The Netherlands and the use of tax incentives: Understanding the impact of increased capital mobility
on the policies of wealthy countries
Abstract
This thesis tries to understand how politicians frame the incentive-based competition for FDI and how they understand the trade-offs involved by studying the case of the Netherlands. Politicians continue to feel that investment incentives are effective and useful. A qualitative discourse analysis will show that the understanding and justification of investment incentives is mostly based on the improvement of the investment climate and the creation of employment. Therefore, this thesis contributes to the understanding of investment incentives by different political forces in wealthy and democratic countries, and how they conceptualize competitiveness between mid 2000s and 2017.
Name J.J.W. van den Berg
Student number 1353411
Master MA Global Political Economy University Leiden University
Date 3rd of July 2020
Thesis supervisor Dr. V. Scepanovic Second reader Dr. S.S. Regilme Word count 15,893 (pp. 1-36)
Index
Abstract ... i
Index ... ii
List of Tables & Figures ... iii
List of Abbreviations ... iv
Preface ... v
1. Introduction ... 1
2. Research Design ... 3
Research question and sub-questions ... 3
Case description and justification ... 4
Methodology and sources ... 8
3. Literature Review ... 9
3.1 MNEs, FDI and economic value ... 9
3.2 Politicians perspective: literature on conceptualization of incentives and FDI ... 10
3.3 Why should the Netherlands provide tax incentives? ... 12
3.4 Why should the Netherlands not provide tax incentives? ... 13
3.5 How does the Netherlands provide tax incentives? ... 15
4. Background to the case studies: MNEs in Dutch perspective ... 17
5. Case 1: The Netherlands-US double tax treaty (2002-2020) ... 20
5.1 Incorporation of the anti-abuse clause - Article 24 (4) ... 20
5.1.1 Discourse regarding the incorporation of the anti-abuse clause – Article 24 (4) ... 20
5.2 Motives disabling Article 24 (4) ... 21
5.3 Restoring the old situation (2017) ... 22
5.3.1 Discourse regarding the motion to stop double non-taxation ... 23
5.4 From 5% to 0% tax on dividends (2004) ... 24
5.2.1 Discourse regarding the reduction of dividend tax ... 25
5.5 Analysis ... 26
6. Case 2: The Netherlands and taxation of dividends (2008-2017) ... 27
6.1 What does the proposal entail? ... 27
6.2 Discourse on abolishment of divined tax 2008 ... 28
6.3 Discourse regarding the proposal 15th of November 2017 ... 28
6.4 FOI requests in 2016 and 2018 ... 29
6.5 Memo’s regarding the dividend tax ... 31
6.6 Analysis ... 32
7. Conclusion: discussion of findings ... 33
Bibliography ... 37
Secondary literature ... 37
Overview of political parties in the Netherlands ... 43 Chronological overview of the Dutch governments and relevant officials ... 44 Overview of two parliamentary debates concerning the use of incentives ... 46
List of Tables & Figures
Table 1: Overview of all political parties mentioned in this thesis ... 43 Table 2: Chronological overview of the Dutch governments and relevant officials (2003-2020) ... 44 Table 3: Overview the parliamentary debate concerning tax incentives with MNEs (Debate on the 1st
of June 2017, p. 1-49) ... 46 Table 4: Overview of parties’ arguments against or in favour of abolishment of taxation on dividend (Debate on the 15th of November 2017) ... 48
List of Abbreviations
AEX Amsterdam Exchange Index
AmCham American Chamber of Commerce
CPB Bureau for Economic Policy Analysis
CIT Corporate income tax
CV Limited partnership business entity
EC European Commission
ECB European Central Bank
ECOFIN The Council of Economics and Finance Ministers
EU European Union
EY Ernst & Young
FDI Foreign direct investment
FOI Freedom of Information (request)
FTE Full-time equivalent
GDP Gross domestic product
GPN Global production networks
HQ Headquarter
IRS United States Internal Revenue Service
MNE Multinational enterprise
MNC Multinational corporation
MoF Minister of Finance
NFIA Netherlands Foreign Investment Agency
NOB Netherlands Order of Tax Advisors
OECD Organisation for Economic Co-operation and Development
PM Prime Minister
R&D Research and Development
RQ Research question
SOMO Centre for Research on Multinational Corporations
SMEs Small and medium sized enterprises
SoF State Secretary of Finance
TFEU Treaty on the Functioning of the European Union
TNI Transnational Institute
US United States of America
Preface
This thesis is the final work of my Master Global Political Economy at the University of Leiden. My master provided me with convenient knowledge of macro-economic and political topics. After finishing my subjects, I got accepted for an internship at the economy and trade department of the Embassy of the Netherlands in Switzerland where I was able to expand my knowledge and obtain experience in diplomacy.
One of the key elements of my work was assisting Dutch entrepreneurs and companies regarding the Swiss economy and various markets. This experience further sparked my interest for the interaction between the public sector and business, and in particular conducting business abroad.
In front of you is the thesis The Netherlands and the use of tax incentives: Understanding the impact of increased capital mobility on the policies of wealthy countries. This thesis tries to understand how politicians in the Netherlands understand the need for investment incentives, and what discourse they use to justify it.
I would like to thank Dr. Vera Scepanovic for her outstanding supervision and guidance. Despite the outbreak of the corona virus, she repeatedly provided me with useful feedback.
I wish you lots of reading pleasure.
Joris van den Berg
1.
Introduction
Since the United Kingdom announced its withdrawal from the European Union (EU) there has been a fierce competition between the Dutch and British government for attracting – and retaining in the case of Great Britain and Northern Ireland – multinational corporations (MNEs), and in particular the headquarters of MNEs. According to the Netherlands Foreign Investment Agency (NFIA) and the Dutch Ministry of Economic Affairs and Climate Policy and the Ministry of Foreign Affairs, 372 companies were brought to the Netherlands in 2018 as a result of Brexit, accounting for 9,847 jobs and 2.85 billion euros in investment (Ministry of Economic Affairs and Climate Policy and Ministry of Foreign Affairs, 2019). Additionally, the NFIA has notified that it is currently talking with over 250 foreign companies – predominantly British companies – on setting up operations in the Netherlands. Since the establishment of the Invest in Holland Network in 2015, of which the NFIA is now part of, 1,402 companies have relocated to the Netherlands (Ministry of Economic Affairs and Climate Policy, Ministry of Foreign Affairs, 2019). But it is not only due to Brexit, both developing and developed countries are continuously competing in attracting foreign direct investment (FDI) and MNE activity. National governments apply various ways in which they try to attract FDI and MNEs. One the most common ways to do this by means of investment incentives.
The Dutch government also provided investment incentives over the past 20 years. However, in 2017 criticism arose among different political parties and in the public debate. It was the first time in contemporary Dutch history that the allocations of tax incentives to MNEs received a great deal of attention, eventually two tax incentives got reversed. The economic consensus is that investment incentives are ineffective and do not increase the national welfare of countries. Yet, consecutive governments in the Netherlands seemed to be convinced of the use of investment incentives. Attracting MNEs is already driven by low corporate income tax (CIT) rates which is already applied in the Netherlands. Although, the Dutch government is still allocating supplemental investment incentives. Questions arise how Dutch politicians understand the need for incentives and what discourses they draw on to justify the use of incentives? In addition, why does the Netherlands continue to feel that it needs special investment incentives?
