Fiscal avalanche in tax haven the Netherlands.

Increasingly, large international companies are using the Netherlands to avoid paying taxes in other countries. Using a web of letterbox companies, ‘royalty-routes’ and favorable legal structures, this network is used  to channel billion’s in and out of the Netherlands. Is that fair?

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Those who make the effort to browse through last year’s annual reports of the 26 letterbox companies that the giant pharmaceutical company Pfizer has established in the Netherlands, will be rewarded. After looking at the sixth year report of the impressive pile of documents Pfizer’s predilection for the Netherlands suddenly becomes crystal clear.  On page 66 of 2011’s year report of C.P. Pharmaceuticals International CV — one of Pfizer’s many firms in the Netherlands — under heading 38 ‘Tax’, it clearly states that the company does not have to pay any taxes in the Netherlands.

“According to the tax ruling of December 1, CPPI CV is considered transparent for Dutch tax purposes and as such not subject to Dutch corporate income tax or dividend withholding tax”. The 10 billion that this limited partnership business entity runs through the Netherlands provides the national treasury with a grand total of zero euro’s in revenue.

And Pfizer can continue to use this comfortable tax ruling – a binding agreement between the tax authorities of the Netherlands and the foreign company – for some time to come. The year report states that this special agreement will continue until the 31st of December, 2013.

The search for tax avoidance schemes is hardly ever as simple as it is in the case of Pfizer. Most of the world’s 100 largest companies have created a web of letterbox companies to make best use of the tax advantages that the Netherlands may provide.  Not often is made explicit that the establishment of these entities in the Netherlands is exclusively for tax avoidance purposes.

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De Volkskrant has taken the time over the last few months, to read the annual reports of all these letterbox firms, and we found many clues on the behavior of international firms. We found that these one hundred companies have over a thousand of such “empty” letterbox firms in the Netherlands.  Most of these firms do not have any employees. And some companies are depositing voluminous annual accounts in the Netherlands, without having any real operational activities in this country.

Another clue is the predilection of large foreign corporations for legal bodies that do not seem related to their commercial form of organization, such as limited partnerships (commanditaire vennootschappen), co-operatives (coöperaties) and foundations. Finally, the accustomed methods of tax avoidance pop up, when billions in dividends, interest payments or royalties appear in the annual reports.

Whatever the method or form of organization, in the end there is but one reason why these numerous mailbox firms are located in the Netherlands: the companies that own these letterbox companies end up paying less taxes for their global operations when using the Dutch tax shelters.

The Netherlands have been a Walhalla for tax avoidance for some time, yet this has seldom led to a political stir in The Hague. Now and again there is a public outcry, such as U2’s and the Rolling Stones’ tax avoidance, but the indignation about such practices mostly takes place in other countries. A recent example is the Irish outrage concerning the fact that U2, at the height of the Irish crisis, moved to Amsterdam for fiscal reasons. Whilst sheltering their income in this country, lead singer Bono kept searching for the spotlights all over the world in the guise of a philanthropist.

Even after a parliamentary inquiry in Great Britain sparked outrage over coffee chain Starbucks, which uses its letterbox companies in the Netherlands to avoid almost all tax payments in the country, Dutch politicians seemed not to take any interest in the issue of tax avoidance.0123vkgraphECbelastingontwijking-3-page-0

The tax shelters of the individual companies are one hundred percent legal, are said to provide for ‘high quality employment’, and bring in tax revenue.  About a thousand professionals are estimated to earn their daily bread in or around the tax avoidance business. The government is estimated to gain around a billion euros in tax revenues. For a few weeks now, Secretary of Finance Weekers comfortingly adds that he is ‘discussing the matter’ internationally.0123vkgraphECbelastingontwijking-4-page-0

Opponents of the tax routes, such as the international organization Tax Justice or the Dutch Somo, particularly criticize the ethical side of the Dutch approach to taxes. When multinationals pay less taxes by making use of Dutch tax regulations, other countries miss out on substantial tax revenues. And when corporations pay little in taxes, it is up to the consumers and employees to fill the treasury. According to Tax Justice and Somo, that is not fair.

Keeping silent
Until now Dutch politicians gave a wide berth to the question of fairness with respect to tax avoidance via the Netherlands.  The Ministry of Finance notes that all practices are in accordance with the law, and refrains from any further comments. A detailed overview of fiscal deals is not available, and most members of parliament are either uninformed or uninterested in the matter.

