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Wednesday, November 12, 2014

Juncker responds to Luxleaks tax scandal

So Margrethe, about these Luxembourgian tax schemes...
European Commission President Jean-Claude Juncker has just made an impromptu appearance at the midday press briefing to make a statement and answer a few questions on the furore surrounding the leaked documents showing the significant number of favourable tax deals given to corporations by the Luxembourg government during his tenure as Prime Minister and/or Finance Minister (1989 - 2013).

Here are the key points from his response:
  • The Commission has previously reviewed the tax arrangements and stated that they are in line with national and international (EU) law.
  • However, due to different national rules, the interaction between EU member states can lead to non-taxation and results which are not in line with moral/ethical standards. Therefore, there is a need for greater tax harmonisation in the EU.
  • The Commission is committed to fighting tax avoidance and will do so under his tenure. There is no conflict of interest since Competition Commissioner Margrethe Vestager has a significant amount of autonomy and Juncker will not discuss the Luxembourg cases with her.
  • Luxembourg has always supported EU tax harmonisation. As Commission President, he will push this idea again. He will also introduce a new mechanism for automatic transparency of tax deals so each member state knows what others are doing.
Quite a staunch defence by Juncker then but needless to say many of the journalists at the briefing (not to mention his critics in the European Parliament) seemed unsatisfied. A few key issues which continue to concern us are listed below.

  • This should not be an excuse to push tax harmonisation at the EU level: Tax is a national issue and should remain so. Juncker’s use of this as an excuse seems to be mostly an attempt at deflection. There are key reasons why proposals on this have never gained traction. Juncker’s insistence that Luxembourg always supported such harmonisation is also an easy defence to make to an extent, since it is clear many other members do not – as such under unanimity there was little hope of it passing. Furthermore, Luxembourg (along with Austria) was the key holdout in delaying the recent deal on tax secrecy.
  • Serious questions need to be asked about the level of scrutiny applied in Juncker’s nomination process: As we have long pointed out, the Spitzenkandidaten process which lead to Juncker’s appointment is a bad idea for a number of reasons (lack of scrutiny being just one of them). Juncker gained the nomination of the European Peoples Party through the support of 382 delegates (less than half the total). In the elections only 10.2% of the potential electorate supported this party (and they only voted for national parties which are part of the EPP), while polls showed that only 8.2% were able to name Juncker as a lead candidate. Furthermore, only a third of people knew the candidate of the lead party would likely become head of the Commission. Overall, there was little scrutiny of Juncker and little discussion of his policy proposals or his past.
  • In general, tax competition is a good thing and should be maintained in the EU: That said, greater transparency is also good for having good functioning markets, promoting competition and helping spread best practice. Proposals for transparency therefore can be welcomed but should also include making information public, of course taking account of companies privacy and sensitive information concerns.
  • All this though should not deflect from valid questions about Juncker’s role in the numerous tax deals struck under his watch: The key questions remains to what extent he was aware that such deals were undermining the tax collection of other member states. The basic premise of Juncker’s defence, to look forward at remedies, should also not detract from necessary scrutiny of these deals and what has happened previously. 
This story has plenty of way to run yet.


Jesper said...

The idea of having the tax-authorities issue letters of comfort seems strange and has little merit. The process is easily abused.

It gives predictability the same way as when credit rating agencies helped tweak finance products to get the desired rating for toxic finance products. The gaming of the system is guaranteed.
Didn't work for finance deals, it doesn't work for tax deals.

What he could do is in the spirit of transparency recommend his friends in Luxembourg to publicise all of the issued letters of comfort. Court verdicts should be public, these letters of comfort has more or less the same legal standing so?

Rik said...

This is another dilemma that always will have a negative outcome for the EU.
Either go against the will of a lot of people and let big companies get away with paying tax at the rate which is several times less as that of individuals.
Or increase corporate tax to a level which is acceptable for large parts of the electorate (seen the taxes they pay themselves and the perception of many that big companies are rich and should pay more. While multinationals will leave the EU with several of their fuctions plus give midsize companies an extra incentive to do something similar. In a climate where growth is at best 1%ish structurally.

Bad for Juncker if this keeps in the news longer. But bad for large cies as well. And likely bad for the economy as well. No new CEO is giving in on a drop of CF by higher taxes, especially in this climate where shares are heavily overpriced anyway. Just calculate how long it will take a company to earn say a rise of taxes with 20% back or an overpricing with 20-50%. Not even to mention both. Much longer than the average CEO is in office.
Problem is this is now playing up in a world where it has become very easy to relocate several of the functions that actually make the profits.

Jesper said...

& come to think of, Luxembourg could have chosen to harmonise their tax-laws to be similar to any country in Europe. And they chose to harmonise corporation tax law to be among the worst for citizens across the EU...

Solidarity? Or leading the pack in a race to the bottom?

Unknown said...

I hate the idea of giving further standardisation / harmonisation powers to the EU. But how do you deal with tax havens within the EU like Luxembourg and Cyprus and outside the EU like Gibraltar, Isle of Man and the Channel Islands? Average person on the British street is not too impressed with the mega-rich getting massive tax advantages.

Rollo said...

EU rules insist that corporation tax is payable in the domicile of the Company HQ. If you are a small country with a small economy, you can greatly increase your tax take by taking 10% of a big company from outside, so you attract these big fish with a low tax rate. Luxembourg and Ireland both do this. If you are a CEO you have a duty to maximize the profits, legally. So you domicile yourself in such a place. You do not need tax harmonization: you simply need to stipulate that the profit is earned where the money came from, together with the location which has the employees. This needs to be the law, and CEOs and boards who break this law should be liable to criminal action. If no accounts are available, then a profit estimated at 10% of turnover should be assumed.

