EU’s investigation into Fiat deal an ‘all-out attack’ on Luxembourg’s tax practices

BRUSSELS : The European Union’s tax investigation of Luxembourg focuses on a single unit of the Italian auto company Fiat. But the implications of the inquiry could in some ways be more far-reaching for multinational companies and their tax accounting than the bloc’s separate Apple-Ireland inquiry, experts said Tuesday.

“I think the European Commission has launched an all-out attack on Luxembourg’s tax practices,” Heather Self, an accountant at the British law firm Pinsent Masons, said Tuesday. “Many international companies run their group financing and treasury operations through Luxembourg-based subsidiaries. The commission is trying to bring Luxembourg to heel.”

In its Luxembourg report Tuesday, the commission – the administrative arm of the European Union – said there was evidence that favorable treatment had been given to Fiat Finance and Trade, a unit of the Italian automaker. Luxembourg has denied having made any special tax deals.

While no other companies have been tied to the investigation, Self said the inquiry would be closely watched in many corporate headquarters because of the many multinationals that have operations in Luxembourg – despite its small size – less than 1,000 square miles – and a population of only about 525,000.

Any findings against Luxembourg in the Fiat inquiry could be awkward for Jean-Claude Juncker, the country’s former prime minister who is the incoming president of the European Commission. Juncker has been accused by his opponents of helping to turn Luxembourg into a tax haven during his nearly two decades leading the nation.

For Luxembourg, the case has become a point of principle. It has been fighting hard to prevent any finding of wrongdoing. In April, the Luxembourg government brought two cases at the General Court, one of the highest tribunals in the EU, challenging requests for information by the commission concerning its tax matters, including elements of the Fiat case.

In a statement Tuesday, the Finance Ministry of Luxembourg said the publication of the commission’s report was “a mere formal step in the procedure” that “contains no new elements.” The government is “confident that the allegations of state aid in this case are unsubstantiated and that it will be able to convince the commission in due time of the legitimacy of the tax ruling concerned.”

Joaquin Almunia, Europe’s competition commissioner, has previously singled out Luxembourg for offering “only partial” cooperation in preliminary fact-finding in the Fiat inquiry.

Juncker, as president of the European Commission during the next five years, will control the commission’s priorities and agenda. But experts said Juncker might not have the appetite – nor see any need – to influence any decision taken by Almunia’s likely successor, Margrethe Vestager, who is still awaiting confirmation for that job by the European Parliament.

Juncker’s “instructions to the designate competition commissioner are that she should pay particular attention to tax – and these are tax cases,” said Konstantinos Adamantopoulos, a Brussels-based lawyer with the firm HFW who advises companies on state aid and tax issues. He is not involved in the cases concerning Apple in Ireland or Fiat in Luxembourg.

Luxembourg had long stood up for the right to determine its own tax affairs, but Juncker “would only stand in the way in this case if it’s the corporate tax rate that is in question, but that is not the case,” Adamantopoulos said.

Even so, if Juncker was “the architect of this special regime, then he should most definitely recuse himself” from any decision, Adamantopoulos said.

Juncker holds a single vote that carries the same weight as that of the 27 other members. But most competition decisions are taken by consensus. That custom has meant any need to call a majority vote has been rare. Vestager, whose hearing at the European Parliament is scheduled for Thursday evening, could not be reached for comment Tuesday.

Natasha Bertaud, a spokeswoman for Juncker, said the commission would remain independent under his leadership. “There are currently several open cases against Luxembourg and more will surely follow,” she said. “As commission president, Mr. Juncker will oversee this stream of commission work as with all other member states.”