Corporate Tax Avoidance Haven In The Heart Of Europe

The recent leak by the International Consortium of Investigative Journalists (ICIJ), labeled Luxleaks, has revealed the enormous gravity and proportions of a phenomenon that is well-known by everyone: corporate tax avoidance.

The decline in public funds do to the non-payment of taxes by large multinational corporations is greater than first thought, and its gravity is proportionally worse in developing countries. Action Aid estimates that developing nations lose about 104,000 million euros a year as a result of tax evasion and or avoidance by multinationals

The average tax contribution of the 340 businesses affected by the Luxleaks, among which are Ikea, Volkswagen and Pepsi, is a meager 2%, and in the most extreme cases, it does not exceed 1%. It is important to note that the average corporate tax in the EU, for example, is 22%.

Key pieces in this massive tax avoidance industry are tax havens. In the EU, the place of honor in occupied by Luxembourg, which is dedicated to sign “preferential arrangements” with numerous companies to attract investment. And it has done so quite successfully.

Luxembourg, after the United States, is the second most important center of global investment.

Most of these “preferential arrangements” were negotiated when Jean-Claude Juncker was prime minister and finance minister in Luxembourg.

It is no surprise, that Mr. Juncker now occupies the chair of the European Commission, although for many it does raise some suspicion. It does not seem logical that, while some countries are getting in debt to supposedly clean up their fiscal mess, countries in the heart of the European single market are engaged in unfair tax competition.

According to the report published by ICIJ, Luxembourg offers a privileged framework for the constitution of special arrangements purely due to fiscal reasons, where holding companies that do not have significant commercial or industrial activities.

It is a key jurisdiction within existing structures that are designed by certain companies, with the help of qualified consultants such as PriceWaterhouseCoopers.

These frames, which include subsidiaries in different countries, behave artificially as a transnational reorganization.

The goal is simply that the drastic reduction in the tax bill for the multinational corporations.

The “incentives” that exist in the Luxembourg scheme have to do with a very pro-foreign-source of dividends, while applying very small deductions as well as several other tax benefits applied to income originating from from royalties.

Companies manage to deduct their losses in high-tax countries like Spain and pay very taxes for the officially declared income in countries like Luxembourg.

The problem is that these “technical” benefits are artificially transferred from the countries where they are generated to tax havens like Luxembourg.

The EU has supposedly begun working on legal reforms to restrict and in some cases close the door to the existing ways in which multinationals take advantage of loopholes to avoid the payment of taxes where income is generated as well as to pressure tax heavens such as Luxembrug to discourage practices that facilitate the movement of income to ghost accounts that are difficult to trace.

However, the fact that a former multinational lobbyist is now presiding over the European Commission itself is not very encouraging. Asking lobbyists or bankers to fairly legislate their own profit schemes and exemptions did not produce any significant reforms in the United States, which is where the last recession began. Does anyone believe that asking European lobbyists and bankers to do exactly that in Europe will result in anything different?

Luis R. Miranda is the Founder and Editor of The Real Agenda. His 16 years of experience in Journalism include television, radio, print and Internet news. Luis obtained his Journalism degree from Universidad Latina de Costa Rica, where he graduated in Mass Media Communication in 1998. He also holds a Bachelor’s Degree in Broadcasting from Montclair State University in New Jersey. Among his most distinguished interviews are: Costa Rican President Jose Maria Figueres and James Hansen from NASA Space Goddard Institute. Read more about Luis.