Future of European tax system

On Thursday 11th February, we travelled to beautiful Maastricht where we had an interview with Professor Dr. Hans van den Hurk at Maastricht University, Faculty of Law. The future of the European tax system was the central point of discussion during this interesting interview.

Could you explain something about yourself, your education and about your career?

I studied fiscal economics at Tilburg University and I have been working in the field of direct taxes and European law in Tilburg. As a student, I started the smallest tax advisory office in the world from my living room and earned money as an advisor.  Later on, I started working for the biggest advisory firms in the world, namely PwC and Deloitte. Currently, I am working independently as an independent consultant for legal and accountancy firms as well as large Dutch and American multinationals.  My work therefore, involves advising on international fiscal law as well as on international strategy and policy.  I also work for government institutions. Besides that, I have been teaching Corporate & International Taxation and International Tax Policy at Maastricht University since 2005. I also taught at Tilburg University for twelve years at the end of the last century. Currently, I am really enjoying teaching at Maastricht University because of the international focus of the university and the fantastic ambience in the most beautiful city of the Netherlands!

How do you look towards American multinationals, which are making use of tax avoidance?

American multinationals have no other choice, since they pay taxes close to 40% in their own country. As a result, they have become less competitive comparable to European companies that have up to 50% lower average tax burden.  The biggest problem of the United States is that they are aware that their system needs reform, but politically this looks impossible. From the moment, American companies set-up their headquarters in the Netherlands, there are no issues so long as they use the tax treaties. However, if they set-up a trust company that executes the orders from the management of the holding company, then this becomes a sensitive matter. In what sense can a trust officer execute a partnership on his/her own accord? If the trust company really serves a role in the company, if it really directs activities independently, then this is fine. However, if the trust company gets directions from the headquarters to be executed on its behalf, then this can become challenging.  In its Foreign Direct Investment Report of 2015, the United Nations said that developing countries would be the main victims if we put an end to the letterbox company industry. The tax pressure, for example in Europe, would be higher.  This could effectively lead to a shortage of FDI available for investing in developing countries.  Such shortage could be as much as seven times the required amount. This should not be forgotten if we really wish to have a discussion on fair taxation. It may be fair for us as it may lead to increase in Dutch taxes but it is not fair for developing countries.

What is your view regarding the fine imposed on Starbucks and Fiat, Finance and Trade Unit by the European Commission (led by Miss Vestager)?

Miss Vestager has to examine the state aid rules from the The Functioning of the European Union (TFEU) treaty.  She has to follow the rules, like they are written down in the treaty, but she is not doing this. She created an extra criterion, which was not embodied in the treaty. The fiscal world knows two important model treaties. The OECD Model treaty and the United Nations Model treaty. Besides that, both organizations have determined transfer pricing guidelines. These guidelines provide definitive directions for companies to apply for determining the correct price in case of an internal transaction between group entities.  These are the only controls the world actually has.  Miss Vestager says that she does not buy that. She wants to do an independent investigation and apply EU-rules with additional criterion to the transfer pricing rules that reaches far beyond what EU stands for.  This leads to a double taxation for the companies. America along with many other countries, applies the OECD rules.  If the taxes in Netherlands are increased, they will not agree to any additional Dutch tax because it would be wrongly charged.   Furthermore, it is annoying that Miss Vestager is moving ahead of the crowd.  OECD is presently busy with the Base Erosion Profit Shifting (BEPS) and the world is waiting to see what they will cover.  Actually it has to be said: Europe, please wait for a moment!

The European Commission strives for an equal tax base throughout Europe as a solution to the problem. How would you solve this problem?

We are really not ready for an equal corporate tax base in Europe, because we still have to cope with the issue of differences in governance across European countries.  For example, I helped the Portuguese government with a tax reform.  In Portugal, a tax inspector is totally autonomous. If the law states that A should be enforced, and s/he thinks it is B, then B will be applied. You can then protest against it, but can you really give any evidence to the contrary? In Italy, it is even worse. Imagine a company has indicated a profit of €1 million in Italy, however, it is possible for it to receive a recovery surcharge equivalent to €10 million profit. Subsequently, this company may appeal against the decision, but the appeal process will take at least a decade and no company would want that. So, they would rather prefer to settle behind the scenes with the tax authorities whereby they state: “You know what, we will declare €1.5 million profit, but then we agree that you will not go into the mutual agreement procedure as stated in the tax treaty.” So in the end, the company will in any case pay far more in Italy than required under the law. Overall, the tax harmonization is currently all about centralizing power in Brussels, because then Brussels will have their own tax base and their own tax system. Under such a system, Brussels will determine the rules, and this would always provide work for the civil servants in Brussels.

In the Netherlands, we can choose to reject the harmonization of the tax system, but the majority of the member states need to vote against it.  In 2015, unfortunately we agreed on the new harmonization guidelines that took Europe 30 years back in time in relation to base taxes on dividends. This is especially true for small service-oriented economies, such as the Netherlands and Ireland, which will suffer as a result. The Netherlands, along with two other countries, tried to stop this, but it was eventually put through. The Netherlands is already paying for this.  Various companies have already relocated their headquarters to the UK because of this reason. In short, it is a weird discussion. Right now, you see that the commission is trying to extend its power and that the smaller countries will pay the price for this. The large countries will put their system through, whereby it fiscally does not really matter if you are in the Netherlands or in Germany. As a result, Europe would make it very complex for itself. This is especially true if the UK would remove itself from the system. The Brexit is of course bad for the UK and for Europe, but if it happens, many holding companies will disappear from the Netherlands to London.

Why do many American multinationals do not see tax avoidance as part of corporate governance?

Tax avoidance remains a complex story. There are more and more companies that are including information on taxation in their corporate governance reports. Such companies effectively end up paying around 40% in corporate tax and other taxes if they do not restructure.  It is an easy option for them.  However, for many companies, tax remains a cost and these companies need to compete against, for instance, European companies, that effectively pay less than half of what American companies are required to pay in taxes.  As already mentioned, an American tax reform is really necessary, but this will not happen in short term.

What is your opinion about the differences in the tax rates for multinationals and Small and Medium Enterprises (SMEs) across various countries?

Small Dutch companies pay around 20-25%. The large Dutch multinationals have an effective tax rate (ETR) of 17-18%, so there is not much of a difference here in the Netherlands. Eventually, you have to deal with a Dutch multinational with a few activities in a country where the tax burden is much lower than in the Netherlands and then you come grosso modo 17%. Sometimes, this could be higher, because a multinational cannot settle the losses incurred in one country with the profit made in another country, and so the tax burden will go up. At times, newspapers give examples of American multinationals with low tax burden in the Netherlands in comparison to a Dutch SME. A crooked comparison, because the American profit would still be taxed at almost 40%.

What advice would you give to students from Tilburg University?

I would, in all cases suggest that they gain international experience. They should make sure that they spend some time abroad. The world is waiting for Dutch people. Dutch people are creative. We have been able to achieve a lot of things with our knowledge and abilities, and therefore have a good reputation in the international domain. This is also why many companies chose to locate their headquarters here. So go abroad!