The main impact of the profits of multinational corporations on the current account
The current account surplus in the Netherlands is strongly influenced by the major role multinational corporations play in our economy. This is due in part to differences in the way earnings are treated for investors on the one hand and earnings for foreign investors with an interest of more than 10% on the other hand statistically speaking.
Only the distributed portion (dividends) of a company’s earnings is considered income to the investor, while the undistributed portion (known as retained earnings) is attributed to the company as income. In the case of multinational companies registered in the Netherlands, profits retained worldwide are deposited in the Netherlands, even if the shareholders in these companies are often foreigners. The opposite effect occurs when companies located abroad do not in turn pay profits in full to Dutch investors, such as Dutch pension funds.
For direct corporate investments, where interest is retained in excess of 10%, retained earnings are allocated as income to direct investors. That’s because the statistical guidelines assume that these “large” investors in the company have a significant degree of control over how the profits are spent (eg, reinvested or distributed), while the smaller shareholder does not.
The impact of moving seats of multinational corporations on the current account
Partly because of the above dynamics, relocation of headquarters by multinational corporations can have a significant impact on the current account balance. In recent years, many foreign companies have moved to the Netherlands. This increases the current account surplus for the Netherlands because the undistributed profits of those companies are for the Netherlands. The relocation of Shell and Unilever to the UK, for example, has had a depressing effect on surplus for the same reason.
An additional indicative analysis for 2022 shows that the Dutch current account surplus would have been smaller if corporate retained earnings had been allocated to shareholders rather than to the company itself. In 2022, the profits that Dutch companies and financial institutions do not distribute to foreign investors amount to nearly 5% of GDP. In contrast, retained earnings not allocated to Dutch investors amounted to approximately 3% of GDP. Thus, the net effect of this alternative treatment of retained earnings would have been a decrease of two percentage points (about €19 billion) in the current account balance.
