Tackling tax avoidance and tax evasion | Deloitte Nederland

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Tackling tax avoidance and tax evasion

On 23 February 2018, the State Secretary for Finance published his tax policy agenda, unfolding his plans for tackling tax avoidance and tax evasion.

13 March 2018

Tax policy agenda

On 23 February 2018, the State Secretary for Finance sent his tax policy agenda to the House of Representatives. Tackling tax avoidance and tax evasion is the cornerstone of this agenda. This will be done by protecting the (Dutch) tax base and introducing measures that safeguard transparency and integrity.

The tax base will be protected in various ways: the State Secretary aims to prevent base erosion, tackle tax avoidance involving qualification differences (hybrid mismatches), and counter improper use of the international dimension of the Dutch tax system. The Netherlands also supports several European Union initiatives on transparency and integrity.

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Base erosion

The State Secretary aims to combat erosion of the Dutch tax base by introducing a set of anti-abuse measures in 2019 as part of the implementation of the first European Anti Tax Avoidance Directive (ATAD 1). On some points, the Dutch interpretation of these provisions will even be stricter than required by the European Union. The bill implementing the measures is expected to be presented to the House of Representatives in the first half of 2018.

ATAD 1, among other things, provides for a general limitation of interest deduction (Earnings stripping). This measure implies that the tax deduction of the net interest payable will be capped at 30 percent of the gross operating profit (EBITDA). The Netherlands will not introduce a group exception, nor will grandfathering rules apply to existing loans. Interest is in any case deductible up to a net amount payable of EUR 1 million. In 2020, a specific minimum capital rule will be introduced for banks and insurance companies.

On top of that, ATAD 1 requires to implement a measure that prevents profit shifting to subsidiaries established in low taxed countries (Controlled Foreign Company or CFC measure). In his letter, the State Secretary mentions that the Netherlands’ transfer pricing rules form a sufficient implementation of ATAD’s option B. In addition, but only for specific situations, the State Secretary chooses to apply ATAD’s option A, including predefined categories of a CFC’s non-distributed (passive) income. Option A would only apply to a CFC that is either subject to a low statutory tax rate or located in a country that is on the black list of the EU. In all cases, the CFC rules will not apply to a CFC that has a defined level of minimum sufficient substance (including wage costs and office). In case a CFC is not in a jurisdiction with a low statutory rate or black listed jurisdiction, or has a minimum level of substance, the Netherlands is not expected to apply CFC rules (beyond its current transfer pricing rules). Hence, option A is only expected to apply in a limited number of cases.

The State Secretary furthermore aims to protect the Dutch tax base by introducing emergency remedial measures for the Dutch fiscal unity regime. We already informed you about this in connection with the CJEU judgment of 22 February 2018 in the joint cases X and X.

Tackling qualification differences

The State Secretary will tackle tax avoidance through qualification differences between tax systems (hybrid mismatches) by implementing the second EU Anti-Tax Avoidance Directive (ATAD 2) into Dutch tax law as from 1 January 2020. The implementation bill is expected to be presented to the House of Representatives in early 2019.

Likewise, the so-called Multilateral Instrument (MLI) has triggered the implementation of a provision in Dutch tax treaties covered by the MLI to ensure that treaty benefits are only granted if a hybrid entity’s income is included in the taxation of the participants involved (hybrid entity provision).

Improper use of the tax system

The State Secretary first of all wants to combat improper use of the Dutch tax system in international structures by implementing a withholding tax on outbound dividends, interests and royalty flows to jurisdictions with a low statutory tax rate and ‘black listed’ countries. The current dividend withholding tax act will be abolished and replaced by a new targeted dividend withholding tax act in 2020. The new withholding tax will only apply to dividend distributions within a group to entities established in countries with a low statutory tax rate and to countries listed on the EU list of non-cooperative jurisdictions. A withholding tax on interest and royalty payments in these situations will subsequently be effective in 2021.

Another major pillar in the combat against the improper use of Dutch tax treaties is the Multilateral Instrument, referred to before, with which all covered treaties can be adapted to the anti-abuse provisions developed in the BEPS project. The implementation bill is currently pending in the House of Representatives.

