Tax Havens: Are the Netherlands a Tax Haven?

Introduction

In recent years many countries and organizations introduced an aggressive campaign against tax havens. The main cause of these campaigns was the financial crisis that hit the entire world. While tax havens are not the main cause of the financial crisis, many countries have the opinion that tax havens have a great share in the global financial crisis. Therefore, the G20 put the spotlight on tax havens at their convention in London in 2009.

Furthermore, the Organization for Economic Cooperation and Development (OECD) published in 2000 a list of 35 jurisdictions which could be seen as a tax haven. These jurisdictions did not fulfil the criteria of a tax haven the OECD defined in the report ‘’ Overview of the OECD’s work on countering international tax evasion”.

This is the main problem with tax havens: There is no clear definition of a ‘’tax haven’’. It will lead to the confusion that some countries will be seen as a tax haven, based on their different tax treatment of certain income components, while other countries do not conclude that the tax-haven-criteria are met.

In this paper I will try to give a broad definition of a tax haven and this will be combined with the question whether the Netherlands can be seen as a tax haven or not.

In the first part of this paper I will give an overview of the possible characteristics of a tax haven, based on the definitions which already exist on this topic. In the second part, I will give a description of the actions many countries and the OECD took to crackdown the tax havens and whether they succeeded in their attempts. I will end this part with describing whether tax havens are as bad as everyone think they are. In the third part, I will examine whether the Netherlands can be seen as a tax haven: why do certain countries see the Netherlands as a tax haven and what is the opinion of the Dutch government on this issue. I will finish this paper with some conclusions concerning the topics I will present in this paper.

What is a tax haven?

There is one clear thing we know for sure about tax havens: There is no such thing as a standard ’tax haven’. There should be a distinction between a ‘pure’ tax haven and an ‘impure’ tax haven.

A ‘pure’ tax haven is a tax haven which is very often described in several reports. In the report of 1998 (Harmful Tax Competition: an Emerging Global Issue), the OECD defined some characteristics of a (pure) tax haven. In this article the OECD concluded that tax competition has many positive effects, but the tax policies of certain countries can have a negative external effect on other countries.

The definition of the OECD consist of 4 characteristics to indentify a tax haven. The first one is that there are no or low nominal taxes. This means that a regime might be harmful when the effective tax rate is zero or the effective tax rate is much lower than the statutory rate. Secondly, the lack of exchange of information is an important characteristic in identifying a tax haven. The OECD includes under this criteria that certain countries are unable or unwilling to give financial information and that there is no or small access to bank information. Furthermore, when there is no transparency, the tax authorities of other countries cannot control whether the effective tax rate in a country is too low. A country is also non-transparent when taxpayers have certain tax advantages which are not available in other countries. The last criteria is that there are no substantial activities in that country. This criteria is included to avoid that countries attract investments that are purely tax driven (the so called brass plate companies).

Next to the definition of the OECD, other authors, like Dharmapala, Hines and Mitchell, give their opinion on what a tax haven is.

Dharmapala and Hines (2008) found several characteristics of a (pure) tax haven. First, they conclude that a tax haven is small of size and usually an island. Furthermore, countries which have a better-governed system, are more likely to become a tax haven than countries which do not have a well governed system. Furthermore, the GDP per capita of a tax haven is much higher than the GDP of a non tax havens (table 1).

Mitchell (2009) described the general criteria of a tax haven: ‘’ the tax-haven policies are designed to attract global capital and are only available to foreigners’’.

Secondly, we have the so called ‘impure’ tax havens. An ‘impure’ tax haven does not fulfil the criteria of an offshore country with only ‘brass plate’-companies. It consist of countries with a diversified economy and an industrial base, which have a normal tax system, but has some specific lucrative options for certain activities or types of corporation. Another characteristic of an ‘impure’ tax haven is that is has several well-educated tax lawyers and accountants who assist many companies with their tax planning [1] .

Tax haven: A negative or a positive phenomenon?

4.1 Negative effects of tax havens

4.2 Positive effects of tax havens

In most of the reports, economist and politicians are negative about tax havens. However, tax havens also have positive effects on the economic environment of a country and the surrounding countries.

Mitchell (2009) concluded that the low tax rate in tax havens can lead to a decrease of the tax rates in high-tax nations. High-tax nations want to compete with the low-tax nations, because they know that their citizens have an escape-option by moving to countries with lower tax rates.

Mitchell also points out that tax havens are better governed than non tax haven, because investors do not want to invest their money in a poor governed country due to the high risk they will bear.

In addition to this, in tax havens there are usually high living standards. According to the World Data Bank, 70 percent of the most richest countries in the world are tax havens. Furthermore, several researchers concluded that tax havens tend to grow faster and will create more welfare for their citizens than high-tax countries.

As a last point, tax havens will promote economical activity in high-tax countries. Citizens of high-tax countries will invest their money in the high-tax nation trough the tax haven, because their exist more tax favourable rules for inbound investments in many high-tax countries, than for their own citizens’ economical activities [2] .