The literature review sets the background on the conceptualization of reasons why countries offer investment incentives. Afterwards a background chapter to the cases studies on the ongoing strategy of the Dutch government in relation to MNEs will be provided. The research question will be answered by a qualitative discourse analysis on two separate cases, as will be explained in the research design. The conclusion will provide a discussion of the findings. The conclusion will show that the discourse of different government formations in the Netherlands can be characterized as “unsubstantiated” and that the understanding and justification for the need of incentives is mostly based
explain the claim unsubstantiated, the justifications provided are very general and are not linked to any specifically perceived need or lack in the Dutch economy. The conclusion will also lay out the discourse of consecutive oppositions, it will show that the opposition has developed a much better understanding of investment incentives over the past 20 years. Nowadays, the attitude of the opposition is more critical towards incentives, the acceptance of the opposition is therefore on a much lower scale.
This thesis will contribute to the understanding of changing paradigms in economic policy in wealthy countries. In general, over the past 20 years awareness among politicians (left and right) about FDI and MNEs has grown. Nowadays, a gradual push back against MNEs, FDI, and finance investment in particular is noticed and consequently investment incentives are being reversed more widely. The conceptualization and understanding the need of FDI and MNEs has changed in comparison to the early 2000s, when favouring policies were considered “no alternative”. Perhaps this conceptualization is no longer credible.
2.
Research Design
Research question and sub-questions
The research question (RQ) proposed in the introduction reads: How do politicians in the Netherlands understand the need for investment incentives and what discourse do they use to justify the incentives? In order to provide a thorough answer to the RQ and to make a comprehensive analysis, two additional concerns will be taken into consideration.
(i) Are there any differences between parties’ discourse about the investment incentives? (ii) Are there any signs of a shift in discourse regarding the use of investment incentives
within parties between the mid 2000s and 2017?
The political system in the Netherlands is highly fragmented and involves a lot of different political parties and government formations.1 Therefore, the first concern reflects on the differences between
different parties regarding their attitude towards MNEs and FDI. Second, the two cases elaborate on two specific affairs in Dutch politics concerning tax incentives for MNEs. As will be explained in description of the cases, in the first case the actual allocation of the tax incentive took place in 2005 but gets reversed in 2017. The second case covers a legislative proposal in 2017 which encompassed a tax incentive for MNEs but was eventually reversed due to political pressure, the second case also has a precedent in 2008. Having these two cases that concern slightly different forms of incentives gives the possibility for synchronous comparison or arguments for their reversal. The cases are similar and different to some extent. In particular, the cases differ in their correlation with foreign relations. The first case brought the Netherlands in dispute with the United States (US) while the second case put the Netherlands at loggerheads with the European Union (EU). Having the possibility of comparing the discussion of both events at two different points in time gives the chance to study it under different party constellations – especially governments vs. opposition – and see if major events that took place in the meantime affected the discourse in any way, e.g. the financial crisis of 2008.
Case description and justification
Below the context of both cases will be briefly explained: 1. The Netherlands-US double tax treaty (2002-2017)
According to a report by the Institute for Taxation and Economic Policy (ITEP), it is estimated that American multinationals have stashed $2.6 trillion away in tax havens abroad; this money does not get taxed and does not flow into the US (ITEP, 2018). In order to repatriate this money Donald Trump has proposed to decrease the tax rate for American MNEs from 35% to 10%. But the question that arises is: where will this money be coming from? Usually countries like Bermuda, Cayman Islands, Switzerland and Singapore are named as tax havens (Frederik, 2017b). However, one country seems to be missing, the Netherlands. According to an investigation by De Correspondent, the Netherlands is the most popular tax haven for American MNEs (Frederik, 2017a). How did the Netherlands become a tax haven for American MNEs? Quite frankly, one simple measure was enough: deleting a single paragraph in the NL-US tax treaty. It is basically a principle of ‘double non-taxation’. For example, when a US MNE sells a product in Europe you would expect its revenue to go to the US. However, a company like Activision Blizzard (videogame producer) has relocated all its intellectual property to the Netherlands in a subsidiary company called ATVI CV, which is based in Rotterdam. The Dutch tax collector recognizes its profit as profit over which tax needs to be payed to the US, while the US federal Revenue Service (IRS) says it owes tax to the Netherlands. As a result, the company pays zero tax over its profit. Frederik (2017a) identifies this is as the duck-rabbit construction; with a reference to the optical illusion.2
In the previous section Trump’s plan to decrease CIT rate was mentioned. But Trump was not the first US president to bring up the issue. Already in April 2009, US president Barack Obama proposed to attack European tax havens, i.e. Ireland and the Netherlands. The CIT rates in Ireland (12.5%) and in the Netherlands (25.5%) were significantly lower than in the US (39.25%). As a result, US MNEs invested in Ireland or the Netherlands and never brought the money back to the US, and thus limited taxes on a lower CIT rate were payed to the Dutch or Irish tax authorities but none to the American IRS. By closing the “loophole”, that is how Obama identified the situation, it was expected that $60 billion would flow back into the US within five years (Ritson, 2009). Important to note is that in 2009 the economic recession was reaching its peak and everything was set into motion within the US to mitigate the economic damage. Nevertheless, due to its historic and strong ties with the US, the Netherlands has always been vulnerable for political pressure from the US. But how did Dutch politicians react to these accusations? In short, Wouter Bos (PvdA), Minister of Finance, and Jan Kees de Jager (CDA), State Secretary of Finance, were not amused and announced they were astonished. In addition, the two 2 The optical illusion is simultaneously a picture of a rabbit and a duck. In the context of the US MNEs in the
officials released a statement in which they classified the statement of Obama as “utterly unjustified”. Moreover, the two officials declared it must had been a misunderstanding because the Netherlands had always been transparent and fair concerning its fiscal climate (Financieel Dagblad, 2009). The following years it became a recurring theme in international politics. In reaction the Dutch parliament passed a motion in 2013 stating that in the future the Dutch government should reject the qualification of “tax haven”, and insisted that this qualification should be omitted in international debates (Tweede Kamer, 2013).
How did such a construction come into existence? The construction labelled by Frederik as the duck-rabbit construction is also referred to as the “check-the- box rule” (Gerth, 2011). The rule dates back to the mid-1990s when increasingly more US corporations were setting up domestic subsidiaries. The IRS had created a box on a tax form that gave companies the option of declaring themselves as partnerships or corporations. Consequently, companies could transfer profits to countries with lower CIT rates – such as the Luxembourg and the Netherlands; the US government had created an essential tool in tax planning. In order to mitigate the negative effects, the IRS tried to impose anti-abuse rules to make sure the profits were subject to taxes. But as Gerth explains, these anti-abuse rules did not apply for payments within companies. And thus, since tax is big business in the Netherlands, tax advisors and MNEs started to exploit the loophole resulting in the channelling of trillions of dollars through the Netherlands (Gerth, 2011).
