The following contribution was posted on the website of the Dutch Ministry of Finance in Dutch on 4 August 2004. Due to the limited space available for contributions, not all our comments are included and those that are, are not worked out in detail - Dutchtax.net.
See also my contribution on the discussion regarding territoriality here below
Short introduction. I am not a scientist and this is no scientific piece of writing. I have been active as international tax professional for 15 years and have spent 5 years in London and New York. I find what to the corporate income tax and the Dutch investment climate since 1997 terrible and have every fear for the future if we continue like this until 2007. This is my attempt to make a constructive contribution about how we can do things differently.
A robust, generally accepted, corporate income tax requires the right basic principles which should be applied consistently. I suggest the following.
It is not bad to pay 35% corporate income tax once over real profits, but once is enough. This is a generally accepted principle (see participation exemption, art. 239 EC Treaty, tax treaties). The articles 10'1d, 10a, 10b, 10d, the forthcoming 13'1 for acquisition expenses and many others (following the motto "8 year deferral is annulment" I also add 14a'8, 14b'6 and 15ad) all limit the deduction of interest, by which the legislator consciously opts for double taxation corporate income tax purposes. The same abuse can be fought with the same rules, through taxation at the source on interest in these specific cases. Then the creditors might possibly still avoid double taxation through rules for prevention of double collection in the resident state (except for taxhavens, but they do not need such rules). The fact that the Netherlands signed away its right to taxation at the source in many treaties (and under the Interest and Royalty Directive), is no reason for double taxation.
Finally, a generous credit system (if necessary only for interests of 5 per cent or more) for those cases where the participation exemption does not apply would make us look good. Generous means among others indirect credits for all underlying income taxes as long as the indirect interest is 5 per cent or more. This is not a government favour, this is simply the prevention of double taxation.
I will respond to the differences between (foreign) subsidiaries/permanent establishment and interest/dividend under the forum contributions of messrs. Van Weeghel, Bellingwout and Van der Lande.
Investors like to know what the future holds. Since 1997 not one year has gone by in which the participation exemption was not changed/limited further. This, together with legislation that regularly enters into force with retroactive effect (for instance proposed law number 29.381) create little consistency. If I must set up a (somewhat) durable holding company structure in Europe, how does the Netherlands compare with for instance Luxembourg and Switzerland for the period 1997 - 2004?
I understand that changes are sometimes necessary, but we should not make it worse than it is. I understand that people at the Ministry of Finance sometimes place the costs of tax facilities next to the financial holes to be filled. For example, 13d costs x million per year; we need x + 3 million, shall we abolish 13d? OR a tax windfall, whom we can pleasure with this and with which specific measure? I would rather have a tax rate of 34.5% in 2004 and a rate of 35.173% in 2005. That makes the legislation durable, saves the Ministry of Finance much work and entrepreneurs much restructuring.
Enough has already been said about this (also by the State Secretary in February). I only note that the argument that only tax professionals read the law can not be a justification for legal uncertainty. Which counsellor dares to give a clean opinion on articles 10'1d, 10a or 25'2? Not even we understand it.
Show that the interests of the taxpayer are cared for in the corporate income tax and the investment climate will improve. Furthermore use the hardship clause often and generously to prevent double taxation and the positive publicity will result in more tax revenue than the expenses of the individual claims that we let go.
In February 2004 at the announcement of the tax plan 2007 the State Secretary said that we are "still among the leaders". Unfortunately is that not, or not totally, true. Fact is, we are terribly behind:
Many companies have already left the Netherlands and another large exodus is probably still coming, driven by the lapse of the rulings from the old ruling practice on 31 December 2005. Does the Ministry of Finance know how many jobs were sustained by these companies (trust companies, accountants, tax consultants, tax inspectors and government auditor s, notaries, lawyers (for prospectusses) and employees of the Dutch Central Bank, are the most obvious groups) or has the Ministery of Finance ever calculated the tax revenue these companies generated (wage tax and social security contributions of afore-mentioned employees, corporate income tax and capital duty of the companies themselves, corporate income tax of their service providers, VAT - often without refund - on all services and then the dividend tax on the billions of dividends paid out). I estimate that in 1997 we still had a few thousand jobs in this industry and that this industry generated more more than a billion in tax revenue per year; I would be happy to let myself be convinced otherwise through substantiated calculations. It sounds very well to say that we only want "real investments" (whatever that might mean in a service economy); but then also dare to say: "the billions of tax revenue and the thousands of jobs are irrelevant to us".
Finally, has there ever been a study into the ripple effects from "unreal" investments. This is important, because if I as a multinational have through blood sweat and tears (that is the way it goes in practice) found an accountant, a lawyer, a trust company, a bank, etc. in Luxembourg and if my largest problem is substance, why will I bring my "real" activities to the Netherlands?
These days you hear consultants say, "we do not rule anything anymore, or hardly do. You cannot put your cliënt through that misery. We simply give an opinion." Congratulations. It sounds tough, but why will I rely on an opinion of a counsellor when I can get a better tax deal and a ruling within 2 to 6 weeks elsewhere?
Instead of judging tax inspectors on their obedience to the special knowledge groups and the Ministry of Finance, they should be rewarded for being commercial. It is necessary that tax inspectors are commercial and that they have the space and the encouragement to do everything they legally can do, to attract real and "unreal" activities to the Netherlands. To cause such an about turns every tax inspector should get a bonus of 5,000 Euros for every new investor and every new activity (of existing investors) that they bring to the Netherlands, as far as I am concerned. Foreign investments and tax revenues will increase drasticly.
