Royal Dutch Shell revealed in 2018 only its gas subsidiary NAM paid corporate tax in the Netherlands, where it is headquartered, following Dutch parliamentary demands that it attends a hearing on tax avoidance.
In the Netherlands, Shell derives income from its head office’s activities, service stations, the chemical plants in Moerdijk, and the refinery in Pernis. All in all, Shell made 1.3 billion euros in profit on those activities last year. However, Shell most likely pays zero euros in corporate tax with regard to the profit they generate.
Shell has two main ways to brush away the profits made in the Netherlands, so as not to pay tax, using legal deductions. Firstly, the company can deduct interest in the Netherlands for loans that are used to invest abroad. And secondly, Shell charges losses suffered from, for example, the search for oil abroad, against the profit made in the Netherlands. Profits made by foreign oil extraction are not taxed in the Netherlands, but the losses made with that oil extraction may be deducted from Dutch profits.
Besides eroding the profit to avoid the corporate tax, Shell also arranged its structure to avoid the withholding tax for dividend. Shell’s corporate structure features a parent company headquartered in The Hague but two share classes and other arrangements to prevent the Dutch government from levying withholding tax on dividends paid to shareholders of its former British arm. The structure/arrangement of this dividend was approved by a 2005 ruling from the Dutch Tax Administration but has been decried by various political and civil society opponents.
Shell admitted that its Netherlands subsidiary paid no tax on profits due to the Dutch system. Shell Netherlands is a member of a fiscal unity (Dutch consolidation regime) with Shell headquarters, also situated in the Netherlands. The fiscal unity also comprises various (offshore) subsidiaries.
Whilst Shell Netherlands did post a pre-tax profit in the years reported, Shell headquarters posted losses due to various deductible charges including financial charges and liquidation losses relating to loss-making offshore investments included in the fiscal unity which cannot be brought against tax in the country where the investment is made. On balance, therefore, the fiscal unity did not post a taxable profit for the years reported and did not have to pay corporate tax in the Netherlands.
Furthermore, Shell also explained its case with regard to dividend arrangement. The company claims that the structure and ruling are perfectly in conformity with the applicable laws and regulations. Moreover, the ruling does not afford the shareholders with any new benefits and merely upholds their pre-existing tax status. The multinational further points out that had this structure not been possible, the simplification drive would have been achieved by keeping a single headquarters in the UK, with the result that the Netherlands would have lost all and any entitlement to levy dividend withholding tax on A or B shares alike.
As a result of this controversy the Dutch Parliament will hold hearings on tax contributions by multinationals starting on 29 May 2019.
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