In 2002 when the US and the Netherlands were negotiating a bilateral tax treaty an ‘anti-abuse clause’ was incorporated. Basically, when a company is trying to avoid taxes, and the Netherlands and the US cannot decide whether it is a duck or rabbit, the company can expect a tax bill from both countries. Nonetheless, one year later another Dutch politician comes into power as Sate Secretary for Finance, called Joop Wijn. In 2005 Wijn wrote a letter to the Financieel Dagblad in which he argued that – while American lobbyists are pressuring him to scrap the anti-abuse clause – it would lead to extreme tax avoidance (Wijn, 2005).Strangely enough, Wijn did the total opposite and deleted the paragraph in the bilateral tax treaty. Consequently it enabled US MNEs to avoid billions of dollars in US tax (Frederik, 2017b). In February 2017 a motion was passed by parliament that by the beginning of 2020 the double non-taxation of US MNEs had to be stopped, and so the construction created by Wijn got reversed.
2. The Netherlands and taxation of dividends (2008-2017)
On the 15th of March 2017 elections were held in the Netherlands, which were followed by the longest government formation in Dutch history. The formation lasted 225 days and included four political parties (VVD, CDA, D66 and ChristenUnie). This long-lasting formation was mainly due to diffuse political origins and beliefs of the four parties, reaching from right-wing to left-wing. Since 1946, government formations in the Netherlands take around 94 days on average. During the negotiations the VVD felt they were being passed on their most important objectives, mainly financial subjects. The VVD – a party traditionally with strong ties with businesses and corporates – felt that large firms were being disadvantaged in the concept deal by the other parties (Janssen, 2018). During the last phase of the negotiations the VVD initiated a package of measures concerning trade and industry. The package consisted of three options: reduction of tax rate on profits, loosening of policy regarding bonuses for bankers, or abolition of taxation on dividends. The other parties condemned all three options but were too anxious to cease the entire formation deal. In reaction CDA, D66 and ChristenUnie gave in to the proposal to abolish the taxation on dividends (Janssen, 2018). The concession made by CDA, D66 and the ChristenUnie pleased the VVD and, with the exception of one last policy issue, there was a coalition agreement. After the 225 days a coalition had been formed. Not knowing what kind of backlash was to be expected after the proposal to abolish of the dividend tax. As a result, the entire opposition pointed fingers at VVD politician and prime minister (PM), Mark Rutte. Despite fierce criticism, Mark Rutte continuously said it would have enormous effects for employment (Van Gemert, 2017). Besides, he kept on denying any linkage with Shell and Unilever and rumours that is was ushered by a lobby group (Janssen, 2018). However, on the 20th of April the Dutch newspaper Trouw published an article in which
it released confidential information concerning certain memos around abolishment of taxation on dividends (Brandsma and Kleinnijenhuis, 2018). Until then, Mark Rutte had always ignored the suspicion of the opposition that the VVD had pressured other parties during the formation. When the opposition got confronted with the related financial numbers, the anger started to rise even more. During previous debates the parliament had indicated that abolishment would lead to a tax deficit of €1,4 billion. In the end the costs turned out to be significantly higher, abolition would mean a deficit of €1,9 billion. When Unilever announced it would not relocate its headquarters to Netherlands, it left the prime minister with no other option than to withdraw the legislative proposal. This case also dates back to 2005 when Joop Wijn lowered the dividend tax tariff from 25% to 15%. Subsequently, in 2008, a majority in the House of Representatives already pleaded for the abolishment of taxation on dividends. However, due to the outbreak of the financial crisis of 2008 a few months later, it was not considered a priority and thus not executed.
In this thesis the discourse in the above defined cases of policies favouring investors and MNEs will be analysed. The main reason is that both cases are clear-cut examples of investment incentives initiated by the Dutch government, and in particular tax incentives. As explained in the description, both cases have roots in the early 2000s but found itself reversed in 2017. By looking at two cases I can trace the arguments for and against the incentives and try to understand the sources of reversal. However, the cases differ in the amount and source of political pressure; the first case was reversed because of a hostility by the European Commission (external) while the second case raised a lot of eyebrows among opposing parties in the Netherlands (internal). In addition, the second case involved extra sources of tension, being the media, which elevated into a large public debate. Another clear difference between the cases is the fact that in the first case the actual allocation of a tax incentive took place while in the second case it did not get any further than a legislative proposal. Third, the cases differ in financial magnitude; the first case was considered greater incentive for MNEs than the second case. The second case was supposedly not as generous as the first case, however, the financial burden for the Netherlands was considered bigger than in the first case. Nonetheless, the cases also share similarities. Both cases contain the use of discretionary practices by different government formations. Moreover, the two cases also relate to some extent and share some overlap, both cases are rooted in the government period of Balkenende II (27th of May 2003 – 7th of July 2006) with an important role for Joop Wijn.3 Both periods,
the mid 2000s and 2017, are generally considered as prosperous times with consistent economic growth. It is therefore that economic hardship could have not been the determining factor for the government to adopt urgent policies to enhance the investment climate. At last, in order to broaden the analysis, a deliberate decision has been made for the incorporation of both cases. These two cases are necessary to compare the discourse about incentives and therefore establish a more justified evaluation of the discourse. For the comparison it is important to note that both cases did not involve a lot of political pressure during the mid 2000s, while 2017 got confronted with a fierce political and public debate. The combination of both is therefore most essential.
Methodology and sources
The literature review provides an outline of academic research on the use of investment incentives by politicians. Furthermore, the literature provides an overview of scholarly conceptualizations of reason for why countries offer incentives to compete for FDI and MNE. This sets the background for the analysis of arguments that are actually put forward by the politicians in the analysis. The literature review and the background chapter incorporate, in addition to the scholarly analyses, an overview of typical arguments put forward in defence of incentives by government papers, consultancy reports and strategy documents.
For the analysis of both cases a qualitative discourse analysis will be used. An examination of the most frequently used arguments by the government and the opposition will be provided for both cases. For the first case, the first analysis covers the period between 2002 until 2005, this section will highlight the arguments in favour of the incentive, followed by the motion of 2017 which will illustrate the line of arguments against the incentives, and thus the source of reversal. For the second case, the first part of the discourse analysis will start in 2008, which will highlight the arguments in favour of abolishment of dividend tax. The next section will elaborate on the debates in 2017, which in turn will both highlight the arguments in favour and against, but most importantly it will reveal the arguments in favour. Nevertheless, it is important to note for the analysis as a whole, for both cases and all period in times, the analysis will be mainly focused on the ‘pro’ arguments because this will help understand how incentives are defended by politicians (government). Furthermore, also the reception among other political parties (opposition) will be considered.
