Dutch officials really don’t like it when someone calls their country a tax haven.

In 2009, the Obama administration did just that, naming the Netherlands as one of a number of countries where scores of major American firms had established subsidiaries in order to avoid paying U.S. taxes. In a press briefing, the White House also noted that, taken together with Bermuda and Ireland, the Netherlands claimed nearly a third of all foreign profits reported in 2003 by U.S. corporations.

These statements provoked outrage in the Netherlands and a protest from the Dutch ambassador in Washington. “We’re not happy,” said Jan Kees de Jager, the Netherlands’ finance secretary. “I expect there’ll be a clarification and we’ll not end up on lists like this in future, between Bermuda and Ireland.” After all, the Dutch response seemed to suggest, everyone knows that those places—and others, such as the Cayman Islands and Switzerland—are tax havens, and to lump the Netherlands in with them was apparently a profound insult.

Shortly afterward, de Jager claimed that the Americans had agreed to stop describing the Netherlands in those terms. Doing so might have been justified by a desire to placate an aggrieved U.S. ally. But the truth is that the Netherlands absolutely belonged on a list of major tax havens—and still does, today.

In 2017, foreign direct investment in the Netherlands totaled $5.2 trillion. But the vast majority of that money wasn’t invested at all: only $836 billion actually entered the Dutch economy. The other $4.3 trillion went into shell companies or subsidiaries set up to avoid paying taxes elsewhere. As such numbers should indicate, this isn’t the work of a few shady players trying to hide their illicit gains: some of the biggest players in the global economy are in on the game. Google and IBM are among the many U.S. companies that have established operations in the Netherlands in order to reduce their tax bills back home. Most people consider Fiat Chrysler an Italian-American multinational; technically, however, it is a Dutch company, having decided for tax purposes to establish its official headquarters in Amsterdam in 2014.

In 2016, the Netherlands—with a population of barely 17 million—accounted for 16 percent of all foreign profits claimed by U.S. companies. Needless to say, that is not because American firms just happen to sell an extraordinary amount of goods and services to the Dutch. Rather, it’s because the Netherlands lets those companies park the money they make elsewhere in Dutch subsidiaries or shell companies, or move those profits through “letterbox” entities in the Netherlands, from which it can be sent on to other tax havens. For example, in 2017, Google took $22.7 billion in profits it made outside the United States and transferred it via the Netherlands to Bermuda, where the money avoided being taxed altogether.

The Dutch government has always contended that things weren’t meant to work out this way. All those shell companies and all that money, officials have claimed, are just the accidental byproducts of innovative tax politics that intend merely to give Dutch companies a leg up in a hypercompetitive global economy. Despite these protestations, the truth is that for decades the Netherlands has deliberately established itself as a tax haven at the direct expense of its European neighbors, the United States, and developing countries. And until recently, the Dutch have gotten away with it.

But in the last few years, more and more journalists and researchers have started to sound the alarm. Meanwhile, the European Union and the OECD have begun to apply pressure on the Netherlands to clean up its act. And the Dutch public has become increasingly fed up with the situation. The government has responded with promises to reform and has taken some preliminary steps. But the proposed fixes are mostly window dressing: the Dutch government clearly hopes that everyone will lose interest after it makes a few relatively painless concessions. So, if they want to see the Dutch tax haven closed for good, the EU, the OECD, and watchdogs in the press and nongovernmental organizations need to keep the pressure on.

The Dutch Advantage

The Netherlands is a small country that has punched above its weight in the global economy for centuries, first as a seafaring colonial power and later as a major center of European finance and trade. One element of its success has been to design tax rules with an eye toward improving its own ability to compete abroad. As early as 1893, the Netherlands had laid the groundwork for its eventual emergence as a tax haven with a rule known as “the participation exemption,” guaranteeing that profits transferred from a subsidiary to a parent entity would not be taxed twice. Eventually, that rule would serve to protect Dutch companies doing business abroad whose foreign income was subject to taxes in other countries.

In the 1960s and 1970s, this idea was enshrined in Dutch foreign policy when the Netherlands began to negotiate tax treaties with other countries that would give an advantage to the big Dutch firms such as Shell, KLM, Unilever, and Philips. Such treaties allow Dutch companies and investors to channel profits made abroad back to the Netherlands, avoiding additional cross-border taxation. In exchange, the country where the profit was made hopes to encourage further foreign direct investment. The Netherlands started with a handful of such treaties but has now has around 100 in place—significantly more than the average number for EU members (80) and closer to that of much larger European countries, such as France (107).

By operating as a tax haven, the Netherlands allows corporations to deprive other governments of funds they need for basic services.

