Luxembourg Leaks

Thanks to the whistleblower Antoine Deltour and the French journalist Edouard Perrin, to whom he has confided, we know that many companies just have to pay obscenely low taxes. As an employee of the consulting company PricewaterhouseCoopers (PwC) he has brought the LuxLeaks affair to the public. Almost all well known big transnational companies like Google, Apple, Amazon, Starbucks, Mc Donald´s, FedEx, IKEA, PepsiCo, Heinz, Procter & Gamble, Microsoft and many others are tax evaders.

According to the revelations Luxembourgian authorities in cooperation with the consulting firm PwC have granted tax benefits which have partially lead to a taxation below 1% 1. Belgium, the Netherlands and Ireland were involved as well. Mc Donald´s was reported to have temporarily paid no tax at all by circumventing the double-tax agreement between Luxembourg and the United States of America 2. Google at the other hand has moved its Asian and European revenues from Ireland to the Bermudas paying no more than 5% tax 3.

Well known tax dodges are illusive credits, high payments of royalties to partner companies in tax havens or internal accounting of goods and services at prices remote from the market. This also works in a way that a company first moves large amounts of capital to a tax heaven subsidiary which grants credits to the national from there. While real business activity takes place in the national offshore company interest payments can be set off the tax here. According to Wikipedia such credits were illusive in nature as there was no credit agreement and no payment of interest rates; i.e. the credit was invented for taxing authorities and did only exist on paper. The payment of high royalties on the other hand is just another tax dodging practice.

The leading consulters of the tax dodging industry are called Deloitte, Pricewaterhouse Coopers, KPMG and Ernst & Young. According to a special committee deployed by the European Union in response to the LuxLeaks affair to fight these tax dodging tricks, one Billion Euros evades Europe every year through these practices 4. Besides many fusions of companies have only been pushed forward because of tax avoidence. Whenever a company merges with another company in a country with lower taxation it can move its headquater into the country with lower taxation (→ tax inversion). Merging companies is the business of investment banks like Goldman Sachs (88%), Morgan Stanley, J.P. Morgan and the Bank of America 5.

Antoine Deltour who has confided himself as an employee of PricewaterhouseCoopers to the French journalist Edouard Perrin is already on charge by the state of Luxembourg. He is threatened with up to five years of prison and a fine as high as one Million Euro 6. His house was already searched and his computer confiscated 7. He is accused of theft, of illegally accessing computer systems, of passing on business secrets, of breaking professional discretion and of the possession of stolen documents 8.

A new law could even make things much worse for whistleblowers. Transnational companies have prepared this since long under exclusion of the public. Please prompt the European Parliament to vote against this law:

Meanwhile persons responsible for tax dodging as well as affected companies do not have to fear any kind of penaltiy for tax tricks which need to be considered partially fraudulent. The worst thing that can happen to companies are subsequent payment of taxes. It is emphasized that the revealed tax dodging tricks were performed in accordance with local legislation. Nonetheless the special LuxLeaks committee installed by the European Commission as lead by Jean Claude Juncker could assert several violations of EU aid granting regulations which the finance ministers of the involved countries would never have been allowed to grant. Apparently even more important is the significance of the special committee in closing legal loopholes which allow profits to be shifted and taxed outside their country of origin.

This special committee has been installed on February the 12 th of 2015. Unfortunately the legal service of the European Parliament which has criticised the investigation mandate as "too vague" prevented an investigation committee to be created 9. An investigation committee would have had a far reaching authority. The special committee has f.i. not been granted access to a study conducted by the European Council in 1999 which had already investigated unfair taxing practices at that time.

Jean Claude Juncker under whose EU-commission presidency the investigations are conducted had to face public pressure induced by the media right at the beginning because many of the tax deals in question had been granted while he was the prime minister of Luxembourg. This in spite of his vow to engage for better European politics in a "presidency of the last chance" at a later time. We believe that blaming him too much for things of the past would not necessarily improve things for the future though these things need to be said. In the worst case it could weaken his position.

At least we will have to assume that he knew about the tax deals and thus that he has the necessary intrinsic knowledge to fight such deals for the future if he really intends to do so. Meanwhile it remained largely unreported that the finance minister of the Netherlands Jeroen Dijsselbloem was ready to take any legal means necessary against the abolition of granted tax advantages for Starbucks 10. This though definitely being contraproductive on a European level would have been understandable if he would solely have been the finance minister of the Netherlands but he was also chief of the Euro group at the same time which is a shame as he did thereby not live up to his responsibility.

One of the questions which Mr. Draghi, president of the EZB, and also Mr. Dijsselbloem would have had to pose is why the current policy of low key interest rates did not trigger the desired effects to stimulate the economy and to prevent deflationary tendencies. The question is not simple to answer as it depends on many factors like f.i. the frame conditions created by Basel III or the low commodity prices.

Nonetheless another factor is for sure that there is continuously taken money out of the sytem from a very few, taking advantage so that the money is missing for consumption and investments. A defensive attitude against tax evasion consequently antagonizes not just an economic pick-up but also the long term central bank targetting. Very low, zero or even a negative interest rate policy can therefore only serve as an emergency measure limited in time which does not come without significant risks on the longer term (speculation, formation of economic bubbles, problems financing retirement payments in Europe* etc.).

the following measures can be seen as likely mandatory for initiating a sustainable economic recovery:

For now let us come back to the LuxLeaks affair. Not much after the special committee on tax evasion has started to work, Mrs. Margarete Vestager, EU Commissioner for competition, who had apparently done her work too well had to face a rebuke from the USA 11. The US-american finance minister Jacob Lew complained in a letter that the claim to return illegally granted government tax aids would hit especially companies from the USA too hard. This would not be justifiable as the affected companies did not conduct their research in Europe according to the US finance minister.

Admittedly such an argument needs to be considered a failure to bring the discussion to the point. A company with business activity in Europe needs to be legitimately taxed for the profits it gains here. Since then it has become somewhat silent about the LuxLeaks affair. We do not know if the US scolding has been accompanied by other means in the background. It needs to be said that the USA would certainly have the power to do so in an economic as well as in a medial way by discrediting certain people.

Nonetheless Mr. Pierre Moscovici, EU commissioner for economy and currency has presented a new Tax Transparency Package on 18 March 2015 which has been put into power by the finance ministers in October 2015. It allows the exchange of advance tax rulings between the member states. Unfortunately these informations are still not avaiable to the EU Commission as well as the broad public which has been critizised by NGOs and the Model European Parliament which should practice for later parliamentarian activity.

On 17 June 2015 Mr. Pierre Moscovici presented the Action Plan for Fair and Efficient Corporate Taxation in the EU. The taxation of corporations would require a radical reform to make everyone pay his fair share. Profits should be taxed where they emerge. The Action Plan suggests a reactivation of the Common Consolidated Corporate Tax Base (CCCTB) as it had already been discussed in 2011 but declined by Ireland and Great Britain. It shall now be consolidated within the year 2016. On January the 27th a revised Action Plan with an extended information exchange has been presented. However it still has to be accepted by the European member states. NGOs have still crticised this plan as too weak.

The G-20 summits in Brisbane 2014 and Antalya 2015 have also given attention to this matter. However apparently without sweeping success as the plans have been commented as insufficient by various NGOs. In spite of all the efforts we need to fear that there will be no sufficient and long lasting effect if whistleblowers and more generally all sources of information are not shielded sufficiently.

2016-04-06 -

* This mainly applies to retirement payments in Europe as retirements in the USA are mainly financed through a highly overrated stock market.