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International Tax and Public Finance

Erschienen in:

03.04.2021

The immeasurable tax gains by Dutch shell companies

verfasst von: Arjan Lejour, Jan Möhlmann, Maarten van ’t Riet

Erschienen in: International Tax and Public Finance | Ausgabe 2/2022

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Abstract

This paper examines corporate tax avoidance involving Dutch special purpose entities (SPEs), or shell companies. We use unique data of the SPEs including the origin and destination country of dividend, interest, and royalty flows passing the Netherlands. First, we present descriptive statistics of these flows which amount to 140 billion euro in 2016. Second, we collect national tax data on the corporate income tax and fiscal treatment of these flows. By combining tax parameters with bilateral flows, we can assess the potential tax gains for multinational enterprises using Dutch SPEs. We find massive tax savings for royalties when Dutch SPEs are used as an intermediate station compared to direct flows between the origin and destination country. We measure this tax gain at almost 3 billion euro in a single year. However, we do not find such tax savings for dividends and interest. We explain where we lack information and hence cannot measure possible tax gains. In regression analysis, controlling for country characteristics, we find that tax differentials partially explain the geographical patterns of income flows diverted through the Netherlands. This paper is one of the first using bilateral income flows as dependent variables instead of FDI stocks or flows.

Vorheriger Artikel Investment in children, social security, and intragenerational risk sharing

Nächster Artikel To them that hath: economic complexity and local industrial strategy in the UK

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See IMF CDIS database.

See Kleinbard (2011) and Zucman (2014) among others.

Clausing (2016) estimates that the overseas profits of American multinationals in the Netherlands amount to 172 billion USD in 2012, of which 139 billion is due to corporate tax avoidance. Tørsløv et al. (2018) calculates that 57 billion USD in profits is shifted to the Netherlands in 2015. Both numbers are disputed by Blouin and Robinson (2019) who claim that the numbers are inflated due to double counting in the US data. In particular the outcomes of Clausing (2016) could be several times lower.

For example, an SPE with assets in country A, B, C and liabilities in country C and D, has four observations in our data.

This total is also reported by DNB to IMF/CDIS and is also used in Damgaard et al. (2019) and Tørsløv et al. (2018).

See The Guardian (2019).

This is also the case for incoming flows. We do not know whether the active business income was generated in the immediate country of origin.

The ranking and shares can deviate somewhat from Table 4, since Table 5 is based on the subsample of SPEs for which the country of the ultimate beneficial owner is known.

The data allow us to consider more income routes between different countries with the Netherlands as intermediate than particular cases presented in the media. However, the data do not allow for the analysis of multi-country income routes. Take the well-known double Irish –Dutch sandwich as many US MNEs have used. With these data we notice the income flow from the company in Ireland to the holding in the Netherlands. These are often royalties because Ireland levies a withholding tax on royalties and the Netherlands does not (until 2021). However, we do not see the royalty flows from other countries to Ireland. These flows may also lead to a tax savings gain, which are not included in our estimates in Sect. 4. We do see the royalties from the Netherlands to the Irish holding on Bermuda (originated from the holding in Ireland). So, we can quantify the last two steps to the final destination, but still do not know where the incomes are generated.

SPEs are assumed to report gross payments before withholding taxes. When withholding taxes are paid in the source country, the actual income by the SPE is smaller than the reported income, which also means there is less available for outgoing payments.

As a robustness check we also perform this allocation using the maximum instead of the minimum of the total incoming and outgoing flow. This did not have a significant effect on the tax planning gains in Sect. 4, nor on the regressions results in Sect. 5.

The totals in Table 2 are slightly lower, since it includes negative values, while Table 6 is based only on positive values. However, the difference is negligible and is not visible in the rounded values.

A relatively large amount (6.6 billion euro) is transformed from incoming interest to outgoing payments on securities. In most cases, these outgoing payments on securities consist of interest paid on listed bonds. We separate these from interest on other loans, because we expect tax planning motives to be less relevant for payments on listed securities.

Examples are Zucman (2013), Alstadsaeter et al. (2018), Tørsløv et al. (2018) and Henry (2012).

For a discussion of double tax relief and the effective tax rates on dividend repatriation see also Barrios et al. (2012).

In practice, an Advance Tax Ruling by the Dutch tax authority may result in some taxable income.

We will assume full deductibility, thus ignoring thin capitalization rules.

In fact, we even will take the flows together. See Sects. 4 and 5.

Obviously, this is a crude proxy, but given the scope of our paper a reasonable assumption.

The double Irish-Dutch sandwich is an example, see footnote 9. This involves payments from European countries to an US owner. In between are entities in Ireland, the Netherlands, Ireland again, and Bermuda.

See Vleggeert (2015).

The IBFD Tax Research Platform was accessed online between end of January and March 2018.

