The role of the Netherlands in offshore finance

As we see the sun go down through the large windows of Spui25, the moderator of the evening, Esther van Rijswijk, wishes everybody a warm welcome. She introduces the main topic of the event: the role of the Netherlands in offshore finance. Together with four speakers, the following subjects will be addressed: what exactly are offshore financial centres, what are their benefits and drawbacks and what — if anything — could change to improve the current situation.

Speakers

The first speaker is Jan Fichtner, who is a postdoctoral researcher for CORPNET. He explains that offshore financial centres commercialize their internal sovereignty. This means that they set their own tax rates and regulations and so attract funds from abroad. Contrary to what is often imagined, offshore financial centres are not always small tropical islands that appeal to wealthy individuals. There is also a corporate dimension, which makes offshore financial centres corporate havens instead of merely havens for individuals. The people who benefit from this system are few in numbers but very well organized. The people to whom this is detrimental, on the other hand, are dispersed over the globe and are, Fichtner argues, probably not aware that states lose tax because of this system of offshore finance.

‘‘The Netherlands is not a tax haven itself, but it is involved in a corporate structure that leads the road to tax havens’’

Javier Garcia-Bernardo, a PhD candidate in Political Science at CORPNET, is the second speaker. He discusses the role of the Netherlands in the offshore system. Relative to other offshore centres, the role of the Netherlands is enormous; even more important than the role of the United States. Why is this? As Garcia-Bernardo explains, the Netherlands is located in the heart of the European Union, has an outstanding infrastructure and a highly educated and multilingual workforce. Also, it has lower interest, royalties and dividend tax rates, which facilitate the movement of capital without paying taxes. The reason why this beneficial tax regime was set up is to avoid double taxation (in two countries: a company’s country of origin and the Netherlands). The risk is that this could lead to companies or individuals paying no tax at all. Besides, the money does rarely end up in the Netherlands. The Netherlands is not a tax haven itself, but it is involved in a corporate structure that leads the road to tax havens.

‘‘It is often unclear what nationality money has’’

Bauke van der Meer is tonight’s third speaker. Van der Meer is a tax advisor for Russian investors that need a Dutch connection. As one of his central points, he argues that it is often unclear what nationality money has. Van der Meer quickly adopts a Dutch bike-metaphor, wherein Dutch business serves as a ‘vehicle’. He compares old BVs to an old Dutch ‘opoefiets’ and new BV’s (limited liability companies) to the modern fixie, one without brakes whereon you have to be careful because it rides much faster than older bikes. But why do we need a Dutch vehicle? Because this is good for international business: the Netherlands has good infrastructure and the Dutch know a lot about company organization, law and tax. Tax is becoming less important though, while other important factors continue to gain weight. Fichtner adds to this that trust is a very significant factor, since it is important for companies to put their assets in a politically stable jurisdiction.

The fourth speaker is Rodrigo Fernandez, who analyses multinationals, tax avoidance, tax havens and shadow banking for SOMO and is a postdoctoral researcher at KU Leuven. Fernandez discusses the structural issues revolving around offshore financial centres, which he defines as a combination of tax havens and the infrastructure needed for money to end up there. He argues that the offshore world has a monopoly position on how capital is structured. There are several categories of issues within these intertwined markets: multinationals avoiding taxes, banks and financial institutions that are involved in shadow banking, illicit money flows that fund terrorism and drugs, wealthy elites and the geopolitics of offshore financial centres. These issues together lead to the rise of the structural power of finance. Fernandez stresses that offshore financial centres provide exit routes for capital, which is in contrast with the democratic principle: multinationals can escape the nation-state where others cannot, which feeds populist movements that in the long term can undermine democracy.

Discussion

Number of jobs created

Ariane Kleijwegt, financial journalist of ‘de Telegraaf’ joins the table for the discussion. She points out that there are different ways of looking at offshore financial centres. Her audience cares mostly about jobs. The four speakers do not agree on how many jobs foreign direct investments create in the Netherlands. Fernandez points out that although the Netherlands benefits from the creation of jobs, the drawbacks from the tax avoidance of companies exceed the benefits of non-Dutch companies coming to the Netherlands.

‘‘A self-controlling market invites rotten apples’’

The role of the trust sector

The trust sector plays an important role in helping companies establish in the Netherlands. One of the questions from the audience on this topic is how Van der Meer decides to accept a Russian client, considering capital flows possibly funding drug traffic and terror. Van der Meer answers that client acceptance takes time, since the whole ownership structure is investigated and risk-checks are carried out. Gut feeling also plays a role in whether or not to accept a client. Also, the system could benefit from faster bureaucracy. Fernandez replies that ‘‘a self-controlling market invites rotten apples’’ and adds that the Dutch Central Bank advocates for more regulation. Together with Fichtner and Kleijwegt, Van Rijswijk states that this may be the central discrepancy between Fernandez’ and Van der Meer’s view: the question if the socioeconomic system would be better off if offshore financial centres could do their own things without regulations.

Do offshore financial centers kill democracy?

It has become completely dark outside when Van Rijswijk introduces the next topic. One of the discussion points is the disagreement between Fernandez and Van der Meer about whether or not offshore financial centres kill democracy. Fernandez’ opinion is that offshore financial centres provide exit routes for capital, which allows capital to escape the control of countries. On the other hand, Van der Meer argues that countries can still regulate the escape of capital, and offshore financial centres provide competition between states, thereby increasing the efficiency of the economic system. Fichtner states that offshore financial centres have contributed to national debt increases during the economic crisis. Since multinationals are able to lower their tax rates in comparison to smaller companies, it gets harder for the state to lower their debt. Yet, tax is not the only explanation of the large amount of foreign direct investments in the Netherlands, claims Fernandez.

‘‘The freedom to choose the Netherlands as a jurisdiction results in added value for the shareholders and should therefore not be restricted’’

The social value of attracting businesses

All speakers agree that tax is not the only reason why companies come to the Netherlands. ‘But if tax is not the most important thing, why is it so elaborately discussed tonight?’ someone from the audience asks. Fichtner responds that without tax benefits the amount of companies in the Netherlands would decline and move to countries such as Luxembourg, a statement to which everybody on the table agrees. However, some companies would still stay without tax incentives, since the Netherlands offers trust and protection for investments, among other factors. Van der Meer added that it is indeed not obvious whether the establishment of pure holding companies is desirable from a point of view of economic activity in the Netherlands, but that the freedom to choose the Netherlands as a jurisdiction results in added value for the shareholders and should therefore not be restricted. An interesting discussion with the audience unfolds, mainly about the social value of the facilitation of these pure holding companies.

‘‘A change of paradigm is needed’’

Shall we regulate them?

Another question from the audience is if this disagreement is comparable to a prisoners’ dilemma, since it would probably work nicely if everyone had the same vision on this. Fernandez agrees and adds that this is at the heart of why nothing happens. Above all, he argues, this is about the hypermobility of capital being enhanced by offshore structures. Van der Meer reacts that it is no good to limit the flow of capital because this will drive up the costs of capital. Fichtner suggests that a change of paradigm is needed, for instance by enforcing country-by-country reporting of all multinationals, which would allow the authorities and the public to understand where companies generate their earnings and thus to tax them accordingly. Kleijwegt agrees, and adds that leaks and whistle-blowers are now helping to keep the public informed and foster discussions on the topic.

— report by Robin Verheij

https://medium.com/@UvACORPNET/the-role-of-the-netherlands-in-offshore-finance-886be60e810b#.38idhm1dl