For both cases primarily transcripts from the debates in the House of Representatives will be used. Other primary documents like legislative documents and Freedom of Information (FOI) requests and will be simultaneously discussed to strengthen the analysis. Media reports will provide extra depth and context regarding the public reception of the proposals. The conclusion presents a discussion of the findings and will be focused on the reasoning behind the arguments.
3.
Literature Review
Incentives by governments - financial and fiscal – is a much-debated topic amongst scholars. There is an extensive body of literature covering the multidimensionality of incentives. A distinction must be made between the use of incentives by developed, transition and developing countries. For this thesis it is important to outline the academic the debate regarding the use of incentives by developed countries, and in particular in the Netherlands. The first section elaborates on the economic value of MNEs based on recent findings by the OECD. The second section sheds light on the rationale of governments and politicians, it clarifies the perception of competition for FDI and the desire to stay attractive for investment. The third covers the theoretical benefits and summarizes the arguments in favour of investment incentives. Followed by the next section which outlines the arguments against investment incentives, with a particular focus on the race to the bottom thesis. The following and last three passages cover the EU legal framework and the Dutch approach.
3.1
MNEs, FDI and economic value
MNEs play a major role in the global economy. It is common belief among scholars that MNEs and their associated activities have beneficial effects on economic growth, transferring technology and managerial expertise, and providing capital (Jensen, 2003, p. 1). Nonetheless, MNEs have been subject of fierce discussions in the media, scientific surroundings and amongst policy makers, mostly due to tax avoidance strategies and climate polluting activities. It seems to be a presumption that MNEs dominate national economies and therefore rule the global economy. As a result, governments tend to follow this assumption and consequently align their policies (OECD, 2018, p. 1). Despite the lack of widely available empirical evidence, recently the Organisation for Economic Co-operation and Development (OECD) confirmed that MNEs play a central role in global economy. Furthermore, the impact of MNEs on national economies “cannot be ignored”, MNES contribute in terms of large share in output, Gross domestic product (GDP) and employment (OECD, 2018, p. 7). However, it must be noted that a number of things have to be taken into account with regard to the value of MNEs for national economies and the global economy. First, the evidence pointing at channelling activities and deviating profits worldwide for tax considerations is growing, which makes it harder to determine the import and export results of MNEs. Second, transfers between affiliates and parent companies are recorded inconsistently. Some are marked as trade and therefore included in national GDP data, while some are listed as earnings and therefore not measured in the output of the MNE. Third, more often MNEs work with international contracts with independent partners in setting up their value chain, instead of setting up foreign affiliates. All different forms of governance make it even harder to determine the importance of MNEs (OECD, 2018, pp. 7–8). For example, the second and third remark could potentially imply that MNEs ‘dominate’ the world economy on an even larger scale, their contribution could be underestimated. However, there
is no hard data available for both remarks so no it is not possible to assess these claims accurately, it is mere speculation (OECD, 2018, p. 8). Nevertheless, the OECD questions the effectiveness of incentive policies.
“Virtually all governments are keen to attract MNE investment as these promote growth and employment by creating new jobs, realising new investments and bringing in new technologies. A growing competition between countries (OECD and increasingly emerging countries) for international investments is observed, including the provisions of specific support measures although it is not clear if such policies are (always) effective. The current discussion in a large number of countries of lower corporate taxes is in no small part motivated by the need for economies to stay competitive in attractiveness ranking for international investments.” (OECD, 2018, p. 2)
3.2
Politicians perspective: literature on conceptualization of incentives and FDI
It seems undisputed that political economy plays a major role in the popularity of incentives, incentives are simply issued by politicians. This section covers the literature concerning the conceptualization by politicians. Sebastian James, researcher at the World Bank, argues that governments’ behaviour is not always “driven by economic rationality” (2013, p. 35). Even more so, often in the decision-making regarding investment incentives, political arguments prevail upon economic considerations. James argues that incentives – in general – are popular among politicians for a variety of reasons (2013, p. 35). First, the fact that governments can provide special benefits to specific businesses or industries in a less visible way. Second, governments consider providing incentives an easier approach to improve the investment climate, especially compared to structural improvements like infrastructure or education. Third, with regard to tax incentives, ministries other than the ministry of finance are more likely to give more incentives than necessary because they do not have to bear the burden of the tax collection. Last, governments want to maintain the image that they actively pursue foreign investment. According to James, the easiest way is to renounce non-existent revenue; i.e. revenue that is not initially acquired by the governments (2013, p. 35). According to James, governments continue to feel that incentives – tax and non-tax – are useful and effective. Governments still assert they have to compete in the global competition for FDI. Reflecting on the abovementioned explanation by the OECD, it becomes clear that tax competition among countries is mostly based on the desire to stay attractive for investment.
“Tax incentives are widely prevalent and reflect the desire of governments to support economic growth and provide value for the local economy through jobs, new skills, and technology. Governments also provide tax incentives in order to diversify their economies and support activities they hope will lead to new sources of growth that use the untapped potential of the country. The widespread use of investments incentives indicates that governments continue to feel that these instruments are useful and effective tools.” (James, 2016, p. 172)
Sonal Pandya reviews 20 years of scholarly research on the political economy of FDI. Her research is twofold: (i) public attitudes towards FDI and FDI policies; and (ii) the perspective of MNEs and how politics and policies influence their investment decision (2016, p. 456). With regard to public attitudes, based on robust empirical findings, she finds that MNEs in general pay higher wages than domestic counterparts. In addition, she identifies an increase in level of labour demand and the elasticity of the labour demand. According to Pandya, these two important market effects drive public attitude towards FDI (2016, pp. 458–459). Concerning politics and FDI policies she concludes that over the past 20 years, countries gradually shifted from FDI restrictions to FDI incentives. Since the beginning of the 1990s countries have employed incentives in a more prominent way. However, in line with James and OECD, also Pandya argues that incentives are ineffective and costly. On top of that, incentives are often transferred to MNEs that do not meaningfully influence their locational investment decision. Pandya explains:
“Given the evidence suggestion that incentives do not attract FDI, their persistence is one of the more important puzzles within the political economy of FDI openness.” (2016, p. 458)
Jensen et al. argue that – despite the fact that existing research indicates that tax incentives have a limited ability to affect investment and are considered costly when measured against the amount of jobs created – the perception of competition for FDI can be politically beneficial, in particular for incumbent politicians. Their findings are based on surveys held in the US and tests how voters evaluate the performance of incumbent politicians with regard to inflow of investment (2014, pp. 433–436). Jensen et al. believe that the existing literature ignores two important matters. First, governments are able to provide specific incentives to individual firms. Second, and essential to this thesis, politicians will use incentives not necessarily for economic reasoning, but to “maximize the probability of staying in power” (Jensen et al., 2014, p. 435). It must be noted that Jensen et al. focus on US states because they believe American states are an “excellent laboratory”, nonetheless, their theory is cross-border (Jensen et al., 2014, p. 436). However, this is only the case if the public perceives FDI as a positive influence. They conclude the following:
“Thus, politicians with sincere concern about the welfare of voters and perfect information about the ineffectiveness of incentives may still choose the “bad” policy due to re-election pressures.” (Jensen et al., 2014, p. 435)
Pandya notes that until recently, scholars have not thoroughly explored the political implications of FDI. FDI encompasses a rich variety of market activities, by disaggregating FDI, political economy scholars could more accurately identify what characteristics of FDI exacerbate or reduce risks for policymakers, being changes in political opposition or public attitudes (Pandya, 2016, p. 466). For example, export oriented FDI is more likely to increase job insecurity because employees are exposed to global market volatility. Accordingly, this could potentially lead to political opposition or a change in public attitude towards FDI or MNE activity.
