A “Magical Fairyland” – How Global Multi-National Corporations Avoid Taxes in Luxembourg

“A Luxembourg structure is a way of stripping income from whatever country it comes from,’’ said Stephen E. Shay, a professor of international taxation at Harvard Law School and a former tax official in the U.S. Treasury Department. The Grand Duchy, he said, “combines enormous flexibility to set up tax reduction schemes, along with binding tax rulings that are unique. It’s like a magical fairyland.”

The deals can be so complex that PwC accountants frequently include “before” and “after” diagrams to illustrate how money flows from subsidiary to subsidiary and across different countries and tax havens. The leaked records show that Luxembourg’s 2009 tax deal for Illinois-based Abbott Laboratories – which makes arthritis drugs and Ensure meal replacement shakes –features 79 steps including companies in Cyprus and Gibraltar. Abbott projected it would invest as much as $50 billion via Luxembourg.

More than 170 of the Fortune 500 companies have a Luxembourg branch, according to Citizens for Tax Justice, a nonprofit research and advocacy group. A total of $95 billion in profits from American corporations’ overseas operations flowed through Luxembourg in 2012, the most current statistics from the U.S. Bureau of Economic Analysis show. On those profits, corporations paid $1.04 billion in taxes to Luxembourg – just 1.1 percent.

– From the ICIJ’s report: Leaked Documents Expose Global Companies’ Secret Tax Deals in Luxembourg

The following expose by the International Consortium of Investigative Journalists (ICIJ), at times reads like a movie script. Leaked documents, one of the world’s largest accounting firms, and a retired tax official named Marius Kohl, nicknamed “Monsieur Ruling,” who was described by a Belgian newspaper as “the guardian of the only door through which companies can enter the fiscal paradise of Luxembourg.”  This piece has it all.

Here are some choice excerpts:

Pepsi, IKEA, FedEx and 340 other international companies have secured secret deals from Luxembourg, allowing many of them to slash their global tax bills while maintaining little presence in the tiny European duchy, leaked documents show.

These companies appear to have channeled hundreds of billions of dollars through Luxembourg and saved billions of dollars in taxes, according to a review of nearly 28,000 pages of confidential documents conducted by the International Consortium of Investigative Journalists and a team of more than 80 journalists from 26 countries.

Big companies can book big tax savings by creating complicated accounting and legal structures that move profits to low-tax Luxembourg from higher-tax countries where they’re headquartered or do lots of business. In some instances, the leaked records indicate, companies have enjoyed effective tax rates of less than 1 percent on the profits they’ve shuffled into Luxembourg.

The leaked documents reviewed by ICIJ journalists include hundreds of private tax rulings – sometimes known as “comfort letters” – that Luxembourg provides to corporations seeking favorable tax treatment.

The leaked documents reviewed by ICIJ involve deals negotiated by PricewaterhouseCoopers, one of the world’s largest accounting firms, on behalf of hundreds of corporate clients. To qualify the companies for tax relief, the records show, PwC tax advisers helped come up with financial strategies that feature loans among sister companies and other moves designed to shift profits from one part of a corporation to another to reduce or eliminate taxable income.

The records show, for example, that Memphis-based FedEx Corp. set up two Luxembourg affiliates to shuffle earnings from its Mexican, French and Brazilian operations to FedEx affiliates in Hong Kong. Profits moved from Mexico to Luxembourg largely as tax-free dividends. Luxembourg agreed to tax only one quarter of 1 percent of FedEx’s non-dividend income flowing through this arrangement – leaving the remaining 99.75 percent tax-free.

“A Luxembourg structure is a way of stripping income from whatever country it comes from,’’ said Stephen E. Shay, a professor of international taxation at Harvard Law School and a former tax official in the U.S. Treasury Department. The Grand Duchy, he said, “combines enormous flexibility to set up tax reduction schemes, along with binding tax rulings that are unique. It’s like a magical fairyland.”

