The European Commission today presented a package of tax transparency measures as part of its ambitious agenda to tackle corporate tax avoidance and harmful tax competition in the EU. A key element of this Tax Transparency Package is a proposal to introduce the automatic exchange of information between member states on their tax rulings.
Jean-Claude Juncker, who began his term as European Commission president last November began his term with a baptism of fire when a trove of 28,000 documents from the Luxembourg offices of PricewaterhouseCoopers (PWC) revealed how he had turned the Grand Duchy into a tax haven when he was prime minister from 1995-2013.
The poacher-turned-gamekeeper has now embraced reform and the Commission has proposed new rules to prevent member countries exploiting tax arbitrage and facilitating evasion.
To avoid long delays on arguments about commercial secrets the rulings will not be issued to the public but will be available to individual tax authorities but all members have to agree on the change as unanimity is required on tax issues.
The Commission said today that corporate tax avoidance is thought to deprive EU member states’ public budgets of billions of euros a year. It also undermines fair burden-sharing among tax-payers and fair competition between businesses. Companies rely on the complexity of tax rules and the lack of cooperation between member states to shift profits and minimise their taxes. Therefore, boosting transparency and cooperation is vital in the battle against aggressive tax planning and abusive tax practices.
Today's Tax Transparency Package aims to ensure that member states are equipped with the information they need to protect their tax bases and effectively target companies that try to escape paying their fair share of taxes.
The last Commission had begun cases under state-aid rules against Apple, Amazon, Starbucks and Fiat and the issue of secret rulings that were granted to big multinational companies by Ireland, the Netherlands and Luxembourg, became matters of contention.
The rulings are primarily issued to provide legal certainty and are, in principle, not problematic. However, the Commission said "where they are used to offer selective tax advantages or to artificially shift profits to low or no-tax locations, they distort competition and erode member states' tax bases."
Brussels also said it would examine whether to force companies to disclose more information on their tax treatment against a backdrop of public anger about massive tax avoidance by wealthy companies.
Pierre Moscovici, commissioner for Economic and Financial Affairs, Taxation and Customs, said: "Tolerance has reached rock-bottom for companies that avoid paying their fair share of taxes, and for the regimes that enable them to do this. We have to rebuild the link between where companies really make their profits and where they are taxed. To do this, member states need to open up and work together. That is what today's Tax Transparency Package aims to achieve."
The so-called LuxLeaks documents issued by the International Consortium of Investigative Journalists (ICIJ) showed that 340 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.
Sigmar Gabriel, German vice chancellor, didn’t mention Juncker by name, but warned in a newspaper interview published last November 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 October The Wall Street Journal reported on the then recently Marius Kohl who spent "spent years engineering [Luxembourg'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 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. “Sometimes it’s easier if you only have to ask one person.”
The Journal said 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.