal year 2016) EU Influences: Substantial Amendments to the Dutch Corporate Tax System An earningsstripping rule for excessive debt financing (although the Netherlands already has sound interest deduction limitations at place), a GAAR, CFC rules and rules on hybrid mismatches will amend the Dutch corporate tax system in short notice and in an immense way. Due to these anti-abuse measures, possible harmful aspects of its key characteristics are reduced. Especially the rules on (reverse) hybrid mismatches with third countries, following to the ATAD II, will take away structures which are in general considered as harmful, such as the CV/BV structure. This structure, which is often used in structures with the US, makes use of a hybrid entity which is transparent in the Netherlands, while it is checked as a non-transparent entity in the US. The Netherlands has been criticized for unilaterally granting access to the tax treaty with the US, thus facilitating a tax avoidance practice. This harmful practice will disappear with the implementation of the reverse hybrid mismatch rules. Due to the immense consequences for current structure, the Dutch Minister of Finance requested for a postponement of the initial implementation requirement of However, the Dutch parliament pressured him into accepting the initial requirement. Finally, the implementation date for the reverse hybrid mismatch was set at 1 January 2022, due to objections of other Member States. 77 OECD (2015), Transfer Pricing Documentation and Country-by-Country Reporting, Action Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. 42

53 The implementation of the ATAD measures clearly lead to substantial amendments to the Dutch corporate tax system, introducing effective anti-abuse rules that are in line with internationally accepted tax principles. 4.9 Previous Reports: An Evaluation The European Commission: aggressive tax planning indicators In December 2015, the European Commission published a study on Structures of Aggressive Tax Planning and Indicators. In this report, the European Commission sets out a number of 33 aggressive tax planning indicators 78, based on identified model aggressive tax planning structures. 79 Since these structures and indicators of aggressive tax planning have been addressed in paragraph 2.2.2, the focus of this evaluation lies on the conclusions of this report with regard to the Netherlands. The main purpose of this study was to review the corporate income tax systems of the EU Member States by means of the ATP indicators, in order to identify those tax rules and practices (or lack thereof) that result in Member States being vulnerable to ATP. As the aggressive tax planning indicators include the lack of anti-abuse rules with regard to hybrid mismatches and the lack of CFC rules, this assessment of the Netherlands corporate tax system seems to be outdated. Moreover, on the assessment date, the amendments to the Parent Subsidiary Directive had not been implemented yet in the Netherlands. A final interesting remark is that the European Commission s study does not conduct an in-depth analysis of the specific national measures. A rather confusing conclusion is the fact that the Netherlands was checked at the aggressive tax planning indicator of the possibility of group taxation with an acquisition holding company. The Netherlands had solid interest deduction limitations at place in this respect, yet the sole fact that this form of group taxation is possible (inherent to the Dutch tax system), leads to presence of this indicator. Although a more in-depth and circumstantiated analysis would be needed in order to investigate and possibly address specific cases of national tax systems being at risk of aggressive tax planning, it is hoped that this study provides useful information for policy makers with a view to improving the functioning of the national tax systems of EU Member States. 80 Aside from the above mentioned (future) changes in legislation, also developments in the field of tax transparency have taken place after this report, such as the automatic ruling exchange and aside from EU measures also cooperation on all OECD measures in the field of tax transparency. 81 In fact, the European Commission argued in its report on harmful tax practices that introducing stringent CFC rules and rules against hybrid mismatches in the Netherlands, would counteract the most common aggressive tax planning structures. 78 See Appendix II. 79 See Appendix I. 80 European Commission, Study on Structures of Aggressive Tax Planning and Indicators Final Report, Taxation Papers, Working Paper N , p Aside from the Country-by-country-reporting and ruling exchange measures on OECD-level also CRS, which imposes additional transparency requirements on financial institutions, similar to the US FACTA and the introduction of an Ultimate Beneficial Owner register. 43

