Morals are good but double- standards and morals are twice as good in the European Union
Will the appointment of Jean-Claude Juncker, Luxembourg's former prime minister, as president-designate of the European Commission, change Luxembourg role from a tax haven to paving the way for tax- harmonization across the EU?
Many grassroot tax activists claim that the appointment of Mr. Juncker is like appointing a burglar to be a warden , because since the late 1960s, Luxembourg has the legal infrastructure to offer a wide range of profit shifting and other tax haven activities. It started as an offshore center for dozens of German banks and reached a peak when Germany imposed a 30 per cent withholding-tax, and billions of D-marks shifted to Luxembourg in the early 1990's. Since then simple "letter box" subsidiaries or other complex tax structures, governed by a 1929 tax law without transparency or accountability components combined with discretion adds to the tax appeal.
Public outcry over tax avoidance
Perhaps with the appointment, Luxembourg is likely to overhaul its tax system and still maintain the attractiveness to global and multinational corporations I order to preserve the accumulated wealth created by a distinctive tax system that has helped make Luxembourg one of the richest countries in the world.
Luxembourg also provides agile financial expertise and has built the world's second-largest fund administration industry. It has a reputation for stability and professionalism, demonstrated by the resilience of its huge banking sector that also avoided mass reduction of equity during the financial crisis. The OECD and IMF together with other tax regimes are working on reforming the international tax rules. The "base erosion" project of the OECD will eventually close the simple loopholes caused by hybrid loans and low-tax branches or information exchange on withholding taxes or bank accounts, but to address the global complex tax structures, it has a long way to go before the results are evident.
Investigations will shake-up EU tax rules.
Luxembourg receives more than 10th of the world's foreign direct investment. The European Commission has recently launched an investigation on some tax rulings involving Fiat while other investigations concern "serious distortions of competition" for multinational like Amazon by offering low-VAT rates to eBook retailers. The creation of the e-commerce hub alone accounts for €800m in revenues or 1.5 percent of Luxembourg's GDP. Other attractive tax treaties results in the country's finance and holding companies that own more than $2tn of assets.
Ménage-a-trios
Copenhagen Compliance understands the multinationals' obligation towards tax planning and its stakeholders. Globalization requires flexibility and a network of tax treaties to avoid double taxation.
Tax authorities have stepped up their attack on tax planning in the wake of the financial crisis; however, they must not penalize multinationals for using onshore or offshore finance centers.
Instead, there are some general issues that the new EU regime must look into in 2015 for harmonization throughout the EU:
- Address the complex an all-embracing rate structures created between Luxembourg, Ireland, Netherlands or other offshore entities where tax rules, arbitraged thru exotic "hybrid" instruments, are treated as loans in one country while its considered to be equity elsewhere - and vice versa creating a new Bermuda triangle.
- React to the struggles required to get even sparse details in the companies' accounts and/or get hold of legal documents, entrusted to lawyers.
- Address the gap between the letter of the law and how it is applied in practice, where informal rulings play an important role.
- Look into the numerous deductions and exemptions that lower the tax rate and create white profits. It is rather an Anti-Loss Laundering because they escape tax altogether.
Eventually, all EU countries must revamp the tax system to avoid harmful global tax competition internally within the EU, if the efforts of OECD or IMF are supported by the new EU commission.
