Speech by Marnix van Rij at the IFA
It’s good to see you all here, in The Beurs van Berlage.
This venue was named after Berlage, the architect who designed this building in its original function, as an exchange – a beurs in Dutch. As a socialist Berlage was convinced that capitalism was on its last legs. So he insisted the building should also serve a public function. After the revolution had achieved its goals, and the exchange had been closed down, the building could still be used for the benefit of the general public.
As we all know, things turned out differently. When traders moved out of this building, it was not because socialism had triumphed, but because the exchange went digital.
And yet, in one sense, history has proved Berlage right. Because the Beurs does now have a public function as he envisaged. Last week the Beurs hosted a gathering of software programmers, and in early September first-year students will convene here to find out what life as a student has to offer.
And now we are here, to talk about ways of countering tax avoidance. If that is not in the public interest, I don’t know what is. I suspect that Berlage would have given his blessing to our meeting.
As State Secretary for Tax Affairs and the Tax Administration, I’d like to set out for you the Netherlands’ position on tax avoidance. Where we started out, what we’ve done to tackle it, and what’s still in store.
In the twentieth century businesses were increasingly confronted with the fact that each country had its own tax system. This could result in double taxation and act as a brake on cross-border business and investment.
In 1963 this led to the publication of the OECD’s first model tax convention.
Since then the world has undergone enormous changes. The economy became increasingly globalised. Multinationals came to play an increasingly dominant role, and a substantial share of global trade now consists of transactions between and within these corporations. And the digital transformation has now made it easier for multinationals and their advisers to develop products and services remotely from their markets.
The aim of tax conventions was legitimate: the prevention of double taxation. However, the international tax system created, left possibilities for double non-taxation. Differences between tax systems enabled multinationals to shift profits to low-tax countries, thereby reducing the tax base of other countries, or leading to no tax at all. These developments were exacerbated by the increasing sophistication of tax planners in identifying and exploiting the legal arbitrage opportunities and seeking out the boundaries of acceptable tax planning, thus emboldening multinationals to adopt aggressive tax positions.
All these practices were in accordance with the law, and we therefore didn’t think too much of it. However, the financial crisis of 2008 shifted the way of thinking.
Central banks, the IMF and national governments had to save banks in order to prevent the collapse of our financial system. A deep economic downturn followed, the euro-crisis ensued, taxes were raised, and the public paid the price. Society no longer accepted these practices. Paying taxes was no longer just a legal issue, or a cost item in your profit & loss statement. Paying taxes increasingly became a moral issue. At the G20 Summit in April 2009, the political leaders were very clear: action would be taken against tax havens. It was the starting signal for what would become the OECD BEPS-Project.
This development had quite an impact on The Netherlands. We have a relatively small country with a relatively big and open economy. We’re proud of our investment climate and we aim to preserve it. In the past this took the form of a tax policy that you might say was quite ‘business friendly’.
When a freshly inaugurated President Obama announced to great fanfare in 2009 that he intended to combat tax avoidance, he had drawn up a list of notorious tax havens. Besides the Cayman Islands, Bermuda and Switzerland, he also mentioned the Netherlands. This caused a wave of negative publicity here. Obama subsequently took back what he’d said about the Netherlands, but the damage to the image had been done. The public outrage could no longer be contained.
This was the backdrop that gave rise to BEPS 1.0 in 2013.
Fifteen proposals by the OECD (partly at the request of the G20) designed to stop any gaps between countries’ tax laws being exploited to obtain tax advantages. I won’t go through the entire list, since you will be familiar with them.
There is still much work to be done, but the 15 plans have already transformed the international tax climate. For the first time, countries have taken large-scale harmonised and coordinated action to counter undesirable tax avoidance.
For the Netherlands, BEPS has triggered a turnaround in tax policy. We may have been on Obama’s blacklist back in 2009, but in some respects we now lead the way in the fight against tax avoidance. . The EU has also very effectively translated the agreements into harmonised binding rules.
- The Netherlands has implemented the ATAD 1 and ATAD 2 rules and others more stringently than the relevant EU directives require.
- We have unilaterally adopted national measures that primarily tackle tax avoidance. Our list of low-tax jurisdictions includes countries that levy corporate income tax at a rate of below 9%. This is stricter than the European Union’s list.
- We have revised our tax ruling policy, including policy on the publication of tax rulings.
- As of next year we will also levy an additional withholding tax on dividends paid to companies in low-tax jurisdictions and in abuse situations. This will make the Netherlands a less attractive location for shell companies.
- We aim to include anti-abuse clauses in all our tax treaties. The Dutch anti-abuse clauses go far beyond the internationally agreed minimum standard.
These are just a few examples of measures the Netherlands is taking to fight tax avoidance, which stem from our specific situation. So we have implemented OECD and EU measures, and – if necessary – national measures. The question is of course whether the measures actually work. Does this legislation actually change the way companies behave? I can’t answer that question for other countries. But as far as the Netherlands is concerned, our measures seem to be working.
One bit of anecdotal evidence is that I now hear the term “onshoring” more frequently, and the term “offshoring” seems to have gone out of fashion. And that is of course what we would like to see. Onshoring activities means real additions to the Dutch economy.
But there is also empirical evidence. The flow of money from the Netherlands to low-tax countries has reduced sharply. This can be seen in the data. Provisional figures indicate that the total flow of income to these countries has fallen by almost 85% from €38.5 billion in 2019 to just under €6 billion in 2021.
