Luxembourg: a tax haven under threat?

Today Luxembourg, the champion in tax rulings, is at the heart of the controversy over the tax benefits granted to multinational companies.

According to the recent investigation “Luxleaks” carried out by the International Consortium of Investigative Journalists (ICIJ), between 2002 and 2010, Luxembourg signed a large number of secret tax agreements with more than 300 multinational companies.

This tax optimisation is based on Luxembourg's flexible tax rules, but also on weaknesses in international regulations. For companies, it consists in creating a holding company or subsidiary in Luxembourg, where the corporate taxes are very low, to transfer its profits avoiding the high taxes applied in the country in which it is established. In this way, famous companies including Apple, Amazon and Ikea make billions of Euros in savings each year.

The American multinationals are the champions in tax optimisation. For instance, Apple, in addition to benefiting from “The Double Irish”, allowing them to relocate profits to an offshore centre, has installed the iTunes European headquarters in Luxembourg to accumulate tax benefits and increase its profits.

Moreover, in addition to being attractive for its low taxes (less than 1%), Luxembourg is also the second country behind the US to be specialized in asset and investment fund management. It is estimated that about 70% of funds distributed worldwide are domiciled in Luxembourg, that is to say 3,800 funds housing more than 2.400 billion euros. For instance, French banks such as Crédit Agricole and BNP Paribas are partly based in Luxembourg to enjoy an important reduction in the tax rate of the income of their investment fund management.

As a result of this tax avoidance, billions of Euros of tax revenue evaporate each year and this represents a huge loss of earning for the countries where the multinationals are established. Consequently, the OCDE is putting pressure on Luxembourg to force the country to abandon its advantageous tax system. Despite it being legal, it deprives other countries of tax revenues at a time when they are undergoing severe budgetary restrictions. 

The European Commission is also investigating the thorny issue of tax avoidance. It estimates that the Luxembourg tax system tailored to large companies equates to an illegal assistance from the State.

Moreover, Pascal Saint-Amans, Director of the OCDE’s Centre for Tax Policy and Administration, estimates that it is deeply unfair that multinational companies avoid taxes by enjoying the failures of the current rules to reduce their tax burden, when other taxpayers are obliged to face a fiscal effort.

Pascal Saint-Amans also underlines the necessity of changing the international rules which make double non-taxation easier by avoiding double taxation. Thus, the current tax system which has been designed to avoid companies to be taxed in different countries for the same activity, in the end allow companies to be taxed nowhere. 

Lastly, tax avoidance will be one of the issues of the next G20 summit which will take place on the 15^th and 16^th November 2014 in Brisbane, in Australia. During this meeting, the G20 members will discuss the action plan against companies’ tax optimisation called BEPS (Base erosion and profit shifting).

Charlotte A.