how luxembourg rubber-stamped tax avoidance on an industrial scale

8/10/2019 How Luxembourg Rubber-stamped Tax Avoidance on an Industrial Scale

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An unprecedented international investigation into tax deals struck

withLuxembourghas uncovered the multi-billion dollar tax secrets of some

of the worlds largest multinational corporations.

A cache of almost 28,000 pages of leaked tax agreements, returns and othersensitive papers relating to over 1,000 businesses paints a damning picture

of an EU state which is quietly rubber-stamping tax avoidance on an

industrial scale.

The documents show that major companies including drugs groupShire,

City trading firm Icap and vacuum cleaner firm Dyson, who are

headquartered in the UK or Ireland have used complex webs of internal

loans and interest payments which have slashed the companies tax bills.These arrangements, signed off by the Grand Duchy, are perfectly legal.

The documents also show how some 340 companies from around the world

arranged specially-designed corporate structures with the Luxembourg

authorities. The businesses include corporations such as Pepsi, Ikea,

Accenture, Burberry, Procter & Gamble, Heinz, JP Morgan and FedEx.

Leaked papers relating to the Coach handbag firm, drugs group Abbott

Laboratories, Amazon, Deutsche Bank and Australian financial group

Macquarie are also included.

The Luxembourg tax files

1. Introduction2. How it works3. Case study: Shire4. Case study: ICAP5. Case study: Dyson6. Analysis by Richard Brooks

7.

Find out more or get in touch

A Guardian analysis has found:

A Luxembourg unit of Shire, the FTSE-100 drug firm behind

attention deficit pill Adderall, received more than $1.9bn in interest

income from other group companies in the last five years, paying

corporation tax of less than $2m over four of the years despite

minimal overheads.
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Vacuum and hand dryer firm Dyson set up companies in the Isle of

Man and Luxembourg to pour 300m of internal loans into its UK

operations in 2011. Interest payments made on those loans slashed

Dysons UK tax bill and were instead taxed at only around 1% in

Luxembourg, saving Dyson companies millions in tax.

Icap, the financial trading firm run by leading Conservative party

donor Michael Spencer, lent $870m from Luxembourg to its US

business for seven years. Interest paid out from US companies on

those loans was 247m, which was taxed at a fraction of official

corporation tax rates in the US and UK.

Stephen Shay, a Harvard Law School professor who has held senior tax

roles in the US Treasury and who last year gave expert testimony on Apples

tax avoidance structures in a Senate investigation, said: Clearly the

database is evidencing a pervasive enabling by Luxembourg of

multinationals avoidance of taxes [around the world]. He described the

Grand Duchy as being like a magical fairyland.

"Luxembourg is like a magical fairyland"Stephen Shay, Harvard professor

There is growing political pressure in the UK and abroad to stop companiesexploiting international tax rules to slash their tax bills. In January last year

David Cameron told business leaders gathered at the World Economic

Forum in Davos he would not tolerate big multinationals avoiding tax. In

particular, he criticised how companies navigate their way around

legitimate tax systems ... with an army of clever accountants.

Chancellor George Osborne has pledged to reveal new measures next

month to stop global corporations diverting profits offshore. Barack Obamahas condemned tax avoiding companies as unpatriotic and the G20 group

of nations is working on new rules to rein in aggressive tax planning.

The revelations will be embarrassing for the new president of the European

Commission, Jean-Claude Juncker, who was prime minister of

Luxembourg between 1995 and 2013. In a speech in Brussels in July,

Juncker promised to try to put some morality, some ethics, into the

European tax landscape. He has insisted that the country is not a tax

haven.


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Pressure is already building on Luxembourg after the European

Commission launched a formal investigation into whether Amazons tax

arrangements in the Grand Duchy amount to unfair state aid. The

Luxembourg tax arrangements of Italian carmaker Fiats finance unitare

also under official scrutiny by Brussels.

Asked recently if such a crackdown risked damaging the economy of

Luxembourg, one senior figure closely involved in the G20 reform

programme said: I dont care. It is like saying: If you fight drugs there will

be no jobs in certain parts of Mexico.

Recent scrutiny by politicians and media organisations of aggressive

structures used by technology groups such as Apple, Google and Amazonhave suggested US digital firms are at the vanguard of cross-border tax

avoidance. But todays revelations show many European multinationals in

non-digital industries have also made extensive use of tax engineering.

