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European Parliament

TAXE-commission

Mr. Lamassoure

Wiertzstraat 60

B-1047 Brussels

Belgium

 

 

Date     June 8, 2015

 

Re:       Reply letter to your request for information

  

Dear Mr. Lamassoure,

 

First of all I would like to thank you for the pleasant conversation we had when your TAXE-commission visited the Netherlands on May 29, 2015 in the context of its investigation of tax rulings and other measures similar in nature or effect. I hope and trust that the presentation given by employees of the Dutch tax authorities regarding the APA/ATR-practice and the subsequent exchange of views with your commission shed some light on things that are done in the Netherlands. You emphasized that this is no investigation into the practices of a limited number of Member States, but that the investigation is focusing on all 28 Member States. Given the limited time, it was impossible for me to answer all your (technical) questions. As agreed on May 29, below I will provide you with an answer to the questions still outstanding. However before I do so, I will react to your letter of April 23, 2015 containing the request for information. Furthermore you will receive additional documents, including documents that might be helpful for getting as complete as possible understanding of the Dutch APA/ATR practice.

 

In your letter you have indicated that you would like to receive more information regarding initiatives undertaken at a national level in the area of transparency and measures against tax avoidance. Furthermore you indicated that you would like to receive overviews of rulings granted, information that was exchanged with other Member States, a blacklist and international tax treaties concluded. Below I will provide you with my reactions per separate subject.

 

Initiatives undertaken at a national level to increase transparency

 

The Netherlands would like to do pioneering work regarding the increase of transparency with respect to the fight of tax avoidance by companies. The Netherlands therefore support the improvements made by the OECD in the area of Country by Country Reporting. Currently the Dutch Government is implementing the recommendations made by the OECD into national regulations. These national regulations will enter into force on January 1, 2016. A consequence of these regulations will be that international companies with a revenue equaling or exceeding Euro 750 million will have to include in a Country by Country-report the allocation of its worldwide profits and of the taxes paid. This information will be sent-on by the tax authorities from the country where its headquarter is residing to the countries in which the company has a branch.

 

Furthermore the Netherlands is already fully cooperative regarding the exchange of information upon request. The Netherlands also support the initiative of the European Commission to come to the automatic exchange of information regarding tax rulings. The Netherlands agree with the Commission that in mentioned Directive it should be determined that Member States will automatically exchange information with respect to similar agreements that they formally do not call rulings. Furthermore it is important that the final Directive will be efficient and well workable for the tax authorities.

 

A perfect example of the pioneering work regarding the increase of transparency the Netherlands want to do is the agreement (memorandum of understanding) with Germany with respect to the exchange of information regarding rulings. This agreement will be signed by both countries in the foreseeable future.

 

Furthermore the Netherlands unilaterally exchange information regarding low-substance entities of which the activities largely consist of receiving interest or royalties with countries in which these entities have called in a tax treaty, an arrangement concluded with the Netherlands that is comparable to a treaty or which has called in the Interest and Royalties Directive (Art. 3a of the ‘Uitvoeringsbesluit internationale bijstandsverlening bij de heffing van belastingen’).

 

Initiatives undertaken at a national level to limit BEPS 

Dutch law and regulations contain several provisions to avoid base erosion and profit shifting. Without striving to be complete I mention the following:

·        Associated enterprises are obliged to use transfer prices as independent enterprises in their internal relations. In case such associated enterprises do not use transfer prices as independent enterprises would, such transfer prices can be corrected based on the at arm’s length principle ((article 8b of the Wet op de vennootschapsbelasting 1969 (hereafter: Wet Vpb 1969)).

·        No settlement of withholding taxes with Dutch corporate income taxes in cases in which the entity which is a resident of the Netherlands acts within the group as a flow-through entity for interest and royalties that that entity incurring a real risk regarding such activities (article 8c of the Wet Vpb 1969).

·        No deduction of interest regarding a loan which actually functions as equity (article 10, paragraph 1, sub d, of the Wet Vpb 1969).

·        The provision aimed against profit drainage by an artificially created deduction of interest where the interest is due to an associated enterprise or natural person (article 10a of the Wet Vpb 1969).

·        The provision aimed against international mismatches regarding no-interest bearing or low-interest bearing long-term loans concluded between associated enterprises (article 10b of the Wet Vpb 1969).

·        No participation exemption for benefits from low-taxed passive participations (article 13, paragraph 8, of the Wet Vpb 1969).

·        The obliged annual revaluation of a low-taxed passive participation which represents an interest of at least 25% (article 13a of the Wet Vpb 1969).

·        A limitation on the deductibility of excessive interest which is related to the financing of a participation (article 13l of the Wet Vpb 1969).

·        The limitation on the deductibility of interest in case of excessive take-over debts (article 15ad of the Wet Vpb 1969).

·        The subjective tax liability for foreign entities that own an interest of at least 5% in a Dutch entity with as a goal to avoid income or withholding taxes at another (article 17, paragraph 3, sub b, of the Wet Vpb 1969).

