In the Dutch coalition agreement, measures have been announced against tax avoidance. One of these is the introduction of a withholding tax on outgoing interest and royalty flows to low-tax jurisdictions(ltj’s) per 2020/21. With this, the Cabinet wants to put an end to tax-driven financial flows to these jurisdictions, in order to prevent the Netherlands from being used primarily to undermine the tax base of other countries. The Ministry of Finance has asked SEO Economic Research (SEO) to map the financial flows that flow through special financial institutions (SFIs) and to split them according to origin and destination. BFIs are companies with a foreign owner whose main function is to transfer financial flows (in the form of dividend, interest and royalties) from abroad to other countries. This measurement can serve as a baseline measurement for the evaluation of the effects of the conditional withholding tax per 2020/2021.

To separate the financial flows from and to SFIs by region of origin and destination, we use a sample of the Dutch Central Bank’s (DNB) largest BFIs. This sample covers approximately 60 percent of the balance sheet totals and income of all the BFIs. The coverage percentage for expenditure is 52 percent.

The breakdown of balance sheet totals in the regional sample shows that in 2016 the EU-28 structurally accounts for more than half of the total on both the asset and liability sides of the balance (55 and 51 percent). The share of the group of ltj’s is small at 6% on the asset side of the balance sheet, but on the liabilities side it is larger (11%). This share is reasonably stable in the period 2004-2016. A similar pattern is visible in tax-relevant income and expenditure – the sum of income and expenditure on dividends, interest and royalties. The majority of the income comes from the EU-28 (50 to 60 percent). The share of income from the LBB group is small (on average about 5 percent). This is different on the expenditure side. Although the EU-28 is heavily weighted (30 to 60 percent of the total), the share of outbound tax-relevant flows to the group of low-tax jurisdictions is larger, around € 18 billion or 21 percent of the total expenditure in the sample in 2016. The share of these expenditures to ltjs clearly increased in the period 2004-2016, from 5 to 21 percent. These expenditures consist for more than 85 percent of royalties, and are concentrated at a limited number of SFIs. This illustrates the function of the Netherlands as a pivot in passing royalties from the EU-28 and US to ltj’s. Based on this measurement, measurement of the effects of introduction of a withholding tax in 2020/2021 seems feasible.