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Tuesday, 6 November 2012

Tax-haven The Netherlands calls: “In the name of our business, Romney for President?!"

Last week, the news was spread that ‘the big three’ banks in The Netherlands (ING Groep NV (INGA), ABN AMRO and Rabobank) all still made usage of tax-havens to help themselves and their customers with avoidance of taxes (the legal equivalent of tax evasion, which is illegal).

At this occasion, it were ‘tax-havens’ in the classical sense of the word: tropical spots, like The Cayman Islands, Bermuda, Mauritius and other islands with lots of sun, palm trees, a few relaxed and tanned inhabitants, very loose tax-rules and literally thousands of ‘paper’ banking limiteds,  that operate as so-called letterbox companies. Banking limiteds that do the kind of business that the IRS should better not hear about, to not disturb the peace and quiet.

The Dutch financial newspaper Het Financieele Dagblad ( wrote on this story that should only be shocking to the unaware and ignorant. Here are some snips of this story:

ABN Amro, ING and Rabobank have been active with dozens of private limiteds in tax-havens, like the Cayman Islands, Bermuda and Mauritius.

The branches in tax-havens are not mentioned in the annual reports of these three banks. However, they are mentioned on the so-called ‘lists of participations’ at the Dutch Chambers of Commerce. When the limiteds would have had material importance, these would have been mentioned in the annual report, according to ING.

Especially ABN Amro and ING – two banks that received state support – have many private limiteds in tax-havens. When asked, the banks state that they are there ‘to prevent from unfavourable taxes’ and ‘not to gain tax-breaks’

Albert Hollander, chairman of Tax Justice The Netherlands, reacts sceptical. He speaks of ‘tax avoidance with letterbox companies’

Spokesmen of the three banks urge that the branches at the tropical islands didn’t lead to any disadvantages for the Dutch treasury

It is very hard to believe the story that the Dutch banks only use the tax-havens to prevent themselves and their customers from unfavourable taxes. It is also very hard to believe that all these letterbox companies run by Dutch banks didn’t lead to any disadvantages for the Dutch treasury.

If the purpose wasn’t to avoid domestic taxes, why would you have those letterbox companies in the first place. On top of that: what is the difference between preventing from unfavourable taxes and gaining tax-breaks? I don’t know?! 

There is a very, very thin line between tax avoidance and tax-evasion; this is especially the reason that banks, lawyers and auditors earn such massive amounts of money with these kinds of financial constructs.

The Dutch politicians (of course) reacted to this news as if they were stung by a wasp. Large words were uttered on radio and TV: ‘it was a disgrace that banks, who were aided by the Dutch tax-payers in order to survive, enabled tax avoidance by Dutch private persons and companies’. On the other hand: when the first panic was over, every politician returned to business-as-usual. There is always a more topical newsflash to react upon.

Summarized, it was the same ole’ same ole’ from politicians that act if they are unaware of things that every insider in the banking business knows or suspects. Simply because they don’t know and perhaps… because they don’t want to know either.

There is a certain amount of hypocrisy in making so much noise about banks doing business at tropical tax-havens. As regular readers of my blog know, The Netherlands is a renowned tax-haven for certain kinds of taxes: corporate taxes, capital growth tax and withholding tax.

Other countries in Europe and abroad suffer from massive legal tax avoidance and considerably lower tax yields, due to the possibility for companies and private persons to pay these taxes at very favourable terms in The Netherlands, via a Dutch letterbox branch. This modus operandi deprives the host country of these private persons and companies from the possibility to charge withholding, capital growth and corporate taxes.

The Netherlands is host to the administrative ‘headoffice’ of many firms in the Fortune 500, but also to famous popgroups like U2 (link in Dutch)  and The Rolling Stones (link in Dutch), simply for the reason that these companies and bands hardly have to pay taxes on foreign dividends, capital growth and royalty earnings.

Please don’t underestimate the earning power of bands like U2 and the Rolling Stones: these bands earned revenues of hundreds of millions of Euro’s (respectively €201 mln and €120 mln in 2005), for which they paid a ‘token’ tax percentage (1.6% in 2005) .