·        The exclusion of the setting-off of losses stemming from holding and financing activities with income stemming from other activities of an entity (article 20, paragraph 4, of the Wet Vpb 1969).

·        Additional substance measures which are included in several policy decrees[1].

 

In an international context the Netherlands also try to avoid base erosion and profit shifting by for example including anti-abuse provisions in tax treaties. The Netherlands for example took the initiative to approach 23 developing countries to include anti-abuse regulations in the tax treaties.

 

Overview of rulings granted

Enclosed (enclosure 1) you will find an overview of the number of rulings granted per year. In the overview a distinction is made between ruling requests granted (per sort of ATR), denied and withdrawn/decommissioned. The distinction between request granted, denied and withdrawn/decommissioned differs from the distinction made in the enclosure enclosed with the letter to the Dutch Parliament regarding the exchange of information regarding rulings (see additional information). The total of the categories however do match.

 

Overview of information that was exchanged with other Member States

Enclosed (enclosure 2) you will furthermore find an overview of information that was exchanged with other Member States. In the overview a distinction is made based on Member States and based on whether the exchange of information took place spontaneously or automatically.

 

Blacklist

The Netherlands do not use a blacklist. However, the Netherlands for example refuse the application of the participation exemption with respect to income from a passive participation in an entity residing in a low-tax jurisdiction. In such case only the so-called ‘deelnemings-verrekening’ (participation settlement) applies. The tax level of a jurisdiction therefore can be important for the applicability of the Dutch participation exemption. This regulation is not related to a certain country, but to the specific situation of the enterprise and the tax rate of the country in which it is active.

 

Tax treaties

The Netherlands do not conclude tax treaties which have the effect of decreasing corporate income tax rates. Bilateral tax treaties allocate the rights to raise taxes as a result of which double taxation is avoided. Furthermore tax treaties constitute a basis for the exchange of information.

 

Questions still outstanding

During the exchange of views that took place on May 29 some technical questions remained unanswered because of a lack of available time. For as far as possible I have abstracted these questions from the case. The reason here for is that for me it is not possible to discuss the specific circumstances of a taxpayer. A member of your commission raised the question what happens if it turns out that the transfer price actually used by parties differs from the transfer price as agreed upon in the APA that is granted. In such case the taxpayer does not live up to its part of the deal as a consequence of which the APA expires.

 

An other member of your commission raised a question regarding our innovation/patent box[2]. This member wanted to know how our innovation/patent box works in the case off software that for 80% was developed in India and for 20% in the Netherlands. In this case I can answer that in such case based on the OECD Transfer Pricing Guidelines it will be determined what is an at arm’s length remuneration for the activities performed in both countries. In case the development was done for 80% in India and for 20% in the Netherlands, and under the assumption that the functions performed in both countries are of a similar nature, a vast part of the profit will be allocated to India. The Netherlands can raise taxes over the at arm’s length remuneration that is allocated to the part of the development that was doe in the Netherlands. The innovation/patent box cannot be applied to this at arm’s length remuneration, since the Dutch entity’s involvement in the development of the asset was not large enough. As a consequence of this the conditions for the application of the innovation/patent box were not met, since in this case one does not meet the condition of a self-developed immaterial asset.

 

However, there can also be situations in which the division of activities turns out less extreme and in which important functions with respect to the research and development activities are undertaken in the Netherlands and the more routinely activities are done in India. In such situation the center of the research and development is considered to be in the Netherlands. According to the OECD Transfer Pricing guidelines in such a situation India is entitled to raise taxes over the at arm’s length remuneration for the activities performed in India. The Netherlands on its turn is allowed to raise taxes over the remaining profit realized via the asset. In such cases the innovation/patent box can be applied in the Netherlands, provided that all conditions for the applicability of the innovation/patent box are met, including the condition that it should regard a self-developed asset. This is only the case in case the taxpayer has decisive power and is functionally capable to lead the research and development activities. For this it is a.o. necessary that the taxpayer posses enough technical knowledge.

 

Finally during meeting a few questions were raised regarding the substance requirement as used by the Netherlands. In the answers it was stated that only a few countries in the same way as the Netherlands, demand high substance requirements to be met by resident entities that want to obtain certainty in advance with respect to cross-border transactions. An international comparative study to which was referred can be found in a publication of PriceWaterhouseCoopers dating from 2009. We refer to “Substance, Aligning international tax planning with today’s business realities” by Axel Smits en Isabel Verlinden, (ISBN 9789081207324).

 

Additional information

Enclosed to this letter (enclosures 3-8) you will find a report of the Algemene Rekenkamer which has conducted a research to tax avoidance, a letter to the Dutch Parliament regarding the exchange of information with respect to rulings, the reaction from the Dutch cabinet to a report of the independent research bureau SEO with respect to special financial institutions and shadow banking, a letter to Commissioner Hill regarding the Impact Assessment in the context of Country by Country Reporting, the PowerPoint presentation regarding the Dutch ruling practice en and overview of countries with which the Netherlands have concluded full DTAs.

 

 

Yours sincerely,

Secretary of State for Finances

 

 

Eric Wiebes

 

 

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