One such treaty has been particularly troublesome: the one between the Netherlands and the United States. Under its terms, U.S.-based multinationals have created Dutch companies called limited partnerships, which the U.S. government considers technically taxable in the Netherlands and therefore not subject to U.S. taxes—even though, in practice, the companies are not actually taxed by the Dutch. As a result, the profits of such companies go untaxed by either country. A report released earlier this year by Oxfam estimated that in 2016 alone this loophole allowed U.S.-based multinationals such as Google, Pfizer, Nike, and Uber to avoid paying taxes on a total of more than $100 billion of overseas profits.

By operating as a tax haven, the Netherlands allows corporations to deprive other governments of funds they need for basic services: infrastructure, health care, education, and so on. This hurts governments and ordinary people everywhere, but the effect is perhaps most pernicious in developing countries, where the needs are most desperate and the tax base is already small. Take, for example, the British-Australian mining firm Rio Tinto. As revealed in a 2018 report co-published by the Centre for Research on Multinational Corporations (SOMO), which is based in the Netherlands, and OT Watch, a Mongolian environmental and human-rights advocacy group, Rio Tinto has in recent years used the Netherlands and Luxembourg as tax havens in order to reduce the taxes it would have to pay on profits it made from mining in Mongolia. By doing so, the company managed to reduce its tax bill by $230 million—an amount that could have hypothetically allowed the Mongolian government to nearly double its spending on education or health care.

Closing loopholes

A crucial part of the story of the Netherlands’ transformation into a tax haven is that fact that it took place with broad support from across the political spectrum. Dutch governments of all stripes have played the game and, until recently, there was little pushback from civic institutions such as the press or academia. Meanwhile, a wide range of special interests have helped build the Dutch haven and protect it from scrutiny. Anytime criticism of Dutch tax policies bubbles up, defenders have a reliable answer: if the Netherlands changed its laws, it would lose its unique position as a small country able to compete in the world economy, which would lead to waning economic and political power. In reality, the fruits of being a tax haven are enjoyed mostly by a small slice of Dutch society: the roughly 10,000 accountants, lawyers, and consultants who are directly or indirectly employed by the tax-avoidance industry. The wider Dutch economy benefits very little: after all, the vast majority of “investment” that the Netherlands receives owing to its tax policies quickly leave for other tax havens. A study produced by the Dutch central bank in 2018 demonstrated just how meager the gains are: the total amount that letterbox companies spend annually on salaries and premiums for government-run social welfare programs is around $1.1 billion—a small sum when considered alongside the Netherlands’ annual GDP of over $820 billion.

Although the tax-avoidance industry has managed to exercise undue influence in the Netherlands, it has less pull in the rest of Europe, and the EU and the OECD have waged a long though not particularly effective battle to get the Dutch to change their ways. In 1999, the EU released a report identifying the Netherlands as the country in the EU with the most harmful tax regimes. The Dutch state secretary for finance at the time, Wouter Bos, dismissed the finding as motivated by “pure jealousy,” and for more than a decade the Netherlands was able to avoid any real crackdown. In 2013, however, the OECD renewed its long-dormant attention on tax avoidance, and in the following years the EU took up the issue as well, approving two important directives to address the problem. Finally, earlier this year, the European Parliament did what no other EU institution had dared to do before and officially recognized the Netherlands as a tax haven. This move won the support of a number of Dutch members of the European Parliament, a position seen by some politicians back home as tantamount to treason.

The EU and the OECD have waged a long though not particularly effective battle to get the Dutch to change their ways.

In the wake of that designation, the Dutch government could no longer carry on as before. In recent months, it has started to reform its tax rules. For one thing, the loophole in the U.S.-Dutch tax treaty is set to be closed next year. And the Dutch government has put forward a proposal to introduce a withholding tax on interest and royalty payments that get channeled to other tax havens. Doing so, however, would put a stop to only a very limited share of transactions, leaving intact the Netherlands’ role as a conduit for such money.

If the Netherlands really wants to change its ways, it will have to take more dramatic steps. The first would be to ensure the taxation, at a normal rate, of all interest and royalty income that is channeled to or through the Netherlands. The government would also have to pass legislation that would make it harder to set up a letterbox company, revise its tax treaties to prevent abuse, and close gaping loopholes that corporations could continue to exploit even if the treaties were fixed. Finally, instead of obstructing the EU and the OECD, the Dutch would instead need to cooperate with both organizations in their efforts to fight tax avoidance. All of this would require a sea change in Dutch politics, and it’s far from clear whether anything like that is in the cards. For the first time in decades, however, it seems possible that the Netherlands just might clean up its act.