Protests from Portugal and other PIIGS countries against tax avoidance via The Netherlands were largely ignored and even laughed away by Dutch politicians. ‘We have been smarter than you and we don’t stop with this lucrative business’ seemed to be their opinion.

What makes this business lucrative indeed for The Netherlands is the fact that especially the head offices from the Fortune 500 companies demand a certain amount of staff, in spite of the fact that those headoffices are mainly letterbox firms. Staff means personnel, personnel means jobs and jobs mean wage tax earnings, especially for domestic staff. The fact that it is business at the expense of other countries is largely ignored.

Today, it was once more confirmed that The Netherlands is a tax-haven to be reckoned with. A Dutch website, called Follow the Money, published details upon one of the most prominent Americans and his former company: Mitt Romney and his hedgefund Bain Capital. Bain Capital is said to have used The Netherlands as a tax-haven and Mitt Romney has presumably (indirectly) profited from this financial construct.

Disclaimer: I was not in the position to check the facts in the following news story, of which I print the pertinent snips.  I have only translated the findings in this story to English. Therefore I reject any legal responsibility, when the facts as presented in this news story prove to be falsified, incorrect or illegal in any sense of the word. Opinions in this article (non-bold, non-italic text) are mine and mine alone!

Here are the pertinent snips of this story from Follow the Money (

Presidential candidate Mitt Romney seems to avoid taxes with Bain Capital via The Netherlands.

Bain Capital, once established by the American presidential candidate Mitt Romney, is one of the most successful private equity funds on the globe.  Private Equity is renowned for its aggressive modus operandi, in which financial wizardry and draconic cost savings are used to benefit as much as possible from a company, taken over by the private equity fund.

[Companies that have been taken over by private equity are often loaded with the debt that was necessary to generate the purchase prise for the company, in order to make an administrative loss that can be compensated with future corporate taxes. The staff and other expenses of these taken over companies are often strongly diminished in order to generate as much cash flow as possible in the least amount of time. Often a company taken over is sucked dry of its cash and sold again, a few years later. This happened for instance with the PCM press group in The Netherlands (link in Dutch) a few years ago– EL]

An essential ingredient for a successful private equity deal is a taxing structure that ideally reduces the tax payments to an absolute minimum. Just like any other self-respecting private equity fund, Bain leaves no tax-break unused. In Bain’s financial web of trusts and holding companies, not only ‘the usual suspects’ appear: the Cayman Islands, Bermuda, Luxemburg. Also The Netherlands is part of the fiscal web.

Since 2010, Bain stored the shares of the Irish pharmaceutical company Warner Chilcott, taken over in 2004,  in a private limited in The Netherlands. Presidential candidate and founder of Bain Capital Mitt Romney also yields from the ‘Holland route’: this becomes clear from official deposits at the American supervisor and Romney’s tax statements.


In 2004, Bain Capital, together with a consortium of private equity funds, withdraws Irish pharmaceutical Warner Chilcott from the stock exchange. The consortium starts a private limited on Bermuda that takes over Warner Chilcott. The purchase price amounts $3.15 bln dollar, of which the consortium brings in $1.2 bln itself and borrows $2 bln. The debt lands at the Bermudan limited and has to be paid by Warner Chilcott itself eventually. When the transaction is finished, Bain has a stake of 21.2% in the Irish company.

The majority of the shares from Warner Chilcott (WC) is stored in a Bain investment fund: Bain Capital Fund VIII. From the 37.5 mln shares that Bain owns in September 2010, the Capital Fund VIII owns over 25.7 mln. This is disclosed in a quarterly report from this fund that has been leaked through techblog Gawker. WC is an extremely successful investment. In September 2010, the market value of the stock is $576 mln, while the original purchase price for the stock had only been $103 mln, according to the quarterly report.

At the end of 2006 WC returns to the stockmarket. The IPO yields over $1 billion. The debt of the company is reduced, but WC also pays $354 mln to the consortium. Shares are bought back and management fees are paid. These are the first yields for Bain and its partners. The real profit will only come later. Bain is patient.

