A Dutch Letterbox Could Cost Bolivia a Fortune
The Netherlands has long been established as a place to do business and as more and more companies are finding out, all you need to do business there is little more than a letterbox.
So what are the advantages of owning a letterbox in the Netherlands? The answer is simple: it helps corporations avoid paying taxes elsewhere and enables them to take advantage of the corporate-friendly Bilateral Investment Treaties (BITs) the Netherlands has with other countries.
The Netherlands is home to about 20,000 of these letterbox companies and this number is rising, on average, by 5 every day. One company taking advantage of this corporate-friendly environment is Euro Telecom Italia NV (ETI), a wholly owned subsidiary of Telecom Italia SpA. ETI has no substantial commercial presence or staff in the Netherlands, but is currently attempting to take Bolivia to the International Center for the Settlement of Investment Disputes (ICSID), an arbitration tribunal at the World Bank, using the BIT the Netherlands signed with Bolivia in 1995. This BIT between the Netherlands and Boliva contains some harsh conditions not usually seen in BITs: the term "investments" has a very wide interpretation and the BIT applies to investments made even before it was signed—to name just two of its draconian conditions.
ETI has requested arbitration because the Bolivian government of Evo Morales has suggested that ETI, which holds a controlling share of Bolivia’s largest telecommunications company ENTEL, has been providing poor service to Bolivians, has not been reinvesting enough in its telecommunications infrastructure, and has been taking millions of dollars of profits out of the country. The Bolivian government set up a commission to begin a review of ETI’s performance, demanded the payment of back taxes, and attempted to negotiate with ETI a buy back of what used to be a public telecommunications company. (This deal included a compensation package for ETI.) ETI reacted furiously and claimed that by undertaking a review of its performance and attempting to negotiate the renationalization of ENTEL, Bolivia had "destroyed" ETI’s investments and its earning potential, therefore making it cheaper for Bolivia to renationalize ENTEL—a paradoxical statement, considering ENTEL continues to operate at a profit and to advertise new products and services in Bolivia. Instead of completing negotiations with Bolivia, ETI opted for a much safer bet, lodging a request for arbitration.
Key Facts and Figures
Number of Bilateral Investment Treaties in 1989: 385
Number of Bilateral Investment Treaties in 2006: more than 2,500
Number of known investor-state lawsuits as of 2006: 255
Proportion of cases filed since 2002: more than 2/3 of all cases
Number of cases currently pending at the ICSID:109
Number of cases in which investor revenues exceeded the GDP of the country: 7
Percentage of cases pending and concluded against
Percentage of cases relating to:
ICSID is known for being business friendly. Indeed, in 36 percent of the cases it has presided over, it has awarded in favor of corporations demanding compensation—often including an allowance for lost future profits. Another 34 percent result in out of court settlements. In contrast, it is not possible for countries to lodge complaints against corporations at ICSID, regardless of how poorly a corporation has behaved within its borders.
On May 2, 2007, the Bolivian government, well aware of the unfairness of the ICSID, officially gave notice that Bolivia was withdrawing from the ICSID Convention of 1966, the first country ever to do so. The ICSID convention, however, states that a six month notice period applies to any withdrawal. ETI lodged its complaint with ICSID on October 12 and ICSID responded on October 29 (just a few days before the notice was due to expire) stating it was willing to review the case, Bolivia then unsuccessfully appealed. (There is some confusion as to whether the notice period is or is not required.) Unfortunately, because ICSID’s decision- making processes are rather long winded, a decision will likely be made sometime between July 2009 and March 2010, just over the jurisdiction. However, if Bolivia refuses to recognize ICSID, as it is doing at the moment, then it could be tried in absentia and the case could progress extremely rapidly.
In response to ETI’s action, 863 citizens groups from 59 countries sent a petition to World Bank President Robert Zoellick. Fifteen Dutch organizations made an appeal to the Dutch government asking it to support Bolivia and investigate corporate abuse of the Netherlands’ investment treaty with Bolivia.
The Ministry for Trade reacted predictably, washing its hands of any involvement in the case, saying, "This concerns a dispute between a Dutch investor and Bolivia. The Dutch state is not a party in this and has no opinion about the merits of the case and the legal basis on which the company has submitted the dispute." What the Ministry doesn’t mention is that the Netherlands receives a considerable income in the form of taxation on capital transfers flowing through letterbox companies and similar financial institutions. In 2006 gross transactions involving these entities amounted to €4.6 trillion, more than 9 times the Dutch GDP. There is also a large consultancy sector supporting these financial institutions estimated to employ 2,500 people and the Dutch government receives approximately €1.2 billion in tax revenue every year (plus a half billion euros in office and management costs). The Italian telecom giant, meanwhile, remains confident that the tribunal will rule in its favor. Robert Sills, counsel for ETI, said, "ETI is confident that the tribunal will determine that it in fact has jurisdiction and proceed to decide the case." Given ICSID’s history of ruling in favor of corporations, this confidence is well warranted.
In an interview with Rocio Rocabado, a resident of Bolivia’s administrative capital La Paz, she said she was happy with what Evo Morales had been doing. "He’s recovering the natural resources [gas] and strategic resources [water, electricity, telecommunications]. He’s trying to provide universal health and education for everyone and I’m happy about his efforts to recover ENTEL." When asked what happened after ETI took over ENTEL in 1995, she said, "Prices went up immediately. ENTEL failed in its investment commitments for rural areas and it’s also avoiding taxes…. Even now, many people in rural areas still don’t have telephones, perhaps it’s just not profitable?"
Today, the European Union is aggressively pursuing a new generation of free trade agreements (FTAs) under the aegis of its Global Europe project, including an FTA with the Andean Community of Nations. The EU claims that this FTA, which promotes further market opening and other privileges for EU service corporations, will bring more wealth and create new jobs. In the light of the Bolivia’s experiences with Telecom Italia, and Bechtel in 2000, these promises sound very hollow indeed.
Oliver Shykles is a freelance researcher.