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The immeasurable tax gains by Dutch shell companies

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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.

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Notes

  1. See IMF CDIS database.

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

  3. 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.

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

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

  6. See  The Guardian (2019).

  7. 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.

  8. 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.

  9. 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.

  10. 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.

  11. 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.

  12. 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.

  13. 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.

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

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

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

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

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

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

  20. 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.

  21. See Vleggeert (2015).

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

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

  24. 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.

  25. 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%.

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

  27. 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.

  28. 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.

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

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Acknowledgements

The authors appreciate discussions with Ed Westerhout and contributions by Thijs Benschop in an earlier stage of the paper. The authors are grateful to Krit Carlier and Albert Termeulen of the Dutch Central Bank for providing the data and fruitful discussions. We have also benefitted from comments by an anonymous referee, Leon Bettendorf, Michael Overesch, Marcel Olbert, Simon Rabaté, Dirk Schindler and Johannes Voget, and the participants at the NTA in New Orleans, 15–17 November 2018, the CPB Tax Haven workshop, 23–24 January 2019, the ZEW Public finance conference, 2–3 May 2019 and the IIPF Annual Congresses, 21–23 August 2019 and 19–21 August 2020. Initially the paper was titled Dutch Shell Companies and International Tax Planning.

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Authors and Affiliations

  1. CPB Netherlands Bureau for Economic Policy Analysis, The Hague, The Netherlands

    Arjan Lejour, Jan Möhlmann & Maarten van ’t Riet

  2. Tilburg University, Tilburg, The Netherlands

    Arjan Lejour

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  1. Arjan Lejour
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Correspondence to Arjan Lejour.

Appendices

Appendix 1: Alternative allocation of bilateral flows

Section 2.2 explains the allocation of bilateral flows. That allocation is based on the minimum of total incoming and total outgoing income of a cluster of SPEs. As an alternative, we base the allocation on the maximum:

$${F}_{io,xy}=\frac{{I}_{t=i,x}}{TI}\frac{{O}_{t=o,y}}{TO}\mathrm{max}\left(TI,TO\right)$$

where Fio,xy is the calculated flow of type i from country x to country y as type o, It=i,x is the incoming flow of type i from country x, Ot=o,y is the outgoing flow of type o to country y, TI is the total incoming flow of the cluster from all countries and in all types and TO is the total outgoing flow of the cluster to all countries and in all types. Subscripts for time and clusters are omitted. The left part of the equation gives a fraction of the total flow of the cluster that we allocate to the flow between country x and y as type i to type o. We only consider positive incoming and outgoing flows and we ignore negative flows. After calculating the bilateral primary income flows, we determine the aggregates between two countries by summing over all clusters. Table 19 shows the assigned primary income flows, by type averaged over 2014–2016.

Table 19 Alternative assigned primary income flows, by type in 2014–2016 (x billion euros)
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Appendix 2: Taxation on transformed income flows

In the tables below, we give the taxation on income flows that are transformed in a conduit entity in the Netherlands. First, we consider incoming dividends that leaves the country as interest or royalties. There will be no taxation in the Netherlands because of the dividend participation exemption and because the Netherlands does not levy withholding taxes on interest and royalties.

For the taxation of incoming interest or royalties in a Dutch SPE, we observe this is taxable income with credit as double tax relief. When it is transformed to dividends a withholding tax may apply. The complication with the double credit situation is that country B only credits the tax paid in conduit C.

See Tables 20 and 21.

Table 20 Taxation on the indirect route from A via C to B: dividend to interest/royalties
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Table 21 Taxation on the indirect route from A via C to B: interest/royalties to dividends
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Appendix 3: Tax havens

The table gives the Gravelle (2013) list of 50 tax havens. The intersection with our selection of 108 jurisdictions is marked by the CIT rates in the table. This gives 26 countries. Some countries are in our selection but are not on the Gravelle list. Two examples are the United Arab Emirates (0%) and Puerto Rico (20%). Observe that we have taken a single, headline nominal CIT rate for each country.

See Table 22.

Table 22 Tax haven list
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Appendix 4: Estimated coefficients of the gravity variables

See Tables 23, 24, 25, 26, 27 and 28.

Table 23 Summary statistics for the gravity variables in the regressions averaged 2014–2016
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Table 24 Explaining bilateral dividend–dividend flows using tax variables for 2014–2016 (gravity part)
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Table 25 Explaining bilateral dividend-int/roy flows using tax variables for 2014–2016 (gravity part)
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Table 26 Explaining bilateral interest-dividend flows using tax variables for 2014–2016 (gravity part)
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Table 27 Explaining bilateral interest-int/roy flows using tax variables for 2014–2016 (gravity part)
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Table 28 Explaining bilateral royalty-int/roy flows using tax variables for 2014–2016 (gravity part)
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Appendix 5: Pooled regressions

See Tables 29, 30, 31, 32 and 33.

Table 29 Explaining bilateral dividend–dividend flows using tax variables for 2005 to 2016
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Table 30 Explaining bilateral dividend-int/roy flows using tax variables for 2005 to 2016
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Table 31 Explaining bilateral interest-dividend flows using tax variables for 2005 to 2016
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Table 32 Explaining bilateral interest-int/roy flows using tax variables for 2005 to 2016
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Table 33 Explaining bilateral royalty-ren/roy flows using tax variables for 2005 to 2016
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Lejour, A., Möhlmann, J. & van ’t Riet, M. The immeasurable tax gains by Dutch shell companies. Int Tax Public Finance 29, 316–357 (2022). https://doi.org/10.1007/s10797-021-09669-y

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