Why European multinationals are reaping dividends from Brexit

MINOLTA DIGITAL CAMERAThe Dutch government’s abolition of dividend tax is a perfect example of the law of unintended consequences in action. Not one party proposed the idea in its election manifesto and business taxes were barely raised during the campaign in March. But by the time the four parties emerged from the negotiating room seven months later they were unanimous in their view that something needed to be done to stop businesses fleeing the country, for one simple reason: Brexit.

Mark Rutte warned that Dutch-based multinational companies were threatening to cross the North Sea once the United Kingdom leaves the European Union, taking tens of thousands of jobs with them. The omertà of Dutch coalition negotiations meant he was unable to name names, but it swiftly became clear that this was a concerted lobbying effort led by Shell and Unilever, two companies that are currently based in both the UK and the Netherlands. Brexit makes this dual position unsustainable, so at some point in the next 18 months they will have to choose where to pitch camp. Analysts expect that when the United Kingdom leaves the European Union, it will become an offshore tax haven, wooing businesses from the continent with tax sweeteners and light regulation. Unless pre-emptive action was taken, argued Rutte, the country would end up like Belgium, and what right-minded Dutchman would want to risk that?

Rutte later apologised to the Belgian government for his ‘clumsy’ comparison, but the impression was cast. Shell and Unilever had stared hard across the negotiating table and remarked how unfortunate it would be if the economic recovery were to be swept off the rails. Economists disputed whether companies were really swayed by how much tax their shareholders had to pay on dividends. The government’s own economic planning agency, the CPB, concluded that scrapping the tax had no discernible effect, save perhaps for a small dose of tax relief for foreign investors. Other analysts pointed out that many large investors, such as pension funds, already pay no tax on dividends. The restrictive consequences of Brexit, such as export tariffs and the loss of passporting rights for financial traders, will outweigh the benefits for many companies. Opposition parties fumed that the centre-right coalition is giving away tax breaks to foreign shareholders while household bills go up thanks to the increase in basic rate VAT (btw).

What hampers the debate is that the danger is unquantifiable and in some ways immaterial. Even those lobbying to remove the tax couched their arguments in equivocal language. Unilever’s statement noted that it was ‘too early to be able to say what effect abolishing dividend tax will have,’ but added that ‘in general we welcome any measures that improve the investment climate in the countries where we operate’. Hans de Boer, chairman of the employers’ lobby group VNO-NCW, argued that the ‘negative effects of dividend tax on the investment climate’ had been ‘a subject of debate for more than a decade’. Note the phrase ‘subject of debate’ rather than anything as substantial as a barrier, a brake or even a matter of concern.

But Rutte stood firm, insisting in a Parliamentary debate on Wednesday that dividend tax is a ‘stone in the shoe’ of the corporate world that must be dug out for the good of the nation. A government that will depend increasingly on opposition goodwill as its term goes on is prepared to absorb plenty of flak in the early stages to head off the notional threat of corporate tax flight. In short, the multinationals have Rutte over a barrel. If one company crosses the North Sea as a result of Brexit, the coalition will be savaged for not fighting hard enough to retain Dutch business; if none do, Rutte can hail the status quo as a triumph of foresight. So far the main beneficiaries of Brexit have been European companies who can use it as a bargaining chip to wring concessions from their own governments.

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