More than 80 journalists in 26 countries, working in collaboration through

theInternational Consortium of Investigative Journalists,have spent six

months scrutinising the leaked papers - after a small number of the

documents were first revealed by French TV journalist Edouard Perrin. The

papers largely relate to clients of PricewaterhouseCoopers Luxembourg.PwC is one of the largest tax advisory groups in the world.

The leaked papers show Luxembourg acting as a go-between, both enabling

and masking tax avoidance, which always takes place beyond its borders.

The documents are mainly Advance Tax Agreements - known as comfort

letters. The leaked papers include 548 of these private tax rulings. These

ATAs are typically schemes put to the Luxembourg tax authorities which, if

implemented, reduce tax bills substantially. If the Luxembourg authoritiesapprove the scheme they provide a comfort letter which is a binding

agreement.

The ECs Amazon and Fiat investigations were launched after Brussels

officials demanded that Luxembourg hand over certain ATAs.

"[I will] try to put some morality, some ethics, into the European tax landscape."Jean-Claude Juncker
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Less than a third of the tax deals brokered by PwC in the 28,000 pages of

documents include a figure for the sums multinationals planned to move

into Luxembourg schemes. However, these deals still amounted to more

than $215bn of loans and investments using the Grand Duchy between

2002 and 2010, many to massage down tax bills.

Given that many more leaked papers did not disclose sums involved, and

that PwC was just one of several accounting firms which secure deals with

the Luxembourg tax authorities, the full scale of financial flows through

Luxembourg, facilitated by comfort letters from the Grand Duchys officials,

is likely to be much higher.

PwC said questions put to it by ICIJ journalists were based on outdatedand stolen information, the theft of which is in the hands of the relevant

authorities.

But analysis of public filings with company registries around the world

indicate many of the leaked tax deals remain in force, sapping tax revenues

from public coffers today.

The Guardians detailed findings were put to Shire,Icapand Dyson. All

three declined to answer questions. They issued statements saying that theydo not engage in tax avoidance and that they pay tax in the countries where

profits are made.

Dyson stressed that its Isle of Man and Luxembourg structure was

unwound in 2013. Icap said it had started a process of winding down its

Luxembourg financing companies last month as part of a wider

reorganisation.

Many papers in the leaked tax correspondence do not reveal enoughinformation to clearly show tax consequences of each groups corporate

structuring. And some corporations will have sought comfort letters from

Luxembourg for reasons other than tax avoidance.

Many large private equity investments are also the subject of Luxembourg

ATAs. Well known buyout firms such as Blackstone and Carlyle appear in

the leaked documents, and Luxembourg investment vehicles are

commonplace in such investment firms.
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A 2008 joint venture between private equity group Apax Partners and

Guardian Media Group, which owns the Guardian, also used a Luxembourg

structure after it invested in magazine and events group Emap, now called

Top Right.

A spokesman for GMG said: We partnered with a private equity company

which regularly used such structures. A Luxembourg entity was used

because Apax already had that structure in place. The fact that the parent

company is a Luxembourg company does not give rise to any UK

corporation tax savings for GMG.

How it works

The documents reveal a number of financial structures which were

approved by the Luxembourg tax authorities, and which led to substantial

tax savings for the companies involved. One of the more common is based

on cross-border lending within a group of companies, and a mismatch

between the perceptions of Luxembourg and overseas tax authorities.

Graphic: Daan Louter, Simon Bowers, Cath Levett, Sen Clarke

How Shires internal lending cutsits tax billA tiny Luxembourg-based unit of Shire, a multinational drug firm

specialising in treatments for ADHD, Crohns disease and rare genetic

disorders, has become one of the most profitable outposts of the

pharmaceutical empire. Shire is a 24bn transatlantic drugs group with big

operations in the UK town of Basingstoke, and Pennsylvania and

Massachusetts in the US.It shifted its corporate head office from the UK to

Ireland for tax purposes in 2008 and is registered in the tax-friendly island

of Jersey. The majority of its sales are in north America.

One of Shires Luxembourg units has made $1.87bn in profits in the last

five years, largely from making loans to sister companies, as it charged

interest rates of up to 9% on those loans. With what appears to be the

consent of the Luxembourg authorities, the enormous profits generated by

this unit were taxed at a fraction of 1%.


