EU Economy
Architect of tax "racket" to commit EU to fight against tax fraud
By Michael Hennigan, Finfacts founder and editor
Nov 12, 2014 - 8:30 AM

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Jean-Claude Juncker, president of the European Commission since Nov 01, 2014

Jean-Claude Juncker, the new president of the European Commission, will be in Brisbane, Australia, this weekend for a summit of the leading economies of the world and the former prime  minister of Luxembourg (1995-2013) who was the architect of a tax haven that has been termed a "racket' by the vice chancellor of Germany, is expected to commit the EU to a fight against tax fraud.

A summit of the G20 (group of twenty) leaders of the 19 biggest developed and emerging economies takes place this weekend in Brisbane (November 15-16) and tax reform is on the agenda.

A leaked trove of 28,000 documents last week, which mainly came from the offices of PricewaterhouseCoopers (PwC), focused attention on the extent of tax avoidance and evasion in the Grand Duchy of Luxembourg, which has a population of 543,000.

The International Consortium of Investigative Journalists (ICIJ) said more than 300 international companies had secured secret deals with Luxembourg to cut their global tax bills to very low effective rates while maintaining little or no presence there.

The European Commission is already investigating whether Luxembourg’s tax deal with Amazon.com Inc. violated rules against state subsidies and it is also examining arrangements with Fiat Chrysler Automobiles NV.

The Financial Times says that "what really underpins its economy is finance, with banking assets 20 times the size of its GDP. So much money floods across its borders that Luxembourg stands tenth in rankings of global investment."

Xavier Bettel, Luxembourg prime minister, said his country was not breaking any rules and it was not the only one to provide tax dodge schemes to large companies.

Reuters reports that Juncker's spokesperson, Magaritis Schinas, told a Brussels news briefing Monday: "Mr Juncker will choose the moment himself to say what he has to say, either at the G20 or at some other time."

An EU official said Juncker was expected to take part in a news conference in Brisbane next Saturday - just two weeks in the job, the man will have zero credibility on tax reform.

Sigmar Gabriel, German vice chancellor, didn’t mention Juncker by name, but warned in a newspaper interview published last Thursday that the region’s tax havens “deliver an ax blow to European solidarity.”

“This racket needs to stop as quickly as possible,” Gabriel told Süddeutsche Zeitung, a German daily.

Last month The Wall Street Journal reported on the recently Marius Kohl who spent "spent years engineering this country’s most valuable export: tax relief."

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

Known in financial circles as “Monsieur Ruling,” Kohl, who retired last year, had sole authority at Sociétés 6 to approve or reject the tax deals for the 50,000 Luxembourg-registered holding companies, most of which have foreign parents.

“Monsieur Ruling” would meet companies tax representatives and sometimes give an oral preliminary ruling that was seldom reversed and operated for five years.

“I could say ‘yes’ or ‘no,’ ” Kohl said according to the WSJ, which he described as his first. “Sometimes it’s easier if you only have to ask one person.”

The Journal says that US companies operating abroad generate about 9% of their foreign profits from Luxembourg-based subsidiaries, on the whole, while employing only 0.1% of their foreign workforces in the country, figures from the Commerce Department’s Bureau of Economic Analysis show.

For Luxembourg-based units of US companies, the effective income-tax rate has been as low as 0.4% in recent years, according to an analysis by Kimberly A. Clausing, an economics professor at Oregon’s Reed College. Much of the foreign profit of American companies never returns home to face the US’s 35% corporate tax rate.

“We would meet him once a month, and if [a tax structure] was OK, you could basically do the deal right away,” says Marc Schmitz, head of taxation at the Luxembourg branch of Ernst & Young.

The Journal said that during Kohl’s time as chief of Sociétés 6, the arm’s-length test—an OECD rule—wasn’t anchored in Luxembourg’s tax law. Nor were companies required to provide detailed documentation to support their calculations.

Asked how he determined whether a company’s pricing information was accurate, Kohl licked his thumb and held it up in the air.

“There was no way to verify it,” he said.

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