FedEx declined comment on the specifics of its Luxembourg tax arrangements. Other companies seeking tax deals from Luxembourg come from private equity, real estate, banking, manufacturing, pharmaceuticals and other industries, the leaked files show. They include Accenture, Abbott Laboratories, American International Group (AIG), Amazon, Blackstone, Deutsche Bank, the Coach handbag empire, H.J. Heinz, JP Morgan Chase, Burberry, Procter & Gamble, the Carlyle Group and the Abu Dhabi Investment Authority.

Disclosure of the leaked documents comes at a sensitive time for Luxembourg, a nation with a population of less than 550,000. Amid the EU probe of Luxembourg’s tax deals, former Luxembourg Prime Minister Jean-Claude Juncker is in his first week in office as president of the European Commission, one of the most powerful positions in the EU.

So our old friend Jean-Claude Juncker has reared his crony head. He’s the central planner who famously said: “when it becomes serious, you have to lie.” This is all starting to make perfect sense now…

Juncker, Luxembourg’s top leader when many of the jurisdiction’s tax breaks were crafted, has promised to crack down on tax dodging in his new post, but he has also said he believes his own country’s tax regime is in “full accordance” with European law. Under Luxembourg’s system, tax advisers from PwC and other firms can present proposals for corporate structures and transactions designed to create tax savings and then get written assurance that their plan will be viewed favorably by the duchy’s Ministry of Finance.

PwC said ICIJ’s reporting is based on “outdated” and “stolen” information, “the theft of which is in the hands of the relevant authorities.” It said its tax advice and assistance are “given in accordance with applicable local, European and international tax laws and agreements and is guided by a PwC Global Tax Code of Conduct.”

I’m certain the “code of conduct” is about as robust as Goldman’s “conflict of interest policy.”

U.S. and U.K. companies appeared more frequently in the leaked files than companies from any other country, followed by firms from Germany, Netherlands and Switzerland. Most of the rulings in the stash of documents were approved between 2008 and 2010. Some of them were first reported on in 2012 by Edouard Perrin for France 2 public television and by the BBC, but most of the PwC documents have never before been analyzed by reporters.

The files do not include tax deals sought from Luxembourg authorities through other accounting firms. And many of the documents do not include explicit figures for how much money the companies expected to shift through Luxembourg.

Experts who’ve reviewed the files for ICIJ say the documents do make it clear, though, that the companies and their advisors at PwC engaged in aggressive tax-reduction strategies, using Luxembourg in combination with other tax havens such as Gibraltar, Delaware and Ireland.

Yes, Ireland. If you recall, I highlighted the tax avoidance strategy known as the “Double Irish” last year in the post: Shocker! Multinational Corporations Don’t Pay Taxes.

The Pepsi Bottling Group Inc., a New York-based unit of PepsiCo, used subsidiaries in Luxembourg to arrange a series of loans among sister companies that allowed the bottler to reduce its tax rate on its $1.4 billion purchase of a controlling interest in JSC Lebedyansky, Russia’s largest juice maker. At least $750 million of the money involved in the Russian deal traveled through a Luxembourg subsidiary named Tanglewood, before landing in a Pepsi subsidiary in Bermuda. Luxembourg acted as a tax-reducing conduit as the profits moved from Russia to Bermuda.

New York-based Coach Inc. set up two Luxembourg entities to move €250 million in Hong Kong earnings in 2011, an amount it expected to approach €1 billion by 2013. One Luxembourg entity acted as an internal corporate bank, allowing much of the luxury goods maker’s Asian operating earnings to glide through a series of foreign entities in the form of interest payments on money the company loaned itself. Filings in Luxembourg showed that in 2012, the company paid €250,000 in taxes on €36.7 million in earnings channeled into Luxembourg – a rate of well under 1 percent.

