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11/5/14, "Leaked Documents Expose Global Companies’ Secret Tax Deals in Luxembourg," Int. Consortium of Investigative Journalism, icij.org, by Leslie Wayne, Kelly Carr, Marina Walker Guevara, Mar Cabra and Michael Hudson
"The landlocked European duchy has been called a “magical
fairyland” for brand-name corporations seeking to drastically reduce tax
bills.
Pepsi, IKEA, FedEx and 340 other international companies have secured
secret deals from Luxembourg, allowing many of them to slash their
global tax bills while maintaining little presence in the tiny European
duchy, leaked documents show.
These companies appear to have channeled hundreds of billions of
dollars through Luxembourg and saved billions of dollars in taxes,
according to a review of nearly 28,000 pages of confidential documents
conducted by the International Consortium of Investigative Journalists
and a team of more than 80 journalists from 26 countries.
Big companies can book big tax savings by creating complicated
accounting and legal structures that move profits to low-tax Luxembourg
from higher-tax countries where they’re headquartered or do lots of
business. In some instances, the leaked records indicate, companies have
enjoyed effective tax rates of less than 1 percent on the profits
they’ve shuffled into Luxembourg.
The leaked documents reviewed by ICIJ journalists include hundreds of
private tax rulings – sometimes known as “comfort letters” – that
Luxembourg provides to corporations seeking favorable tax treatment.
The European Union and Luxembourg have been fighting for months over Luxembourg’s reluctance
to turn over information about its tax rulings to the EU, which is
investigating whether the country’s tax deals with Amazon and Fiat
Finance violate European law. Luxembourg officials have supplied some
information to the EU but have refused, EU officials say, to provide a
larger set of documents relating to its tax rulings.
Today ICIJ and its media partners are releasing a large cache of
Luxembourg tax rulings – 548 comfort letters issued from 2002 to 2010 –
and reporting on their contents in stories that will be published or
broadcast in dozens of countries. It’s unclear whether any of these
documents are among those still being sought by EU investigators, but
they are the kinds of documents that go to the heart of the EU’s
investigation into Luxembourg’s tax rulings.
The leaked documents reviewed by ICIJ involve deals negotiated by
PricewaterhouseCoopers, one of the world’s largest accounting firms, on
behalf of hundreds of corporate clients. To qualify the companies for
tax relief, the records show, PwC tax advisers helped come up with
financial strategies that feature loans among sister companies and other
moves designed to shift profits from one part of a corporation to
another to reduce or eliminate taxable income.
The records show,
for example, that Memphis-based FedEx Corp. set up two Luxembourg
affiliates to shuffle earnings from its Mexican, French and Brazilian
operations to FedEx affiliates in Hong Kong. Profits moved from Mexico
to Luxembourg largely as tax-free dividends. Luxembourg agreed to tax
only one quarter of 1 percent of FedEx’s non-dividend income flowing
through this arrangement – leaving the remaining 99.75 percent tax-free.
“A Luxembourg structure is a way of stripping income from whatever
country it comes from,’’ said Stephen E. Shay, a professor of
international taxation at Harvard Law School and a former tax official
in the U.S. Treasury Department. The Grand Duchy, he said, “combines
enormous flexibility to set up tax reduction schemes, along with binding
tax rulings that are unique. It’s like a magical fairyland.”
FedEx declined comment on the specifics of its Luxembourg tax arrangements. Other companies
seeking tax deals from Luxembourg come from private equity, real
estate, banking, manufacturing, pharmaceuticals and other industries,
the leaked files show. They include Accenture, Abbott Laboratories,
American International Group (AIG), Amazon, Blackstone, Deutsche Bank,
the Coach handbag empire, H.J. Heinz, JP Morgan Chase, Burberry, Procter
& Gamble, the Carlyle Group and the Abu Dhabi Investment
Authority.
For their part, Luxembourg’s officials and defenders say the
landlocked nation’s system of private tax agreements is above reproach.
“No way are these sweetheart deals,” Nicolas Mackel, chief executive
of Luxembourg for Finance, a quasi-governmental agency, said in an
interview with ICIJ.
“The Luxembourg system of taxation is competitive – there is nothing
unfair or unethical about it,” Mackel said. “If companies manage to
reduce their tax bills to a very low rate, that’s a problem not of one
tax system but of the interaction of many tax systems.”
Less than 1%
Disclosure of the leaked documents comes at a sensitive time for
Luxembourg, a nation with a population of less than 550,000. Amid the EU
probe of Luxembourg’s tax deals, former Luxembourg Prime Minister
Jean-Claude Juncker is in his first week in office as president of the
European Commission, one of the most powerful positions in the EU.