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Shires tiny Luxembourg finance company in an office with dozens of other

corporate occupants Shire HoldingsEuropeNo2 Sarl, or SHES2 for short

has lent out a total of more than $10bn.

Away from Luxembourg, more than two-thirds of Shires $5bn in annualrevenues came from the sale of prescription drugs in the US and Canada

last year. But group profits around the world were taxed at an average of

16.4% less than half the official tax rate for most big businesses in

America.

Somehow, the FTSE 100 firm had hit upon the holy grail of tax

management: a structure that allowed it to access some of the most

profitable healthcare markets in the world while keeping its tax bill low atthe same time.

The main factor pushing down its tax bill is explained in the smallprint of

the groups annual report as intra-group items. That is, the tax

consequences of investments and transactions between Shire group

companies around the world.

Leaked letters from PwC, Shires tax advisers, reveal how far Shire was

prepared to go to conjure up tax advantages through highly artificial taxstructures.

The confidential papers reveal the critical role in group tax planning played

by SHES2 one of seven Shire companies incorporated in Luxembourg.

Over the last five years this business received $1.91bn of interest income

from loans it made to other Shire companies, including more than $580m

last year alone. By the end of 2013, sister companies within the Shire group

owed SHES2 more than $10bn in loans and interest equivalent to morethan two years sales for the entire group.

The Guardian asked Shire why it had such large internal loans when the

overall group had few borrowing needs. Shire declined to comment.

The borrower companies and where they operate remains unknown. It is

likely however that the vast interest payments have created huge tax

deductions for these sister units, whose profits are lowered by the cost of

paying the interest on the Luxembourg loans.
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With minimal operating costs including staff wage bills of less than

$55,000 a year SHES2 appears to be one of Shires most lucrative

business units with profits over five years of $1.87bn.

But Shires annual report makes mention of SHES2 only once, in anappendix that lists the groups subsidiaries.

Meanwhile, accounts for SHES2, filed in Luxembourg, show that, despite

its towering profits, the company recorded no corporate income tax charge

at all.

The Guardian sent a reporter to the offices of SHES2 in Luxembourg but

found few of the trappings to be expected of a multi-million-dollar

enterprise. Watch footage of Rupert Neate attempting to find a SHES2

employee in Luxembourg:

Company filings show SHES2 had just four official managers, two of whom

were senior figures in Shires tax department, working at UK head office in

Basingstoke, England. Among them is Fearghas Carruthers, the groups

head of tax.

The key to solving the riddle of how SHES2 appears to have made $1.91bnof interest income almost disappear for tax purposes is found in leaked

Luxembourg letters from tax advisers at PwC to the local tax office. They

offer a rare glimpse into the groups labyrinthine corporate structures.


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A diagram provided by PwC to help the Luxembourg tax authority to understand the

corporate structure of Shire. The Guardian has picked out SHES2 and an Irish company

called Shire Holdings Ireland No.2 Limited in yellow. The circle labelled LuxPE is the

Irish companys Luxembourg branch.Photograph: Guardian

The answer lies in Ireland, where Shire moved its corporate headquarters

from the UK in 2008 after the Labour government had attempted a

crackdown on UK multinationals using internal financing companies inaggressive tax planning structures.

Among a cluster of Irish-registered Shire firms is a holding company Shire

Holdings Ireland No.2 Limited, or SHIL2 for short. This Irish company has

for years been charging itself interest on billions of dollars of loans to

itself. More specifically, the interest has been charged on loans from

SHIL2s head office registered near Dublin to a SHIL2 branch office in

Luxembourg. Rupert Neate returned - to the same office block on theoutskirts of Luxembourg city - to enquire about SHIL2.


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Leaked papers show that Shires tax advisers told the Luxembourg tax

authorities that this unusual lending within the same legal entity had

transformed the drug groups wider activities in the Grand Duchy into a

lending conduit: pushing one large loan from Ireland, through two

Luxembourg units (SHIL2 and SHES2), and onwards to Shire companies

around the world.

Such a chain of back-to-back lending, advisers from PwC argued, effectively

meant Shires intra-group loans were only passing through Luxembourg.

Therefore, the local taxman did not need to conduct a rigorous assessment

of Shires tax liabilities. The full Luxembourg corporate tax rate should still

apply, but only on a notional amount of profit. In Shires case, PwC

suggested, the Grand Duchy should be satisfied taxing just 1/64% thatis 0.0156% of the billions in loans and interest owing to SHES2.