“This is the first time really that we’ve seen inside the workings of Luxembourg as a tax haven,” said Richard Brooks, a former U.K. tax inspector and author of the book The Great Tax Robbery, who was hired by ICIJ to help review some of the leaked documents. “The countries . . . that are losing money, they don’t know about it, don’t know how it operates at all.”

More than 170 of the Fortune 500 companies have a Luxembourg branch, according to Citizens for Tax Justice, a nonprofit research and advocacy group. A total of $95 billion in profits from American corporations’ overseas operations flowed through Luxembourg in 2012, the most current statistics from the U.S. Bureau of Economic Analysis show. On those profits, corporations paid $1.04 billion in taxes to Luxembourg – just 1.1 percent.

Other tax havens, Ireland for example, openly advertise rock-bottom corporate tax rates of 12.5 percent. Luxembourg instead maintains a statutory tax rate of 29 percent, but the leaked files show that the duchy has routinely approved tax rulings that whittle down what counts as taxable income to practically nothing. This can drop Luxembourg’s effective tax rate deep into single digits.

The deals can be so complex that PwC accountants frequently include “before” and “after” diagrams to illustrate how money flows from subsidiary to subsidiary and across different countries and tax havens. The leaked records show that Luxembourg’s 2009 tax deal for Illinois-based Abbott Laboratories – which makes arthritis drugs and Ensure meal replacement shakes –features 79 steps including companies in Cyprus and Gibraltar. Abbott projected it would invest as much as $50 billion via Luxembourg.

In a 2009 presentation, PwC highlights Luxembourg as a place with “flexible and welcoming authorities” who are “easily contactable” and offer a “readiness for dialogue and quick decision-making process.”

Most of the leaked tax rulings were approved and signed by the same tax official, Marius Kohl, now retired. Sometimes known in tax circles as “Monsieur Ruling,” Kohl was described by one Belgian newspaper as “the guardian of the only door through which companies can enter the fiscal paradise of Luxembourg.” During his time as head of a Luxembourg agency called Sociétés 6, Kohl oversaw the approval of thousands of tax agreements, personally signing as many as 39 in the course of a single day. The Wall Street Journal has reported that since Kohl retired in 2013, it can take up to six months for a tax ruling to be approved.

Corporations that have established toeholds in Luxembourg have made use of financial instruments that shift money around the map to play one country’s tax rules against another. This might be, for instance, a hybrid debt instrument that allows profits to move out of a high-tax EU country to a Luxembourg entity. The profits are treated as interest payments in Luxembourg, where they can be deducted from taxes. In the parent company’s country, they can be treated as dividends and eligible for a tax exemption.

These companies can represent big bucks. From the U.S. alone, direct investment into Luxembourg in 2013 was $416 billion, according to the U.S. Bureau of Economic Analysis. Of that, the vast majority, $343 billion, was in the form of holding companies, which are vehicles to hold securities and financial assets rather than to create local jobs.

Reuters reported in 2012 that Amazon’s Luxembourg arrangements allowed it to have an average tax rate of 5.3 percent on overseas income from 2007 to 2011. Amazon company filings show that in 2013 the on-line merchant reported revenues of $20 billion from its European operations, which are channeled primarily through Luxembourg.

With all this tax avoidance, you’d think Amazon would be able to post higher profits.

Adding a political twist to the Brussels probes is Juncker’s rise to the presidency of the European Commission. As Luxembourg’s prime minister, he signed into law the provision that allows companies to write off 80 percent of royalty income from intellectual property.

Glad to see Juncker’s doing so well. It makes sense, in a global economy run by thieves, lying certainly pays off.

Look, I’m not a big fan of taxes to begin with, particularly not within the current system in which there is so much waste and fraud in government. The big point here is this situation once again highlights the stark difference with how the rich and powerful are treated within society and the average person. While the IRS looks to tax complimentary employee lunches and targets organizations based on their political views, multi-nationals with billions of earnings barely pay a dime. Just another example of the neo-feudal vice clamping down on the planet.

In Liberty,
Michael Krieger

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