In May 2009, the management of WC announces that they are planning to move from Bermuda to Ireland. The trigger for this operation is the announcement by president Obama to be tougher on notorious tax-havens, like Bermuda. Ireland doesn’t fit in the group Cayman Islands, Bermuda, Panama, but has nevertheless an attractive fiscal establishment climate, as is acknowledged by the management of Warner Chilcott. ‘Ireland offers a stable legal and regulation framework for the long term’ and ‘a robust network of tax treaties’, according to the management in an explanation on its plans.

After the great move of Warner Chilcott, Bain Capital also changes its structure by storing its WC shares in a Dutch private limited in August 2010.

Alter Domus  [aka Other Home – EL], a company that renders ‘administrative services to multinational companies and alternative investment funds’ delivers the officials for the private limited.

The Netherlands is chosen as a domicile because of its ‘specialty of the house’: the participation dispensation. When a Dutch company holds more than 5% of the shares in another company, no taxes have to be paid on all yields coming from those shares (dividends or profits out of sales of this stock amount). In combination with its vast network of tax treaties, this offers potentially large, fiscal benefits. ‘The Netherlands is the world champion in participation dispensation’, according to fiscal consultant Jos Peters of tax consultancy office Merlyn..

When Warner Chilcott would directly remit dividend to the Bain partnership on the Cayman Islands, 20% withholding tax (dividend tax) would be levied in Ireland. However, when dividend would be remited to a Dutch private limited, this limited is dispensated from withholding taxes in Ireland. The Dutch internal revenue service also levies no withholding taxes, due to the participation dispensation. Thus the dividend can flow freely via Luxemburg to the sunny and tax-free beaches of the Cayman Islands. The same is applicable to the capital growth on stock – buy for ten, sell for twenty – that also remains untaxed, due to the participation dispensation, Irish-Dutch bilateral tax treaties and EU guidelines.

Since 2010, Bain earned $389 mln in dividends (and WC ‘earned’ $2.85 bln in debt). By using the ‘Holland Route’ Bain saved at least $77 mln in Irish withholding tax, according to Jos Peters who himself is consultant for a number of large private equity funds. Since the moment the shares WC had been stored in The Netherlands, Bain also sold for $334 mln in shares. ‘Bain saves a lot of capital growth tax when the stock is sold’, according to Peters.

How much Romney and his wife invested in the Bain Capital Fund VIII is unknown. In 2006, his stock is worth ‘over a million dollar’. This is disclosed by the ‘public financial disclosure report’ that Romney deposited at the American Electoral College during his election campaign in 2008. Since then the value has only increased. The tax returns of Romney and his wife disclose that they received both more than $2.05 mln in dividends in 2010 and 2011. The value of their stock in the fund increased with $5.5 mln in the same period.

The article of which I only took the most important snips is an absolute must-read for everybody that is interested in American politics and/or tax-avoidance. Non Dutch-speaking readers can use the Google Translation service. A tip of the hat to the people of Follow the Money who did the research.

If these facts are true (and I have little doubt that they are), it doesn’t mean that Mitt Romney is directly involved with this tax avoidance scheme by Bain Capital. Although there is controversy on whether Romney resigned in 1999 or 2002, his involvement ended well before 2004 when Warner Chilcott was taken over.

Still, it sheds an unfavorable light on one of the candidates for the American presidency. Although Romney is not directly involved in tax avoidance, he has a strong business attachment to a company that seems to be. In my opinion, candidates for the presidency should in general be incorruptable, honest and credible.

It sheds also a very unfavorable light on tax-haven The Netherlands. Not only does the country refuse to levy a fair amount of taxes on dividends and capital growth, but by doing so it deprives other countries from their deserved sources of income. Especially for countries in need, these are sources of income that can hardly be missed.

I wonder if this is a reason for The Netherlands to desire Mitt Romney as the next president of the United States. Both seem to share a mutual interest in tax avoidance.

To end this story with a moral ingredient: tax avoidance on any scale is wrong. Nobody loves taxes (except for the Finance Minister), but paying those is a necessary ingredient for a healthy economy, a good safety net for people in need,  a safe and sustainable environment for our children and grand-children and a modern and safe infrastructure that should be part of a modern country.

How important the (safety) infrastructure of a country is, is something that is very well understood  by Americans and people from all over the world at this moment.

Tax avoidance might be legally allowed, but in my arrogant opinion it remains morally wrong.

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