54 4.9.2 Oxfam-Novib According to a report by the international charity organization Oxfam, the Netherlands is the top EU tax haven regime for corporate tax avoidance. This report contains a study which draws on the European Commission study on aggressive tax planning indicators addressed in the above. According to Oxfam, such tax regulations perpetuate poverty and extreme inequality in the world. Oxfam finds that it is according to such tax policies, that MNEs are able to yearly avoid at least USD 100 billion in taxes in developing countries. According to Oxfam, the Netherlands perpetuates poverty and extreme inequality in the world with its tax policy. Aside from these conclusions, the key question of this report is whether the Netherlands is a tax haven or not. With regard to an aggressive tax planning indicator, the term itself says that having certain tax regulations at place is an indication that aggressive tax planning is facilitated. As mentioned in the above, the European Commission did not conduct an in-depth analysis of tax regulations of all EU member states. It is merely identifying risks which may expose particular jurisdictions to aggressive tax planning 82 and should be analysed further. Moreover, in the European Commission report it is specifically stated that it identifies weaknesses of the national tax systems in the EU and sets the ground for additional analysis and new policy initiatives. 83 A final remark on this report is directed at Oxfam s recommendation to support the CCCTB with a minimum corporate tax rate. This would mean that Member States would have to completely give up their sovereignty on direct tax matters to the EU. Aside from being highly unrealistic, this recommendation ignores the fact that tax competition (in the internal market) can have positive consequences in terms of efficiency In Conclusion: An Assessment of the Dutch Corporate Tax System Benchmark Based on the above conducted analysis, the following assessment can be made: i) Stimulation of effective taxation within the internal market by adopting measures against aggressive tax planning that are consistent with the OECD BEPS conclusions. The Netherlands has been an advocate for the implementation of EU measures against tax avoidance, while in the same time the Netherlands is implementing OECD measures against tax avoidance, such as the nexus approach in its innovation box regime, the MLI with aim of implementing a principal purpose test in its treaties and various transparency and exchange of information measures. However, it should be noted that the nexus approach of the innovation box might not be in line with EU standards, as will be addressed under the third point. ii) As corporate tax avoidance is a global issue, tax transparency and administrative cooperation between Member States tax administrations is a high priority in the fight against tax avoidance (also creating a level playing field within the internal market). Since the Netherlands recognises that corporate tax avoidance is a global issue, it advocates the coordinated implementation of measures against tax avoidance, including tax transparency and 82 European Commission, Study on Structures of Aggressive Tax Planning and Indicators Final Report, Taxation Papers, Working Paper N , p European Commission, Study on Structures of Aggressive Tax Planning and Indicators Final Report, Taxation Papers, Working Paper N , p

55 exchange of information measures on EU level. During its presidency of the EU, the Netherlands set a goal of a reaching agreements on these matters as fast as possible, arguing that this global issue asks for a coordinated approach. iii) The promotion of a fair taxation and fair competition, meaning that taxation should take place where the value is created and the activity is carried out. The Netherlands has obviously implemented the public CbC reporting measures on EU level. In addition, it implemented the CbC measures on OECD level as well. These measures have as main purpose the effective exchange of information in order to reduce tax avoidance and levy taxes where the value is created an the activity is carried out. Although the amendment of the innovation box is aimed at countering abuse and tax avoidance, the chosen anti-abuse rule seems not to be in line with the principle that taxation should take place where the value is created. iv) The fight against tax avoidance focuses on MNEs, as unlike SMEs and individual taxpayers, MNEs are capable of international tax avoidance. The Netherlands aims to focus its fight against tax avoidance on MNEs and additionally has in general safe harbours at place for SMEs in anti-abuse legislation. v) Targeting third countries with bad governance with the objective of further public transparency on corporate income taxes of MNEs. The Netherlands is an advocate of global tax transparency, therefore it is implementing OECD measures next to the EU measures on tax transparency and exchange of information. However, one may wonder how developing countries are taken into consideration in OECD measures. The Dutch parliament pressured its government in accepting the initial implementation date for the measures on hybrid mismatches with third countries. This is a signal that tax avoidance is seen as a global issue, which should be aimed at fair competition. vi) Prevention of double taxation: measures against tax avoidance may not lead to double taxation. The participation exemption, the lack of withholding taxes on interest and royalty payments and the Dutch treaty network lowering the withholding taxes on dividend have as a main purpose the prevention of double taxation. Moreover, possible abuse of these tax advantages is tackled with antiabuse rules that are in line with EU standards, not to mention the ATAD measures which will be implemented in the Netherlands Identifying a tax haven Taking into account the above conclusion on the assessment of the Dutch corporate tax system against the established EU benchmark, the following conclusions can be drawn as to whether the Netherlands can be identified as a tax haven: i) No or only nominal taxes (for certain types of activities or companies). It might be argued that the innovation box regime should fall within this factor. Even if it would, this factor should be accompanied with the following factors for identifying a tax haven. ii) Tax advantages are given without any requirement of real economic activity and substantial presence in the jurisdiction giving those advantages. 45