Even if examples of tax avoidance via the Netherlands appear, the Ministry keeps silent.  For example, when asked about the desirability of Nike’s tax structure in the Netherlands, the Ministry’s response was thus: “I cannot comment on individual taxpayers”.

The de Volkskrant research shows that meanwhile, tax avoidance via the Netherlands is steadily growing. In the last few years the world’s largest multinationals have established more and more letterbox firms in the Netherlands. Out of the 100 largest companies of the world, 84 now have fiscal subsidiaries in the Netherlands.

Until very recently, Chinese companies were practically the only companies that ignored the Netherlands as a fiscal refuge, but this has changed. On January 8th 2013 Petrochina — China’s biggest oil and gas producer – founded their third cooperative in the Netherlands, in two years’ time.

Some multinationals have been in the Netherlands for decades, such as the American oil company Exxon Mobil. The company uses as many as 64 Dutch subsidiaries to funnel dividend income from countries such as Venezuela, Nigeria, Russia and Angola trough the Netherlands and out to the United States. At least 38 of these letterbox firms have zero employees on the payroll. Exxon Mobil does pay taxes in the countries where the oil and gas is extracted. However, the profits that the energy concern makes and which travel back to the parent company, are not taxed in the Netherlands.

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The Netherlands have created a favorable tax regime for dividend and interest. A company that funnels the dividend from a foreign subsidiary to the parent company’s country of residence, have to pay less taxes. Almost every multinational – from Microsoft to IBM and from Procter & Gamble to BHP Billiton – uses this route through the Netherlands.

Around the turn of the century the royalty method became popular. When a company registers its intellectual property in the Netherlands, and subsequently lets it foreign subsidiaries pay for the use of the property rights, the tax burden can be significantly reduced. There is no tax on royalties in the Netherlands.

The best known company that makes use of the Dutch tax regulations on royalties is Google. The search engine’s intellectual property is filed in the Netherlands. Via subsidiaries particularly in Ireland and Bermuda Google transfers a sum in excess of seven billion euro’s to the Dutch Google Netherlands Holding, whilst charging the same amount to this holding.

Google Netherlands Holding, with its zero employees, ends up paying a meager 2.7 million euro´s to the Dutch tax authorities. This allows Google to save more than 2 billion euro´s that would have otherwise been made out to the American treasury.

Since 2005 there has been a marked increase in the number of registered letter box companies. Companies that hitherto had no presence in the Netherlands – such as the American telecom provider Verizon and the British pharmaceutical company GlaxoSmithKline – erected holdings in our country.

Recently a seemingly odd legal structure, the co-operation (coöperatie), started to catch on. The cooperation was once designed as a legal form of cooperation for farmers and is generally used as a legal form for non-profits. In the last few years multinationals such as supermarket chain Wal-Mart, cable company Comcast and soda giant PepsiCo suddenly registered as a cooperation in the Netherlands.

The reason these corporations are registering as co-operations in the Netherlands is the following: co-operations do not have to pay taxes over the profits distributed to its members. Furthermore, the co-operation protects against Peeping Toms, since these  ‘partnerships’ publish very concise annual reports.

Huge sums

Co-operations, for example, are not required to inform the Dutch chamber of commerce of the profits that have been made. Nonetheless, it is clear that huge amounts are associated with these letter box entities. The asset value of Wal-Mart’s, Chevron’s and Samsung’s Dutch branches runs in the billions.

For Wal-Mart the anonymity that the cooperation provides apparently is not yet enough. With titles such as the Rhine American Holdings Coöperatie and Broadstreet European Holdings Coöperatie the supermarket chain gave its Dutch branches names that do not suggest any link to Wal-Mart. These until recently unknown letter box companies came into view by use of an international register of chambers of commerce that de Volkskrant consulted.

The final curious fiscal construction that emerged in the research is the use of the special kind of limited partnership (‘commanditaire vennootschap’ or CV) that was once conceived with the goal of creating a partnership between the shareholder that controls the company and its investors. The CV has been a popular vehicle for investments in ships and property for a few years now, as the profit distribution is fiscally favorable. Not only Pfizer but IBM, Wells Fargo, PepsiCo and Volkswagen now also have a CV in the Netherlands.

The global financial crisis was preceded by a unrestrained and barely regulated growth of credits and accompanying financial instruments. This de Volkskrant research shows a corresponding trend in fiscal routes through the Netherlands. The number is growing, the structures are getting more complex and more in transparent, and all the while politicians seem unaware of the expanding fiscal web that large businesses are spinning in the Netherlands.

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