A letter of consent from the Luxembourg tax office does not appear in the

cache of leaked files, but it is clear from publicly available filings elsewhere

that the avoidance structure was set up in 2008 and appears to have

remained active at least as recently as the end of 2013.

By the end, the complex structure had created a multi-billion-dollar lending

chain, bearing no relation to Shires overall borrowing needs. The structureappeared to have little commercial benefit other than a tax conjuring trick:

tax bills have been lowered for Shire borrower companies around the world

while the groups Luxembourg operations had all but escaped

corresponding tax on the interest income.

In a statement, the group said: Shire Holdings Europe No.2 Sarl, is part of

our overall treasury operations. We have a responsibility to all our

stakeholders to manage our business responsibly; this includes managingour tax affairs in the interest of all stakeholders.

Icaps skeleton-staffed multimillion dollar office

Above a stamp shop, behind closed office blinds, on the first floor of a

terrace building overlooking a park on Boulevard Prince Henri in

Luxembourg City, the lights appear to be out.

When the Guardian pressed the buzzer one October afternoon a male voice,with what seems a Dutch accent, sounds over the crackly intercom. The


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speaker confirmed this was, indeed, the Luxembourg offices of Icap, the

London-listed financial trading group.

Polite and good humoured, he chuckled and apologised for having to catch

his breath, explaining he has just run down some stairs to answer thebuzzer. He said little else about Icaps Luxembourg lending operations,

however, and wouldnt let the Guardian in the building. Watch footage of

our reporter, Rupert Neate, trying to make contact.

Official filings show two Icap companies at this address. Together they have

sucked hundreds of millions of dollars in interest income out of the high-

tax US and, with the help of a third Icap unit, and made them all but

disappear for tax purposes.

Together they had lent a total of $870m to Icap operations in America by

March 2008. Annual accounts since then show these loans remained on the

companies books unchanged every year. They were still outstanding at the

end of March this year.

Last week the Guardian approached Icap with the findings from its

investigation into thebroker firms Luxembourg activities. In response,

Icap explained that the loans had just recently been repaid in full by thegroups US operations, and that a process to wind down its Luxembourg

unit had begun only last month.

No such information was relayed by the voice on the intercom, though

Icaps local manager has since explained that Luxembourg secrecy laws

meant he could not offer explanations.

Company accounts suggest neither of the two Icap lending firms had much

commercial activity - other than the holding of large loans to the US.The companies names are as long as they are uninformative Icap

Luxembourg Holdings (No.1) Sarl and Icap Luxembourg (No.2) Sarl. In

leaked tax correspondence they are abbreviated to generic terms LuxCo1

and LuxCo2.


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A detail from one of the documents shows

part of Icaps corporate structure, as it relates to Luxembourg.Photograph: Guardian

Over the last seven years, the two each had just one employee paid an

annual wage of less than $15,000 while other costs of operating above

the stamp shop have also been consistently small.

It is a far cry from Icaps busy trading desks in New York and London,

scenes from which every year appear in the newspapers as astring of

celebrities take over the dealing phones as part of a charity day.Last year

the Duchess of Cornwall and Strictly Come Dancings Craig Revel Horwood

manned the lines.

Offering services in many of the busiest financial markets foreign

exchange, credit, interest rates and equities the group has a busy role atthe heart of the City of London, Wall Street and other financial centres.

The chief executive, Michael Spencer, has the best political connections,

serving as treasurer of the Conservative party between 2006 an 2010.

Hisdonationsto the party have totalled nearly 5m.

But no celebrities or cabinet ministers have ties to Icaps quiet Luxembourg

offices. LuxCo1 and LuxCo2 are not mentioned among the 22 main

subsidiaries listed in Icaps annual report. Yet together the two companies
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received a total of $248m in interest on their loans to the US in the last

seven years.

And thanks to modest overheads - the pedestrian office, the single

employee - almost all of the interest income converted into profit, makingLuxCo1 and LuxCo2 among the most lucrative subsidiaries within the Icap

empire.

The tax position on the Luxembourg lending profits is less than clear from

company accounts, which record both LuxCo1 and LuxCo2 as having no

income tax to pay at all for the seven years reviewed by the Guardian.

