Luxembourg Leaks (2014)

Luxembourg Leaks (sometimes shortened to Lux Leaks or LuxLeaks) is a collaborative investigation that exposes for the first time on a global scale how Luxembourg works as a tax haven in the middle of Europe. The LuxLeaks scandal broke in November 2014 when the International Consortium of Investigative Journalists published thousands of pages of documents, many of them leaked by Antoine Deltour, a whistleblower and former employee of PwC. The documents revealed details about how more than 300 companies with operations in Luxembourg had cut their tax bills by moving profits around different parts of the corporate group and playing national tax systems off against one another.

The leaked papers show Luxembourg acting as a go-between, both enabling and masking tax avoidance, which always takes place beyond its borders. The documents are mainly Advance Tax Agreements – known as comfort letters. The leaked papers include 548 of these private tax rulings. These ATAs are typically schemes put to the Luxembourg tax authorities which, if implemented, reduce tax bills substantially. If the Luxembourg authorities approve the scheme they provide a comfort letter which is a binding agreement.

Less than a third of the tax deals brokered by PwC in the 28,000 pages of documents include a figure for the sums multinationals planned to move into Luxembourg schemes. However, these deals still amounted to more than $215bn of loans and investments using the Grand Duchy between 2002 and 2010, many to massage down tax bills.

Given that many more leaked papers did not disclose sums involved, and that PwC was just one of several accounting firms which secure deals with the Luxembourg tax authorities, the full scale of financial flows through Luxembourg, facilitated by comfort letters from the Grand Duchy’s officials, is likely to be much higher.

PwC said questions put to it by ICIJ journalists were based on “outdated” and “stolen” information, “the theft of which is in the hands of the relevant authorities”. But analysis of public filings with company registries around the world indicate many of the leaked tax deals remain in force, sapping tax revenues from public coffers today.

Pepsi, IKEA, AIG, Coach, Deutsche Bank, Abbott Laboratories and nearly 340 other companies have secured secret deals from Luxembourg that allowed many of them to slash their global tax bills. PricewaterhouseCoopers has helped multinational companies obtain at least 548 tax rulings in Luxembourg from 2002 to 2010. These legal secret deals feature complex financial structures designed to create drastic tax reductions. The rulings provide written assurance that companies’ tax-saving plans will be viewed favorably by Luxembourg authorities.

Companies have channeled hundreds of billions of dollars through Luxembourg and saved billions of dollars in taxes. Some firms have enjoyed effective tax rates of less than 1 percent on the profits they’ve shuffled into Luxembourg. Many of the tax deals exploited international tax mismatches that allowed companies to avoid taxes both in Luxembourg and elsewhere through the use of so-called hybrid loans.

In many cases Luxembourg subsidiaries handling hundreds of millions of dollars in business maintain little presence and conduct little economic activity in Luxembourg. One popular address – 5, rue Guillaume Kroll – is home to more than 1,600 companies.

A separate set of documents reported on by ICIJ on Dec. 9 expanded the list of companies seeking tax rulings from Luxembourg to include American entertainment icon The Walt Disney Co., politically controversial Koch industries and 33 other firms. The new files revealed that alongside PwC tax rulings were also brokered by Ernst & Young, Deloitte and KPMG, among other accounting firms.

The Guardian’s detailed findings were put to Shire, Icap and Dyson. All three declined to answer questions. They issued statements saying that they do not engage in tax avoidance and that they pay tax in the countries where profits are made. Dyson stressed that its Isle of Man and Luxembourg structure was unwound in 2013. Icap said it had started a process of winding down its Luxembourg financing companies last month as part of a wider reorganisation.

Many papers in the leaked tax correspondence do not reveal enough information to clearly show tax consequences of each group’s corporate structuring. And some corporations will have sought comfort letters from Luxembourg for reasons other than tax avoidance.

Many large private equity investments are also the subject of Luxembourg ATAs. Well known buyout firms such as Blackstone and Carlyle appear in the leaked documents, and Luxembourg investment vehicles are commonplace in such investment firms.

