Business-Friendly Bureaucrat Helped Build Tax Haven
LUXEMBOURG — On the first floor of a rust-colored building near the main railway station, Marius Kohl spent years engineering this country’s most valuable export: tax relief.
As head of a federal agency called Societes 6, Mr. Kohl approved thousands of tax arrangements for multinational corporations, sometimes helping them save billions.
Societes 6’s official function is to determine how much tax is owed each year by roughly 50,000 Luxembourg-registered holding companies, most of which have foreign parents. International regulators say the authority has acted more as a facilitator, endorsing confidential tax arrangements that bring business to Luxembourg while allowing global companies to avoid paying what regulators consider their fair share of taxes elsewhere.
Known in financial circles as “Monsieur Ruling,” Mr. Kohl, who retired last year, had sole authority at Societes 6 to approve or reject the tax deals. Foreign companies flocked to the tiny country during his tenure because of the speed and ease of the approval process, local tax advisers say.
“I could say ‘yes’ or ‘no,’” Mr. Kohl, a bearded 61-year-old with a ponytail, said in a recent interview, which he described as his first. “Sometimes it’s easier if you only have to ask one person.”
The European Union’s executive arm said this month it is investigating whether Luxembourg’s tax deal with Amazon.com Inc. violated rules against state subsidies to an individual company. It is looking into similar arrangements with Fiat Chrysler Automobiles NV and has hinted that more probes will follow. Luxembourg and both companies say they have adhered to tax rules and done nothing wrong.
In Luxembourg, foreign companies have access to deductions and holding structures that can slash their tax bills from the 29% headline corporate rate to close to zero. Often, they pay little or no tax on income from royalties, dividends, interest, proceeds of liquidations or capital gains.
Even as Europe has standardized rules on everything from light bulbs to bolts, tax policy remains the province of national governments. But with many countries struggling to reduce debt, there is pressure on the EU to take a tougher line with tax-outlier governments.
Much attention has focused on Ireland and its role in helping firms slash taxes. Dublin this month moved to scale back its breaks. EU authorities have also zeroed in on the Netherlands, where Starbucks Corp.’s European roasting operation is under scrutiny. Starbucks said it complies with all relevant tax rules.
Regulators say no European country has been as aggressive as Luxembourg over the years in using tax breaks and confidentiality to lure global businesses.
A review of its tax system last year by other countries under the auspices of the Organization for Economic Cooperation and Development concluded Luxembourg didn’t comply with international standards of transparency and sharing of information.
“Luxembourg’s wealth comes from helping companies not pay taxes in the countries where the value was created,” says Pascal Saint-Amans, a senior OECD official who spearheads an international effort to overhaul corporate tax rules. “Instead of creating value they create tax advice.”
Luxembourg Finance Minister Pierre Gramegna, says his country fully complies with global standards and isn’t a tax haven.
“We always go by international rules,” says Mr. Gramegna, who until last year led the country’s chamber of commerce. He said legislation to address the OECD concerns would be implemented this year.
The OECD last month presented proposals to standardize rules for taxing multinationals, which would force more transparency and make it harder to shift profits to low-tax places. Before the proposals can take effect, countries must turn them into law. And a key issue remains unresolved: how much operational heft a company must have in a country to declare that country its tax home.
U.S. companies operating abroad generate about 9% of their foreign profits from Luxembourg-based subsidiaries, on the whole, while employing only 0.1% of their foreign workforces in the country, figures from the Commerce Department’s Bureau of Economic Analysis show.
For Luxembourg-based units of U.S. companies, the effective income-tax rate has been as low as 0.4% in recent years, according to an analysis by Kimberly A. Clausing, an economics professor at Oregon’s Reed College. Much of the foreign profit of American companies never returns home to face the U.S.’s 35% corporate tax rate.
Forcing Luxembourg to dismantle its system would be hard. Its financial-services sector, accounting for 36% of its economy, depends on a permissive tax environment and discretion.
That business has made Luxembourg, population 550,000, the world’s richest country on a per capita basis, according to the International Monetary Fund. The wealth is rooted in thousands of jobs for bankers, lawyers and auditors. There are 149 banks registered here. The mutual-fund sector is second in size after the U.S.’s, with $3.3 trillion in assets under management.
The country is a hub for cash flows. Using complex structures and the favorable tax regime, companies move hundreds of billions of dollars a year in and out. Over a decade, investments held by foreign businesses in Luxembourg quadrupled to $3.2 trillion, more per capita than in any other country, according to OECD data.
It is also Europe’s center for e-commerce. EU rules allow online retailers based in Luxembourg to levy its sales tax — lower than other countries’ — for digital purchases around the Continent. The EU recently changed that rule, a move the government expects to cost it about 700 million ($894 million) in annual tax revenue.
Business is robust despite such headwinds. Luxembourg has adopted some of the changes demanded of it, most recently by agreeing to scrap its banking-secrecy laws, only to carve out new tax-friendly niches such as tax-exempt holding structures for wealthy foreigners, local tax advisers say. Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP have invested in new office complexes, and several Chinese banks have recently made Luxembourg their European base.
Luxembourg’s success in preserving its allure as a tax home despite the pressures is a testament to its sway in Europe.
As a founding member of the EU, Luxembourg has long acted as an arbiter between the Continent’s two heavyweights, France and Germany. Its leaders played a central role in ushering in the euro. It is home to institutions such as the European Court of Justice. Its longtime premier, Jean-Claude Juncker, was recently elected to the presidency of the European Commission.