3.3
Why should the Netherlands provide tax incentives?
This section sheds light on theoretical benefits of tax incentives combined with the empirical evidence provided in section 2.1 (MNEs, FDI and economic value). In general, there are many arguments in favour for governments to use investment incentives. Wells et al. (2001, p. viii), researchers of the World Bank, boil the arguments down into two categories. First, they argue that investment incentives increase the flow of new FDI. They explain: “investments will be made that would not be made in the absence of incentives” (2001, p. viii). Second, they argue that governments get caught up in a competition leaving them with two options; either matching the incentive or the prospect of losing the investment to a competing territory (2001, p. viii). In 2013 James made a general cost-benefit analysis regarding the use of tax and non-tax incentives. James (2013, p. v) argues that the possible benefits that arise from incentive policy are: “higher revenue from possibly increased investment; and social benefits – such as jobs, positive externalities, and signalling effects – from this in increased investment.”
Jensen et al. (2014, p. 436) argue that important investment determinants, such as: quality of infrastructure, market size and level of human capital are very complicated to change in a short period of time. Incentives have become a fundamental tool or strategy for short-term economic development, as a result, politicians worldwide are applying incentives. According to Jensen et al. (2014, p. 436), tax incentives in particular have two clear advantages for governments: incentives can be issued for individual investments and a relative short period of time, or “immediately” as Jensen et al. explain. However, the question that arises is whether incentives have significant impact on investment decisions? Back in 2003, Blomström and Kokko (2003, p. 5) already observed the increasing emphasis of incentives among MNEs executives. In the beginning of the 1990s incentives were considered minor determinants for investment decision, the effects were marginal. They argue that the main reason for the emerging importance of investment incentives is globalization, internalization and trade liberalization. Setting up global production networks (GPNs) has never been so easy for MNEs. As a result, global and
regional markets have become integrated and developing and transition economies are also able to participate in the competition for FDI (Blomstrom & Kokko, 2003, p. 6). Developing or transition economies are generally confronted with poor infrastructure or low human capital, i.e. determinants that could hinder investment by MNEs. For these countries, applying investment incentives could be justified because it could attract investment despite barriers (Jensen et al., 2015, p. 334). Moreover, positive spillovers could be an important contribution to current economic development. However, this justification is problematic for developed countries. Yet, Blomström and Kokko (2003, p. 6) argue that due to limitations on active national trade and exchange rate policy in the EU, member states are bound by decisions by the European Central Bank (ECB) and European Commission (EC), incentives have become more frequent and more generous. Consequently, incentives started to play a more important role for MNEs, and thus more generous incentives have a larger impact on investment decisions.
3.4
Why should the Netherlands not provide tax incentives?
In the previous section, Wells et al. boiled the main arguments in favour of general investment incentives down to two categories, so have they done for the arguments against incentives. The first argument is that incentives have limited effect on the total foreign investment worldwide, and thus generate a “net transfer” from taxpayers to investors. Second, the public burden usually exceeds the additional benefits created by the investment that would not have been made without the incentive (Wells et al., 2001, p. viii). Following the potential benefits listed in previous section, James also lays out two important costs. First, the loss of revenue from investment that would have occurred without the incentives. Second, James emphasizes the importance of indirect costs such as administrative and leakage costs and potential economic distortions (James, 2013, p. 35). Tax incentives can lead to increased complexity and the associated administrative compliance among tax administrations and taxpayers, it is therefore likely that indirect administrative and leakage costs will increase. The increased economic distortions are basically loss of efficiency. For example, the allocation of a tax incentive for specific investment is likely to distort the allocation of other financial resources. Moreover, investment in incentivised sectors is more likely to grow while investment in regular sectors is expected to decrease, and thus incentivised sectors and companies could potentially enjoy an artificial competitive advantage. Furthermore, James argues that tax incentives in particular create an unfair tax competition or so-called race to bottom (2013, p. 38). Pandya agrees with Jensen and argues that the previous two decades of research into FDI indicates: (i) that MNEs enjoy stronger legal protections and are receive more generous incentives while fewer regulations are imposed; (ii) and that FDI remains disputed because it is not clear that countries that bear the costs actually receive more investment (Pandya, 2016, p. 466).
According to Nathan Jensen: “the race to the bottom thesis overemphasises the importance of fiscal competition for FDI and downplays the importance of the political factors that affect government policy” (2008, p. 7). The race to the bottom thesis is based on the assumption that MNEs remain mobile in their investment decisions. The thesis underscores the high capital mobility of MNEs, i.e. MNEs are able to search the world for the best locational advantages at any time. However, Jensen argues differently, as soon as an MNE has established any affiliate or an headquarter (HQ) it becomes “illiquid ex post” (2008, p. 6). In addition, Jensen brings in the argument that MNEs search for credibility and political stability, it is these countries - who are able to ensure these requirement – that attract higher levels of FDI. In other words, MNEs are not as mobile and thus investment incentives could be unnecessary. In relation with mobility of MNEs and in in slight contrast to Jensen, Laamanen et al. (2012, pp. 187–189) have analysed relocations of HQs in Europe during 1996 and 2006. According to their study, high tax rates and high unemployment are considered push factors and “increase the likelihood of HQ relocation”. For example, an increase in corporate income tax (CIT) rate of 1% point will increase the likelihood of relocation with 6.8% (Laamanen et al., 2012, p. 188). One of their main contributions to the comprehension of understanding MNEs and their mobility, is that their results confirm that international tax competition certainly exists and a significant impact has in investment decisions by MNEs, in particular HQ relocation decisions (Laamanen et al., 2012, pp. 204–206). The CIT rate is harmonized in the Netherlands and is equal for every enterprise active on Dutch soil. According to the NFIA, the Netherlands has a very favourable fiscal climate. The NFIA explains as follows:
“With a competitive corporate income tax rate in Europe – 16.5% on the first €200,000 and 25% for taxable profits exceeding €200,000 – as well as a number of attractive incentive programs, the Netherlands offers a supportive fiscal climate for international companies. The Netherlands offers a wide tax treaty network, special measures for highly skilled expats and certainty in advance of future tax positions – just a few of the features that help multinational companies thrive in the Netherlands.” (NFIA, 2020, p. 1)
The explanation of the NFIA clarifies the position of the Netherlands, the Netherlands already applies a relatively low CIT rate which enhances its attractiveness.It is therefore that supplemental tax incentives become questionable; is the CIT not sufficient and to what extent are supplemental tax incentives effective in luring MNEs to the Netherlands. Based on the economic consensus with regard to FDI competition, Jensen et al. solve two important “puzzles” related to the phenomenon of tax incentives: first, tax incentives are ineffective in attracting MNEs or a related form of investment to a particular location; and second, the more generous incentives are “economically suboptimal” (2014, p. 435). Economically suboptimal means that every effort should be made to optimise the performance. For
example, if an MNE decides to invest due to a very generous incentive, their quantifiable and qualitive contribution should outweigh the actual incentive.
