Luxembourg: tax avoidance with friends in high places

Luxembourg Ville

The craving for money yields fantastic devices invented by the best minds capitalism can hire. What is one to make of this: if you earn Britain’s average annual income of £26,500 you will pay the basic rate of 20% income tax, but if your income is £6bn you can get away with less than 1% tax, and it’s all perfectly legal? Tax avoidance, money laundering, rigging money markets – these are the chosen means of enhancing profits used by many of Britain’s biggest companies. Receive child tax credits that are later ruled to have been mistakenly paid and you are relentlessly pursued for every penny, even into the courts, by Her Majesty’s Revenue and Customs; make the most minor infraction of the Job Centre’s commands and you are sanctioned and denied benefits; head a company with a household name, shift fortunes abroad, out of the government’s reach, and you are knighted for services to the country. Trevor Rayne reports.

This November The Guardian published the findings of over 80 journalists in 26 countries working with the International Consortium of Investigative Journalists. They examined 28,000 pages of leaked tax agreements and returns for over 1,000 companies. Most of the documents were Advance Tax Agreements, known as comfort letters, arranged by Britain’s biggest accounting firm PricewaterhouseCoopers (PwC) with Luxembourg’s tax authorities. They are tax avoidance schemes organised for the likes of Ikea, Dyson, Amazon, Pepsi, Heinz, Vodafone, Fiat and so on. Only a third of the documents examined mentioned the sums of money to be moved through Luxembourg but these amounted to $215bn between 2002 and 2010 for PwC clients alone. Companies pay tax rates of 1% on profits shuffled into Luxembourg, although Luxembourg’s official corporation tax is 29.2%.

The big four accountancy firms are PwC, KPMG, Deloitte and Ernst and Young. Together in 2013 they employed 750,000 and made £74bn. Globally PwC employed 195,400 people and made £139,153 per employee. These firms audit the books for the giant multinationals and banks; they sit at the centre of finance capital and entwine governments and political parties in their gilded webs. A PwC spokesperson, responding to the findings, said PwC advice was ‘given in accordance with applicable local, European and international tax laws and agreements and is guided by the PwC code of conduct.’ These parasites drafted the laws!

British Prime Minister Cameron and Chancellor Osborne say that they will stop the multinationals avoiding taxes. This is for public consumption only; they say something quite different in private and act accordingly. In 2012 Osborne reduced anti-tax avoidance laws aimed at multinational companies and their overseas subsidiaries. For the benefit of companies set up in Luxembourg, Osborne reduced taxes on their profits to no more than 5% (The Guardian 5 November 2014). The intention was to attract multinational companies to Britain, where tax avoidance schemes, such as those practised in Luxembourg, are acceptable. The multinationals then establish subsidiaries abroad, ‘shell companies’, abroad through which to transfer their profits.

It is estimated that up to $1trillion is being taken out of underdeveloped countries every year by a network of corrupt activities employing anonymous shell companies. ‘A World Bank report in 2011, found that 70% of the biggest corruption cases between 1980 and 2010 involved anonymous shell companies. The US and UK were among the jurisdictions most frequently used to incorporate legal entities that hold proceeds of corruption,’ (Financial Times 17 November 2014). At their November meeting in Brisbane, the G20 leaders declared, ‘We endorse the 2015-16 G20 anti-corruption action plan’ to improve transparency against corporate secrecy. Should any of its readers fret about the stated intentions the Financial Times offers reassurance, ‘But doubts remain over the willingness of politicians to undertake effective action. Only a handful of governments have so far acted on similar commitments made more than a decade ago to tighten the rules against money laundering.’     

‘A magical fairyland’

Luxembourg is smaller than Kent and has a population of 543,202 people. For every police officer in Luxembourg there are four accountants; they have an awful lot of money to count, some $4 trillion is invested there! Harvard law professor Stephen Shay, testifying to the US Senate on tax avoidance mechanisms, described the Grand Duchy as being ‘like a magical fairyland’. In 2012 bank assets in Luxembourg amounted to 1,725% of its Gross Domestic Product, compared to 549% in Britain and 284% in Germany. A magical world indeed where over 1,600 companies share just one address, 5, rue Guillaume, but then the companies may amount to little more than a brass plate.