56 Possible abuse of tax advantages, such as the favourable treatment of holding companies, is tackled with anti-abuse rules that are in line with EU standards, not to mention the ATAD measures which will be implemented in the Netherlands. Moreover, abuse of the innovation box regime is tackled by implementing the OECDs nexus approach. It may however be argued that this final anti-abuse rule is not in line with EU standards, as appears from the assessment in the previous paragraph. iii) Lack of effective exchange of information and transparency. As appears from the EU benchmark in the previous paragraph, the Netherlands tax system is in line with EU standards on the effective exchange of information and tax transparency. In addition, the Netherlands adheres to OECD measures on this field. iv) Lack of effective (general) anti-abuse rules against tax avoidance that are in line with international standards, such as the OECDs BEPS Reports. As appears from the assessment in the previous paragraph, the Netherlands has or will shortly have effective anti-abuse rules at place which are in line with international standards. It should however be noted that the anti-abuse rule in the innovation box regime might not be in in line with the standard of taxation where the value is created and where the income is earned. 46

57 5 Conclusions: An Analysis of the Dutch Corporate Tax System 5.1 Answering the Research Question Based on the analysis in the previous chapters, the main research question can be answered. Before answering the main research question, the answers to the sub research questions are summarized below. In order to come to a conclusion with regard to the main research question, the following sub research questions will be answered: (i) (ii) (iii) (iv) What does the concept tax haven entail? What are the developments in the field of tax avoidance in the EU and what are the EU standards for anti-tax avoidance measures by Member States? To what extent do the key characteristics of the Dutch corporate tax system indicate that the Netherlands is a tax haven? Has the Netherlands included any measures in its domestic law which combat tax avoidance and to what extent should the Netherlands increase its efforts in this respect? 5.2 A Suiting Definition: Key Factors Due to difficulties in providing a precise definition of a tax haven and the different characteristics a tax haven can have, the Dutch corporate tax system is assessed on the basis of a list of key factors for identifying a tax haven. The key factors for identifying a tax haven for the purpose of the conducted analysis are as follows: v) No or only nominal taxes (for certain types of activities or companies); vi) vii) viii) Tax advantages are given without any requirement of real economic activity and substantial presence in the jurisdiction giving those advantages; Lack of effective exchange of information and transparency; Lack of effective (general) anti-abuse rules against tax avoidance that are in line with international standards, such as the OECDs BEPS Reports. For the purpose of identifying a tax haven, the corporate tax system should be assessed by taking all the above factors into consideration. Any mentioning of a tax haven, refers to the above concept in the specific situation, unless explicitly otherwise mentioned. The importance of each separate key factor depends on the context and the characteristics of the tax system. No or only nominal taxes for certain types of activities or companies cannot be the determining factor in this analysis. This first factor should at least be accompanied by one of the three other key factors in order to define a tax haven, because in combination with requirements of real economic activity, substantial presence and effective anti-abuse rules, tax advantages in the form of a lower tax rate are not considered to be harmful. The second factor (lack of effective exchange of information and transparency), on the other hand, could immediately lead to defining a country as a tax haven. As mentioned in the various points of view in the previous paragraph, this characteristic of a tax haven is a strongly recurring one. Finally, in a time of globalization and economic integration, anti-abuse rules are an essential tool for countering tax avoidance which cannot be missed in a tax system, especially if it as an EU member state. Therefore, a lack of effective anti-abuse 47