Juncker, Luxembourg’s top leader when many of the jurisdiction’s tax
breaks were crafted, has promised to crack down on tax dodging in his
new post, but he has also said he believes his own country’s tax regime
is in “full accordance” with European law. Under Luxembourg’s system,
tax advisers from PwC and other firms can present proposals for
corporate structures and transactions designed to create tax savings and
then get written assurance that their plan will be viewed favorably by
the duchy’s Ministry of Finance.
“It’s like taking your tax plan to the government and getting it
blessed ahead of time,” said Richard D. Pomp, a tax law professor at the
University of Connecticut School of Law. “And most are blessed.
Luxembourg has a very user-friendly tax department.”
The private deals are legal in Luxembourg but may be subject to legal
challenge outside the country if tax officials in other nations view
them as improper.
Luxembourg’s Ministry of Finance said in a statement that “advance
tax decisions” are “well established in many EU member states, such as
Germany, France, the Netherlands, the U.K. and Luxembourg” and that they
don’t conflict with European law as long as “all taxpayers in a similar
situation are treated equally.”
PwC said
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.”
In its statement PwC said media do not have “a complete understanding
of the structures involved.” While the company can’t comment on
specific client matters, it rejects “any suggestion that there is
anything improper about the firm’s work.”
ICIJ and its media partners
used corporate balance sheets, regulatory filings and court records to
put the leaked tax rulings in context. News organizations that have
worked together on the six-month investigation include
The Guardian,
Süddeutsche Zeitung and
NDR/WDR in Germany, the
Canadian Broadcasting Corporation,
Le Monde,
Japan’s Asahi Shimbun,
CNBC,
Denmark’s Politiken,
Brazil’s Folha de S. Paulo and others.
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. Most of the rulings in the stash of
documents were approved between 2008 and 2010. Some of them were first
reported on in 2012 by Edouard Perrin for France 2 public television and
by the BBC, but most of the PwC documents have never before been
analyzed by reporters.
The files do not include tax deals sought from Luxembourg authorities
through other accounting firms. And many of the documents do not
include explicit figures for how much money the companies expected to
shift through Luxembourg.
Experts who’ve reviewed the files for ICIJ say the documents do make
it clear, though, that the companies and their advisors at PwC engaged
in aggressive tax-reduction strategies, using Luxembourg
in combination
with other tax havens such as
Gibraltar,
Delaware and
Ireland."...
Among deals documents show:
"Belgium’s richest family, the billionaire de Spoelberch dynasty,
obtained a private tax ruling from Luxembourg in 2008. The de
Spoelberch clan, part of the country’s old nobility and close to the
royal family, holds a big stake in ABInbev, the world’s biggest brewer
whose labels include Budweiser, Stella Artois, Corona and Beck’s. The
records indicate the de Spoelberch’s routed €2 billion through Ireland
and then Luxembourg, reducing taxes with each step. The only sign of
Luxembourg companies controlled by the family appears to be
a small
letter box at an address that lists nearly
190 other companies
....
Gilded Age
Last month, in the Gilded Age splendor of New York’s private
Metropolitan Club, Pierre Gramegna, Luxembourg’s minister of finance,
tried to woo the Wall Street crowd with some premier cru wine and a
little levity. He told assembled financiers that he wanted to dispel the
myth that his tiny country is nothing more than a tax haven:
“Luxembourg is not an offshore place. I say it loud and clear.”
What he got back was hearty round of laughter.
In the wake of the EU’s probe of its tax practices, Luxembourg
officials continue to bristle at their nation’s tax haven label. The
country, a founding member of the EU, boasts of being a multi-lingual
nation in the heart of Europe with a business-friendly and stable
government. Once primarily a steel-maker and manufacturer, Luxembourg
has transitioned into a financial center rivaling London, New York or
Hong Kong. With $3.7 trillion in assets under management by banks and
other institutions, Luxembourg is second only to the U.S. as a global
investment center.
More than 170 of the Fortune 500 companies have a Luxembourg branch,
according to Citizens for Tax Justice, a nonprofit research and advocacy
group. A total of $95 billion in profits from American corporations’
overseas operations flowed through Luxembourg in 2012, the most current
statistics from the U.S. Bureau of Economic Analysis show. On those
profits, corporations paid $1.04 billion in taxes to Luxembourg –
just
1.1 percent.
Other tax havens, Ireland for example, openly advertise rock-bottom
corporate tax rates of 12.5 percent. Luxembourg instead maintains a
statutory tax rate of 29 percent, but the leaked files show that the
duchy has routinely approved tax rulings that whittle down what counts
as taxable income to practically nothing.
This can drop Luxembourg’s
effective tax rate deep into single digits."...
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