Jesper said...

Current rules are that profits are taxed in the country where it is earned, the location of the HQ is almost irrelevant.

Profits are shifted from high-tax countries to low-tax countries through cross-border intra-community intercompany transactions. Transfer pricing, royalty payments etc.
Have a look for transfer-pricing accountant job ads and you'll notice that they all work in the tax-team, in other words they work in the function responsible for minimising tax-liability. Their dual responsibility might be a coincidence....

Tax-havens sell themselves cheaper and cheaper, that is why companies can get away with the low tax paid in Luxembourg. Tax-havens figure 1% of a big number is more than 0% of any number. None of the companies using Ireland, Luxembourg, Cyprus etc for reducing their CT-bill is paying anything close to the headline CT-rate in those countries - they all have special regimes to reduce the tax-bill even further. The race to the bottom is through these special regimes.

The biggest scam is IP-related. One way to deal with that is to charge a percentage fee of the IP-related charges out of a country. That would eliminate the problem of valuing IP, simply take it from the filed accounts and only allow for 50% (or lower) of the cost to be offset against profits. IP is worthless without the legal system enforcing IP so it would be fair that the legal system would be paid for enforcing it.

Denis Cooper said...

"This should not be an excuse to push tax harmonisation at the EU level"

Of course it will be; what else would you expect?

christhai said...

Come on OE and others - that Junckers or any other Commissioner for that matter is corrupt - is just not news.

Indeed being utterly corrupt is an essential job qualification for a Commissioner.

Just what kind of organisation do any of you think you are dealing with?

Since its inception the EU at senior and now at junior level is "Naturally" corrupt.
Stealing from the tax gifts of the member states is not some bizarre or uncommon occurrence. It is the NORMAL state of affairs.

Why do you think Barroso brought in total exemption from not just prosecution for ANY crime Committed by a Commissioner - but that Investigation of a Commissioner is forbidden by EU Law?

Perhaps the words Santer Commission (pre-exemption) illuminate.

Nothing is going to happen to Juncker - he is Merkel's pet President and will do exactly as he is told by her.

Rik said...

Only what is exactly earned is unsure.

Basically a multinational group performs several functions that add value some of them a lot.
R&D, manufacturing, holding stock, sales, financing. Of these only holding stock and sales have to be performed in a certain country.
Simply put what you will see is that if corporate taxes get to individual level the other functions will be moved to lower taxes jurisdictions. Plus sales and holding stock could be done by somebody else.
Basically eroding the full taxbase on the whole transaction.
This is effectively what you are seeing now.

They are simply too late with this. All these functions cannow be done in countries like India or China (or taxhaven like structures for financing and central management).
Staff required is since a few years available there often in larger quantities than in the West. And still at much lower prices.

So simply years too late and having a huge potential for shooting yourself in the foot. Jobs will move and not come back.

Jesper said...


I've worked in accounting in an international manufacturing company.

Location of IP and pricing of IP is central in minimising CT-liability. Interest-rates on inter-company loans can also be used but nowhere near as flexible. Location of anything else is almost entirely irrelevant for CT-liability.

The most valuable IP-rights in the world generates almost no profits in high-tax countries and that correlation is not a coincidence.

Rik said...

Ips indeed donot generate high tax income fully agree.
My point is as far R&D goes that high tax countries basically have the choice to let the present situation exist or face a massive outflow of a) companies (that move their head office) and b)R&D centers to low tax jurisdictions.
Increasing tax and think companies will not react is simply moronic.

Basically a lot of R&D facilities in the West are only still there as the costs of moving to say India is considerable. Pure on a running basis (excluding costs of moving) India is already often a much better alternative. Increasing taxbase or taxrates simply means that a move becomes more attractive. Before a lot of the functions had to be in the West, simply because the rest lacked skills. But probably half a billion people now only in India and China have those skills and work for a lot less than people in the West. While their respective countries are very eager to have those activities moving to their countries.
Same with much other functions. Manufacturing probably the most important one. Make already expensive manufacturing West even less financially attractive.
No Win Game for the West.

On finance most profits are moved by playing with debt/equity. More loans means more deductions. Allocate capital in low tax jurisdictions.

And probably things will get even worse for the West. In a lot of countries the next outsource wave has already started and now it largely concerns midsize companies. These are at the moment probably more important for employment than the big ones.
But are still neglected by a lot of governments. And nearly always face a substantially higher tax burden than the biggies. So like the multinationals before they will start to demand more favourable tax treatment. Shifting the total tax burden even more to the middle incomes. In Europe there are simply not enough high incomes to pay for all the stuff. Not even to mention that the private rich nearly always have sufficient possibilities to avoid tax.

So all this stuff is either only for the homecrowd or done by morons that donot understand that they will shoot themselves in the foot.

The point is many multinationals can effectively operate in most countries without having any presence in that country. Headoffice can be somewhereelse and with that capital.
R&D/marketresearch in say India or china resp outsourced.
Sales and logistics outsourced and/or remote via internet.
Nothing left to tax. Plus the jobs are partly gone and the locally outsourced ones are against considerably less conditions.
Lose lose lose situation.

Jesper said...


CT-rates has no relevance when deciding where to put R&D-facilities. The IP generated by R&D is transferred at a nominal cost internally to a tax-haven.

Pharma tend to be R&D intensive so this might be a good example:
"Bristol-Myers Squibb has a subsidiary in Luxembourg that has one part-time employee, assets of €22.7 billion, and a branch in Swords, Co Dublin."