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In a 24-page long letter to the country’s Parliament, Dutch State Secretary for Finance, Menno Snel, has set out a detailed tax plan to tackle multinational tax avoidance, including measures to prevent the internationally-oriented Dutch tax system from being used as a conduit to tax havens.
The February 23 letter notes that tackling tax avoidance is one of the Government’s policy priorities. It states that the Netherlands would implement measures to prevent erosion of the Dutch tax base, exploitation of hybrid mismatches between the tax systems in the Netherlands and other countries, and abuse of the country’s tax treaty network.
Preventing base erosion
Snel said that the Government will, by June 2018, submit a Bill implementing the first EU Anti-Tax Avoidance Directive (ATAD-1). The Directive requires member states to introduce a range of corporation tax measures from 2019.
In particular, the Directive requires a general interest limitation rule (earnings stripping rule), a measure preventing profits being taxed in low-tax countries by shifting it to a low-taxed subsidiary controlled by a parent company, and a general anti-abuse rule to enable abusive tax practices to be tackled where there is no legislative measure to this effect.
The letter notes that the Government would, in some aspects, go further than what is strictly required under the Directive.
Transfer pricing decree
Next, the Government would amend the Transfer Pricing Decree in 2018 to bring it into line with the updated OECD Guidelines.
The letter explains: “The OECD Transfer Pricing Guidelines have been revised to combat tax avoidance as part of the BEPS project. The aim is to prevent the pricing of transactions being used as a way to shift profits to countries where the value is not created. The new OECD Guidelines set out a method for analyzing and modifying risk allocation in respect of intra-group transactions. This makes it possible to prevent profits being shifted to countries without relevant functions by allocating risks arbitrarily.”
“The revised text also provides far more detailed guidance on determining the entity within a group to which the income generated by activities involving valuable intangible assets such as patents should be allocated. As a rule, this will not be the legal owner of the intangible asset if it has carried out few, if any, value-adding activities. Profits should be allocated to and taxed in the countries where the important functions have been or are being performed.”
The Netherlands is also considering measures to prevent taxpayers from exploiting differences between tax jurisdictions in the characterization of instruments or entities to avoid tax in the Netherlands or another country. Specifically, the Government would incorporate the second EU Anti-Tax Avoidance Directive (ATAD-2) into Dutch law in a timely manner and apply it from January 1, 2020. The Government would also include a hybrid entity provision in treaties via the BEPS Multilateral Instrument, the letter states.
Further, the Government would include a provision in tax treaties to ensure that tax treaty benefits are only granted if a hybrid entity’s income is taxed in the hands of the participants in that entity. “If the use of the hybrid entity results in the income not being subject to tax, treaty benefits are not granted. This hybrid entity provision can apply by means of the BEPS Multilateral Instrument to existing treaties that do not yet include a provision of this kind,” the letter explains.
‘Conditional’ withholding tax
Finally, to prevent the internationally-oriented Dutch tax system being used as a conduit to tax havens, the Government would introduce a system of withholding taxes on dividend, interest, and royalty flows to low-tax jurisdictions, and in the event of abusive tax arrangements.
According to Snel, the new withholding taxes would be levied on entities established in the Netherlands that pay dividends, interest, or royalties to a group entity if that group entity is established in a country with a low statutory rate or a country on the EU list of non-cooperative countries. “This is why the withholding tax is referred to as ‘conditional’,” Snel wrote.