Cees-Frans Greeven, Buren, in Law360 on the Dutch perspective of the Multilateral Instrument

Dutch Embrace Supertreaty To Address Tax Avoidance, 2018 Law360 16-138

The Dutch government’s wholehearted embrace of a landmark multilateral agreement is a way for the Netherlands to publicize a staunch opposition to tax avoidance against the backdrop of changing international priorities and lingering criticism regarding how the country has handled multinational corporate taxpayers, tax practitioners say.

The multilateral agreement — the first of its kind among tax treaties, which tend to be bilateral — is one of the end products of a project to curtail base erosion and profit shifting, or BEPS, initiated by the Organization for Economic Cooperation and Development. Since June, more than 70 countries have signed on to the multilateral instrument, or MLI, which will allow them to close gaps in existing international tax rules that can give rise to treaty abuse and tax avoidance strategies.

Of the signatory countries, the Netherlands has selected all but one of the MLI’s provisions to adopt for its tax treaties, a measure that practitioners say signals the country’s commitment to the BEPS plan — and to its international reputation.

Daan Roosdorp, a tax attorney at Bird & Bird LLP in the Netherlands, told Law360 that the Dutch government has adopted so many MLI provisions because it wants to address tax avoidance, a goal that it has not been shy about emphasizing in press releases and other communications. This stance is a significant change from a decade ago, when political initiatives to combat tax avoidance were less frequent and subject to more debate, he said.

“As such, it is not so much that we see the marketing aspect as a reason why the Netherlands selected so many MLI provisions, but rather as evidence of the fact that addressing tax avoidance is a prominent political issue these days and it makes sense in that context that the government has opted for broad application of the MLI,” Roosdorp said.

In one recently publicized effort, the Dutch Ministry of Finance last month urged Parliament (2018 Law360 3-89) to ensure that the Netherlands is one of the first signatory countries to take the next step and ratify the MLI, moving it one step closer to taking effect. In a letter to Parliament dated Dec. 20, Finance Secretary Menno Snel made it a point to emphasize that the Netherlands has adopted more treaty provisions than other nations, including anti-abuse measures. The agreement must be ratified by five countries for it to become active.

While the MLI includes provisions ranging from the definition of a permanent establishment — a taxable presence of a foreign entity — to mandatory arbitration, practitioners believe that the anti-abuse provisions are likely to have the biggest impact on global taxes when the instrument goes into effect.

“The Netherlands has checked nearly all of the options, including the artificial use of a permanent establishment,” said Edwin Visser, a tax policy leader with PricewaterhouseCoopers’ Netherlands affiliate and a former official with the Ministry of Finance. “The Netherlands had opted to implement that, while a lot of other countries have not.”

Willem Bongaerts, also a tax attorney at Bird & Bird’s Netherlands office, said the country had been accused of accommodating tax planning too much. The Netherlands doesn’t necessarily agree with that characterization, he said.

“But I think for us, it’s good to show that we are serious about this, and maybe far more serious than some other countries, and are indeed trying to attack abusive structures,” Bongaerts said.

The Netherlands is one of several European Union nations, including Ireland and Luxembourg, that have been criticized for their treatment of multinational corporate taxpayers, including by the European Commission. Last month, the commission launched an investigation (2017 Law360 352-63) into tax rulings granted to Ikea subsidiaries in the Netherlands that may have given the companies an unfair advantage in the country.

However, specialists pointed out that the MLI largely targets situations different from those that the commission has investigated for alleged illegal state aid. 

As Bongaerts put it, the MLI is trying to prevent the use of treaties without real nexus, and the state aid discussion is essentially about trying to attract nexus — in addition to people and functions — by giving unfair tax benefits.

“In principle, they seem to be different ideas,” Bongaerts said. “But that being said, of course there are some clauses in the MLI that [target situations where] you can easily have a lot of substance in a country but allocate some profit to a branch and give a full exemption.”

Visser said companies that would be affected by the treaty provisions are financial services companies that have little or no substance in the Netherlands. Accordingly, he didn’t think the commission’s investigations influenced the finance secretary’s recent letter pressing for ratification.

“Those investigations are into rulings with multinational companies with quite significant substance in the Netherlands,” Visser said.

Cees-Frans Greeven, a partner at Buren in the Netherlands, similarly saw no direct link between the European Commission investigations and a push for early ratification of the MLI, saying the latter is in line with the Dutch government’s expressed commitment to be a front-runner in the BEPS project.

However, Greeven noted that while it was politically very sensitive to challenge the commission’s ideas on its tax reform agenda, the Netherlands seems to support a more balanced approach.

France and Germany are trying to push their own agendas. While those may work well for those countries, which have large domestic markets, they may not be suited to EU members with small domestic markets, like the Netherlands and Ireland, he said.

Both France and Germany have been aggressive toward corporate taxpayers in the past. Germany in 2008 introduced rules, widely criticized by other OECD members, that effectively reversed the result when companies restructured into tax-efficient commissionaire arrangements in which they conducted their foreign sales through agents. France, long known for its aggressive audits, has in recent years focused its efforts on companies including Amazon.com Inc., Apple Inc. and Google LLC.

“The commission seems keen on following the French and German approach, and the Netherlands is trying to have a more balanced attitude on this,” Greeven said. “But [the Netherlands] will also have to accept the new reality within the domestic and political arena, and that new reality is that public opinion no longer accepts these types of arrangements [that the commission has targeted] and so they have to take action,” Greeven said.

Reinout de Boer, a partner at Stibbe in the Netherlands, said that for an open, midsized economy such as the Netherlands’, there is always the challenge of striking a balance. He noted that the Dutch government wants to attract foreign investors, including through the tax climate, while at the same time refrain from implementing policies that could not bear scrutiny.

“That’s the challenge for the Dutch government as well as any government in the EU,” de Boer said.

The MLI, however, is one area where the Dutch government can articulate its commitment to international tax standards. While the government has already selected all but one of the MLI’s provisions, the question now centers on if or when Parliament will ratify the agreement, which will apply to all 91 Dutch tax treaties, except for the nine that are currently in renegotiation.

So far, Austria, Jersey and the Isle of Man are the only jurisdictions to have communicated to the OECD that they've ratified the treaty, according to the organization's website. But Poland's parliament approved the measure and Singapore has taken steps to ratify it, bringing the MLI close to passage. Although the instrument goes into effect once it has been ratified by five countries, the changes don’t take effect until the countries on both ends of any bilateral agreement approve them.

As for the Netherlands, Greeven said it was likely to ratify the treaty, even with the current center-right government that took office in October.

“You would not really expect them to be great supporters of all these measures as opposed to a left-wing government, but there is so much public pressure and so many active left-wing members of Parliament, that they are really pushing hard to make sure that they are able to actively change some Dutch tax policies,” Greeven said.