Wednesday

26th Sep 2018

Magazine

LuxLeaks: An opportunity?

  • Bilions of euros that should have gone to national treasuries never did - their absence secured by 'comfort letters' which gave guarantees that the scheme was approved by the tax authorities. (Photo: Fotolia)

As political honeymoons go, it was short and ended abruptly.

Just one week into his job as European Commission president, Jean-Claude Juncker was broadsided by a series of newspaper articles outlining the depth and breadth of corporate tax avoidance schemes in Luxembourg. Schemes thought up and enacted while he was running the country.

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  • Jean-Claude Juncker - the man in the spotlight. Juncker was prime minister of Luxembourg when the schemes were thought up and enacted (Photo: europarl.europa.eu)

Known as LuxLeaks, and published in early November, they detailed how hundreds of multinationals were able to pay little or no tax in the countries they were based in by channelling profits through the Grand Duchy.

Billions of euros that should have gone to national treasuries never did - their absence secured by "comfort letters" which gave guarantees that the scheme was approved by Juncker's tax authorities.

Luxembourg's affection for making life easy for multinationals was never a secret. In speeches to national parliament in the early 2000s Juncker referred to his role as a negotiator in setting up favourable arrangements for companies such as Aol and Amazon. He saw it as a way of weaning his country off its reliance on industry.

But the scope – revealed in black and white – was new to the public. LuxLeaks showed that 343 companies – including giants such as Swedish furniture maker Ikea, German lender Deutsche Bank, and US tech firm Apple – received comfort rulings.

It was an awkward revelation for someone who had come to the EU post acknowledging that his commission had to win back the trust of EU citizens or "fail".

The more awkward because the political tide has changed in recent years. While such deals may be perfectly legal, they are seen as morally untenable in the context of austerity and high unemployment in Europe.

State aid rules

At the same time, Juncker's own commission - in one of the last steps undertaken by the previous president - is currently investigating a series of tax deals to see whether they breached EU state aid rules.

EU lawyers are looking into breaks given to Apple in Ireland, coffee chain Starbucks in the Netherlands, and to e-commerce giant Amazon as well as to Fiat Finance in Luxembourg - the last two raising the question of potential conflict of interest.

Juncker's initial reaction was a misstep. He chose to ignore the revelations, letting his spokesperson inform the public that it was "normal practice".

A week later, he broke his silence and said that if the "tax rulings" (or comfort letters) led to "non-taxation" he would regret it.

He also made two proposals: the commission would try and unblock the very-stuck legislation on creating a common corporate tax base - first tabled in 2011 - and propose a new law on the automatic exchange of information on comfort letters.

Margrethe Vestager

Juncker is in the spotlight because he is now European Commission president, but many EU governments engage in the same practices.

A day after the LuxLeak revelations, a Dutch report suggested the Netherlands' corporate tax regime is on a par with Luxembourg's. Ireland and the UK are also assiduous in wooing multinationals with tax deals.

The issue looks likely to keep haunting Juncker. His competition commissioner, Margrethe Vestager, is looking into whether Luxembourg breached EU rules on state hand outs.

If she finds the Grand Duchy didn't, there are likely to be grumblings about a whitewash.

If she finds it did, then Juncker would be in the uncomfortable position of heading an EU institution meant to be guardian of rules that he broke as prime minister.

A blessing after all?

But the whole affair could yet turn out to be a blessing in disguise.

LuxLeaks has once more put the issue of tax avoidance onto the political agenda. The fact that the EU commission president is a part of the story means it has a higher chance of staying there.

Reviving the common corporate tax base and putting forward a new law on automatic exchange of comfort letters - as Juncker plans to do - could normally be said to be legislative dead ducks from the get-go.

EU tax-related laws require unanimous agreement - a feature which Luxembourg, among others, has used to its fullest in the past.

But the new political dynamic and the great (and angry) public gaze might make it harder for member states to hide behind their veto than previously.

On balance, having as commission president a man who did so much to aid corporate tax avoidance while PM might result in some real action - 2015 will tell.

This story was originally published in EUobserver's 2014 Europe in Review Magazine.

Click here to read previous editions of Europe in Review magazines.

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