Governments are competing for global HQs tax

This article first appeared in Bloomberg’s Tax Planning International Review, in April 2018

The recent decision by Unilever to relocate its new unified headquarters to the Netherlands has indicated how far governments are going to attract multinationals to their country.

On March 15, 2018, Unilever announced its “next steps in the transformation of Unilever into a simpler, more agile and more focused business,” which include the dismantling of their dual headquarters and relocation of certain headquarter functions to Rotterdam. The Unilever board believes the simplification of its corporate structure (from two legal entities, a Dutch N.V. and a U.K. PLC, into a single legal entity incorporated in the Netherlands) will create a simpler, more agile and more focused company with increased strategic flexibility for value-creating portfolio change.

The move by Unilever is said not to be Brexit-related nor tax-related; however, it seems to be part of a (larger) trend where multinational enterprises (“MNEs”) are reconsidering their group structures and the number of different jurisdictions and markets where they are active (whether, for instance, on account of BEPS—as described below—or in light of Brexit).

This article will look at some of the reasons behind some of these recent group restructurings and the responses that governments are giving in an attempt to attract MNEs to their country.

The tax landscape is in flux, largely as a result of three international developments:

• the OECD Base Erosion and Profit Shifting project (BEPS) and the European Anti-Tax Avoidance Directive (ATAD) project;
• US tax reform; and
• Brexit.

BEPS and ATAD

The BEPS project has many parts; one common theme is a move to substance and a series of anti-avoidance measures.

The concepts that were developed by the BEPS project are now being implemented in the local legislations of EU member states under ATAD. Certain countries have already introduced some of the provisions, like the anti-hybrid rules in the UK or the earning stripping rules in Germany: but most of the measures are expected to enter into force as of January 1, 2019.

These provisions are meant to ensure a (European) level playing field as it regards to taxation. MNEs that made use of, for example, hybrid arrangements or excessive debt financing, will be forced to amend these practices. As a result, MNEs are currently dismantling passive holding and financing companies in order to avoid limitation on benefits/principal purpose test/general anti-abuse rules being applied, restructuring hybrid-financing structures in order to avoid non-deductibility of intra-group expenses, and considering the impact of controlled foreign corporation rules on investments held by/through tax haven jurisdictions.

US tax reform

On December 22, 2017, President Trump signed the 2017 US Tax Reform Reconciliation Act, also referred to as the “Tax Cuts and Jobs Act.” This Act is the most extensive change to the Internal Revenue Code since the Tax Reform Act of 1986, and includes provisions that significantly impact the tax position of MNEs. One of the consequences of the Act is that it eliminates the biggest differences that existed between the former US tax system and most of the European tax systems.

Key provisions

Some of the key provisions introduced are:

• the general income tax rate is effectively lowered to around 25 per cent (21 per cent federal tax, plus relevant state taxes), which coincides with the average European corporate income tax rate;
• earning stripping and anti-hybrid changes are introduced which are very similar to the ATAD changes presented by the European Commission (while the amendments to the US controlled foreign corporation rules go well beyond the scope of ATAD); and
• the new US territorial system (at least for qualifying dividends) resembles what European countries call a “participation exemption.”

The introduction of this system seems to create more of a level playing field and could lead to the elimination of well-known tax planning loopholes, where base erosion tools that MNEs may have used in the past in respect of US subsidiaries may no longer be effective and existing structures may be dismantled.

Brexit

After the Brexit vote and the most recent agreement between the U.K. and the EU on the text for the agreement governing the transition (or implementation) period following the U.K.’s departure from the EU, MNEs that are active in regulated industries are reconsidering their legal structures.

These three developments described above are triggers for MNEs to consider their current structures and to implement changes. Such changes may include the transfer of business operations and staff to different jurisdictions: various governments are seeking to attract these operations to their jurisdictions.

When MNEs are reconsidering their group structure, various aspects play a role. These include:

• skilled workforce;
• proximity to markets;
• logistics, ease of doing business;
• stable political climate, regulatory and other legal hurdles; and
• a local tax system that does not increase the MNE’s tax burden.

When taking about the Unilever headquarters relocation to Rotterdam, Dutch Minister of Economic Affairs Erik Wiebes credited Unilever’s choice for the Netherlands to the attractive business climate: “This decision shows that the Netherlands is an attractive business location for internationally-operating organizations. That is good news, because there is strong international competition for headquarters and R&D centers and it is the Dutch government’s ambition to position our business climate as strongly as possible.”

The quote shows two interesting developments: that there is strong international competition for headquarters and R&D centers; and that governments are pushing this competition for the most favorable business climate.

Coming back to Unilever’s decision to move to Rotterdam, several of these elements above were relevant, including legal and regulatory reasons. Unilever’s strategic review concluded that a single holding company brings greater simplicity and more flexibility to make strategic changes in the future, including through equity-settled acquisitions or de-mergers, which was, apparently, a legal and regulatory issue under the existing structure.

However, one key element for Unilever was, it is understood, the proposed abolition of Dutch dividend withholding tax—a recent attempt from the Dutch government to create a level playing field with other competitors including Luxembourg and the UK Unilever’s press release mentioned in this respect:

“Unilever NV dividends are currently subject to Dutch dividend withholding tax at a rate of 15 per cent. The Dutch government has announced that the Dutch dividend withholding tax will be abolished from 1 January 2020. Following simplification of the corporate structure and until such abolition, shareholders in the new Unilever holding company will be able to receive distributions in the form of a capital repayment for Dutch tax purposes which will be paid without Dutch dividend withholding tax.”

When it comes to governments attempting to attract MNEs to their jurisdiction, they may, in the short term, only influence a few areas such as the regulatory regime, bringing down legal hurdles and introducing a competitive tax system. Other areas discussed, including skilled workforce, proximity to markets, logistics, ease of doing business and a stable political climate, can only be influenced on a medium–long term.

The current Dutch government has made it clear that while on the one hand it is keen on attracting new businesses to the Netherlands, it also wants to comply with EU state aid rules and anti-BEPS provisions which look to counter aggressive tax planning. Against that background, the Dutch government for instance changed its policy on withholding taxes: For “legitimate” businesses, it will abolish its dividend withholding tax as of 2020 and the Netherlands currently has no withholding taxes on interest and royalty payments. However, payments of dividends, interest or royalties by any Dutch-resident entity will suffer a new withholding tax if such payments are made to a group entity that is either resident in a jurisdiction with a low statutory income tax rate or a jurisdiction that is on the EU list of non-cooperative jurisdictions (as of 2021).

It is clear that in addition to the Netherlands (https://investinholland.com), other governments are involved in similar exercises, e.g. Luxembourg (http://luxembourgforfinance.com) and Ireland (https://enterprise-ireland.com).

• The tax landscape is in flux, as a result of three international developments, among other factors. These three developments are triggers for MNEs to consider their current structures and implement changes
  • BEPS and the European ATAD project;
  • US tax reform; and
  • Brexit.
• Because such changes may include the transfer of business operations and staff to different jurisdictions, several governments attempt to attract MNEs to their country.
• When it comes to governments that are attempting to attract MNEs to their jurisdiction, their influence, in the short term, may be limited to areas such as the regulatory regime, bringing down legal hurdles and introducing a competitive tax system.
• The current Dutch government has made it clear that while on the one hand it is keen on attracting new businesses to the Netherlands it also wants to comply with EU state aid rules and anti-BEPS provisions countering aggressive tax planning.
• MNEs need to carefully examine pros and cons for the most relevant jurisdictions.