With regard to the first puzzle mentioned by Jensen et. al, Bobonis and Shatz (2007) argue that tax policies directly aimed at foreign investors have little effect and do not play an important role in the location investment decision. It is important to note that their research was focused on different states across the United States but could have similar implications for the EU. Buettner and Ruf (2007) argue further that, when tax incentives are issued to convince MNEs to influence their location decision, they are generally out of proportion, and thus the costs usually exceed the benefits. Relating to the second puzzle, Kokko and Blomström (2003, pp. 1–3) suggest that the use of investment incentive is not an efficient way to raise national welfare. Their main argument is that positive spillover is not automatic consequence of FDI or MNE activity. National firms will only benefit from FDI if they have the motivation – and perhaps more important – the ability to absorb the technology and skill spillovers. Furthermore, they indicate that when governments choose to maximize these spillovers by incentive policies, it generally turns out to be inefficient. Another frequently used argument, and line with the second puzzle, is employment, or the creation of new jobs, as most politicians like to argue. Jensen et al. (2015, pp. 334–335) demonstrate that governments use “creative accounting” for the number of jobs created. Most of the newly available positions are generally filled by individuals already employed, these positions usually require highly skilled or educated people. In addition, Jensen et al. mention the research of Glaeser (2001) who demonstrates that the amount of jobs created relative to the number of dollars spent are most of the time out of balance. It provides clear evidence that incentives are generally considered excessive. Moreover, hardly any government takes into account the “counterfactual and the multiplier”. This entails, that (i) usually governments do not consider the amount of jobs created without the incentive program; and (ii) governments do not determine the amount of jobs created indirectly because of the incentive program.
3.5
How does the Netherlands provide tax incentives?
“The Netherlands want you to know that it is not a tax haven. But Menno Snel, the country’s No. 2 finance official, grudgingly acknowledges that the Dutch have become experts at something else: aggressive tax planning.” (Ewing, 2018)
Jack Ewing, journalist at the New York Times, labels the Netherlands as an affluent member of the eurozone which offers a respectable court system, a comprehensive network of tax treaties and lack of corruption. It is therefore, due to these business friendly policies, that the Netherlands receives more FDI than other EU member states such as Germany and France. In short, Ewing concludes that tax is big business in the Netherlands and that – despite political promises by almost all political parties in the
Netherlands to change the system and get rid of discretion – not much will change in the near future. MNEs have vigorous power in the Netherlands and their lobby strategy will possibly weaken any effort for change (Ewing, 2018). Allegedly the Dutch government has a reputation for close cooperation with MNEs and maintains discretion regarding this cooperation, which in turn has led to public anger the past years (Ewing, 2018). But how are tax incentives provided in similar countries, like other OECD countries and other EU member states? According to James (2016, pp. 168–170) the manner in which tax incentives are provided varies greatly across the world. However, James argues that one practice is common in all regions worldwide: “the use of discretionary measures”. In his research, 33 OECD countries were surveyed, and at least one third apply some sort of discretion during the provision of tax incentives. James argues that one would think that OECD countries not use discretion and “prefer a rule based system” that would be transparent (James, 2016, p. 169). Yet, as the two case studies used in this thesis will illustrate and as demonstrated by Ewing, the Netherlands still uses some sort of discretion.
The EU legal framework of State aid covers fiscal incentives, however, not all tax incentives fall within the framework. According, to Gugler the European Commission (EC) Treaty is not sufficient to tackle all manifestations of unfair tax competition.4 Especially because all member states apply their
own fiscal policy (fiscal sovereignty). Furthermore, the measure adopted by a member state needs to be specific in terms of offering preferential treatment only to enterprises in a certain region or sector (Gugler, 2016, pp. 94–118). All aspects considered, discussing tax issues with MNEs is very common within the EU. “There are no legally enforceable means to deter other member states from offering tax privileges other than the state aid provisions of the EC-Treaty” (Gugler, 2016, p. 108). As a result, it is very common within the EU that countries negotiate with MNEs and offer tax incentives, to offer the best locational advantages.
4 The EC Treaty refers to the Treaty of Lisbon (TFEU) which entered into force on 1st of December 2009. EU
member States’ incentive policies are governed by the EU’s law and policy on State Aid, part of the TFEU. This regulatory framework on State Aid consists of a package of treaty provisions, guidelines and communications. Nevertheless, the core of the governance regarding incentive policies is Articles 107, 108 and 109 of the TFEU
4.
Background to the case studies: MNEs in Dutch perspective
This section covers the Dutch strategy, also in historic perspective, towards attracting MNEs, and in particular HQs, and the use of incentives. It seems puzzling why the Netherlands continues to feel the need to provide incentives in order to compete for MNEs (HQs) and improve its business environment; this while a significant number of HQs are already based in the Netherlands and its business environment is already assessed as rather strong. Furthermore, it will give some background information about the NFIA. According to Arjen Slangen, professor of international business at the University of Leuven, little fundamental research has been done into what relocations of HQs mean for a country in terms of employment and added value (Hekking & Couwenberg, 2017). Most of the research that shows the importance of HQs for the Netherlands has been conducted by private consultancy firms, like The Boston Consultancy Group (Gostelie et al).5 In 2011 the Dutch Ministry of Economic Affairs andClimate Policy and the Ministry of Finance put together a so-called Topteam Headquarters, they concluded the following:
“Headquarters are very important to the economy: high quality positions at international- and European headquarters have great economic and strategic value for the Dutch economy and competitiveness.” (Topteam Hoofdkantoren, 2011, p. 3)
Despite the lack of evidence into positive effects of HQ locations, this competition exists. In previous section the research into HQ relocations in Europe between 1996 and 2006 of Laamanen (2012) et al. was mentioned. They confirmed that CIT rate and unemployment are considered push factors and significantly increase the likelihood of HQ relocation. In short, there is international competition for HQs, even though academic evidence into the positive effects is inadequate and the issue is somewhat understudied. In order to grasp the reasoning of the Dutch government and conceptualization of incentive-based competition, the positive effects noted in earlier mentioned reports initiated by the Dutch government will be outlined.
