By Jesse Drucker (Business Day)
The Netherlandshas emerged as one of the most important tax havens for multinational companies and itsrole as a $13-trillion relay station on the global tax-avoiding network is prompting a backlash.The Dutch parliament debated the fairness of its tax system on Wednesday. For example, Yahoo has managed to funnel millions in global profits to island subsidiaries, cutting its worldwide tax bill. Last month, the European Commission declared a war on tax avoidance and evasion, which it said costs the EU €1-trillion a year.
INSIDE Reindert Dooves’s home, a 17th-century, three-storey, converted warehouse along the Zaan canal in Amsterdam, a 21st-century internet giant is avoiding taxes.
The bookkeeper’s home office doubles as the headquarters for a Yahoo offshore unit. Through this room, Yahoo has taken advantage of the law to quietly funnel hundreds of millions of dollars in global profits to island subsidiaries, cutting its worldwide tax bill.
The Yahoo arrangement illustrates that the Netherlands, in the heart of a continent better known for social welfare than corporate welfare, has emerged as one of the most important tax havens for multinational companies. Now, as a deficit-strapped Europe raises retirement ages and taxes on the working class, the Netherlands’ role as a $13-trillion relay station on the global tax-avoiding network is prompting a backlash.
The Dutch parliament debated the fairness of its tax system on Wednesday. Legislators from several parties, including members of the country’s governing coalition, say they want to remove a stain on the nation’s reputation.
"We should not be a tax haven,” says Ed Groot, a member of parliament from the Labour Party, which along with the People’s Party for Freedom and Democracy took power in November last year.
Both ruling parties are "fed up with these so called PO Box companies”, he says. "If they go somewhere else we are not sorry at all because they spoil the name of Holland. Otherwise you can wait for retaliation measures and this we don’t want.”
Last month, the European Commission, the European Union’s (EU’s) executive body, declared a war on tax avoidance and evasion, which it said costs the EU €1-trillion a year.
The commission advised member states — including the Netherlands — to compile tax-haven blacklists and adopt anti-abuse rules.
It also recommended reforms that could undermine the lure of the Netherlands, and hurt a spin-off industry that has mushroomed in and around Amsterdam to abet tax avoidance.
Attracted by the Netherlands’ lenient policies and extensive network of tax treaties, firms such as Yahoo, Google, Merck and Dell have moved profits through the country. Using techniques with nicknames such as the "Dutch Sandwich”, multinational companies routed €10.2-trillion in 2010 through 14,300 Dutch "special financial units”, according to the Dutch central bank. Such units often only exist on paper, as is allowed by law.
The EU’s 27 member states had accumulated an annual €519.5bn budget deficit as of the second quarter of last year, according to Eurostat. In response, Spain is slashing teacher salaries and Greece is cutting funding for public hospitals and prescription drugs. The Netherlands had a deficit of €24.9bn.
"Governments around the world have to cut budgets and at the same time multinational companies are avoiding taxes,” says Arnold Merkies, a Dutch parliament member from the Socialist Party.
Mr Merkies recently sent questions to the state secretary for finance about the Netherlands’ role in enabling a tax-avoidance strategy used by Google, after it was reported last month that the company had funneled almost $10bn through a Dutch shell company en route to Bermuda in 2011. The move cut the company’s worldwide tax bill by $2bn that year.
"We connect the tax havens here,” Mr Merkies says. "We have a harmful role in the world and have a responsibility toward the rest of the world.”
Profit shifting into tax havens by corporations costs the US $90bn a year, according to Kimberly Clausing, an economics professor at Reed College in Portland, Oregon. The US faces a projected budget deficit of almost $1-trillion in fiscal 2013.
The Paris-based Organisation for Economic Co-operation and Development — which sets standards for how multinational companies allocate taxable income around the world — is also tackling the issue. It is discussing a proposal that could make it harder for companies to move profits through the Netherlands into island tax havens.
Anger over corporate tax avoidance is spreading throughout Europe.
On January 31, the UK parliament is scheduled to hold its second hearing on the issue. At a November hearing, MPs questioned executives from Google and Starbucks about their use of Netherlands subsidiaries to cut taxes.
Yahoo’s offshore operations cut its taxes by $42.8m in 2011, US securities filings show. Last February, the company reported a dispute with the US Internal Revenue Service regarding its overseas arrangements.
It did not disclose the amount at stake.
Yahoo pays all applicable taxes in every jurisdiction, says Sara Gorman, a spokeswoman for the company.
By routing profits through the Netherlands en route to island havens, companies receive an important benefit: they generally do not have to pay taxes on payments leaving or entering the country. Technology and pharmaceutical companies often seek to reduce their tax bills by paying royalties to license patent rights from offshore subsidiaries.
Such transactions could incur a cost: many developed nations impose a withholding tax — sometimes as high as 33% — on royalties leaving for zero-tax locales with which they do not have tax treaties, such as Bermuda and the Cayman Islands. By contrast, the Netherlands does not impose withholding taxes on royalties leaving the country, regardless of their destination.
The Netherlands’ role in facilitating tax avoidance began in force in the late 1970s, when it started what are known as advance-pricing agreements to attract multinational companies, says Francis Weyzig, chairman of Tax Justice Network Europe.
Under such agreements, multinational companies agree to leave a tiny amount of income in the Netherlands to be taxed in exchange for being permitted to route profits through the country. This remainder left for the revenue authorities in the Netherlands is known to tax planners as "the Dutch Turn”.
Yahoo, for instance, has an agreement to pay taxes equal to about 1.35% of the unit’s total revenue, says Mr Dooves, who has run the Yahoo unit since 2007. "The benefit of the Netherlands is that you know all upfront,” Mr Dooves says.
Records show that the Yahoo unit reported Dutch income taxes in 2009 of €1.28m — out of the€101.5m in royalties it funnelled through the subsidiary that year. That is a small price to pay. In return, Yahoo can move profits to virtually any destination without paying a withholding tax.
Tax avoidance has fostered a sizeable industry in the Netherlands of so-called trust firms, generating about €1bn in annual tax revenues and about 3,500 jobs, according to a 2009 study by SEO Economic Research.
Jan Reint de Vos van Steenwijk, MD of TMF Holding says he expects the government to wait until the release in July of a report on the economic effect of the corporate services industry before taking any action.
"The benefits to Holland are employment, high-level tax advisers,” says Jos Peters, tax director for Merlyn Tax Solutions & Royalty Conduit Services in Rotterdam. "They come to us and why should we refuse this? We are not doing anything illegal or immoral.”
Last month, Blackstone Group, the New York-based private equity giant, announced it would buy one of the biggest such firms, Intertrust, for $833m, according to a person with knowledge of the deal.
Merck, the maker of diabetes drug Januvia and asthma treatment Singulair, lists 54 subsidiaries in the Netherlands. From 2002 to 2010 the pharmaceutical company routed more than €7bn in royalties, mostly from European sales, to Bermuda via an Amsterdam subsidiary called Crosswinds.