Companies that want to save taxes can take advantage of lucrative investment options in offshore tax havens. Or… there's the Netherlands. Rock-bottom Dutch tax rates have been luring German firms across the border.
"Why roam so far abroad? Look: there are good things so close to home!"
Johann Wolfgang von Goethe wasn't thinking of the Netherlands when he wrote those words, and he certainly wasn't thinking about how to reduce his tax bill. But as it turns out, tax havens aren't just islands in the Caribbean. Some EU countries are fulfilling the same function. German companies, for example, can save a lot of money by crossing the Dutch border for tax purposes, or hopping over to Ireland.
Thomas Eigenthaler, chairman of the German Tax Authorities Employees Union (DSTG), is familiar with this phenomenon. "The Netherlands and Ireland, both EU members, have national tax laws that damage their European neighbors," he said in an interview with DW. Worse still: "These states are often also gateway countries for genuine tax havens, like the Dutch Antilles."
Tax evasion made easy
German companies don't need to go to the Caribbean to save taxes
Professor Christoph Spengel, an economist at the University of Mannheim, explains what makes the Netherlands so attractive to German companies. "License taxes are very low at five percent, compared to 25 percent for ordinary business profits."
The "Dutch haven" model allows German companies to save twice over. First, they pay considerably less on income earned from license fees and patents in the Netherlands than they do in Germany. The parts of the business that are resident in Germany pay their Dutch subsidiaries for the right to use these licenses, and are entitled to deduct these payments from taxes paid in Germany.
Spengel points out that the practice "reduces the amount of corporate tax owed in Germany and brings down local business taxes as well."
Christoph Eigenthaler says this is not, of course, a trick ordinary taxpayers can get away with. It's only useful for "companies that work on an international basis, that have international links, subsidiaries abroad. As soon as you're working across the border, anything is possible."
Legal, but disreputable
These kinds of models for optimizing tax liabilities - experts refer to it as "aggressive tax structuring" - are completely legal, says economist Christoph Spengel. Thomas Eigenthaler agrees that, legally, the companies are doing nothing wrong. It may be regarded as a disreputable practice, he says, but: "Of course, there's not such thing as morality when it comes to tax law."
The conduct of international German companies is certainly not always above-board. Eigenthaler recognizes this by the fact that "often, all you find in the Netherlands and the overseas tax havens is a mailbox. It's often all just a sham." They're able to get away with it, he says, because "the German revenue office simply doesn't have the capacity or the personnel to verify everything."
The Netherlands is not the only country where it's possible to save money in this way. Switzerland is still a popular tax loophole for German businesses, says Spengel. He points out that other EU members are following the Netherlands' lead: "Luxembourg, in particular, which has a comparable model for patent income. And in spring 2013 the British introduced the so-called patent box, which effectively only taxes license income at 10 percent, whereas the normal tax rate there at the moment is 24 percent."
Losses in the tens of billions
Professor Spengel says it's impossible to give an accurate estimate of how much the German treasury is losing out through tax evasion along the Dutch model. But Christoph Eigenthaler knows from his work that the losses are on a massive scale: "If you look at them all together, not just Holland, not just Ireland, but all the countries right the way across into Asia - you only have to look at the big car manufacturers - this shunting results in tax losses in the tens of billions. Every year."
Eigenthaler believes that European politicians have a responsibility to do something about it. "Stop this competition in the field of tax law," he urges. The subject of tax evasion is on the agenda of the G20 summit in St Petersburg this week, but neither Thomas Eigenthaler nor Christoph Spengel believe that this will provide a solution. They're both convinced that there's not going to be a quick fix for this problem.