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 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 from the jurisdiction.
The European Union and Luxembourg have been fighting for months over Luxembourg's reluctance to turn over information about its tax rulings to the EU, which is investigating whether the country's tax deals with Amazon and Fiat Finance violate European law. Luxembourg officials have supplied some information to the EU but have refused, EU officials claim, to provide a larger set of documents relating to its tax rulings.
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 per cent tax-free.
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, HJ Heinz, JP Morgan Chase, Burberry, Procter & Gamble, the Carlyle Group and the Abu Dhabi Investment Authority.
For their part, Luxembourg’s officials and defenders say the landlocked nation’s system of private tax agreements is above reproach.
"No way are these sweetheart deals," Nicolas Mackel, chief executive of Luxembourg for Finance, a quasi-governmental agency, said in an interview with ICIJ.
“The Luxembourg system of taxation is competitive - there is nothing unfair or unethical about it,” Mackel said. “If companies manage to reduce their tax bills to a very low rate, that’s a problem not of one tax system but of the interaction of many tax systems.”
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.
Luxembourg's Ministry of Finance said in a statement that "advance tax decisions" are "well established in many EU member states, such as Germany, France, the Netherlands, the UK, and Luxembourg" and that they don't conflict with European law as long as "all taxpayers in a similar situation are treated equally."
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.”
In its statement PwC said media do not have “a complete understanding of the structures involved.” While the company can’t comment on specific client matters, it rejects “any suggestion that there is anything improper about the firm’s work”.
ICIJ and its media partners used corporate balance sheets, regulatory filings and court records to put the leaked tax rulings in context. News organisations that have worked together on the six-month investigation include The Irish Times, the Guardian, Süddeutsche Zeitung and NDR in Germany, the Canadian Broadcasting Corporation, Le Monde, Japan's Asahi Shimbun, Denmark's Politiken, Brazil's Folha de S. Paulo and others.
US and UK 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 analysed 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.
The documents show that:
The Pepsi Bottling Group Inc, a New York-based unit of
, 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
, before landing in a Pepsi subsidiary in
. Luxembourg acted as a tax-reducing conduit as the profits moved from
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 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 per cent.
IKEA has used Luxembourg as part of a tax-savings strategy almost as complicated as the retail chain’s ready-to-assemble furniture. IKEA operates through two independent groups of companies: IKEA Group, which controls most of the 364 iconic IKEA big-box stores and Inter IKEA Group, which controls the franchise. Inter IKEA’s structure includes a Luxembourg holding company, a Luxembourg finance company, a
foundation and a Swiss finance arm. Leaked documents show IKEA’s Luxembourg operations opened the Swiss subsidiary in 2009 to outsource part of their financing operations to yet another low-tax jurisdiction, allowing the company to save taxes both in Luxembourg and in Switzerland.
Belgium’s richest family, the billionaire de Spoelberch dynasty, obtained a private tax ruling from Luxembourg in 2008. The de Spoelberch clan, part of the country’s old nobility and close to the royal family, holds a big stake in ABInbev, the world’s biggest brewer whose labels include Budweiser,
, Corona and Beck’s. The records indicate the de Spoelberch’s routed €2 billion through Ireland and then Luxembourg, reducing taxes with each step. The Luxembourg companies controlled by the family have a small letter box at an address it shares with nearly 190 other companies.
Even the Canadian government got a private Luxembourg tax ruling. In 2008, the Public Sector Pension Investment Board, which manages pensions for all Canadian federal employees, including the Royal
Canadian Mounted Police
, bought real estate in Berlin. The pension board set up Luxembourg companies that helped it sidestep German land transfer taxes. A complex internal loan structure allowed the board to pay minimal taxes in Luxembourg on income from the German properties. The investment board has a Luxembourg office - a place where desks can be rented by the month and where two employees watch over $600 million in European investments.
The Canadian pension board and Inter IKEA both said their tax planning complies with all laws and regulations. The Canadian fund argues that because it has tax-exempt status in Canada, it ultimately gained "no tax advantage" by routing investments through Luxembourg. Inter IKEA said its total effective corporate income tax rate is currently around 14 percent.
Pepsi, Coach and an accountant for the de Spoelberch family’s Luxembourg holdings declined to comment on the specifics of their tax arrangements.
Less than 30 percent of the tax deals in the leaked documents include a specific figure for the amount of money that companies said they planned to “invest” through the Luxembourg agreements. The total for those deals was roughly $215 billion between 2002 and 2010.
The figure would likely grow to several hundred billion dollars if projected investments in other deals in the leaked PwC documents were included. And the overall figure for money shuffled through Luxembourg as the result of confidential tax agreements would grow even larger if tax deals arranged through other accounting firms were included.
PwC’s letters seeking special tax rulings were usually 20 to 100 pages long. They detail various financial strategies and then specify the tax treatment the accountants expect to get for their clients - suggesting, for example, that dividends be treated as tax-free interest.
The leaked tax rulings indicate that negotiations were conducted in private meetings between PwC accountants and Luxembourg tax officials. Once the final written proposal was submitted by PwC, it was often approved the same day.
The schemes 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. The total projected investment by Abbott via Luxembourg was $50 billion.
A spokesperson for Abbott declined comment.
Reuters reported in 2012 that Amazon’s Luxembourg arrangements allowed it to have an average tax rate of 5.3 per cent 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.
The commission's Amazon investigation focuses on one of the online retailer's key companies in Luxembourg, Amazon EU S. à.r.l., which handles services to Amazon's European customers.
The commission argues that a generous 2003 tax ruling by Luxembourg authorities allows Amazon EU S.à.r.l. to funnel millions of euros in tax-deductible royalties each year to yet another Amazon company in Luxembourg, a limited partnership that is tax exempted. This tax break and others like it allow Amazon to pay little in taxes in the Grand Duchy on its European sales.
The leaked PwC documents show that in 2009 Amazon EU S.à.r.l. reported more than €519 million in royalty expenses while the limited partnership Amazon Europe Holding Technologies SCS had an influx of the same amount "based on agreements with affiliated companies." Thanks to the royalty expenses and other deductions, Amazon EU S.à.r.l. posted a taxable profit of just €14.8 million and paid €4.1 million in taxes in Luxembourg.
Amazon did not respond to ICIJ’s requests for comment.
Margot Williams, Emilia Díaz-Struck, Delphine Reuter, Frédéric Zalac, Harvey Cashore, Lars Bové, Kristof Clerix, Julia Stein, Titus Plattner, Mario Stäuble, Minna Knus-Galán, Matthew Caruana-Galizia and Neil Chenoweth contributed to this story.