The Netherlands: Worlds Biggest Tax Haven?

[Music] this is the Netherlands a fine country full of flowers windmills and loose regulations around the finer things in life this country is in many ways like a lot of very developed European countries where you have explored earlier on the channel very high living standards good social mobility a strong economy and healthy levels of inequality but the Netherlands hides a bit of a secret behind it's lovely flowery smile it is one of the largest tax havens in the world but how does this make sense the Netherlands has a high income tax rate of over 50% for top earners it has a corporate tax rate of 25% and they're not even particularly strict laws around things like banking privacy in countries like Switzerland for example so all this is making the Netherlands sound like a pretty terrible tax haven all in all so why is it so popular well as with everything to do with taxation of international entities like multinational corporations it is complicated majorly complicated a lot of this complexity is by design a big part of modern-day schemes like this is not making it too obvious and sprinkle a lot of nuance on the whole system so it is not so obvious what it is you were doing it is majorly bad publicity to be exposed as a tax dodging company when Starbucks was called out in Europe for avoiding tax or a series of intricate schemes their revenue fell drastically in the market from a level of consumer backlash so yeah companies are keen to keep these operations complicated in order to avoid been exposed to what they are doing it is also very important that companies can justify moving this money around from country to country to national governments if they can provide a legitimate reason for these funds transfers and that is fine they turn around and say also I just don't want to pay corporate income tax they are likely to find themselves slapped over the head by their local tax agency in whatever country they mainly involved in the second reason freezing bill complexity is that modern-day tax structures are not as simple as visiting your closest tax haven that is very 1980s there is a lot more to it these days than just that companies basically shop around country to country to fit out a taxation model that suits them a touch of low taxes from Bermuda a sprinkle of financial privacy from Switzerland and a teaspoon of intellectual property rights from the Netherlands you okay so let's say you're a crafty and morally onerous multinational CEO and you're keen to make some of your profit disappear to the land of no tax how would this work you would think you could just set up a holding company in Bermuda or Panama or any other zero corporate tax nation on earth funnel all of your profits there and call it a day and be done with it right well no firstly this is very obviously tax dodging as the primary motivator of sending money overseas and therefore not allowed secondly it just doesn't work by the time you can transfer the money to Bermuda or Panama or the British Virgin Islands or whatever it would have already been counted as profit in the USA and you would have already had to pay corporate income tax on it so instead what you do is this set up your company in Bermuda a lovely tropical paradise with zero taxation and let's call that company Bermuda Holdings you V then you use that company to purchase a company in Ireland let's call it Island Limited very creative names that I know this is a shell company so it won't actually cost you anything besides a $1 token sale price plus the cost to set the company up you then merge these two companies into bermuda lads Limited now you have a functioning company in both of these countries that is managed in Bermuda Ireland is not a tax haven in itself it has a 12 and a half percent corporate tax rate which is not bad but much worse than 0% which is what we're after here what makes Ireland so great is a law that states if a company is owned by another foreign company then the profits can be transferred to that country and taxed over there at whatever that country's tax rate may be hmm cool so then you give Bermuda land limited all of your intellectual property let's say your logo and sub technology patents or whatever the Moodle land limited then sets up another company in the Netherlands let's call it Netherlands Limited the Moodle and then licenses out all of these intellectual property rights to this company here the reason the Netherlands is so perfect for this is because it has a nearly zero percent tax rate on the revenue from patents and an agreement with other European countries that money can be transferred country to country tax-free okay so now let's follow the money let's say your company sells your product in the United States and makes a $1,000 sale after costs of goods sold and business expenses you would be left with a profit of let's say $500 and you should pay tax on that but no no suddenly you have to pay a fee to use the logo and the technology involved in that product to the Netherlands Limited that is the current license holder of all these patents remember let's say Midlands Limited conveniently charges you a $500 licensing fee for every one unit sold well suddenly for every $1,000 in sales you are paying $1000 in costs and expenses and making zero profit and therefore paying zero tax in the United States awesome now the money is in the Netherlands and Netherlands limited just made $500 in revenue from its intellectual property that it holds the license to well that's fine remember the tax on intellectual property in the Netherlands is super low effectively zero in some circumstances so no problems here but the Netherlands limited cannot sit on this money or else it will count as profit and it will be hit with a 25 percent tax rate which kind of defeats the purpose of this whole ballet so it is a hot potato of funds to Ireland it does this because it did not actually own those patents the Moodle and limiter did and now it has to pay for that licensing and old surprise-surprise the licensing fee is $500 shocking now the noodle land in Ireland has the money and because of another lovely Irish law it won't have to pay revenue on this intellectual property licensing because the Irish government basically says if you have paid tax on it once even if it's in another country and even if it was only half a percent you don't have to pay tax on