58 rules that are in line with international standards is a factor of a tax haven. In order to establish a benchmark for these international standards, the EU anti-tax avoidance measure are addressed while answering the following sub research question. 5.3 An EU Benchmark and Implementation Requirements Anti-tax avoidance rules are much needed in the current fiscal environment, yet pointless without effective exchange of information and tax transparency. Based on the above, it seems that the EU is taking major steps in the right direction with regard to combatting tax avoidance and aggressive tax planning. It is clear that several measures on different aspects of aggressive tax planning have been taken in the EU in order to counter tax avoidance. Moreover, effective exchange of information and tax transparency are becoming more and more important. These measures and developments bring several new regulations which have to be implemented in the Netherlands within the next few years. More importantly, they are based on certain objectives, on the basis of which the following benchmark can be established: i) Stimulation of effective taxation within the internal market by adopting measures against aggressive tax planning that are consistent with the OECD BEPS conclusions; 84 ii) As corporate tax avoidance is a global issue, tax transparency and administrative cooperation between Member States tax administrations is a high priority in the fight against tax avoidance (also creating a level playing field within the internal market); iii) The promotion of a fair taxation and fair competition, meaning that taxation should take place where the value is created and the activity is carried out; iv) The fight against tax avoidance focuses on MNEs, as unlike SMEs and individual taxpayers, MNEs are capable of international tax avoidance; v) Targeting third countries with bad governance with the objective of further public transparency on corporate income taxes of MNEs; 85 vi) Prevention of double taxation: measures against tax avoidance may not lead to double taxation. It is clear that the Netherlands is amending or will amend its corporate tax system due to the addressed EU implementation requirements. However, are the key characteristics of its corporate tax system in line with the object and purpose of these EU developments? Moreover, is the Netherlands a tax haven on the basis of these key characteristics? As follows from the conclusion in the previous chapter, the Dutch corporate tax system is in general in line with the above EU standard. However, a remark is made with regard to the anti-abuse rule in the innovation box regime, as the occurred costs are a decisive factor instead of the income earned. 5.4 The Netherlands: Tax Haven on Earth? In essence, the treatment of holding companies in the Netherlands favourable due to the combination of the participation exemption, the lack of withholding taxes on interest and royalty payments and the extensive treaty network. In addition, the innovation box brings advantages for IP creating companies. Clearly, these favourable measures can be misused by tax planning MNEs seeking tax advantages without 84 Although the OECDs BEPS Reports are of importance within the EU, it should be noted that no reference is made to OECD measures that are not in line with EU law. 85 Targeting is quoted as obviously, the EU does not have the means to change tax practices of third countries. However, by pressuring them into changing certain harmful practices, e.g. by peer pressure or sanctions as the levy of withholding taxes on interest and royalties, this goal of global tax transparency can be achieved. 48

59 moving their economic activity. In the current fiscal environment, under influence of an increasing globalisation, it seems to boil down to having effective anti-abuse rules at place to counter this abuse. In conclusion, based on the key characteristics of the Dutch corporate tax system and taking into account the discussed recent tax developments in the EU, the Netherlands is not a tax haven. 5.5 Recommendations for the Dutch corporate tax system: fair competition On the basis of the established EU benchmark, the following recommendations can be made for further aligning the Dutch corporate tax system with the current fiscal environment: Substance requirements The Dutch substance requirements should be aligned with the current fiscal environment and recent developments on the field of countering tax avoidance. The requirement of relevant substance should be added to the current list, e.g. by bringing it in line with the planned Dutch anti-abuse rule for cooperatives (at least EUR in payroll costs that are related to the company s activities and an own office space). Public transparency of rulings Although important steps have been taken towards tax transparency on rulings between tax jurisdictions, it is in line with the purpose of the Dutch ruling practice to make tax rulings, or at least their conclusions public for all taxpayers and other stakeholders. This way, certainty for taxpayers on the use of tax rulings is ensured and controversy around the ruling practice would be mitigated. Work towards international agreement against the corporate tax race to the bottom The Netherlands should not seek to lower its corporate tax rate as a compromise for implementing anti-tax avoidance measures. As many international measures and standards on countering tax avoidance affect the tax base, competing with the tax rate would lead to a corporate tax race to the bottom, which would again mainly benefit MNEs and result in a lower tax revenue on a global/eu level at the cost of less mobile taxpayers. Stimulate providing developing countries with a stronger place within international tax negotiations It is clear that internationally the focus lies on countering tax avoidance. However, the negotiations are dominated by rich OECD members, which may lead to neglecting important considerations from the perspective of developing countries, thus failing to tackle the problem globally. This is not in line with the purpose of these developments, as tax avoidance is a global issue which should be tackled globally. Amend the nexus approach of the innovation box The application of the innovation box should be aligned with the income earned with the IP, instead of with the costs occurred. This is also in line with the EU standard of targeting MNEs when countering tax avoidance instead of SMEs. The fact that costs have occurred does not mean that actual income is earned with the IP. 49

