EU: When taxation is tailor-made

As president of the Eurogroup, Jean-Claude Juncker sponsored draconian adjustments on the periphery, while at the same time preparing succulent fiscal agreements that drained tax revenues from those countries and filled Luxemburg’s treasury coffers.

Actually, this method was already known. But manners are manners, so few State members have acknowledged the reality. Most have criticized these methods and have demanded more transparency so that everybody can play according to the same rules. Even Mr Juncker himself, who carries the brunt of responsibility for what was going on for almost two decades, has volunteered to lead the EU along the path of  fiscal virtue–presuming they let him finish his mandate.

Each scandal carries with it some level of deceit. So far, the Prime Minister of Luxembourg, the liberal Xavier Bettel, has clearly stated that he will refuse to support the measures of tax harmonisation that Mr Juncker is encouraging from Brussels. For him there is no doubt: taxation must remain a national issue. Mr Bettel also denied that he runs a tax haven in an interview with the Belgian newspaper L’Echo “Here you pay taxes and there is transparency,” he said. He added provocatively that there are now six officials in the Luxembourger administration who work on fiscal arrangements with multinationals, versus one person during Mr Juncker’s mandate. This is “because of the volume of work,” he says.

It must be recognised that Mr Juncker has some clout that Mr Bettel, for now, lacks. Luxembourg, as well as Austria, Belgium and Holland will have to renounce banking secrecy from 1 January 2015 due to a policy approved by Mr Juncker when he was still leading the Grand Duchy. He did so reluctantly. But he did it. It is not easy to understand the minutiae in these matters, but  Mr Juncker´s words may help:

“When I was a child, they said that steel was a gift of the Gods to Luxembourg, the same as the Nile was a gift to Egypt. It represents between 30% and 40% of our GDP. Then the metalworking industry collapsed. My first decision as Secretary for Employment sent my father (who worked in the sector) into unemployment,” he explained in an interview with Le Soir.

Then, Luxembourg found an “economy of substitution”, by attracting the savings of its neighbours, which banking secrecy undoubtedly helped. Luxembourg’s banking sector became 22 times the size of its economy.

“It grew so much that we became as dependent on the sector as we were before on the metalworking sector. So we wanted to get out of that dependency. From then on, we have tried to diversify through several means, all of them legal.”

Today, their financial system represents 12% of the country’s GDP. Luxembourg has learnt to deal face-to-face with the Double Irish (the Irish system designed to attract companies that have low tax rates), with the Dutch Sandwich (which is its equal in the Netherlands) or with any of the tax havens in the Canal.

Luxembourg specialized in a practice known as “Tax Rulings”, which offers certainty and predictability regarding the manner in which companies will be treated in matters of taxation. These “rulings” were born in 1975, during litigation between a Dutch society and the Dutch Treasury because of the taxation of two German subsidiaries of the Dutch society. Even though the resolution favoured the Dutch Treasury, it had to issue a recommendation about how some structures should be treated in the future. Thus the first “ruling” was born.

The “rulings” regime was modified because the Primarolo Report considered it as a harmful tax practice. Nowadays, the “rulings” regime is more demanding. However, new revelations hint at 340 companies benefiting from this, among them large multinationals such as Pepsi, Ikea, Burberry, Amazon, British American Tobacco (which produce, among others, Lucky Strike), or McGraw-Hill (owner of Standard & Poor’s).

That’s why the case has been named “Luxleaks”. Phillippe Lamberts, chief of the Greens at the Parliament, suggested avoiding vetoes and moving forward tax harmonisation. The first step is forgetting about a directive. Instead of forcing governments to act, it is necessary to impose greater transparency standards on companies, forcing them to publish rulings from which they have benefited in their annual reports. This obligation would only require qualified majority.

Mr Juncker has personally been interested in Mr Lamberts’ proposal; he likes it and he has asked Commissioner Pierre Moscovici to find out if it is workable.

“I am proud of our tax strategy; it is called capitalism,” Eric Schmidt, CEO at Google declared. Google pays 2.4% in global taxes. Who wouldn´t be happy with such an arrangement?