A 2008 joint venture between private equity group Apax Partners and Guardian Media Group, which owns the Guardian, also used a Luxembourg structure after it invested in magazine and events group Emap, now called Top Right.

A spokesman for GMG said: “We partnered with a private equity company which regularly used such structures. A Luxembourg entity was used because Apax already had that structure in place. The fact that the parent company is a Luxembourg company does not give rise to any UK corporation tax savings for GMG.”

The companies had worked with big accounting firms and secured rulings from the Luxembourg tax agency that such arrangements did not flout national laws. Those involved included household names such as Ikea, Pepsi and Fiat.

One tactic revealed in the scandal was companies arranging loans between different subsidiaries within the same group at high interest rates. The result was that profitmaking businesses in high tax countries had to pay back loans to entities in lower-tax countries, effectively transferring profits from where they would have been taxed most.

Multinationals also routed investments through “brass-plate” companies in Luxembourg, which had very little presence in the country other than a registered legal address. This was done to take advantage of the grand duchy’s favourable treaties with other countries, allowing the companies to avoid certain taxes in other jurisdictions they had invested in.

The scandal brought public attention to these practices, known as “base erosion” and “profit shifting”, and put pressure on politicians to tackle them.

Since the LuxLeak scandal broke, Luxembourg’s politicians and senior financial services figures have argued that the problems exposed were down to international rather than national failings. They say the government has worked with other countries to improve information-sharing among national tax authorities and fix the divergences between tax codes that made it possible for companies to hide their profits from tax collectors.

How it works
The documents reveal a number of financial structures which were approved by the Luxembourg tax authorities, and which led to substantial tax savings for the companies involved. One of the more common is based on cross-border lending within a group of companies, and a mismatch between the perceptions of Luxembourg and overseas tax authorities.

Big firms are exploiting rules designed to encourage international trade so they can avoid paying millions in tax. They do this using financing structures in Luxembourg which pay very little tax, but which secure them tax deductions in the countries where they do most of their business. Our example explains how Acme, a fictional company, uses a common scheme

Normally, these days, if an HQ is paid for supplies it sends to a subsidiary in another country, the subsidiary can claim a tax deduction for the cost of those supplies. But the headquarters is correspondingly taxed on the payments it receives

A key form of supply in modern business is financing. In a common case, an HQ which provides loans to a subsidiary will be taxed on the interests it receives at HQ, but the subsidiary will secure a corresponding tax deduction

Interest is a tax-deductible cost in Yellowland, so the authorities accept that Acme does not pay tax there. The interest payments are, however, a taxable income in Blueland, so Acme does pay tax in its HQ country. But what if it could find a way not to?

Acme now sets up a deliberately complex intermediary structure in Luxembourg, consisting of a branch of its Blueland HQ and a separate financing subsidiary. Neither of these has numerous staff or extensive local operations

It uses loans and interest charges to shift profits from doing business in Yellowland into Luxembourg. Acme Yellowland tells the Yellowland tax authorities that it is paying interest on a loan from Acme Luxembourg

As before, interest payments are tax-deductible, so Acme Yellowland pays no tax. But interest income is taxable in Luxembourg, so we would expect tax to be levied here

Separately, Acme Blueland HQ lends a similar amount to its branch in Luxembourg, mirroring the loan from Acme Luxembourg to Acme Yellowland. Acme persuades the Luxembourg tax authority to consider both its offices in Luxembourg under one tax return.Taken together, they say that the loans to Acme Yellowland are effectively being passed on from Acme HQ in Blueland

The Luxembourg tax authorities accept this structure, and allow Acme in Luxembourg to claim a tax deduction. This deduction almost entirely cancels out the tax bill created by its interest income from Yellowland

You might expect that tax would finally be charged in Blueland when HQ receives interest income. But from the perspective of the Blueland authorities, Acme Branch is an integral part of the HQ company, so no payments are seen

Consequently, Blueland tax authority sees nothing which can be taxed. We now have a tax deduction in Yellowland, but no corresponding tax charges in Blueland and almost no charges in Luxembourg