Strengthening tax systems in developing countries: policy evaluation

Background
The Dutch Ministry of Foreign Affairs (MFA) commissioned SEO to carry out an evaluation of 1) the Dutch (inter)national tax policy as well as 2) the bilateral and multilateral capacity development activities supported by the Netherlands. The aim of this evaluation was to assess the role of the Netherlands, and its recent policy changes,  in international tax avoidance.

Key findings
Our key conclusions and recommendations are fourfold:

• Despite undertaking various reforms, the Netherlands still plays a role in global tax avoidance. The Netherlands has taken various measures to combat tax avoidance, including the introduction of conditional withholding taxes on royalties and interest, the tightening of substance requirements and a revised ruling policy for providing certainty in advance. The aforementioned measures have made tax avoidance via the Netherlands less attractive, but the current regulatory framework does not prevent foreign multinational companies from setting up “letter-box” companies in the Netherlands, nor have all loopholes in the Dutch treaty network been closed.
• The Netherlands should cooperate more with other countries to reduce the risks that capital flows are diverted to other conduit countries. Multilateral cooperation also mitigates the ‘first-mover disadvantage’ that potentially arises when being one of the first countries to adopt more stringent tax measures.
• Efforts to reform harmful Dutch double-taxation treaties (DTTs) have had mixed effects. The Dutch policy regarding the implementation of anti-abuse clauses in its DTTs with developing countries has only been partially effective, as 7 of the 23 countries approached by the Netherlands showed no interest in implementing such measures. Dutch outward FDI to countries implementing the clauses has decreased, but the extent to which these measures have reduced tax avoidance is unknown.
• Additional research is needed to understand why adoption of anti-abuse clauses among developing countries has been relatively low. If the reason is a lack of enforcement capacity, the Netherlands could consider providing additional capacity development (CD) programmes to these countries. Even when the reasons are more complex, the Netherlands could engage more with these countries to better understand their doubts, misconceptions or capabilities, in regards to the implementation and enforcement of the measures.
• The Netherlands’ involvement in tax-related CD has increased. During the evaluation period, the Netherlands has supported 6 bilateral and 13 multilateral programmes in the area of taxation. Generally speaking, the activities were demand-driven and targeted topics and themes that related to weaknesses identified through benchmarking exercises. However, the response to CD demands from a given country may at times have been too “passive” or the “relevance assessment” inadequate. Moreover, the effectiveness of CD activities was often hampered by political constraints, recipient countries’ fear of decreasing its international competitiveness and their general distrust towards the BEPS recommendations.
• The policy of the Dutch government is not fully coherent. The Dutch government pursues two broad policy goals: (1) increasing domestic resource mobilisation (DRM) in developing countries, and (2) promoting the interests of the Dutch economy, that are sometimes in conflict. The Netherlands took steps to increase policy coordination between the two Ministries, most notably through the Dutch Cabinet’s Agenda on Policy Coherence for Development (PCD), but it is still difficult for the MFA to influence the OECD discussions or DTT negotiations.
• Providing CD through multilateral channels would likely improve relevance, and also make the Netherlands less conflicted in its international tax policy. Multilaterally provided CD would likely alleviate the capacity constraints that bilateral agencies face, while also reducing the potential incoherence between the two Dutch Ministries.
• To further improve policy coherence, more cooperation between the Dutch Ministries of Finance and Foreign Affairs is recommended. As a general rule, the MFA should be more involved in determining the country’s position in matters pertaining to international taxation and developing countries, and should ideally be involved in DTT negotiations as well.

In light of ever-evolving tax avoidance schemes and the new global minimum tax (GMT), continued training of tax officials in developing countries continues to be of importance.

Methods
SEO used three key information sources for this evaluation: (1) relevant literature, project documents and data; (2) in-depth interviews with the Dutch MFA, Dutch Ministry of Finance (MoF), OECD, Dutch embassies, NGOs, private sector companies, CD-recipients, CD-providers and other tax experts; and (3) in-depth case studies in Ghana, Kenya and Uganda.