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The difference between tax avoidance and tax evasion

According to De Wilde, the distinction between tax avoidance and tax evasion is crucial. “Tax evasion is fraudulent and punishable by law. If discovered by the authorities, the taxes still have to be paid, and penalties or prosecution may follow,” he explains. He provides concrete examples: “Tax fraud usually involves earning money without declaring it to the tax authorities and without paying income or corporate tax. Think of hiding your company’s turnover from the tax office, or paying for home renovation ‘under the table’ without VAT being charged.”

Tax avoidance, by contrast, is fundamentally different, De Wilde emphasises. “Within the boundaries of the law, taxpayers openly use the options provided by tax legislation to achieve the lowest possible effective tax burden.” He clarifies that this is not illegal. “However, in recent years, tax avoidance has received increasing attention, particularly regarding its social acceptability — or lack thereof.”

A key instrument in tax avoidance structures is the use of so-called letterbox companies. “These are entities that have no real economic activity but are used to channel financial flows in a legal sense — often in ways that undermine the spirit of tax rules,” De Wilde says. Such empty entities are typically established in jurisdictions with low or zero corporate tax. “Sometimes, letterbox companies are used to exploit mismatches between different countries’ tax systems. If you know in advance where the loopholes and overlaps are, you can take advantage of them strategically.”

A race to the bottom?

According to De Wilde, tax avoidance is not just about companies exploiting legal loopholes. “Countries also act strategically when designing their tax systems. This is what we call (unfair) tax competition.”

This creates a situation in which everyone feels compelled to participate. “The tax avoidance and tax competition debate is essentially a prisoner’s dilemma. At the end of the day, it is about tax revenue and competition. Companies compete with each other, and taxes represent costs that reduce post-tax profits. If the costs become too high, businesses look elsewhere. That is a very human response.”

The same applies to countries, De Wilde adds. “Raising taxes makes a country less attractive as an investment destination, while lowering taxes makes it more attractive. This leads to the risk of a ‘race to the bottom’, particularly in relation to mobile economic activities such as profits and capital.”

This dynamic can have undesirable effects, he warns. “Sometimes countries shift the burden to other tax bases — such as labour (income tax) or consumption (VAT) — to fund public spending. After all, government expenditure still needs to be financed. It may not be fair, but it is the reality.”

Why the Netherlands changed course

For years, the Netherlands was known as an attractive hub for international businesses. “Up until about seven years ago, the Netherlands openly and actively promoted a favourable corporate tax climate. The traditional pillars of this regime were the participation exemption, the absence of withholding taxes on outbound payments, an extensive tax treaty network, and the possibility of advance tax rulings with the Dutch tax authorities,” De Wilde explains.

This combination made the Netherlands a popular conduit country. “The interplay between the tax treaty network and national tax rules made the Netherlands an attractive hub jurisdiction — a kind of tax-logistics junction for international business,” he says. “Companies investing across borders often did so via Dutch intermediate holding companies. Over time, this increasingly affected the Netherlands’ reputation and international credibility.”

Since 2018, however, the Netherlands has introduced numerous measures to limit this conduit function. “In recent years, dozens of measures have been taken to reduce the use of the Netherlands as a transit country. The Netherlands has actively aligned itself with international efforts to combat tax avoidance and tax competition,” De Wilde states.

He highlights some key reforms: “The Netherlands has introduced withholding taxes on outbound interest, royalties and dividends to low-tax jurisdictions and in cases of abuse. It has adopted measures to neutralise cross-border mismatches, to prevent dividend stripping, and to require a substantial economic presence (nexus) for tax rulings. The Netherlands has also implemented the 15% global minimum tax (Pillar Two).”

In addition, there have been moves towards greater transparency. “Companies must report where they pay how much tax — first to the tax authorities, and soon publicly in their financial statements. Tax advisors must disclose potentially aggressive tax schemes, and the Dutch tax authority shares information about rulings with other countries,” De Wilde adds.

Is the Netherlands still a tax haven?

De Wilde stresses that the Netherlands is now actively engaged in international debates. “The Netherlands takes a proactive and constructive stance in the global conversation on tax avoidance and international tax reform. The government’s 2020 policy paper on international tax policy clearly shows its commitment to aligning domestic rules with international developments.”

But whether the Netherlands is doing enough is not a question with a clear-cut answer, according to De Wilde. “That is ultimately up to each person to decide for themselves. What is ‘enough’ for one person might be too little — or too much — for another. Ask someone from a multinational corporation, and their answer might differ significantly from that of someone struggling to make ends meet.”

In the end, taxation is a political choice, he stresses. “Not paying taxes while expecting a doctor to visit when you are ill — it does not quite add up. The same goes for the police officer, the schoolteacher, the firefighter, the dykes, and the social safety net. Someone, somewhere, has to foot the bill.”

That is why De Wilde advocates for a balanced tax mix. “I believe taxes should apply to returns on labour, capital and entrepreneurship on the supply side — via income taxes — and on consumption on the demand side — via VAT. This includes a fair and properly designed tax on corporate profits and capital income. One way or another, everyone must contribute: companies and households, the wealthy and the less wealthy. That includes in the Netherlands.”