The true position, however, is discoverable with the help of leaked tax

approvals given to Icap, in private, by the Luxembourg taxman. These show

that LuxCo1 and LuxCo2 were treated in their tax returns as part of a

lending chain. Although neither company had any borrowings themselves,

another ICAP unit, registered to the same address on Boulevard Prince

Henri did.

The Icap borrower company in question has an innocuous sounding name

ICAP US Holdings No2 Ltd, or ICAP US2 for short but it is a truly

exotic corporate creature. Despite having just one employee, paid $12,000in Luxembourg, this UK tax-resident company has three registered

addresses: a law firm in Gibraltar; Icaps international headquarters on

Broadgate in the City of London; and the office above the stamp shop on

Boulevard Prince Henri.

A clue as to its importance to Icaps finance and tax affairs comes from the

list of directors at Icap US2. These include Stephen Caplen, deputy

financial director for the Icap group, and David Ireland, Icaps head of tax.

In the Luxembourg branch office, meanwhile, the sole reprsentant

permanent is the non-board member Paul de Haan. Watch the video to

learn more about Mr de Haans role.

A leaked Luxembourg tax deal, covering all three Icap financing units,

shows these units were treated collectively as a the middle link in a lending

chain: a conduit rather than a lender.

As a result, the local tax office agreed, the borrowing activities of Icap US2sLuxembourg branch was generating tax deductions that could be neatly


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offset against the tax liabilities on almost all interest income earned at

LuxCo1 and LuxCo2.

The resulting near-zero tax bill in Luxembourg could hardly be seen as

controversial so long, of course, as the millions paid out in interest byIcap US2 in the Grand Duchy was taxed when it became income for the

lending company. And therein lies the twist.

The lender to ICAP US2 was, in fact, ICAP US 2 itself. More precisely, ICAP

US2 was lending hundreds of millions of dollars to its Luxembourg branch.

In an exotic arrangement one seen elsewhere repeatedly in the leaked tax

files the group was effectively paying interest to itself.

Meanwhile, in Britain, tax inspectors scrutinising this arrangement

recognised there was something unusual afoot. But there was not much

they could do to block it, because the UK does not recognise such internal

company lending as taxable.

The result was that Icaps interest payments - paid by Icap US2s

Luxembourg branch to another part of Icap US2 in a different country -

almost disappeared, for tax purposes. The saving ran into many tens of

million of dollars.

That said, the UK taxman was not entirely without powers to act. HMRC

was able to use its anti-avoidance powers, under the so-called controlled

foreign companies regime, to winkle out a relatively small amount of tax

from Icap US2.

Over the last five years for which there are available accounts, Icap US2

appears to have paid an average corporate income tax of $3m a year to

HMRC and $83,500 to Luxembourg.

While the precise effective tax rate achieved on Icaps interest income is

hard to calculate, it is clear that it is a fraction of the headline corporate tax

rates in the US and UK over the last seven years.

In a statement to the Guardian, Icap said: Icap is a British company, which

has always paid more tax than the UK corporation tax rate, and we do not

engage in aggressive tax avoidance. We pay all taxes due on the profits

earned in the countries in which we operate. Our Luxembourg financing


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operation was created to support a series of acquisitions Icap made in the

US in the 2000s, and is now being wound down to reduce costs. Its profits

were taxed in the UK. It is an entirely standard financing method and was

agreed by HMRC.

Dyson sweeps away profits from the taxman

Up until 2010 the corporate structure behind Dyson, the hand dryer and

vacuum cleaner group, was as functional as its products.

Shares in Dyson James Ltd (DJL), the main business, based in Malmesbury

in Wiltshire, were owned by inventor and entrepreneur Sir James Dyson,

with the founders three children each holding minority stakes.

The billionaire industrial designer, who came up with the bagless vacuum

cleaner and built a company with a 1bn turnover, has become a figurehead

and spokesman for UK engineering and science.

In the late 2000s a rash of businesses moved their headquarter operations

abroad. Shire, UBM and WPP had moved to Ireland. Ineos switched to

Switzerland. Dyson did not approve.

We dont have any plans to do that [move tax domicile], he said in 2008.

I think its wrong to direct your business for tax reasons. Your business

should be where you can do it best.

However, his company went on to use elaborate tax structures after he

made those comments.

At the start of 2010, new tiers of holding and finance companies began

sprouting into life above DJL.

