Recent documents published by the International Consortium of Investigative Journalists (“ICIJ”) indicate that some 340-plus international companies, including such household names as Pepsi, IKEA, and FedEx, have been channeling profits through Luxembourg in order to avoid billions of dollars in taxes.
The report is based on a collection of almost 28,000 pages of leaked documents. The documents contain hundreds of private tax rulings known as “comfort letters” provided by Luxembourg to corporations looking for tax breaks. The documents appear to indicate that by funneling profit through subsidiaries, international corporations have been able to cut their tax rates drastically, saving them billions of dollars. For example, the ICIJ’s report concluded that FedEx’s effective tax rate in Luxembourg was less than 1%. Such a rate is dramatically lower than the country’s official 29% corporate tax rate.
But, how is this possible? Luxembourg provides confidential tax deals that are tailored to individual companies. International corporations have access to deductions and holding structures that can lead to extremely low tax bills. Often, they are required to pay little or no tax on income from royalties, dividends, interest, proceeds from liquidations or capital gains. Tax advisors from PwC and other firms are allowed to present their own tax proposals designed to create tax reductions and get written confirmation that their plans will be viewed favorably by the duchy of Luxembourg’s Ministry of Finance.
The question left in the wake of these documents is, are these tax deals legal? For months now, the European Commission, the European Union’s executive body, has been looking into this question. The Commission has put pressure on Luxembourg to turn over documents related to its tax rulings with Amazon and Fiat Finance. While Luxembourg officials have provided some information, they have refused to provide the bulk of the documents related to its tax rulings.
Many countries in the EU are concerned that Luxembourg’s tax policies supply it with advantages over other European countries. While a country having lower tax rates than its neighbors is not against EU rules, it could be an infringement if Luxembourg has granted special deals to some companies that were not available to all. In fact, just last year a review of Luxembourg’s tax system by other countries under the auspices of the Organization for Economic Cooperation and Development determined that the system was in violation of international standards of transparency and exchange of information.
To add to the controversy, Jean-Claude Juncker, the former prime minister of Luxembourg, took office as the president of the European Commission just four days before the reports were released. While Juncker has promised not to abuse his position or “stand in the way” of any regulatory cases, many are concerned Luxembourg will not give up its tax system lightly.
What’s more, many observers are skeptical that the situation with Luxembourg is merely a symptom of a greater overall pattern. These observers believe that international companies with clever accountants will always find a way to take advantage of international tax breaks, thereby leaving smaller companies and average taxpayers to absorb lost tax revenues. Jurgen Kentenich, chief tax fraud investigator of the German city of Trier, which borders Luxembourg, explained that accounting firms are always coming up with new ways to cut tax rates “and lawmakers and tax authorities are always behind…chasing.”
Luxembourg has become a Tax Haven for International Companies (PDF)