According to the Ministry of Economic Affairs and Climate Policy, a great deal of research has been done into the economic value of MNE presence in the Netherlands. The research unanimously indicates the great importance of MNEs, this is due to the direct effects – but maybe even more important – the strategic value for the Netherlands (Topteam Hoofdkantoren, 2011, p. 3) In 2009, the Rotterdam School of Management at the Erasmus University published its report regarding the strategic value of the top 100 MNEs in the Netherlands. The authors (Dr. Baaij et al., 2009) explained the strategic value according to the Diamond model of Porter, they defined the strategic value as twofold; the quantifiable
5 Examples of those reports are: Hoofdkantoren een hoofdzaak – Tijd voor industriepolitiek nieuwe stijl (2008),
contribution and the qualitative analysis. One of the most important quantifiable contributions was the creation of employment, the top 100 MNEs created direct 29,000 FTE and indirect 62,000 FTE (Topteam Hoofdkantoren, 2011, p. 7). In addition, they determined that MNEs in the Netherlands: submitted 70% of the patents, spent €1 billion on R&D and they dominated the Amsterdam Exchange Index (AEX) with 80% (Topteam Hoofdkantoren, 2011, p. 7). Nonetheless, the authors discovered that these contributions only formed “the tip of the iceberg”, as formulated in the theory by Porter. The Diamond model of Porter derives from Porters’ work Competitive Advantage of Nations. According to Grant (1991, pp. 535–536), nowadays it is still an important book that bridges the gap between international economics and strategic management. The “invisible part of the iceberg” was a more decisive contributor to the strategic value, this is explained by means of four points (Topteam Hoofdkantoren, 2011, pp. 9–10):
1. MNEs create breeding ground for talent in higher education; 2. MNEs are important catalysts for Dutch clusters;
3. MNEs play a key role in the transfer of knowledge and in the strengthening society;
4. MNEs are a driving force for SMEs, education and government (with regard to international competitive laws and regulations).
It may be clear that the Dutch government is convinced of the economic value of MNEs, and in particular of its HQs. Although, even more interesting is the Dutch perspective on its current investment climate and its thoughts about additional measures that needed to be taken to attract these MNEs. In general, the Dutch investment climate was being assessed as relatively good and possessed some attractive features: its geographic position, good infrastructure, excellent telecommunication infrastructure, a well-known business environment and a culture of doing business, a well-educated labour force, high value clusters (chemistry, water, creative industry and financial services) and an enjoyable living environment. On top of that, the authors mentioned the Dutch tax system as a renowned quality of the investment climate (Topteam Hoofdkantoren, 2011, p. 14). However, the tax system is also subject to criticism and was calling for a change, according to the authors. They assumed, in order to increase the competitiveness of the Netherlands, certain technical changes to the tax system needed to be made. Among the list of suggestions was the abolition of dividend tax (Topteam Hoofdkantoren, 2011, p. 15). This highlights the role of the tax incentives that will be discussed in following two cases. According to the Topteam, the Netherlands did not need to make single deals with investors, however, the focus was supposed to be on reforms to the general tax code, which in turn illustrates the perception of the government. Nonetheless, general tax reforms are considered more expensive or at least more controversial with the general public. It seems that single discretionary deals with investors or MNEs were out of scope.
In this thesis, in particular the first case, the NFIA is regularly mentioned, it is therefore that some background information about this organization will be provided. The NFIA is part of the Invest in Holland network, this a collaboration between the NFIA, regional economic development agencies and cities in the Netherlands (Invest in Holland, 2020). The NFIA itself already exists for more than 40 years, established 1978. The NFIA’s core task is to promote the Netherlands as a business location and guide interested foreign companies in finding the right location for direct investment. According to the NFIA, it has supported more than 4,000 companies based in 50 countries, to expand their business or to set foot in the Netherlands (Invest in Holland, 2020). On behalf of the Ministry of Economic Affairs and Climate Policy, on 4th of March 2020, a report about the functioning of the NFIA between 2010 and
2018 has been published by seven independent researchers (Meijaard et al., 2020). The researchers conclude that the services of the NFIA significantly lead to more investment in the Netherlands (Meijaard et al., 2020, 70). Furthermore, 25% of the surveyed companies told the researchers that their decision to invest in the Netherlands was mostly based on the efforts by the NFIA Meijaard et al., 2020, 71).
5.
Case 1: The Netherlands-US double tax treaty (2002-2020)
5.1
Incorporation of the anti-abuse clause - Article 24 (4)
In 2002 bilateral tax treaty negotiations took place between the Netherlands and the US, the purpose was to amend the Convention of 1994 (Amending the Convention between The United States of America and The Kingdom of The Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, 2004). In 2002, Wouter Bos (PvdA) was State Secretary of Finance, Bos urged for the incorporation of an anti-abuse provision in the Convention (Frederik, 2017a, p. 7). Two years later in 2004, the next State Secretary, Joop Wijn (CDA), explains the adoption of the anti-abuse clause in an explanatory memorandum for the House of Representatives (Tweede Kamer, 2004a, pp. 3-5). According to Wijn, during the negotiations the US made it clear that the Netherlands was considered an “inversion country”. This basically means that US based MNEs emigrated their holdings to the Netherlands, while most of their property, ownership and daily management was still based in the US; while the nature of their activities and location remained virtually intact (Tweede Kamer, 2004a, pp. 4). The MNEs concerned were able to pay a much lower CIT rate without the anti-abuse clause, being the Dutch CIT rate. Therefore, the US based MNEs did not pay US CIT over their activities fictionally registered in the Netherlands. It seems that the anti-abuse clause was an important topic for the US during the negotiations in which the Netherlands complied with their demand.
5.1.1 Discourse regarding the incorporation of the anti-abuse clause – Article 24 (4)
Wijn elaborates around the topic of the anti-abuse in the explanatory memorandum for the House of Representatives. The anti-abuse clause, also referred to as the “actual presence test” by the Dutch government and is based on two criteria, the location of its share trading and the location of its most important office, being the location of its daily management (Tweede Kamer, 2004a, pp. 10-11). The first component was much cheered on by the US because it made it much easier to identify US companies that benefited because of inversion. The second criterium is essential to properly assess the actual location of a company. Increasingly more MNEs were setting up subsidiaries in the Netherlands and trading its shares in the Netherlands while their daily management was still based in the US. These two criteria were essential to determine the principle place of management and leadership. Over the years more and more MNEs established subsidiaries in the Netherlands whose shares were exclusively listed on recognised stock exchange in the US. The Dutch government identified the new anti-abuse clause including its two criteria as “custom-made” and it was supposed to be an effective tool to prevent abuse of tax advantages. Moreover, Wijn stated that by voting in favour of this anti-abuse clause, the Netherlands was clearly expressing its desire to continue to be committed to the interests of “real” Dutch companies (Tweede Kamer, 2004a p. 11). With “real” Dutch companies, Wijn was trying to stress that
the Dutch government was focussing on Dutch companies instead of foreign companies. This seems to be a political argument for the public because Dutch companies were not disadvantaged due to favourable regimes for US MNEs. In addition, Wijn also stated it also clearly showed that cases of abuse and wrongful use of tax treaties could not count on Dutch sympathy and that the Netherlands was prepared to incorporate adequate measures in bilateral tax treaties to prevent such abuse and improper use (Tweede Kamer, 2004a, pp. 9-11). Yet, Wijn also states something that is perhaps even more important:
“By once again signalling by means of this protocol, that the Netherlands is prepared to cooperate in measures against abuse, and the fiscal image of the Netherlands abroad, which has been somewhat damaged over the past decade, will be improved” (Tweede Kamer, 2004a, p. 11)
The reactions in the Houses of Representatives can be described as rather positive and constructive. During a debate on the 3rd of May the members of the factions CDA, LPF, PvdA and VVD declare that
they have noted the entry of force of the Protocol for avoidance of double taxation and tax evasion with great satisfaction. Furthermore, they state that for the importance of mutual economic relations and in the view of mutual investment, these members were pleased to contribute to rapid parliamentary approval (Tweede Kamer, 2005a, pp. 2-3). However, it is important to note that the politicians thought the matter was rather complex. It is therefore that members of the LPF and CDA had asked a group of tax advisors to write a commentary (van der Linden & Bevaart, 2004). The authors of the commentary made a critical observation about the fact that the Protocol is treated as a “hamerstuk” and did not receive any attention during a parliamentary debate, while the implications were substantial (van der Linden & Bevaart, 2004, p. 1).6The months after, an exchange of letters between the political parties
and Wijn took place in which technical issues and legal matters were discussed (Tweede Kamer, 2005b; Tweede Kamer, 2005c).
