‘A shambles’ is what Professor of Tax Law Jan van de Streek of Leiden University calls the bill by outgoing State Secretary for Tax Affairs Hans Vijlbrief (D66), which aims to combat a specific form of tax avoidance. In doing so, intellectual property (such as trademark rights) is shifted within a company to create a deductible item – and ultimately have to pay less profit tax.
Next Monday, a debate on the intended law is on the agenda in the House of Representatives, which will be called the Act Preventing Mismatches in Application of Business Principles in full. The intended effective date of the law – after approval from both Houses – is January 1.
Crocs and Uber have found a new way to avoid tax via the Netherlands in recent years. NRC already wrote about this last summer. Their method works as follows: the American multinationals sold intellectual property within their own organization. In both cases, the selling party was a branch in Bermuda and the buyer a Dutch subsidiary.
The Dutch BVs can write off this purchase – with the current rules – in the coming years. This means that they are allowed to deduct the amount paid from the operating profit, which comes from all over the world. This leaves a smaller amount on which they still have to pay tax.
The Uber BV created a deductible item totaling 6.7 billion dollars (5.8 billion euros), according to the annual report of 2019. At Crocs, that was 492.5 million dollars last year.
The aim of the envisaged new law is to combat so-called mismatches in the sale of intellectual property within one company. Multinationals must use the same purchase and sale price on paper when moving trademark rights or other forms of intellectual property from one subsidiary to another.
At the moment, the price that a Dutch BV pays does not have to correspond to the amount that a foreign sister company mentions in the books.
The result may be that the Dutch company is then allowed to write off a higher amount from the profit than it has received elsewhere – and thus avoids tax. The law that has now been drafted to combat this type of mismatch could put an end to this construction. But Uber and Crocs don’t seem to be very bothered by the bill that is now in place.
Not much to fear
Why Uber and Crocs have less to fear from the bill from a tax perspective? It doesn’t address all methods. The manufacturer of the well-known plastic sandals and clogs and the taxi service both used two methods to finance the purchase of their subsidiaries. They did this through an internal loan and a capital contribution – a kind of gift from one subsidiary to another.
Under the new law, Crocs will lose some of this self-created tax benefit. The internal gift is then not regarded as a so-called business transaction, and therefore falls under the bill. But the internal loan is not included: Crocs can continue to write off that part of the purchase – which does count as a business transaction.
And that depreciation on the trademark rights in the Netherlands saves Crocs tax. The lower tax in the Netherlands cannot be offset by a higher tax in Bermuda: the overseas tax haven does not levy tax on corporate profits.
In addition, the loan has an additional advantage: Crocs can deduct not only the depreciation from the profit, but also the interest paid. Exactly how much money this construction will bring Crocs under the new rules is unknown. But probably millions of dollars.
Uber gets away with even better. In addition to the loan portion, the taxi and meal delivery company may also write off the gift portion of its intellectual property in the Netherlands, unlike Crocs. The bill only applies to transactions that have been made from 1 July 2019. Older transactions are subject to a transitional arrangement. Uber already transferred its trademark right to the Dutch BV in April 2019. As a result, the entire tax advantage of Uber remains out of reach of tax inspectors.
It is no coincidence that the tax constructions that Crocs and Uber use will fall outside the intended new rules. State Secretary Vijlbrief deliberately excludes business transactions from the bill. The idea is that other countries are already taxing such transactions. But in Crocs’ case, that country is Bermuda – and it has no income tax.
Uber will also be well off if the intended new law is passed, thanks to a conscious choice. In an earlier version of the bill, erected structures were already covered by the new rules from 2017. Lobby groups such as the Dutch Association of Tax Advisers (NOB) thought this was going too far. In a response, the professional association emphasized that looking back is allowed “only in exceptional situations”. If the legislator found it necessary to look back, then this should in any case be done from a much later moment, the professional association stated.
The NOB found an ally in the Tax Authorities, who said they were unable to check as many old tax routes. Looking back five years is “extremely complex” for the Tax Authorities, officials of State Secretary Vijlbrief wrote in a memorandum accompanying the bill last July. According to the officials, it is “very conceivable” that looking back five years “will have a negative impact on the feasibility of the bill”. The Council of State also recommended a later effective date, namely 2021.
Made speed
Under pressure, Vijlbrief subsequently limited the transitional arrangement to 1 July 2019. That is a short period, says Professor Van de Streek. “I would say that housing intellectual property in tax havens has long been socially undesirable.”
Outgoing MP Bart Snels of GroenLinks is working on tackling tax avoidance. In principle, he is pleased with the law. Vijlbrief has promoted a committee recommendation to a bill within a year and a half. Snels: “We have made some progress, that’s good.”
At the same time, Snels would like to see a number of things differently. “There are holes in the current bill. All cases of double non-taxation, such as the internal loan and a gift, should be covered by the law. The Tax and Customs Administration must be able to intervene if a construction is only intended to avoid tax. And GroenLinks is going to amend that the retroactive effect of the law goes back to 2017, so that Uber is no longer excluded.”
Also read: The Netherlands’ ultimate tax bait is no more, but tax specialists are working hard on alternatives
A version of this article also appeared in NRC in the morning of October 22, 2021
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