OECD Welcomes Dutch Efforts To Counter BEPS

The OECD has welcomed efforts by the Dutch Government to tackle base erosion and profit shifting but called for the overall tax regime to be simplified, including in area of value-added tax.

In its latest Economic Report on the Netherlands, the OECD said that the Government is attempting to change the country’s image as a low-tax conduit jurisdiction with extensive proposals to prevent BEPS.

“In the past, the Netherlands has been considered to be an important jurisdiction for multinational corporations, which created a reputational issue linked to aggressive tax planning,” the report observed. “Dutch tax rules, designed for avoiding double taxation, are used by companies that engage in tax planning, as suggested by high levels of dividend, royalty, and interest payments made via the Netherlands.”

“The Netherlands has, however, made significant progress to contain base erosion and profit shifting, in line with OECD recommendations,” the report continued. “A new policy agenda to tackle tax evasion and avoidance was recently sent to Parliament by the Dutch State Secretary for Finance to overturn the Dutch reputation of leniency towards BEPS by multinationals.”

In February 2018, the Dutch Government announced a comprehensive package of tax anti-avoidance proposals designed to bring the jurisdiction’s rules into line with new European Union anti-avoidance laws and fulfill its obligations under the international BEPS agenda. These include implementing the first and second EU anti-tax avoidance directives in 2019 and 2020, respectively.

These measures are being balanced against other proposals to improve the Netherlands’ tax competitiveness, including a gradual reduction in the rate of corporate tax from 25 to 21 percent, with the 20 percent lower rate of corporate tax on profits up to EUR200,000 (USD232,700) to be lowered to 16 percent.

The report also noted that the Netherlands has made substantial progress towards implementing the OECD’s specific BEPS recommendations.

“The Netherlands has started to implement the BEPS measures in a comprehensive way,” the OECD said. “It has effectively started to exchange information on tax rulings with its partners, and none of the Netherlands’ preferential tax regimes have been considered as harmful, in line with BEPS Action 5 on harmful tax practices. In this regard, the new Dutch innovation box also follows the internationally agreed nexus approach. On Country-by-Country reporting, and in line with BEPS Action 13, the Netherlands has the domestic legal framework in place (it has signed the Multilateral Competent Authority Agreement for the automatic exchange of Country-by-Country reports) and has activated its information exchange network, ahead of the first exchanges which will start in 2018.”

While the Government plans to extend the dividend tax exemption to outbound payments to non-EU and non-EEA jurisdictions with a tax treaty with the Netherlands, the OECD welcomed the fact that the measures will be accompanied by measures that deny the zero rate in case of abusive situations or of distributions to low-tax jurisdictions.

In the area of VAT, the report said, to help simplification efforts, the dual VAT rates should be streamlined to reduce inefficiencies in the tax system. It suggested that this could be achieved by phasing out the lower rate.

“Reduced rates have been found to be a poor instrument to support low-income households and the negative impact of an increased lower VAT rate on low-income households could be offset by targeted transfers,” the report said.

In 2019, the lower rate of VAT will be increased from six percent to nine percent with the standard VAT rate to remain on hold at 21 percent.

Looking at the overall tax system, the OECD recommended that reforms should address the discrepancies in tax treatment of different work contracts, broaden the tax base, and reduce the overall tax complexity.

“A high marginal tax wedge provides strong disincentives for workers to increase the number of hours, including low-income individuals. Tax expenditures lower taxes for households and companies by EUR18.5bn (three percent of GDP) per year, but often benefit richer households, and do not have the envisaged effect or have not been evaluated,” the report said.

“The government should undertake a thorough review of the multiple tax deductions, with an aim of simplifying the system as a whole,” it concluded.