5.2
Motives disabling Article 24 (4)
As previously mentioned, Wijn decides to disable article 24 (4) of the bilateral tax treaty between the US and the Netherlands. The disablement of the article entered into force on the 1st of January 2006,
this while Wijn was still answering questions about the Protocol up to the 1st of September 2005. The
Dutch government released a statement in which it provided the legal reasoning for disabling the article (Ministerie van Binnenlandse Zaken, 2005). Strangely enough, not a single debate occurred in the House of Representatives, neither the media reported about it. In the governmental statement, Wijn declared
that it appeared that this new article may have had a detrimental effect on companies that had shaped their interests in Dutch subsidiaries. Wijn explains his reasoning as follows:
“Because the income of such a hybrid entity is not taxed by the United States, the Netherlands - having regard to Article 24(4) of the Convention - is not required to grant any relief from dividend withholding tax on dividends paid to such an entity. I consider such an effect undesirable in certain cases. By means of this decision I approve that under the following conditions with respect to hybrid entities (which for Dutch tax purposes are considered transparent and for US purposes non-transparent) which have interests in an entity establish in the Netherlands, the application of Article 24, paragraph 4, of the Convention may be omitted, provided that entity carries out actual activities in or through the Netherlands.” (Ministerie van Binnenlandse Zaken, 2005, pp.1-2)
The explanation by Wijn is rather complex and involves a lot of legal jargon, his reasoning needs a bit of clarification. The hybrid entities Wijn talks about are also referred to as “commanditaire vennootschap” (CV) in Dutch, roughly translated a limited partnership business entity. This is legal entity form is only used in Germany, Belgium, Austria and the Netherlands. In the amendment of the bilateral tax treaty it was agreed upon that the Dutch tax authorities would tax these CVs while they are actually considered transparent, i.e. transparency means that they are not ought to be taxed. These CVs are designed to be transparent and consist of solely partners and no employees. The fact that they were taxed since the beginning of 2005 was considered detrimental according to Wijn. Again, until 2017, no response to this decision is recorded by the EU or a Dutch political party. According to Frederik (2017a, p. 9) the only response recorded was one by the US Treasury Department in 2005. The US Treasury Department told the Wijn it would not fight his decision, but Dutch companies should not expect a similar treatment in the US. In addition, Frederik (2017a, p. 3) concludes that – until the FOI request revealed the implications of Wijn’s decision – not a single discussion around the matter of the disablement of Article 24 occurred.
5.3
Restoring the old situation (2017)
In February 2017 a motion was passed that by the beginning of 2020 the double non-taxation of US MNES had to be stopped (Tweede Kamer, 2017a). The motion was submitted by four parties: SP, D66, GroenLinks and ChristenUnie. The motion arose from a proposition by the European Commission to stop the duck-rabbit construction by the beginning of 2019, it did not have a binding force because it was a Directive (Tweede Kamer, 2017a; European Commission, 2016).7 In first instance the Dutch
7 For further information on the EC Directive on hybrid mismatches with third countries of 2016, or see
<https://ec.europa.eu/taxation_customs/business/company-tax/anti-tax-avoidance-package/anti-government did not want to agree on this and initiated a start date of 2024. Eventually a compromise was reached to stop the construction by the beginning of 2020. The awareness and knowledge among different political parties had finally reached a new critical point, however, in the end US MNEs were able to use the construction for fifteen consecutive years.
5.3.1 Discourse regarding the motion to stop double non-taxation
On the 1st of June 2017 a large parliamentary debate took place regarding tax policy for MNEs. This
marked the beginning of fierce political opposition against tax incentives for MNEs in the Netherlands. For a better understanding of the conceptualization of the tax-incentive based competition among the different political parties in the Netherlands in 2017, an overview of the debate on the 1st of June is
provided in the appendix. Important to take into account for the analysis of the debate is that the day before the debate, the Dutch newspaper NRC Handelsblad, published an alarming article. The article revealed that the Dutch government had financially contributed to the invoices of tax consultancy firms that had assisted MNEs in the negotiations with the tax authorities about the tax burden, also referred to as a “ruling”. A ruling is custom made tax agreement with a government. According to the NRC Handelsblad, the NFIA had offered several MNEs to pay along the invoices KPMG fiscal advisors, this offer entailed to pay 50% of the invoices. According to NRC, eleven companies had made use of this offer in the period between 2012 and 2017 (Rengers, 2017).
As mentioned before, the appendix provides a complete overview of all arguments by the opposition. Nevertheless, the overall opinion was that the government was only focused on the Dutch investment climate and Wijn’s action was considered illegal. After the contribution of each party it was time for the contribution of the State Secretary for Finance, Eric Wiebes (VVD). Wiebes immediately reflects on the common ground among all the parties: all parties emphasised the moral of paying taxes, also MNEs should pay its fair share. Afterwards Wiebes shifted to the aspect of discretion. He admitted that discretionary practices like rulings should be omitted in the future, tax avoidance by MNEs should not be an aspect of the attractive investment climate. Wiebes also admitted that tax avoidance was part of the investment climate during the time of Wijn’s decision back in 2005 (Tweede Kamer, 2017b, pp. 18-32). Wiebes also reflected on the motives of Wijn to disable article 24 (4), according to Wiebes several US MNEs were intending to leave the Netherlands. Wijn made his decision due to this potential threat. Finally, Wiebes asks himself the question whether the Dutch government would act in a similar way nowadays. His answer is a resounding no (Tweede Kamer, 2017b, p. 33). Subsequently, the minister for Economic Affairs Henk Kamp (VVD) took the stand and introduced some important numbers and specifications that underpinned the motives of the Dutch government to participate in the global competition for FDI. According to Kamp, the aforementioned NFIA, is not there to lure tax avoidance to the Netherlands. In fact, its mission is to convince MNEs to come the Netherlands to conduct international business. These business represent a substantial share of the Dutch economy and the
