AS HE sets his new team to work, European Commission president Jean-Claude Juncker must be delighted with the way his competition commissioner Joaquin Almunia is dealing with the big tax-dodging question that hangs over Ireland and Luxembourg.
Almunia’s investigations into Apple’s arrangements in Dublin and Fiat’s and Amazon’s in the Grand Duchy are examining whether the companies have received “state aid” through special deals with the local taxmen, who allegedly agreed to tax smaller profits than they should under their own laws.
“National authorities must not allow selected companies to understate their taxable profits by using favourable calculation methods,” says Almunia. “It is only fair that subsidiaries of multinational companies pay their share of taxes and do not receive preferential treatment which could amount to hidden subsidies.”
A wheeze for diverting profits
Illegal state aid, in other words, involves special deals for specific companies, which makes the nature of the investigation highly convenient for Juncker. For as prime minister of Luxembourg for 18 years, he presided over a system in which any big company could approach the Luxembourg taxman with a wheeze for diverting profits made, say, in the UK, US or elsewhere in Europe, into subsidiary companies in the Grand Duchy.
All they had to do was move vast slabs of capital there, dressed up as legitimate financial instruments. The Luxembourg tax authorities would then tax just a tiny fraction of the money using a sliding scale based on how much was washed through the Grand Duchy. In the largest cases involving billions of euros, such as one undertaken by UK drugs company GlaxoSmithKline, the fraction would be just 1/64 percent (0.016 percent) of the funds, when the real profits on this earned by lending money to companies in the organisation elsewhere in the world were hundreds of times as much. Those countries would give tax relief for the latter, far higher, amount. Result: a huge tax dodge.
Hundreds, possibly thousands, of multinationals visited the Luxembourg tax avoidance store, first exposed in the UK in Eye 1314 two and a half years ago when a leaked cache of schemes approved by the Luxembourg authorities revealed companies including Daily Express publisher Northern & Shell, Pearson Group plc, Glaxo, HSBC and even, ahem, the Guardian Media Group enjoying the Grand Duchy’s fiscal charms. The practice explains why the ratio of foreign investment to GDP in Luxembourg is the highest in the world at 4,700 percent (compared to the UK, itself fairly high, at around 50 percent).
But as the scale of the scam shows, the shop was open to all large companies. At several billions of pounds every year, this will have made the cost to other countries far larger than that of sweetheart deals given to particular companies like Apple in Ireland and Amazon in Luxembourg – but its widespread availability also took it out of the definition of “state aid”.
In announcing the state aid investigation into Amazon, Brussels officials were thus able to point out that their inquiry “does not call into question the general tax regime of Luxembourg”. How helpful for its architect, Jean-Claude Juncker!