As prime minister from 1995 through last year, Mr. Juncker was a staunch defender of Luxembourg’s tax system and the principle of tax competition within the EU. “No one has ever been able to make a convincing and thorough case to me that Luxembourg is a tax haven,” he recently said on German television. “Luxembourg employs tax rules that are in full accordance with European law.”
Nestled in the hill country between Belgium, France and Germany, Luxembourg, the world’s last grand duchy, is smaller than Rhode Island, with about half the population. Its economy long relied on steelmaking, but with a decline of that industry in the 1970s, Luxembourg focused on expanding its financial sector by offering tax breaks for foreign capital. Its bank-secrecy laws attracted billions in deposits.
Though the roots of its tax regime reach back 85 years, foreign corporations started coming in large numbers in the early 1990s. One reason: Luxembourg was quick to adopt an EU directive allowing companies to pay taxes in a European headquarters rather than where their other subsidiaries operated.
It also expanded a web of tax treaties: bilateral pacts to prevent corporate income from being taxed twice. Luxembourg has 73 of these and 19 more pending.
While a number of other countries also offer attractive tax setups, a quality making Luxembourg a pillar of corporate tax strategies is trust, many say.
“There’s real stability,” says Phillipe Neefs, a senior partner at KPMG in Luxembourg. “The law is very clear. And if it’s not clear, there’s an open line with the ministries.”
Financial authorities’ close relationship with business has raised eyebrows in neighboring countries. A particular annoyance is Luxembourg’s tax-ruling system. A company presents a holding structure to the tax authority before putting it into place, to find out how its tax bill would be calculated. The advantage for companies is threefold: They can make adjustments if the tax office has a problem with the structure; once approved, a structure is binding for five years; and it is all confidential.
“Tax rulings are only there to provide certainty, which is a key point for companies,” says Alain Steichen, a tax attorney who also advises the government.
During Mr. Kohl’s 22-year tenure, another advantage was that in many cases, companies could get an informal nod from him before their application went under review. In most European countries, getting a tax ruling is a lengthy process. In Luxembourg, it often took one meeting.
Mr. Kohl hosted company representatives and their tax advisers in his large corner office at Societes 6. Decor was modest except for a Pirelli calendar — a gesture of gratitude, he says, from the tire company for his help navigating the tax system. The limited-edition calendars, featuring suggestive pictures of famous models by star photographers, are a status symbol, sent to a select group including celebrities and corporate leaders.
Seated at the center of a table, Mr. Kohl would often go over several company dossiers with tax advisers in one sitting. “We would meet him once a month, and if [a tax structure] was OK, you could basically do the deal right away,” says Marc Schmitz, taxation head at Ernst & Young’s Luxembourg branch.
Mr. Kohl earned a reputation for always honoring his preliminary rulings. “He never changed his mind,” Mr. Steichen says.
With thousands of case files and a staff of 50, Mr. Kohl regularly worked from early morning until 9 p.m. “I wanted to make sure everyone was served,” he says, sitting at his kitchen table in Esch-sur-Alzette, a steelmaking town where he was born.
Mr. Kohl says none of his superiors in the finance ministry, including Mr. Juncker, who served as finance minister for two decades, questioned or criticized his approach at Societes 6.
In the country’s close-knit tax advisory community, Mr. Kohl is regarded as an unsung national hero. “He deserves a medal,” says Mr. Steichen, who says the corporate structures Mr. Kohl approved account for up to 80% of Luxembourg’s 1.5 billion euros in annual corporate tax revenue. “He worked his socks off.”
Mr. Steichen, who has known Mr. Kohl for decades, says the tax inspector was always careful to follow the law, “but if he could take the business-friendly reading, he would.”
European Commission investigators suspect some of the arrangements violated rules barring state aid to companies. The commission’s probes of the Fiat and Amazon tax rulings concern whether prices the companies’ Luxembourg affiliates charge other company subsidiaries for services and the use of intellectual property were set at “arm’s length” or were designed to reduce the tax hit.
During Mr. Kohl’s time as chief of Societes 6, the arm’s-length test, an OECD rule, wasn’t anchored in Luxembourg tax law. Nor were companies required to provide detailed documentation to support their calculations.
Asked how he determined if a company’s pricing information was accurate, Mr. Kohl licked his thumb and held it up in the air.
“There was no way to verify it,” he said.
Luxembourg has been reluctant to share its corporate tax rulings. It initially rejected the European Commission’s request for information on its tax rulings. After the EU threatened to take it to court it provided details on the Fiat and Amazon rulings, but it still refuses to provide a broader set of information requested by the EU.
“Every country has its laws, its traditions,” says Mr. Gramegna, the finance minister. “If some countries think that confidentiality is not an issue in terms of taxation, that everything should be on the Internet on everybody, that’s a choice. It’s not ours.”
In 2012, several of Societes 6’s rulings ended up in the hands of a French journalist who disclosed details in a documentary on French TV, revealing that a number of large companies had avoided paying taxes in their home countries by channeling profits to Luxembourg.
In 2013, Mr. Kohl took early retirement, after 37 years at the tax office. A team of six replaced him. Oral rulings are no longer permitted, and the waiting time can now be as long as six months, tax advisers say.
Reflecting on his time at Societes 6, Mr. Kohl says he had no regrets.
“The work I did definitely benefited the country, though maybe not in terms of reputation,” he says.