For a tiny country of just 500,000 inhabitants, the Grand Duchy of Luxembourg is getting a heck of a lot of international attention these days. And certainly not of the welcome kind. At the beginning of this week, the Washington-based International Consortium of Investigative Journalists (ICIJ) published tens of thousands of documents that finally shed light on one of the world’s most important and most secretive tax havens – at least until now.
The picture that emerges is one of endemic tax avoidance and evasion that has helped transform Luxembourg into the world’s richest country on a per capita basis. The country also boasts the world’s highest ratio of bankers to inhabitants – a staggering 1:21.
Thanks to the revelations, we have learned that:
Hundreds of European and global transnationals, including Accenture (the former auditing arm of Arthur Andersen), IKEA, Burberry, FedEx, Blackstone, Deutsche Bank, H.J. Heinz, JP Morgan Chase, Procter & Gamble and HSBC, have signed sweetheart deals (endearingly titled comfort letters) with Luxembourg’s tax authorities that effectively allow them to avoid taxes in the countries where they rack up their profits. In some cases they have paid tax on profits of just 1%.
The “Big Four” accountancy firms – PwC, Ernst & Young, Deloitte and KPMG – served as the frontline architects of Luxembourg’s tax avoidance system. According to PwC, which is alleged to have helped corporations like Pepsi and IKEA reduce their tax bills by billions of euros, ICIJ’s reporting is based on “outdated” and “stolen” information, “the theft of which is in the hands of the relevant authorities.” It said its tax advice and assistance are “given in accordance with applicable local, European and international tax laws and agreements and is guided by a PwC Global Tax Code of Conduct.”
U.S. and U.K. companies appeared more frequently in the leaked files than companies from any other country, followed by firms from Germany, Netherlands and Switzerland. The companies implicated used Luxembourg in combination with other tax havens such as Gibraltar, and Ireland.
Such revelations hardly come as a surprise to anyone with a rudimentary knowledge of Europe’s capital markets. Despite repeated denials from the Luxembourg government, it has long been abundantly clear that the tiny diminutive grand duchy has long served as a giant black hole for corporate profits and investment funds. The question is:
What Happens Now?
For the European Commission, which recently appointed the already disgraced former Prime Minister of Luxembourg Jean Claude Juncker as its President, the news could not have come at a worse time. Juncker, still in his first month of office, is already facing calls to resign from a growing number of MEPs, including Front National’s leading lady Marie Le Pen.
More to the point, now that the cat is finally out of the bag, how will the EU address the problems posed by Luxembourg’s continued existence as a tax haven? Will the Grand Duchy face a similar fate to Switzerland, which has been faced with high profile tax evasion cases brought by the US justice department against a number of leading Swiss banks?
Just as pointedly, what could the ICIJ’s revelations mean for the EU’s numerous other low-tax jurisdictions. As I reported in Beware, the Borderless Taxman Cometh, the growing trend is for national jurisdictions to exchange information on private bank accounts – all in the name of tackling the scourge of tax evasion and the illegal economy. In 2017 new rules for information sharing between EU states will come into effect that have the potential to significantly curtail the levels of secrecy offered by low-tax jurisdictions.
No doubt countries like Ireland, with its extremely generous corporate tax regime, and Austria, with its chronically opaque banking system, will be paying close attention to developments. So too will the Netherlands, a little-known fiscal paradise that is second home to 48 percent of the Fortune 500. However, these countries pale into insignificance when compared to the granddaddy of all tax havens: the City of London.