2020 Memorandum on Tax Treaty Policy (unofficial translation) 1. Introduction Since the adoption of the 2011 Memorandum on Tax Treaty Policy, more attention has rightly been paid to combating tax avoidance and to the special position of developing countries in relation to tax matters. Taken together with various other developments, this has altered the position adopted by the Netherlands in negotiations on tax treaties. In issuing this new Memorandum on Tax Treaty Policy, I wish to consult with parliament on the policy to be pursued by the Netherlands on tax treaties and clarify the Dutch negotiating position in advance of any future negotiations. In preparing this memorandum, I have chosen to outline the main political and policy-related arguments underlying the position adopted by the Dutch government in negotiations on tax treaties. A new memorandum is now needed because the 2011 memorandum has been superseded by more recent domestic and international anti-tax avoidance initiatives. The main international development in this respect is the OECD’s Base Erosion and Profit Shifting (BEPS) project commissioned by the G20. Over 130 countries are now working together, within the OECD/G20 Inclusive Framework, on the implementation of the measures proposed by the BEPS project. Both the OECD Model Tax Convention on Income and on Capital (2017) and the UN Model Double Taxation Convention (2017) have been updated to bring them into line with this project (and also in other respects). On the domestic front, while countering tax avoidance is a key priority of the government,1 the need to ensure that legislation is enforceable in practice and also to retain an attractive business climate, as well as the growing importance of effective dispute resolution mechanisms, are all important considerations. Government policy on tax treaties should move in tandem with changes in domestic legislation. I am referring in particular to the implementation in tax treaties of the planned withholding tax on the payment of interest and royalties to low-tax or non-cooperative jurisdictions and in situations of abuse.2 As a further point, it is my intention that tax treaties signed with developing countries should take more account of their special position. The explanation of the political and policy-related arguments underlying this memorandum is intended to ensure that the government retains broad support for the crux of its negotiating position. I realise that there will be very few occasions where the government manages to incorporate all its wishes in a tax treaty. After all, no two countries have the same domestic tax legislation, the implementation of legislation also differs from one country to another and, most importantly, the treaty partners all bring different wishes to the negotiating table. As a result, the approach adopted will be tailored to each individual case. The government will need to decide, in negotiating each tax treaty, whether the terms of a potential agreement are sufficiently in line with the policy-related arguments underlying this memorandum. I should finally like to point out that the current international debate on profit allocation and a minimum level of taxation may lead to a further revision of the policy on tax treaties in the future (see section 2.5). I will be informing parliament separately on this matter.3 1 See the letter of 23 February 2018, Parliamentary Papers, House of Representatives 2017/18, 25087, no. 188, and the letter of 28 May 2019, Parliamentary Papers, House of Representatives 2018/19, 32140, no. 51 on the Tax Policy Agenda. 2 Withholding Tax Act 2021, Bulletin of Acts and Decrees 2019, 513. 3 See for example the letter of 10 February 2020, no. 2020-0000027423. AVT20/FZ131562 1 2. The main features of Dutch government policy on tax treaties 2.1 Why does the Netherlands enter into tax treaties? The object of a bilateral tax treaty or tax convention is to foster economic ties between countries by avoiding double taxation and at the same time preventing tax avoidance and tax evasion. A tax treaty apportions taxing rights between the countries in question, thus greatly reducing the risk of double taxation. This removes a potential barrier for residents of one of the two countries from undertaking economic activities in the other country. The tax treaty provides legal certainty for taxpayers in both countries. Due to its open economy and relatively small domestic market, the Netherlands has a great deal to gain from an extensive network of tax treaties. By removing barriers preventing foreign enterprises from operating in the Netherlands, tax treaties can help create jobs in the Netherlands. It is also important to remove any barriers that could prevent Dutch enterprises from operating competitively in foreign markets. Employees, pensioners, self-employed people, sportspersons, performing artists and students who work or invest abroad, or who either live abroad or move abroad, may find themselves confronted with double taxation if more than one country (each acting on the basis of its own domestic legislation) wishes to tax the same income. Finally, a tax treaty can facilitate the taxation of individuals and entities in cross-border situations, for example by means of arrangements for the exchange of information and the provision of assistance with the collection of taxes by the tax authorities. 2.2 With whom does the Netherlands sign tax treaties? A complex of factors play a role in any decision taken by the Dutch government on whether or not to enter into negotiations on a tax treaty with another state. While the Netherlands is willing in principle to negotiate a tax treaty with any state, capacity constraints compel the government to set priorities in this respect. The nature and scale of the economic relations (actual or potential) involved are important factors in setting such priorities. Other key considerations are the way in which the tax systems interact with each other (i.e. does double taxation occur?), as well as political and diplomatic factors. One important consideration is whether a state features on the EU list of non-cooperative jurisdictions for tax purposes4 (‘the EU list of non-cooperative jurisdictions’) or whether it has been designated by the Netherlands as a low-tax jurisdiction.5 States are placed on the EU list of non- cooperative jurisdictions if they fail to meet certain international standards, for example in the areas of transparency or harmful tax competition. The Dutch government takes the view that, in order to successfully tackle tax avoidance and tax evasion, it is vitally important for states to comply with international standards. It is for this reason that the Netherlands does not believe in entering into negotiations on new tax treaties with any states on the EU list of non-cooperative jurisdictions. Moreover, the Netherlands has a policy of reviewing existing treaties signed with states that have featured on the EU list over a prolonged period. In doing so, the Dutch government is giving effect to the motion tabled by MPs Carola Schouten and Tjeerd de Groot.6 States are designated as low-tax jurisdictions by the Netherlands if they do not subject entities to corporation tax or if the statutory rate of corporation tax is lower than 9%. States are sovereign in setting their own tax rates and may therefore decide not to levy any corporation tax at all without 4 Council conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes (2020/C 64/03), OJ C 64/8, 27 February 2020. 5 The government lists each year in a ministerial order those states that are to be designated as low-tax jurisdictions during the forthcoming calendar year. The Order on low-tax and non-cooperative jurisdictions for tax purposes was adopted for the first time on 31 December 2018, Government Gazette 2018, 72064, and amended under an Order of the State Secretary for Finance on 18 December 2019 amending certain implementation regulations relating to taxes and benefits, Government Gazette 2019, 69810. 6 Parliamentary Papers, House of Representatives 2015/16, 25087, no. 122. AVT20/FZ131562 2 contravening any international agreements. On that basis there are no objections in principle to starting talks on a new tax treaty with such a state. At the same time, there is usually a relatively low risk of double taxation involving these states, and this factor is taken into account when setting priorities for future negotiations. If the Netherlands already has a tax treaty with a low-tax jurisdiction or with a state on the EU list of non-cooperative jurisdictions, we will seek to start talks on the renegotiation of the treaty. The objective in doing so will be to adjust the treaty in such a way as to enable withholding tax to be levied on payments of interest and royalties to low-tax jurisdictions in relevant situations. This point is discussed in further detail in section 5.3. 2.3 Countering treaty abuse and tax avoidance It is important to bear in mind that tax treaties can be used for the purpose of tax avoidance. Preventing the abuse of tax treaties is one of the Dutch government’s policy priorities. The OECD’s BEPS project has proposed a number of solutions to the problem, including the adoption of minimum standards. Under the minimum standard proposed in Action 6 of the BEPS project, countries are entitled not to grant treaty benefits if one of the main reasons for undertaking a particular transaction, and hence making use of a tax treaty, may be assumed to be the exploitation of opportunities for non-taxation or reduced taxation. The Netherlands has chosen to go further than the minimum standard in adopting measures aimed specifically at preventing treaty abuse and tax avoidance.