European Commission president Jean Claude Juncker has accepted the political responsibility for Luxembourg’s tax practices but the country’s former finance minister, with a 27 year tenure, also added that he was not the “architect” of the problem.
What is the problem exactly or how was money moved around Europe by multinationals in order to avoid paying large tax bills? Financing structures are in place in Luxembourg which help companies pay very little tax, these structures also have the benefit of giving these companies tax deductions in the country where they have their headquarters.
So far so easy, but it gets complicated. Companies routinely loan money from a branch in one country to a branch in another. For the company receiving the loan there is a tax deduction, i.e. Ireland offers tax deductions for companies that wish to set up in its borders. This we know and are used to. The initial loan’s interest payments are taxable in the country the loan was issued from. It is at this point that a loop hole is needed.
The company let’s call it ‘A’,( but we’ll still keep calling Luxembourg by its name), is based in Ireland but sets up another branch of itself in Luxembourg, but this is a branch of its headquarters, not just any old branch. At the same time the initial branch of ‘A’ sets up a financing wing of its operation. These are the offices that have one mail box and one person employed that have been reported on in the media.
Like before, the initial branch of ‘A’ moves loans from its financing wing to itself, all inside Luxembourg’s borders. The financing wing would then have to pay interest payments, one would expect. At the same time ‘A’ makes an identical loan to its headquarters in Luxembourg.
This is where the Luxembourg’s tax laws come to the party. An application is made to the tax authorities that both ‘A’s headquarter’s branch and the financial wing of the initial branch should be able to make one single tax return. The interest payable and the tax deduction meet in ‘holy taximony’ and cancel each other out, leaving albeit a negligible little tax bill to be looked after.
On the point of the #LuxLeaks, as they have come to be known, Juncker said that it was an inevitable outcome of Europe having so many different standards. Some have called for his resignation over the issue, but this has been rejected by him stating: “There is nothing in my past indicating that my ambition was to organise tax evasion in Europe.”
This all comes ahead of the G20 summit in Brisbane, Australia where he will represent the EU. One of the main topics at the summit will be signing off on new measures to try and curtail corporate tax evasion. In an interview with The Guardian parliament member Margaret Hodge called it “the height of hypocrisy”.