60 5.6 Final Reflections (C)CCTB? One of the solutions for tax avoidance practices that would also limit harmful tax competition between the member states might be the introduction of a common consolidated corporate tax base (CCCTB). The CCCTB is a corporate tax system which treats the EU as a single market for the purpose of one consolidated tax base for group companies. Based on this CCCTB, taxable income is apportioned within the member states based on a formula which takes into account assets, labor and sales of the companies in the member states. In October 2016, the EU Commission announced a proposal towards a CCCTB in two stages. The first stage covers a common corporate tax base (CCTB), while the second covers the CCCTB. These proposals will be submitted to the European Parliament for consultation and to the Council of the EU for adoption. Furthermore, the proposals are subject to negotiations and all 28 Member States will have to unanimously agree to them before they can be adopted. In the proposal, the Commission approved that the CCTB Directive shall be adopted by 31 December 2018 in the domestic laws of EU Member States, and its provisions shall apply from 1 January With regard to the CCCTB Directive, the Commission suggested that it shall be adopted by 31 December 2020 in the national legislation of EU Member States, and its provisions shall apply from 1 January However, the EU Member States are currently not expected to reach unanimous agreement on these proposals within the suggested timeframe. The main reasons for this expectation are the direct impact on the tax revenues of the member states and the substantial loss of sovereignty on direct tax matters (with an exception to determining the tax rates) of the member states. The Dutch government s assessments of the CCCTB proposal was in general a negative one. While the Netherlands supports the objectives of the Commission, it has grave reservations about the implementation proposed by the Commission, as the proposals drastically limit the ability of the Netherlands to organize corporate income tax as it sees fit. The only thing the Netherlands can independently do is set the tax rates for taxpayers that fall under the scope of the Commission s proposals; the tax base and apportionment of the profit is organized at EU level. It should be noted that these sole possibility of competition might be a risk that the CCCTB will increase tax competition between member States, leading to a tax race to the bottom. The government considers the excessive limitation of its discretionary power undesirable. Furthermore, the Netherlands argues that the possibility of responding to future developments by changing the tax base is also limited, given that unanimous agreement by the member states must be reached on this. As mentioned in the Introduction, when discussing aggressive tax planning by member states, the underlying problem is often ignored. Distortions of the internal market caused by aggressive tax competition by the member states are actually a consequence of the fiscal sovereignty of states in a globalizing economy. De Wilde describes that international tax systems are based on allocation formula s from the past century and seem to be outdated due to the enormous changes in the world, e.g. globalization, European integration and the rise of MNE s. In his view, the separate entity approach (under which each separate group company or permanent establishment is considered a single tax payer) needs to be let go in favor of a unitary business approach M.F. De Wilde - Some Thoughts on a Fair Allocation of Corporate Tax in a Globalizing Economy, Intertax, Volume 38, Issue 5. 50

61 5.6.2 The underlying problem When discussing aggressive tax planning and competition, the underlying problem is actually the conflict between globalization and sovereignty of countries on tax matters. A solution for this problem would be to change the internationally accepted profit allocation formula, as this would mitigate tax avoidance practices and increase taxation where the value is created and the income is earned.. However, it is not likely that this will happen any time soon, as countries strongly hesitate to let go of their sovereignty on (direct) tax matters. For the same reason, I believe that the EU member states will not agree on the introduction of a CCCTB. Instead of targeting the underlying conflict, the problems arising from this conflict are being combatted by anti-tax avoidance rules and measures on an increased tax transparency. It is clear that several measures on different aspects of aggressive tax planning have been taken in the EU in order to counter tax avoidance. Moreover, effective exchange of information and tax transparency are becoming more and more important, as appears from the earlier addressed points on the EU agenda. It is not easy to structure these different measures, even less when taking into consideration the different implementation dates. Moreover, aside from the developments discussed for the purpose of this study, various other measures have been taken with the aim of a fairer competition within the EU. In Appendix III, a summarizing overview can be found of the main EU developments in this field, including the expected dates of implementation and the likelihood of the future measures being implemented. 87 Although further reaching amendments to international tax principles and EU standards have been argued in literature 88, at the moment these measures and developments are reality in the EU fight against tax avoidance. 87 See Appendix III. 88 See E.C.C.M. Kemmeren, Principle of Origin in Tax Conventions, Dongen: Pijnenburg, 2001; S.A. Stevens, The Duty of Countries and Enterprises to Pay Their Fair Share, Intertax, Volume 42, Issue 11 (2014) and M.F. De Wilde, Some Thoughts on a Fair Allocation of Corporate Tax in a Globalizing Economy, Intertax, Volume 38, Issue 5 (2010). 51

