By Dimitrije Tasic
Stepping into his office in the first week of November as the new president of the European Commission, Jean-Claude Juncker announced that one of the main goals of his presidency is to start a fight against tax machinations and bring some morality and ethics into this issue. However, little did he know that only a few days later, he would find himself at the epicenter of an international tax scandal discovered on the territory of the Grand Duchy of Luxembourg, a country in which he served as prime-minister from 1995 to 2013.
A report of over 28,000 pages produced by the International Consortium for Investigative Journalism (ICIJ) explains the tax evasion schemes practiced for years in this tiny European country. According to the report, the tax evasion scheme was created by numerous international companies and financial institutions and assisted by Luxembourg tax authorities and accounting firm PricewaterhouseCoopers (PwC). In particular, since 2000, 343 foreign companies ranging from American- Pepsi, the Canadian state pension fund, German- Deutsche Bank and Ikea to the investment fund of Abu Dhabi were allocating funds for a minimum tax on their global business and shifting profits through their branches/subsidiaries registered in Luxembourg.
The entire tax evasion scheme was not all that complicated. For example, a company that seeks to conceal its profits at home would first have its books prepared by PwC and would then ask for a “letter of support” from a specific person in the Luxembourg tax administration, a person called Marius Kohl (retired in 2013). Indeed, Kohl’s signature was found on most of the 548 approved “letters of support” with which companies and institutions were allowed to open their branch/subsidiary in Luxembourg. This would allow them to transfer their profits from countries with a high tax rate to Luxembourg, exchange borrowings and loans between their own branches/subsidiaries around the world, buy property abroad, transfer profits from the sale of intellectual property realized elsewhere, etc.
In return, companies seeking the “letter of support” would promise large investments in Luxembourg and Luxembourg tax authorities would in certain cases approve a corporate tax rate of less than 1%, instead of the official rate of 29%. A foreign company would then register a branch/subsidiary in Luxembourg, often only in the form of a mailbox, or at best, open offices with very few employees.
The entire amount of losses incurred by domicile countries as a consequence of the aforementioned actions is not known. The ICIJ report mentioned an amount of at least $220 billion. However, this is certainly not the entire amount, since the ICIJ did not have access to tax arrangements, which involved international accounting companies other than PwC also active in the Grand Duchy.
Tax evasions schemes are not new and are not infrequent. During the most recent financial crisis, they became even more frequent. However, what is different in the case of Luxembourg, compared to tax havens such as Andorra, Panama, or Hong Kong is that since the mid-20th century, Luxembourg has been a distinguished member of the global financial arena. In addition, the Grand Duchy is one of the founding countries of the EU. Finally, in the international arena of “big bucks,” until recently, there was a widespread belief (at least in public) that Luxembourg respected the established rules of international business and its taxes.
Nevertheless, Brussels has for some time suspected the transparency of tax affairs in Luxembourg. In fact, it was Juncker himself (Prime-minister of Luxembourg at the time) who decisively rejected delivering some of Luxembourg’s tax agreements with large transnational companies, amplifying suspiciousness in the EU. Very recently, the European Commission initiated an official investigation on the tax arrangements of “Fiat” and “Apple” in Luxembourg.
To what extent Juncker has been involved -in his capacity as Prime Minister of Luxembourg – in such tax dealings is not yet known. However, it is known that Juncker himself signed into law a tax exemption of 80 percent on profits made by sales of intellectual property. Meanwhile, the European Commission announced yesterday an investigation regarding this tax scandal. Luxembourg tax authorities still claim that they have been operating in accordance with tax laws of the EU. Juncker, as a president of the European Commission, refused to comment on the ICIJ report but said that he would not interfere with the upcoming investigation.