Shares in DJL were now owned by a new UK holding company: Dyson

James Group Ltd (DJG), which in turn became a subsidiary of Clear Cover

Ltd, a parent company incorporated in Malta.

Two group financing companies were also established: one in the Isle of

Man called Silver Cyclone, one in Luxembourg called Blue Blade.

Leaked details of tax deals with the Luxembourg tax office show these wereto be the vehicles for a 300m injection of loans into DJG in the UK. Like


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all good corporate manoeuvres it was given a muscular-sounding code

name: Project Ajax.

In a matter of months, the simple corporate architecture that existed before

had been swept aside. Dyson and his children remained the ultimateowners but their immediate interest was now in a company registered to an

address on Ting Point in the Maltese costal town of Sliema, the site of a

former British barracks.

Back in Britain, financial transactions that bore little relation to breaking

new ground in product design began to take place. Instead of product

engineering, this was financial engineering.

In 2010 DJG had to meet new interest costs of 5.37m that were paid to

newly-created sister company Blue Blade, filings in Luxembourg show.

These costs are thought to have been largely or entirely tax-deductible -

meaning they lowered profits at DJG, and thus its tax bill.

Dyson declined to confirm this, saying only that tax matters were

commercially sensitive.

Accounts for Blue Blade show the groups corporation tax for 2010 was just55,037 an effective tax rate of just under 1%. Somehow the business had

escaped tax at anything close to the then headline rate of over 28% in

Luxembourg.

Only in leaked tax papers is an explanation to be found. In a 2009 letter to

Marius Kohl, one of Luxembourgs top taxmen, Dysons tax advisers at PwC

argued the case for Blue Blade to be charged tax on only a small fraction of

its interest income.

The letter makes clear PwC had met with Kohl to discuss the matter a

month earlier.

At the heart of the tax advisers case was a claim that Blue Blade should pay

almost no tax because although it had lent 300m to DJG, it had also

borrowed 299m from Isle of Man-based Silver Cyclone.

PwC make no secret of the fact that the loan from the Isle of Man was

interest-free. Nevertheless, it suggests, Blue Blade should properly benefit


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from a tax deduction as if it had been required to pay interest to Silver

Cyclone.

[Blue Blade] will be allowed to deduct a deemed interest on its interest free

debt involved in the financial on-lending activity, PwC wrote. Rather thantaxing all of Blue Blades lending profits, Luxembourg should only tax a tiny

fraction of the sums borrowed.

The nine-page PwC letter was sent to Kohl on 11 November. On the same

day, the Luxembourg taxman sent back a two-paragraph reply: Further to

your letter... relating to the transactions that [the Dyson group] would like

to conduct, I find the contents of said letter to be in compliance with the

current tax legislation and administrative practice.

With these words, Kohl provided official sanction for the Dyson scheme to

go ahead as PwC had described.

The Guardian asked the Dyson group why Blue Blade should qualify for a

tax deduction over deemed interest costs when, in reality, this company

had almost no borrowing costs thanks to the interest-free loan from Silver

Cyclone. Dyson did not answer.

In a statement it said: Advice a number of years ago was that a non-UK

holding structure would aid growth further, however, that has not turned

out to be the case and the holding structure of Dyson group is now entirely

in the UK.

For reasons unknown, the 300m loan from Blue Blade was repaid in less

than a year. But analysis of Dyson filings in the UK, Luxembourg, Malta

and Isle of Man show that in 2011 the group rebuilt a near identical

structure. This time, however, millions of pounds in interest payments fromUK operations went to a Luxembourg company called Copper Blade. And

the payments were higher as the Malmesbury holding company had

borrowed 550m.

This large loan was partly repaid in 2011 and again in 2012, with all debts

and the entire structure unwound last year.

Dyson told the Guardian: The Dyson family business paid 330m in UK

tax over the past three years, clearly not the act of a company avoiding its


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fair share of tax. Dysons success means that over 85% of its technology is

sold overseas ... At no time did the [groups former] non-UK structure

deliver any significant tax advantage and, of the entities in question all have

been dissolved or are in a liquidation process.

Analysis: Havens make for a global race to thebottom

Richard Brooks writes:Occupying a damp 1,000 square miles where the

French, German and Belgian borders meet, the Grand Duchy of

Luxembourg is a far cry from the palm-fringed tropical island tax haven of

popular imagination.