Note we use the dividend rate on substantial shares in ownership and not on portfolio dividends.

The possibility of no-relief-at-all also exists. This has been treated as deduction. Some countries exempt only up to 95% of foreign source dividends. This has been treated as full exemption.

In a robustness check we also use the effective CIT rates in 2015 from Tørsløv et al. (2018). These were available for 64 of the 107 countries (including the Netherlands) in our data. For countries for which effective rates were not available we still used the statutory rates. Then the unweighted average effective CIT rate in 2015 was 13.0%, while the unweighted average statutory CIT rate in 2013 was 22.3%.

Examples are Blonigen and Davies (2004), Egger et al. (2009), Sauvant and Sachs (2009) and, Blonigen et al. (2014).

It is possible that there are SPEs which would have a bilateral flow for a country pair, but which do not have the incoming and outgoing flows in the same period; we ignore them in the analysis and put the dummy variable, for the country pair, at zero.

For all numbers in the text based on column (3) we take the exponent of the coefficient and subtract 1. Due to the large coefficients in many cases, the outcomes differ substantially from interpreting the coefficients as semi-elasticities. That interpretation is only valid for small coefficients.

See among others Dischinger and Riedel (2011) and Karkinsky and Riedel (2012).

Alstadsaeter, A., Johannesen, N., & Zucman, G. (2018). Who owns the wealth in tax havens? Macro evidence and implications for global inequality. Journal of Public Economics, 162, 89–100. https://doi.org/10.1016/j.jpubeco.2018.01.008CrossRef

Beer, S., De Mooij, R., & Liu, L. (2020). International corporate tax avoidance: A review of the channels, magnitudes, and blind spots. Journal of Economic Surveys, 34(3), 660–688. https://doi.org/10.1111/joes.12305CrossRef

Barrios, S., Huizinga, H., Laeven, L., & Nicodème, G. (2012). International taxation and multinational firm location decisions. Journal of Public Economics, 96, 946–958. https://doi.org/10.1016/j.jpubeco.2012.06.004CrossRef

Blonigen, B. A., & Davies, R. B. (2004). The effects of bilateral tax treaties on U.S. FDI activity. International Tax and Public Finance, 11, 601–622.CrossRef

Blonigen, B. A., Oldenski, L., & Sly, N. (2014). The differential effects of bilateral tax treaties. American Economic Journal: Economic Policy, 6(2), 1–18. https://doi.org/10.1257/pol.6.2.1CrossRef

Blouin, J. (2014). Defining and measuring tax planning aggressiveness. National Tax Journal 67(4), 875–900. dx.doi.org/https://doi.org/10.17310/ntj.2014.4.06

Blouin, J., & Robinson, L. (2019). Double counting accounting: How much profit of multinational enterprises is really in tax havens? SSRN paper. https://doi.org/10.2139/ssrn.3491451CrossRef

Clausing, K. A. (2016). The effect of profit shifting on the corporate tax base in the United States and beyond. National Tax Journal, 69(4), 905–934. https://doi.org/10.17310/ntj.2016.4.09CrossRef

Clifford, S. (2019). Taxing multinationals beyond borders: Financial and locational responses to CFC rules. Journal of Public Economics, 173, 44–71. https://doi.org/10.1016/j.jpubeco.2019.01.010CrossRef

Crivelli, E., De Mooij, R., & Keen, M. (2016). Base erosion profit shifting and developing countries. Finanz Archiv, 72(3), 268–301. https://doi.org/10.1628/001522108X14646834385460CrossRef

Damgaard J., Elkjaer, T. & Johannesen, N. (2019). What is real and what is not in the global FDI network? IMF Working Papers 19(274).

Davies, R. B. (2004). Tax treaties and foreign direct investment: Potential versus performance. International tax and Public Finance, 11, 775–802.CrossRef

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Dudar, O., Spengel, C. & Voget, J. (2015). The impact of taxes on bilateral royalty flows. ZEW Discussion Paper No 15–052.

Egger, P., Loretz, S., Pfaffermayr, M., & Winner, H. (2009). Bilateral effective tax rates and foreign direct investment. International Tax and Public Finance, 16, 822–849. https://doi.org/10.1007/s10797-008-9092-xCrossRef

European Commission. (2017). Aggressive tax planning indicators—Final report (IHS, CPB, Dondena), Taxation Papers, WP No. 71–2017.

European Union (2003). Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States

European Union. (1990). Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States

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Titel: The immeasurable tax gains by Dutch shell companies
verfasst von: Arjan Lejour
Jan Möhlmann
Maarten van ’t Riet
Publikationsdatum: 03.04.2021
Verlag: Springer US
Erschienen in: International Tax and Public Finance / Ausgabe 2/2022
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-021-09669-y

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