Ikea provides an example of the conjuring tricks that PwC and Luxembourg perform. Inter Ikea, based in the Netherlands Antilles, lent up to €6bn to Inter Ikea Finance in Luxembourg. This subsidiary then transferred the money to Ikea’s branch in Switzerland. The Swiss branch lent the money to Ikea group companies elsewhere. Interest received from the group companies went back to the Swiss branch where it was taxed at very low rates. The money that passed through Luxembourg was taxed at 0.03% for each 1bn euro sent on to Switzerland and once the fund exceeded 6bn euro the tax would fall to 0.016%, all ‘in compliance with current tax legislation’, announced a Luxembourg tax official.

Dyson is another company that perfected a sleight of hand to profitable effect by conjuring up different identities in Malta, the Isle of Man and Luxembourg. £300m worth of loans would be pumped from abroad to Dyson James Limited in Britain. Money paid on the loans would go to Dyson’s Luxembourg entity Blue Blade. As costs these payments would be tax deductible. Blue Blade paid under 1% corporation tax in Luxembourg; it could demonstrate that it had borrowed money from the Isle of Man subsidiary and this would be registered as a cost for tax deduction purposes, but the money from the Isle of Man was interest free, there was no cost! Magic it is when profits resurface as costs, and the profits just got bigger.

The pervasiveness of corporate tax avoidance is demonstrated by the Financial Times and The Guardian, who both call for a clamp down. The Financial Times is owned by the Pearson Group plc which has employed complex tax avoidance structures in Luxembourg. The Guardian Media Group refinanced an offshore joint venture in trade publishing, Emap, with the private equity firm Apax ‘via a purchase of external mezzanine debt’ conducted through two new Luxembourg companies. Very fancy!

The Napoleon of crime

‘Princes should devolve all matters of responsibility upon others, take upon themselves only those of grace’. Niccolo Machiavelli, The Prince.

The European Commission is now charged with negotiating measures to stop tax avoidance. However, the European Commission president is Jean-Claude Juncker, prime minister of Luxembourg between 1995 and 2013, when Luxembourg became the top European tax haven. One commentator remarked that putting Juncker in charge of efforts to combat tax avoidance was like putting Dracula in charge of a blood bank. Juncker says that he did not design Luxembourg’s tax regime and that the tax authorities acted independently. This did not convince Britain’s Secretary of Work and Pensions Iain Duncan Smith who said it was time for European commissioners to show they had ‘no fear of investigating their own’. Duncan Smith was echoed by Labour shadow European spokesperson Pat McFadden, ‘if more comes out on this then really serious questions will have to be asked about his [Juncker’s] position’. Following a motion proposed by, among others, Britain’s Ukip and France’s National Front, the European parliament is to debate whether Juncker should resign as the European Commission president. Meanwhile, the mastermind behind the entire contrivance, the Napoleon of crime, sits untouched behind any one of the desks in PwC’s 776 offices in 157 countries.                    

The Conservative Party, the Liberal Democrats and the Labour Party are all in thrall to PwC. Since 2010 PwC staff held positions in the offices of Labour’s Shadow ministers for international development, business and education. A senior PwC associate is currently on a six month posting worth £75,000 to Shadow Education Secretary Tristram Hunt. Shadow Business Secretary Chuka Umunna received research support worth £60,000 from PwC in 2013-14 to help shape tax, welfare and business policy. A Labour Party spokesperson said that accountancy firms ‘do not influence opposition policy decisions’. What on earth are they doing then? Rachel Reeves, Labour’s Shadow Work and Pensions’ secretary, is getting help from a PwC consultant from October to January for £41,000. Shadow Chancellor Ed Balls received almost £200,000 from PwC and the rest of the Shadow Treasury team got over £170,000 of support. Labour has also received over £250,000 for staff costs from KPMG.

The Labour Party is the direct beneficiary of PwC and its tax avoidance schemes, it invites PwC to advise and direct its would-be ministers. We may have the vote but who runs this country? The City runs it.  


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