62 Bibliography B Blomeyer and Sanz, Study on European initiatives on eliminating tax havens and offshore financial transactions and the impact of these constructions on the Union s own resources and budget, April Bratton, W. and McCahery, J., Tax Coordination and Tax Competition in the European Union: Evaluating the Code of Conduct on Business Taxation, 38 Common Market Law Review C Carrero, J. and Seara, A., The Concept of Aggressive Tax Planning Launched by the OECD and the EU Commission in the BEPS Era: Redefining the Border between Legitimate and Illegitimate Tax Planning, Intertax, Volume 44, Issue 3, Christensen, J. and Murphy, R., Tax us if you can second edition, Tax Justice Network, E European Commission, Study on Structures of Aggressive Tax Planning and Indicators Final Report, Taxation Papers, Working Paper N European Commission, Study on Structures of Aggressive Tax Planning and Indicators Final Report, Taxation Papers, European Commission, Towards Tax Co-ordination in the European Union, COM(97)495. G Gordon, R.A., Tax Havens and Their Use by United States Taxpayers An Overview, A Report to the Commissioner of Internal Revenue, Special Counsel for International Taxation (Gordon Report), January K Kavelaars, P., EU and OECD: Fighting against Tax Avoidance, Intertax, Volume 41, Issue 10, Kemmeren, E., Principle of Origin in Tax Conventions, Dongen: Pijnenburg, I

63 Kemmeren, E., The Netherlands: Fiscal unity, Groupe Steria s per-element approach and currency losses relating to a non-resident subsidiary (C-399/16(X NV)); Starbucks and State aid (T-760/15 and T-636/16), February Kiekebeld, B.J., Harmful tax competition in the European Union Code of Conduct, countermeasures and EU law, Kluwer: EFS Brochure Series, N Nouwen, M.F., The European Code of Conduct Group Becomes Increasingly Important in the Fight Against Tax Avoidance: More Openness and Transparency is Necessary, Intertax, Volume 45, Issue 2. O OECD (1987) International Tax Avoidance and Tax Evasion: Four Related Studies (Paris). OECD (1998), Harmful Tax Competition: An Emerging Global Issue. OECD (1998), Harmful Tax Competition: An Emerging Global Issue (Paris). OECD (2000), Towards Global Tax Co-operation (Paris). OECD (2013), Addressing Base Erosion and Profit Shifting, OECD Publishing. OECD (2015), Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. OECD (2015), Developing a Multilateral Instrument to modify Bilateral Tax Treaties, Action Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. OECD (2015), Preventing the granting of Treaty benefits in Inappropriate Circumstances, Action Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing OECD (2015), Transfer Pricing Documentation and Country-by-Country Reporting, Action Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. II

64 Orlov, M., The Concept of Tax Haven: A Legal Analysis, Intertax, Volume 32, Issue 2, P Palan, R., Murphy, R. and Chavagneux, C., Tax Havens: How Globalization Really Works, Cornell University Press, S Stevens, S.A., The Duty of Countries and Enterprises to Pay Their Fair Share, Intertax, Issue 11, T B.J.M. Terra, B.J.M., and Wattel, P.J., European Tax Law (student edition), Deventer: Kluwer, W M.F. De Wilde, M., Some Thoughts on a Fair Allocation of Corporate Tax in a Globalizing Economy, Intertax, Volume 38, Issue 5. III

65 Appendix I Model Aggressive Tax Planning Structures European Commission, Study on Structures of Aggressive Tax Planning and Indicators Final Report, Taxation Papers, Working Paper N and OECD (2014) Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements, p IV

66 Appendix II Aggressive Tax Planning Indicators As identified in: European Commission, Study on Structures of Aggressive Tax Planning and Indicators Final Report, Taxation Papers, Working Paper N V

67 Appendix III Time Span Anti Tax Avoidance Developments in the EU VI