The Dutch tax environment for multinational foreign directive investment (FDI) has been characterized as ‘a tax haven’ or, perhaps more accurately, as a ‘conduit financial centre’. Anyway, with a share of up to one third of the worldwide market for tax-driven FDI diversion, the Dutch tax planning industry has become a prominent target of recent OECD and EU anti-avoidance measures. While previous governments took a defensive attitude, the current government wants to do away with letterbox companies, and is developing modifications in many of the relevant Dutch tax rules. This seems to be a radical breach with traditional Dutch policy in the field of international taxation – or is it?

Over the last century, Dutch rules for taxation of cross-border FDI were developed based on a consistent policy view: FDI should not be hindered by tax borders. This served the interests of a small open economy hosting many internationally successful enterprises. A specialized tax planning industry only emerged in the second half of the 20th century as a by-product of this “open borders” policy. The first backlash from treaty partners (and the EU) came in the 1980s – and Dutch policymakers responded by tightening the relevant rules and by agreeing with adaptation of bilateral tax treaties. But from the mid-1990s the promotion of conduit tax facilities became a positive political programme, and adjustments to the next backlash (from the OECD and the EU harmful tax competition initiatives) were cosmetic in nature.

In the meantime, the economic weight of the sector increased. The sum of tax and legal advisors’ fees plus Dutch tax payments added up to 0.5% of GDP in the mid-1980s, and increased to over 3% of GDP in recent years. Political influence grew as well. The phrase “investment tax climate” became almost synonymous with “letterbox facilities” – a sign that the interests of the tax planning sector had successfully been translated into public policy arguments.

It was only after the 2008 financial crisis that problems started to develop. Low tax payments by multinational firms (MNEs) drew public attention, aided by the fact that worldwide FDI data became accessible online. This data (published by the OECD, the IMF and UN institutions) showed that the Netherlands was the number one destination of US investments worldwide – and that the Netherlands was the main destination and/or source of FDI for many EU Member States (including those that were affected by the Euro crisis), and for many developing countries as well.

The G20/OECD initiative to tackle tax base erosion and profit shifting (BEPS) produced important adaptations of international tax rules and norms that have been and will be implemented by many countries (within the EU, the Anti Tax Avoidance Directives are a direct follow-up). While this international tax policy did not proceed by naming and shaming, it is quite clear that three EU Members (the Netherlands, closely followed by Luxembourg and Ireland) are the main “offenders”. The current government is clearly feeling the full heat of international pressure, but it also has to deal with a mix of sectoral interests and entrenched tax policy arguments that resist effective change. On balance, it is still hard to say whether more-than-cosmetic changes are being achieved.

Read our: full paper “How the Netherlands became a Tax Haven for Multinationals” It will be published in the Cambridge Tax Centre series Studies in the History of Tax Law, part VIII.