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Throw that development aid through the letterbox...

Netherlands and tax haven, two words you increasingly hear in the same sentence. In total, 55 of the 100 largest companies established in the Netherlands for tax reasons. The tax evaded by these companies through the Netherlands has many adverse effects on African countries, among others, to which the Netherlands gives development cooperation. To counter this tax evasion, the government has taken some successful measures, at least so they themselves say in a recently published Chamber letter. How effective are these measures really and what are the consequences of the Netherlands being a tax haven?

The Netherlands: a paradise for businesses

According to CBS there were over 37,000 foreign companies with a branch in the Netherlands by 2020. One of the reasons for this that is very obvious is the tax benefits for companies that can be obtained here. With so-called tax havens, people often think of islands like the Bahamas or Bermuda or the place where bankers have kept their money for decades: Switzerland. But the Netherlands is also a lock for companies to pay as little tax as possible between the lines. As a result, the Netherlands was ranked at spot 4 of the Corporate Tax Haven Index, making the Netherlands a tax haven for good reason. One of the best-known examples of this is Shell, whose former headquarters were in the Netherlands and which is still a major employer there. In 2021, the company effectively paid only 7% load on the 2.2 billion profit they had obtained in our country. This is in stark contrast to the nearly 31% effective tax Shell paid on average worldwide.

To combat these forms of tax evasion, the government has taken action with the most obvious measure being the conditional withholding tax which has been in force since 2021. According to some this was just a PR stunt, but the government says the measure is a success, according to the aforementioned parliamentary letter in response to the recommendations of the Committee on Flow-through Companies. In it, the cabinet says that the flow to low-tax countries fell from €39 billion in 2019 to €6 billion in 2021. Despite the fact that this indeed seems to indicate that the withholding tax is effective, this is not the whole story. Indeed, most of this drop is not due to this tax at all, but to Irish and US legislation, argues an investigation From The Dutch Bank.

The negative consequences

Led by top civil servant Bernard ter Haar, the committee on flow-through companies spent six months investigating the activities of letterbox firms in the Netherlands. It concluded that measures to combat this form of tax avoidance, such as withholding taxes, could be much more effective. The countries that lose the most tax money due to the existence of letterbox firms tend to be developing countries. A good example of this is Uganda, where three foreign companies with a Dutch holding company alone lost €257 million in lost tax revenue. Money that the country could have put to good use for important public services.

The government cites the main reason for the tax breaks they give to companies as creating many jobs and generating revenue for the exchequer. However, these benefits are very small and the disadvantages of the lost money in development cooperation are totally disproportionate to this.

In its enquiry, the committee came up with a list of both tax and non-tax solutions. Among others, making it more expensive to hold letterbox firms and setting up an international register so that it is clear who exactly is profiting was recommended. In doing so, the committee also stressed the importance of international cooperation to counter criminal flow-through activities. It is hoped that the government will take these recommendations to heart and actually implement effective policies.

On 18 May this year, the government will release its annual report on policy coherence for development. This will state to what extent the Netherlands' commitment to development cooperation is hampered by its commitment in other areas. All in all, it remains to be seen what this report will contain, but it is clear that there is significant incoherence between Dutch tax policy and development cooperation policy.

Image: Pixaby