it again that just wouldn't be fair what Bermuda land limited would have to pay tax on though is the $500 in total profit it would have made Ireland still has corporate tax ah but remember the Irish government is very kind here once again they say sure you have made profits here in Ireland but you're a bermuda based company just take that money back home and pay your taxes there at whatever that tax rate may be mm-hmm yeah sure sounds good this structure is very complicated obviously but it legitimizes the funds transfers across the board paying for licensing is not tax avoidance it is a business expense almost every single business in the world has to pay for even economics explain limited pays licensing expenses to Adobe Premiere and storybooks and like god-awful stock footage collection and rightfully so businesses should be able to subtract this from their profit even if those licensing agreements were probably something they could have had for free if they just held on to their own patents that air who is to say giving away your patents to a company that is totally not you as a bad business move so this scheme is perfectly legitimate it just involves paying licensing fees to countries around the world but it also avoids any form of taxation by going from America to make a sale to the Netherlands to avoid paying intellectual property tax revenue to Ireland to avoid paying foreign transfer fee taxes and then through Ireland to Bermuda to avoid paying corporate taxes you have avoided basically paying any form of corporate tax you really probably should have been paying believe it or not this is one of the more simple structures for this type of money transfer it is so widely used and popular in fact that it has its own name it's called and I'm not kidding the double Irish with a Dutch sandwich good lord who said those accountants don't have a sense of humor those cheeky cheeky bastard a lot of people look down on this kind of scheme and there is a strong argument to be made that company's making profits in a country should probably pay some tax in that country these kind of companies are probably dependent on public roads to ship their goods and policing to keep their factories safe and this doesn't come for free it comes from taxes but the thing is none of this is illegal and for the most part it is hard to discern legitimate businesses paying legitimate expenses from companies looking to erode their profit base he could very easily be argued that it is better for a hundred companies to get away with questionable practices like this rather than one company paying taxes on profits they didn't actually make on the flip side it is a struggle for a lot of businesses not to engage in this type of activity because if you don't your competition will and with less money going to taxes and more money left over that can be used on expansion or research and development or and paid back to shareholders they are going to be more competitive as a business that could over time start driving you out of work which is not only unfair to your shareholders but also your staff and suppliers who will also be out of work this is slowly starting to turn around though getting called out for using even legal tax minimization structures like this is a big deal for company's public image these days and the double Irish with a Dutch sandwich structure we have just explored well that's not going to be possible after 2021 due to new tax laws passed by the Dutch government under a lot of pressure to get rid of this scheme it is almost inevitable that some genius accountant with a team of lawyers already has the next double IRS for the Dutch sandwich structure thought up and ready to go as soon as 2021 rolls around it is impossible to keep on top of every legal loophole from every country out there and while this is true these schemes will continue to exist are they moral well it's not as simple as saying guru tax avoidance bad there is a lot to be said that this is just a necessary evil for a lot of companies and for the Netherlands it has meant tens of thousands of high paying jobs with companies like KPMG and Deloitte setting up major operations here to facilitate these structures for their international clients will these operations continue once this has been removed well it's hard to say there are winners and losers in all of these types of operations all we can do is inquire about the net good a system is doing and speculate about the problems a solution might cause hi guys I hope you enjoy the latest video if you did please consider liking and subscribing if you really enjoy the video please consider supporting us on patreon the link is in the video description otherwise I will be live-streaming the Q&A session that will be hosted on our discord server for an hour after this video goes live so if you have any questions jump on there either live stream or our discord server otherwise I will be doing my very best to reply to any serious comment in the comment section below choose guys bye

Channel: Economics Explained

Views: 370,272

Rating: 4.9331775 out of 5

Keywords: the economy of the netherlands, the economics of the netherlands, the economy of the netherlands explained, the economics of the netherlands explained, the netherlands economics explained, economics explained the netherlands, the netherlands economy explained, the netherlands economy, the netherlands economy economics explained, economics, the netherlands economics, how the netherlands economy works, economics explained

Id: i0FOUR5x5Rg

Length: 10min 54sec (654 seconds)

Published: Thu Dec 05 2019

Reddit Comments

[u/cocoGG]

Inb4 Dutchies come and tell us we are just jealous of their "succes".

[u/NoInterest4]

The main problem is the Netherlands is not gaining anything from this, except for the bad fame. The companies that are doing this are paying for a PO Box and some lawyer fees here. Meanwhile, the usual person is paying 52% income tax, plus about 130 Euro per month for the compulsory medical insurance, plus about 100 Euro per month as road tax, the public transportation is one of the most expensive in Europe and so on.

[u/collegiaal25]

Dutch person here: if you want it to stop, stop buying our products. Ask your government to put sanctions on it, or to stop your companies to trade with us. If the Netherlands actually suffer from it then you'll see how quickly our government fixes it.