Open the newspaper or turn on the TV in these times of financial crisis and your head will soon be spinning from all the billion-euro figures being bandied about. The European Union is pumping €750 billion into a rescue fund for Greece, while the US is embarking on a job creation plan worth 330 billion euros.
by Rodrigo Fernandez
But the figures can get even more astronomical: thousands of billions flow through the Netherlands each year thanks to its favourable tax climate. There is a good reason why 80 of the 100 largest companies in the world have a holding company in the Dutch tax haven. The Netherlands is employing double standards, argues Rodrigo Fernandez, financial geographer and multinational researcher.
Investors heading for Holland
The Netherlands heads the IMF’s world rankings for direct foreign investment. In 2009, its total in incoming investments amounted to no less than 3,000 billion dollars, while its outgoing investments totalled 3,700 billion dollars.
These figures represent 377 percent and 465 percent respectively of Dutch Gross National Product (GNP). By comparison, the United States, a country with a national income of over 14,000 billion dollars, occupies second place on the IMF rankings with incoming investments of 2300 billion dollars and outgoing investments of 3500 billion (16 and 25 percent of GNP respectively).
In other words, the ratio of GNP to foreign investment is 20 times higher in the Netherlands than it is in the US.
In global rankings for flow of capital, the Netherlands is always up there in the top ten with countries such as Switzerland, the Cayman Islands, Ireland and Luxembourg. These are all relatively small economies with massively disproportionate financial sectors. They are links in a chain of financial centres which enable multinational concerns, banks and hedge funds to pump inconceivably huge flows of capital around the world. These financial flows bear no relation whatsoever to any actual economic activity in the country where they appear on the books.
These financial flows largely take place within empty shells, better known as brass plate companies. The main aim is to avoid paying tax and to sidestep regulations. As a result, investments from country A do not go directly to country B, but are channelled through the Netherlands in order to take advantage of the fiscal tricks that the Netherlands has to offer.
One of the most important fiscal features of the Netherlands is its unusually extensive network of bilateral taxation and investment treaties. The combination of these two types of agreement furnishes multinationals with a great many entitlements in the Netherlands, with no strings attached in the shape of obligations. This is why the Tax Justice Network has referred to the Netherlands as a treaty paradise.
These tax treaties – often with developing countries – were originally created to protect companies from paying tax twice on the same activities in different countries. But nowadays their primary function is to shift the right to impose tax from the country where the economic activity takes place, to the country where the head office is registered.
On paper at least, the Netherlands is home to a large number of corporate headquarters keen to make use of the favourable Dutch tax regime, which prevents taxes being imposed in the country where the economic activity takes place. By way of comparison, in this area the rate of tax in the Netherlands averages 5 percent, as opposed to 35 percent in the US.
The Dutch government should be asking critical questions about the tax haven created by a small army of 15,000 tax experts, notaries and legal specialists at the Zuidas business district in Amsterdam. The taxation revenue of one billion euros in the Netherlands is generated at the expense of many times more tax revenue lost by other countries.
Figures concerning the role played by individual tax havens are difficult to come by, but NGO Christian Aid has calculated that developing countries miss out on over 160 billion euros a year in tax revenue, compared to the total of 100 billion euros they receive in development aid.
Tolerating such enormous and unchecked financial flows put the stability of the financial system in danger.
At a time when Europe is creaking under the burden of a painful debt crisis, the Netherlands is acting as an important link in a network that enables major multinationals and banks to shirk their tax obligations. While everyone is being forced to tighten their belts, from Athens to Madrid to Amsterdam, those with the broadest shoulders get off scot free and the legitimacy of the tax regime is undermined in the process.
The Netherlands is playing a hypocritical role in the crisis by accusing other countries of irregularities and incompetence while it offers banks and multinationals a haven from which to operate.
Video: The New York Times