On 19 April, the European Parliament agreed on a resolution asking for specific EU measures against tax fraud, evasion and avoidance. The resolution, among other issues, stresses that “strengthening the regulation of, and transparency as regards, company registries and registers of trust is a prerequisite for dealing with tax avoidance”. It seems that the Netherlands is an important addressee of this latter concern. What is wrong with the Dutch tax corporate tax environment?

Is the Netherlands a tax haven? When asked, our ministers of Finance always say “ no”: the Netherlands has normal tax rates and no special regimes encouraging international tax planning. But in every overview of the tax planning industry, the Netherlands rank among the top-five jurisdictions. The international capital flows of both European and US-based multinational enterprises are often directed through the Netherlands. The Dutch Central Bank estimates the capital invested in Dutch tax planning vehicles at 2,500 bn Euro. The resolution of the European Parliament is a sign (and not the first one) of growing objections against the Dutch tax climate.

The traditional line of defense is that the Netherlands, as a small open economy, has always aimed at reducing international tax borders, e.g. by exempting foreign income of resident corporations, by having no taxes at source (royalties, interest) or at low rates (dividends), and by maintaining an extensive network of bilateral tax treaties. And indeed, this tax policy has been successful in making the Netherlands a good location for headquarters of large firms. Moreover, it is fully compatible with the aims of the EU treaty freedoms and with much of the European Commission’s involvement in tax policy.

One problem is that many countries do favour the idea of taxing at source. For developing countries, taxes on royalties and dividends are among their cash cows; many OECD Member States rely on these simple taxes as well. The idea that international capital flows should not be discouraged by tax barriers is not generally shared.

But the underlying problem is one of economic substance as compared to legal form. Thousands of Dutch-based corporations perform no significant economic activities, have no premises or staff to speak of, and are basically just conduits for enormous money flows. That is what the EP resolution points at. The Dutch financial industry, as well as the Revenue, capture modest benefits from these paper activities. But clearly, the cost of protecting these benefits against international criticism is increasing.