The Don Quixote of International Tax Law

Eric Kemmeren (1963) has three things to ‘keep him off the streets’ as the professor of international tax law and international tax economics says from his room at the university in Tilburg: He is ‘of counsel’ at EY, deputy justice of the Arnhem Court of Appeals (Tax Division), but first and foremost he is of course an independent professor, an authoritative (co)-author of, amongst others, one of Kluwer’s standard works, ‘Klaus Vogel on Double Tax Conventions’, and one of the editors of the EUCOTAX Series on European Taxation and EC Tax Review.

He started his career at the Dutch IRS, where he worked as a tax inspector for over four years. “Yes, I used to get a bit of extra space around me at a party when I started to talk about my work, but I have always sincerely enjoyed tax law. You really operate at the intersection of economics and law. As a tax lawyer, you have to be able to master a restructuring as an accountant. You also look at public finance and develop a macroeconomic perspective. Not everyone is destined to work at a multinational, I always tell my students. Some people simply have more of a ‘public heart’.”

Prof. Kemmeren is of course among those happy few. When Tilburg University offered him a position, which included writing a PhD, the idealist did not think twice. When reworking his master thesis into his first publication, the seed for a career in science had already been planted. In 1991 Kemmeren started his research into ‘Principle of Origin in Tax Conventions: A Rethinking of Models.’ ‘I ran into obstacles in international taxation and I wanted to find out what caused the malfunctioning and of course how it could be overcome.”

Letterbox companies

In his doctorate research the Kluwer author and current chairman of the tax economics department pleaded for a radically different approach in respect of the access to and the application of tax treaties. Today every company incorporated under Dutch law automatically qualifies as a resident of The Netherlands, thereby becoming a tax subject and thus gaining access to Dutch tax treaties. ,,It is based on the idea that taxation should take place in the country of residence. I think that is a mistake at the root of the system. Because where you live says nothing about where you earn your income. In my opinion, you should look at where the income-producing activities are performed.” That country should be allowed to impose a corporate income tax on a company according to Kemmeren, because this company uses the infrastructure and public goods of that country to generate its profit.”

Is The Netherlands capable of unilaterally changing access to tax treaties? Yes, says Kemmeren with conviction. If the scope of ‘tax subject’ under Article 2, paragraph 4 of the Dutch Corporate Tax Act is restricted to the effect that companies must have their production in the Netherlands in order to be liable to tax there, he predicts there will be ‘fewer problems with channeling income streams, such as dividends, interest and royalties, through letterbox companies established in The Netherlands. If you were to ask such a company ‘what is it you are you doing here exactly’ it would simply not know how to answer that question,’ Kemmeren explains.

Taxation where the value is added

Critics anticipate problems. What about the Googles and Facebooks of this world, for whom we produce value in the form of data everywhere, at any time of the day? Kemmeren begs to differ. ,,Consumer data are nothing but raw material. What matters is what you do with them. In the case of Google, one can argue that the value is created in Silicon Valley. All those algorithms do not come falling out of the blue sky, engineers work hard on developing the software. The intellectual element is added in Silicon Valley. Consequently, the profit made with it should also be taxed there.”

Recently, Christine Lagarde, president of the International Monetary Fund, argued for another solution: shifting part of the power to levy corporate income tax to the country where the goods or services are consumed. That is what Kemmeren’s most recent research is about that will be published as a chapter of a book by Kluwer. A derivative of that study was already published as an editorial in EC Tax Review already. He considers Lagardes proposal ‘a band aid solution’ which is difficult to implement in practice. ,,Think of it: where are all the end users of a product or service located in an international economy? Everywhere! Such band aid will only be a temporary solution. We have to do something fundamental here! ”

Tax planning is not a dirty word.

The participation exemption has now become a black sheep in the discussion on tax avoidance, according to Kemmeren and wrongly so. ,,Tax planning has almost become a dirty word. But a large part of our income is produced abroad. A participation exemption fits that paradigm.” The participation exemption stipulates that dividend payments from a subsidiary whose profits have already been taxed abroad will not be taxed again in the country where its parent has been established. A subsidiary of a Dutch company in Ireland, for example, must be able to compete with local companies that are taxed there at a lower local rate than the Dutch tax rate. If The Netherlands were to tax the distributions of dividend to the Dutch parent as well, this would result in a competitive disadvantage on the Irish production market. With the globalization of economies, the participation exemption seems to become increasingly popular. In recent years the United States, the United Kingdom and Japan have switched to a similar system.

However, the tax scheme is used to set up structures for multinationals that want to avoid taxation as well. According to research from the European Commission in 2015, The Netherlands sets up most tax planning structures per year by and far of all Europe. Kemmeren: ,,If you repeal Article 2, paragraph 4 of the Dutch Corporate Income Tax Act, the access to Dutch tax treaties will cease to exist with the tax liability. That is actually a very effective remedy to tackle conduit structures. “

Opponents mourn potential loss of tax income for the Dutch State, accountancy firms, lawyers and trust companies. Others point to thriving multinationals as Tommy Hillfiger, now headquartered in The Netherlands that allegedly started out as a letterbox company. ‘There is always a reason to stick with the old rules,’ says Kemmeren. ‘If you want to be lenient towards start ups you could allow for an interim phase. If after such a period, a company did not develop a sufficient level of productivity, tax liability stops and as a consequence also the access to the tax treaties.”

A better world starts with taxation

He got the message out in 2001 and he still keeps tooting the horn today. In 2013, the OECD followed suit and started a debate to redefine rules on the allocation of taxing rights to countries where the value is created. Applying this principle would result in holding companies no longer being taxed in their state of residence as is currently the case with many American multinationals. ‘I did cheer for a bit when I heard the news,’ says Kemmeren. ‘But when I look at the interim results, I am disappointed again. Many OECD members states are ultimately rich countries that provide capital to low-income countries. They miss out on tax income if the activities are only taxed in the poorer countries where production takes place.’

The scholars plea on revised access to Dutch tax treaties is still one of his favourite research subjects today. ,,I think science has a strong connection with society. You try to organize something of that society by means of a tax system. Ultimately, organizing and analyzing – and suggesting how things can be done differently – improves our prosperity and well-being. That may sound a bit like Don Quixote, but that is the ultimate goal. ”