In fact the country owes its status as the worlds premier corporate tax

haven to its position at the heart of Europe. A founding member of the

European Economic Community in 1957, Luxembourg enjoys all the

freedoms governing investment in what is now the European Union. These

and a network of taxation agreements with all the worlds leading

economies ensure the Grand Duchy is accepted in a club of leading nations

that share basic principles on how to tax corporations operating across

national borders.


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Office buildings in Luxembourgs financial district. A far cry from the Caribbean island

vision of tax havens. Photograph: Graeme Robertson/Graeme Robertson

Such a privilege would never be afforded to island-in-the-sun tax havens.

Large economies, such as the US and UK, typically block multinationals

from shifting profits to low-tax territories by imposing withholding taxes

on payments leaving their borders. Luxembourg, by contrast, is a respected

member of the international economic club, and assumed therefore to tax

its companies fully; it even has a corporate income tax system with a 29%

rate that is now relatively high by international standards. So money flows

into the country tax-free.

Secretly, however, Luxembourg is a tax haven, offering a range of ways inwhich payments that reduce a multinationals taxable profits in a country

such as the UK or US can escape tax when received in the Grand Duchy.

These include: exempting income diverted to foreign branches of

Luxembourg companies in places like Switzerland and Ireland, tax relief for

paper investment losses, and the approval of complex hybrid financial

instruments and corporate structures within its borders. Top FTSE 100

firms like Vodafone and GlaxoSmithKline are known to have exploited

these opportunities to channel billions through Luxembourg companies.


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When a multinational approaches the Luxembourg tax authorities with a

scheme employing one of these tactics, after a meeting or two to chew over

the details a senior official rubber-stamps the plan and the company walks

away with a big tax break. In this way the Grand Duchy behaves like the

club member who enjoys all the benefits of membership while quietly

pilfering from the kitty.

"Luxembourg is like the club member who enjoys all the benefits of membershipwhile quietly pilfering from the kitty"Richard Brooks

It might be an underhand way to run a tax system, but it serves

Luxembourg well. The country has the highest levels of foreign investment

inflows and outflows in the EU, taking a small but valuable tax levy as themoney washes through. Corporate income taxes, at 5% of GDP,

consequently form a far greater share of Luxembourgs finances than they

do in other EU countries.

As the world cottons on to Luxembourgs tax poaching, pressure for

reform grows. So does embarrassment for the new president of the

European Commission, Jean-Claude Juncker, who as prime minister of the

Grand Duchy for 18 years until 2013 presided over the activity. Revelations

of precisely how its corporate tax avoidance factory works give the lie to

Junckers repeated protestations that the country is not a tax haven.

Investigations by the European Commission into deals offered by

Junckers government to Amazon and Fiat might or might not conclude

that they constituted anti-competitive state aid. But these inquiries

concern the possibility of sweetheart deals for favoured companies, when

the bigger problem is that Luxembourg offers major tax breaks to all

companies as long as they have enough money.

Neutering Luxembourg as a tax haven at the heart of Europe requires an

overhaul of its corporate tax law and administration. A concerted effort

coordinated by the OECD aims to bring many of the tax structures

facilitated by Luxembourg to an end. But, even if its proposals are

technically sufficient, it will take intense political pressure to force

Luxembourg to implement them.


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In the meantime, despite his claims to be spearheading the OECDs work,

George Osborne has enhanced the allure of Luxembourgs tax breaks. In

2012 he drastically scaled back anti-tax avoidance laws targeted at

multinationals so-called controlled foreign companies. These are tax laws

that since 1984 have caught profits diverted by UK multinationals into tax

havens. In a move specifically aimed at favouring finance companies

established in Luxembourg, Osborne reduced the tax on their profits to no

more than 5%.

Osbornes changes are designed to make the UK an attractive place for

multinationals to base themselves. They do so by accommodating predatory

tax practices, in response to opportunities provided by countries like the

Netherlands and Luxembourg. Other widely publicised tax breaks such asthe patent box special tax rate for income from intellectual property mimic

concessions elsewhere.

This is the real harm that tax havens like Luxembourg cause. They turn

tax competition into a global race to the bottom, depleting the

contributions of major corporations and leaving citizens to pick up the tab.

how luxembourg rubber-stamped tax avoidance on an industrial scale

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