The State Secretary introduces clear minimum substance requirements for holding, financing and licensing companies, which are also expected to determine whether the “principal purpose test” in the Multilateral Instrument will be met. The substance requirements include the current Dutch minimum substance requirements plus a minimum wage cost and office requirement. If Dutch companies do not meet these substance requirements, information will be exchanged with other countries. These stricter conditions will also apply for obtaining advance certainty through an APA/ATR.

Transparency

The government supports the EU initiatives on Mandatory disclosure and public Country-by-Country Reporting within the framework of transparency.

Mandatory disclosure implies the mandatory provision of information to the Tax Administration on - potentially aggressive - cross-border tax structures by financial intermediaries (including tax lawyers). If intermediaries are unable to comply with their duty of disclosure, it will shift to the respective taxpayers. Agreement about this measure is expected to be reached within the EU in the first half of 2018.

Public Country-by-Country Reporting means that multinationals with worldwide sales over EUR 750 million must each year disclose public information on, i.e., the nature of their activities, their profit or loss before tax, and profit taxes paid. Taxpayers should specify this information for each EU Member State and third country that is listed as a non-cooperative tax jurisdiction.

Finally, the State Secretary indicates that it is relevant that other countries also address international tax avoidance. In this context, the Netherlands has cooperated to the so-called EU list of non-cooperative tax jurisdictions (also called the black list). EU Member States have committed themselves to applying certain administrative counter-measures, such as raising the risk of tax audits for taxpayers who use structures involving black listed countries.

Comment

This clearly is an extensive package of measures, included in what is called the Tax Policy Agenda, which was published on 23 February 2018. An agenda that otherwise includes the reduction of taxes on labour, improvement of the business climate, increased greening of the tax system, and an efficient administration of the tax system.

We have limited ourselves to the section covering tax avoidance and tax evasion. But we want to share a comment on one of the other four topics as well, i.e., enhancing the business climate. We have two reasons for doing so. First of all, this not much of a topic in that few concrete proposals are made; effectively it merely repeats what is in the 2017-2021 Coalition Agreement, whose main points are the reduction of the (regular) corporate income tax rate to 21%, down from 25%, and the almost complete abolition of the dividend withholding tax. What’s more, the package of measures for combating tax avoidance and tax evasion could hardly be said to improve the business climate. On the surface this may not be terribly worrisome. Still, it is a pity. Certainly if the Netherlands takes a stricter stance than any of the other countries and then fails to take substantial other measures to improve the business climate, this could definitely turn into a problem. And this aspect of the Tax Policy Agenda could definitely have been stronger.

The document is less challenging than many might have expected it to be. Most of what is included in the agenda, just like a large part of the package for combating tax avoidance and tax evasion, simply copies what is in the 2017-2021 Coalition Agreement. The proposals are not much more than simple compliance with obligations the Netherlands has already promised the EU and the OECD to do earlier on (as part of the BEPS project). More concrete points presented are far and few between. They are typical for the State Secretary’s strict approach, for that matter. One of these points comes in the form of stricter substance requirements, as a result of which in almost all cases a payroll total criterion applies (minimum salary of EUR 100,000), and an office space criterion (keeping an office for at least 24 months). Another example is the tax-free allowance for the earnings stripping of a mere EUR 1 million, where the EU Directive considers a tax-free allowance of EUR 3 million to be acceptable. The exclusion of any group exception whatsoever, an option the EU does offer, is regretful, too. In short, in applying this exception the position of the group in terms of financing is compared to the financing of the entity within the group with which the limitation of interest deduction applies. If the group ratio is more favourable, this can also be applied to the individual company within the group.

We next point out the CFC rules, particularly the government’s choice to go for option A (see above). Option B would seem to be the more attractive option for the business community. It is an alternative in which corrections will only need to be made if prices are not at arm's length. That said, in terms of improper use cases option A is most likely easier to implement for the government, with much less arguments from taxpayers. That said, one major thing to note is the application of the more favourable option B on all non-improper use cases. This mostly provides for a transfer price adjustment. So this is a good development. Finally, preliminary withholding taxes on interest and royalties will be implemented. Together with the substance requirements this will most probably lead to much fewer financing flows running through the Netherlands than is the case right now. None of this is necessarily a bad thing, as long as there also is a clear agenda to improve the investments and business climate. It would be a good thing if this were still realised. Maybe pariliament can play a part in this.

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