Luxembourg haven brainchild

LUXEMBOURG—On the first floor of a rust-colored building near the main railway station, Marius Kohl spent years engineering this country’s most valuable export: tax relief.

As head of a federal agency called Sociétés 6, Mr. Kohl approved thousands of tax arrangements for multinational corporations, sometimes helping them save billions.

Sociétés 6’s official function is to determine how much tax is owed each year by roughly 50,000 Luxembourg-registered holding companies, most of which have foreign parents. International regulators say the authority has acted more as a facilitator, endorsing confidential tax arrangements that bring business to Luxembourg while allowing global companies to avoid paying what regulators consider the companies’ fair share of taxes elsewhere.

Known in financial circles as “Monsieur Ruling,” Mr. Kohl, who retired last year, had sole authority at Sociétés 6 to approve or reject the tax deals. Foreign companies flocked to the tiny country during his tenure because of the speed and ease of the approval process, local tax advisers say.

“I could say ‘yes’ or ‘no,’ ” Mr. Kohl, a bearded 61-year-old with a ponytail, said in a recent interview, which he described as his first. “Sometimes it’s easier if you only have to ask one person.”

The European Union’s executive arm said this month it is investigating whether Luxembourg’s tax deal with Amazon.com Inc. violated rules against state subsidies to an individual company. It is looking into similar arrangements with Fiat Chrysler Automobiles NV and has hinted that more probes will follow. Luxembourg and both companies say they have adhered to international tax rules and have done nothing wrong.

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In Luxembourg, foreign companies have access to deductions and holding structures that can slash their tax bills from the 29% headline corporate rate to close to zero. Often, they pay little or no tax on income from royalties, dividends, interest, proceeds from liquidations or capital gains.

Even as Europe has standardized rules on everything from light bulbs to bolts, tax policy remains the province of national governments. But with many countries struggling to reduce debt, there is pressure on the EU to take a tougher line with tax-outlier governments.

Much attention has focused on Ireland and its role in helping companies slash taxes. Dublin this month moved to scale back its breaks. EU authorities have also zeroed in on the Netherlands, where Starbucks Corp. ’s European roasting operation is under scrutiny. Starbucks has said it complies with all relevant tax rules.

Regulators say no European country has been as aggressive as Luxembourg over the years in using tax breaks and confidentiality to lure international businesses.

A review of its tax system last year by other countries under the auspices of the Organization for Economic Cooperation and Development concluded that Luxembourg didn’t comply with international standards of transparency and exchange of information.

“Luxembourg’s wealth comes from helping companies not pay taxes in the countries where the value was created,” says Pascal Saint-Amans, a senior official at the OECD who is spearheading an international effort to overhaul corporate-tax rules. “Instead of creating value, they create tax advice.”

Luxembourg’s finance minister, Pierre Gramegna, says his country fully complies with global standards and isn’t a tax haven.

“We always go by international rules,” says Mr. Gramegna, who until last year led the country’s chamber of commerce. He said legislation to address the OECD concerns would be implemented this year.

The OECD last month presented proposals to standardize rules for taxing international companies, which would force more transparency and make it harder for companies to shift profits to low-tax places. Before the proposals can take effect, countries must turn them into national law. And a key issue remains unresolved: how much operational heft a company must have in a country to declare that country its tax home.

via Business-Friendly Bureaucrat Helped Build Tax Haven in Luxembourg – WSJ.

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