The remaining €6 billion consists largely of dividends, which will also be covered by the withholding tax from 2024 onwards. So we expect a further reduction over time.
And our – alongside Irish and American - measures have put an end to tax avoidance schemes like the double Irish with a Dutch sandwich.
So the initial signs are encouraging, but we must not start celebrating too soon. The harmonised approach to tax avoidance is only ten years old, and the actual anti-abuse measures were only introduced in 2019. Perhaps we need to do more.
What’s still in store?
Looking ahead, the challenges of the digital economy loom large. Tax systems have always been based on the idea of levying tax on people and organisations that are physically present in a country. But that approach is at odds with today’s digital economy. A social media platform, for instance, does not need a physical presence in a country. As a result, these kinds of businesses are able to elude the tax authorities. The only way to tackle these challenges is at international level. We are reaching the limits of what we can do at national level to prevent tax avoidance.
An international approach is the most efficient way to close loopholes and avoid creating new ones. The reform of the international tax system is therefore key to ensuring that multinationals pay their fair share where they operate. Pillars 1 and 2 are fundamental and historic in this respect.
The Pillar 2 agreement on minimum taxation has our wholehearted support and we welcome the progress that’s been achieved. What’s more, we are the first EU country to put the Pillar 2 legislation before our parliament with a view to its becoming effective as of the start of 2024. This also provides certainty to the multinationals concerned, albeit still a very complicated proposal. The internet consultation has given the opportunity to provide input, and we have adapted the proposal in response to it.
On Pillar 1 the timetable is different, as you all know. But the technical work is advancing as we speak with a view to coming to an agreement this month, ahead of the G20. The Netherlands strongly supports this, because a multilateral agreement is key. The alternative of measures by individual countries is not preferred.
We also warmly support further rules combating the misuse of shell companies for tax purposes. We are aware that our international oriented tax system has given rise to a substantial amount of pass-through income flowing through our country. We of course welcome real economic activities, but abusive structures should be tackled.
In order to effectively combat such practices, an EU solution is a crucial step. The Commission presented its proposal in late 2021 and since then negotiations have been taking place in the EU. It’s important that the EU member states reach an agreement soon, hopefully under the Spanish presidency. I don’t rule out unilateral measures as an alternative, but clearly an EU-wide solution would be the best way forward.
All in all, many important measures are still ahead. In all these proposals we have to try and establish feasible and enforceable rules. This is important to tax authorities and business alike. It is a point of concern I always have, and which I make in Brussels too. It is one thing to make policy and legislation, but it has to work in practice, in the enforcement by the tax authorities. Politicians do not always have enough attention for this.
Ladies and gentlemen,
I’m sure you’ve already noticed, but one of the most striking features of this building is that it has extremely large walls. They were constructed using no less than nine million bricks.
Berlage didn’t just make that choice because he was fond of impressive walls. He also wanted to send a message: ‘insignificant as an individual, but powerful in great numbers’.
The same applies to our efforts to tackle tax avoidance. As an individual government, or as the EU or the OECD, we can do a great deal, but we can’t do it alone. Alone, we’re like an individual brick. But to stop tax avoidance, all the relevant players need to shoulder their responsibility. That means you too. Together we can build a strong wall against tax avoidance.
Both in the Netherlands and at international level, the Dutch government has championed efforts to tackle tax avoidance. That is demonstrated by the measures I mentioned earlier. Outside observers can see that we are matching our words with action. Our reputation is now much stronger, within the EU, the European Parliament, and the OECD.
The question is: just because something is permitted, should you always do it? The practices at issue are often not criminal matters, but matters of trust and ethics.
The government has a role to play in the form of legislation: for the cabinet, the emphasis is on reaching agreements at international level. But you have a role to play too.
- To tax advisers, I would say: avoid aggressive tax planning and discuss the societal implications when giving tax advice to your clients.
- Companies: stick to the letter but also to the spirit of tax law, be transparent about your strategy towards tax and the tax that you pay, and make sure that your corporate structure matches the reality of your operations.
- And finally, to academics: teach your students about the broader societal dimensions of tax. And although combining a job in academia with a job in tax practice can have added value, in order to ensure public support it’s crucial that you are always transparent about your different roles.
I know that you are aware of these issues and have been pondering them for a long time. The Dutch Tax Governance Code is a good example: organisations representing business in The Netherlands have devised this Code in which they commit to increasing transparency on tax strategies and steering clear of aggressive tax planning. The sector will be monitoring it and I want the state-owned enterprises to comply with it.
I would also like to mention the Tax Principles adopted by the Dutch Association of Tax Advisers. And finally the Dutch Register of Tax Advisers has introduced a test when applying for a tax consultant’s number from the Tax Administration. The aim is to regulate their profession in order to ensure the quality of advisers.
These are all important initiatives. And they demonstrate that companies and professional organisations are taking the debate about their societal responsibilities seriously.
If we all take a similar approach to our respective roles, not only will we make it easier to collect tax – we will also give the public a greater sense of fairness and build a strong wall to guard against tax avoidance together.
Let us not forget the role of ngo’s either. It is important to hear all the different perspectives on this issue, and it is my ambition to bring all parties together. Because it is not only rules that matter, but also accountability.