Luxembourg leaks controversy a ‘game changer’

The revelations about Luxembourg tax agreements negotiated by PricewaterhouseCoopers for some of the largest corporations in the world have been described as a “game changer” by an expert on international tax.

Ronen Palan, professor of international politics at City University London and author of a number of books on globalisation, including Tax havens: How Globalisation Really Works, published by Cornell University Press, said the reports illustrate how the EU's smallest member state is a "tax haven".

"It was an open secret among tax experts that Luxembourg is among the leading tax havens in the world," he told The Irish Times.

Whereas Switzerland’s financial centre has been in decline for the past few years, largely because of the high profile tax evasion cases brought by the US justice department against a number of leading Swiss banks, Luxembourg has developed into a large financial centre eclipsing Switzerland and nearly matching Singapore and Hong Kong’s financial centres in asset size, he said.

“Yet Luxembourg has managed to remain ‘under the radar’ not least because its politicians and bankers have been denying for years that it is, or ever was, a tax haven.”

He said the leaked PwC documents, published by the Washington DC-based International Consortium of Investigative Journalists (ICIJ), provided the necessary proof that it is a tax haven.

“The revelation are likely to prove as damaging to Luxembourg as previous revelations were to Switzerland and Liechtenstein.”

Prof Palan said that for the first time, there was clear evidence linking not an isolated and supposedly rogue bank, but one of the ‘big four’ accounting firms, PwC.

“I cannot stress enough the importance of the role played by the big four accounting in the development of the offshore world. The vast majority of the tax schemes that we have heard about in the past few years are organised by one [ or other] of the big four accounting firms.”

PwC has so far said little about the 28,000 pages of documentation now in the public domain, most of it setting out intended transactions involving billions of euro being contemplated by hundreds of multinational clients of PwC Luxembourg, and the tax consequences of the intended moves. In many cases the Luxembourg companies that are to carry out the multibillion euro transactions have not yet been incorporated when approval is sought.

Short, two-paragraph responses agreeing with the tax interpretation set out in the PwC letters, from a Luxembourg revenue official, make the documents into so-called advanced tax agreements with the small EU state.

Among the client companies mentioned in the documents are Ikea, FedEx, Pepsi, Amazon, Accenture, Deutsche Bank and Irish food multinational Glanbia.

In a statement yesterday, PwC said the media reports on Luxembourg co-ordinated through the ICIJ were based on partial, incomplete information dating back four years or more, which was illegally obtained.

It said PwC provides independent professional advice to clients on the issues that are important to them in running their businesses including a wide range of tax issues. “This can include advice on the taxation of potential business transactions in a particular country. We also assist our clients with the preparation of tax returns and with discussions with tax authorities.”

Client relationships were governed by strict confidentiality, PwC said. However intra group financing, such as that described in the leaked documents, was a norm of international business. “Luxembourg is a longstanding centre for financing activity for companies with international operations.”

It said all PwC’s advice and assistance was given in accordance with applicable local, European and international tax laws and agreements and was guided by PwC’s global tax code of conduct.

“Our global tax code sets out guidance for our tax professionals around the world on a range of issues, including taking into consideration how any tax decisions will be viewed by wider stakeholders.”

The chief executive of Oxfam Ireland, Jim Clarken, has said the revelations highlight “a toxic global tax system depriving nations of billions of euro in tax”.

“Oxfam Ireland is urging world leaders to crack down on tax avoidance and fix a toxic system after the revelation that thousands of companies have legally avoided tax through deals negotiated through Luxembourg,” he said.

“The Luxembourg leaks underline the scale of the problem. It’s not just one isolated scandal – we’re talking about a whole industry making profits disappear, which hurts Europeans and developing countries alike.

Europe must urgently agree on greater transparency on multinationals to ensure they pay taxes where they really make profits, he said.

Tax avoidance through the use of legal loopholes was driving rapidly increasing inequality and depriving governments around the world, including Ireland, of billions that could help combat poverty and drive inclusive economic growth, he said.