Governments miss out on billions of tax revenues annually as the result of tax havens such as the Netherlands. The Coronavirus pandemic tellingly shows how such tax havens undermine public policy and cohesion within the EU, argues Boris Kowalski.
Boris Kowalski works at the German Marshall Fund of the United States
The Coronavirus presents a daunting challenge to public finances. The pandemic has shown how years of austerity following the Global Financial Crisis have undermined the capacity of healthcare systems.
Governments are having to dig deep in their pockets to support overstretched healthcare systems and reinvigorate faltering economies. But while governments across the world scramble to gather public funds to fight the pandemic, tax havens such as the Netherlands do exactly the opposite.
The issue of tax paradises is a sore point among the Dutch political elite. In 2009, when President Obama’s plan for countering tax avoidance identified The Netherlands as a tax haven, Dutch policymakers were ‘shocked’ to be grouped together with tax havens such as Bermuda and Ireland.
Meanwhile, Dutch MPs on two occasions rejected motions to recognise the country as a tax haven – after the European Parliament did so – while current Finance Minister Wobke Hoekstra stated that he refuses to accept this characterisation.
For anyone outside the Dutch political establishment, however, it is clear that The Netherlands is in fact one of the biggest conduits for tax avoidance in the world.
According to a 2017 study, The Netherlands alone is responsible for channelling 23% of all corporate offshore investments into infamous destinations such as the British Virgin Islands. It is estimated that countries miss out on $22bn in tax revenues annually as a result of corporate tax avoidance facilitated by the Netherlands.
And while the role of the Netherlands as a tax haven is not a new revelation, the pandemic painfully shows how the Netherlands and its lenient tax regulations undermine public finances on a global scale.
A report by the IMF estimated that countries lose $600bn in tax revenues annually as a result of tax havens, of which $200bn accounts for developing countries that are in the direst need of public finances.
Yet, even developed economies in the European Union that are hit hardest by the pandemic – such as France, Spain, and Italy – are estimated to lose $10bn in tax revenues annually due to corporate tax avoidance facilitated by the Netherlands.
Whereas tax avoidance may usually seem abstract for policymakers and citizens alike, images of overflowing hospitals in Lombardy during the early stages of the pandemic serve as concrete examples of how tax havens effectively undermine public finances and public services within the EU and beyond.
A recent report by the Tax Justice Network visualised the loss of public finances in the context of the Coronavirus. The report estimated that $245bn in tax revenues are lost annually as a result of corporate tax avoidance, enough to pay the annual wages of over thirty million nurses worldwide.
The Netherlands, which the report identifies as the third biggest contributor to international tax losses, therefore plays a huge role in undermining public services on a global scale.
The Netherlands is obviously just one of many international tax havens, and unilateral action in the Netherlands will not solve the problem of industrial-scale tax avoidance (although most tax havens are in fact advanced economies in Europe). However, such a race-to-the-bottom attitude does not obscure the fundamental, ethical questions regarding tax havens.
At the peak of the pandemic’s first wave, Dutch Prime Minister Mark Rutte signed a letter along with other national leaders calling for a coordinated international response to the Coronavirus in Africa. Yet how can a government credibly claim to help such societies when billions of dollars from these very same countries simultaneously flush into the Netherlands?
Similarly, how can we expect solidarity within the European Union to fight the pandemic when member states see badly needed public finances flow into the Dutch financial system?
One can certainly not escape the irony – or hypocrisy so you will – of prime minister Rutte demanding reforms to labour, pension, and – yes – tax systems from countries such as France, Italy, and Spain in return for EU financial support to fight the Coronavirus.
The practical consequences of this perceived hypocrisy for European solidarity clearly manifest itself. Poland recently threatened to take the Netherlands to the European Court of Justice over its “aggressive tax system inconsistent with the rules of the internal market” after the Dutch parliament voted to file a case against Poland for rule of law violations.
Though legally unfounded, one can easily see how the Dutch tax practices can be used to undermine European solidarity – perhaps to a degree even justifiably so.
The debate about the Dutch role as a tax paradise is therefore as much an ethical as an economic one. Yet, on both levels, this debate is largely absent in the Netherlands, in part due to the continued denial among Dutch politicians.
Calls to address tax avoidance have been growing rapidly in recent years, and the Coronavirus pandemic should be the final wake-up call for the Netherlands too.
Every country carries responsibility for the international response to the Coronavirus. For the Netherlands, this responsibility starts at home, by finally addressing the fundamental problem of tax havens.