Even if we get almost no corporate income tax from a company (think of a typical intermediate holding company), this still resulst in a lot of VAT, dividend tax, wage tax and social security contributions (see here before under 2).
I find that the Ministry of Finance should make a clear choice. I know that "we levy what we levy according to our own rules and that is it" is far better for the investment climate than "if it is not levied elsewhere, then we will do it". Even worse is "we do it, but we do not say so". Foreign law and measures and a foreign tax policy is not covered by article 104 of the Constitution (article 104 of the Dutch constitution states that tax will only be levied by law). Take the U.S. (here again) as example, where saving foreign tax is seen as a business reason for a transaction. The difference between exemption and credit systems can not explain the difference between levying tax on behalf of another or not.
We hear much about good faith towards treaties partners. That is fine, but you should also not treat them like imbiciles either. They can fend for themselves. Example: conduit financing and conduit royalties. The exchange of information between authorities is fine. However, the source state determines who is the beneficial owner and the Netherlands therefore does not have to attack conduit structures. It may well be that the source country is very comfortable with its industry borrowing cheaply abroad via the Netherlands (it increases the local profit) and that it uses its source tax for totally different affairs. Good faith demands an actual resident in the Netherlands under art. 4 of the General Tax Act and a free exchange of information between authorities; nothing more; certainly no minimum equity requirement.
Finally is it important to accurately determine whether no tax is levied elsewhere. An example: If the ultimate shareholder of a Dutch company is resident in a credit land, there is a good chance that any tax that the Netherlands levy on behalf of another country only leads to double taxation, since the country of the ultimate shareholder will probably not allow a credit for the Dutch tax levied.
I once read that when Amsterdam was still just a small little village and Utrecht a large rich trade center, Amsterdam ultimate outpaced Utrecht financially, because the bishop of Utrecht greedely levied too much toll from the the Hanseatic Leagues and that these leagues slowly but surely more and more often chose for the somewhat further, smaller, but especially much more commercial village on banks of the river Y. Let the Dutch trade spirit, for which we are historically known, become resident at the tax inspectorate, the special knowledge groups and the Ministry of Finance.
In addition to the above, we have also reacted to arguments under two other topics, pleading for a change to a territorial tax system. Our comments were:
I strongly doubt whether the implementation of a territorial system would modernise and simplify the corporate income tax, for the following reasons.
I believe that a territorial system is actually not EU compliant (I know that "EU proof" is the general term used, however I do not think that Europe is the enemy and I will keep using "EU compliant").
Many countries outside Europe are actually going the other way. Traditionally many South American countries and old British colonies often had territorial tax systems. During the past years an increasing number of these countries changed to a worldwide system. It seems helpful to me that we know why these countries changed, before we embrace that which they have actually abandoned.
Finally, I refer to discussions in the US about a territorial system in order to fulfill WTO requirements. Although it initially looked as if many supported a territorial, or an exemption, system, the opinion actually turned from this. See the 2004 report of the National Foreign Trade Council, of which about the whole Dow Jones is a member. I quote a paragraph from the executive summary:
“However, the proposal has other substantial drawbacks. The foreign source exemption proposal would likely fail to resolve the United States’ current WTO issues, in that the proposal would likely be WTO non-compliant. Further, the proposal would cost substantial revenues. Any attempt to mitigate the cost or modify the allocation rules – even if successful – would detract substantially from the simplicity, stability, and administrability of the proposal. Finally, the proposal would result in some taxpayers having significant income that is not taxed in any country, and other taxpayers with significant expenses not deductible in any country. The long run stability of such a system is questionable.”
The following has been said about the loss of revenue before the American House Committee on Ways and Means:
“Territorial systems generally make it more difficult to defend the domestic tax base from attack, since moving offshore results in a bigger tax savings under a territorial system than a world-wide system. That is, territorial systems enhance and legitimize methods of tax avoidance and evasion that should be curtailed under any sensible policy rule.”
I also do not believe that a territorial system will lead to substantial simplification.
“While a territorial system sounds simpler in theory, in practice it often turns out not to be.
First, territorial systems have to define the income that is exempt. In practice, territorial systems tend to apply only to active business income. Even within that category, the territorial system may only exempt active business income (a) if it faces taxes above a certain threshold level in the host country, (b) from a certain type of business (e.g., e-commerce), and/or (c) from certain countries.
Second, the treatment of non-exempt income must be specified.
Third, the allocation of income and expenses across jurisdictions takes on heightened importance in a territorial system.
For all of these reasons, territorial systems end up with complex rules regarding foreign tax credits, anti-deferral mechanisms, and allocation of income and expenses.”
” In addition, moving to a territorial system may generate difficult transition issues with respect to deferred income, deferred losses and accumulated tax credits in the old system. It may also require the renegotiation of numerous tax treaties.”
It is true that we should treat foreign subsidiaries and permanent establishments alike. However, it is about treating foreign subsidiaries like permanent establishments and not vice versa. We must create the possibility of a cross border tax consolidation (at least within Europe). It is not that difficult to make it work: you treat foreign subsidiaries like foreign permanent establishments: the rules on loss compensation, the recapture of foreign losses and the carry forward of foreign profits which apply to permanent establishments should be copied in full.
Is it going to cost a lot? Not more than what M&S is going to cost in any case; provided that we keep the recapture of foreign losses in tact.