Luxembourg tax files: how Juncker’s duchy accommodated Skype and the Koch empire
The EU’s most powerful official is under mounting pressure as dozens more multinational corporate names are dragged into the Luxembourg tax scandal following a new leak of confidential documents on Tuesday.
Jean-Claude Juncker, president of the European commission, has been battling to distance himself from the growing furore over the Grand Duchy’s role in facilitating “industrial scale” tax avoidance. Among the new companies exposed in the secret tax documents are Disney, FTSE 100 firm Reckitt Benckiser, the Skype internet-phone arm of Microsoft and Koch Industries. The Koch empire is the second largest privately-owned business in the US and is controlled by siblings who fund rightwing political campaigns.
According to documents obtained by the International Consortium of Investigative Journalists dozens of multinationals implicated in the latest leaks engineered complicated corporate structures that often helped reduce tax bills to a fraction of what they otherwise would have been. Documents analysed by the Guardian show:
• Skype, the voice-over-internet business now owned by Microsoft, used two Luxembourg companies and an Irish subsidiary to circulate royalties and profits in a pattern that helped its Skype Technologies unit in Luxembourg report no corporation tax over a five-year period.
• Invista, an offshoot of Koch Industries that owns the Lycra brand, underwent a 26-step restructuring called “Project Snow”. Invista uses an internal bank that lends cash to other group companies at high rates of interest. The exotic corporate structure neatly allows the company to pick up a lucrative tax break in Switzerland and at the same time keep its Luxembourg tax bill to a minimum.
The new revelations will step up the pressure on Juncker who, in his former role as prime minister of Luxembourg, pointedly praised Luxembourg’s tax policies, something that attracted Skype to the Grand Duchy. In 2005, when Juncker was both prime minister and finance minister of Luxembourg, he said: “Skype will remain based here … this is partly because of the favourable fiscal environment we’ve created here in Luxembourg.”
Since revelations last month about scores of controversial Luxembourg tax deals – some of which are many years old but still in use – Juncker has sought to brush aside suggestions the Grand Duchy, under his leadership, undermined the tax receipts of other nations by enabling large-scale tax avoidance by multinationals.
Skype will remain based here … partly because of the favourable fiscal environment we’ve created in Luxembourg.
Jean-Claude Juncker, 2005
“I am not the architect of the Luxembourg model because this model doesn’t exist,” he said last month, insisting that his government did no more than compete hard for inward investment as others did.
Juncker has faced mounting criticism, including a censure vote in the European parliament, in the wake of the first document leak. The Guardian, together with the ICIJ and more than 20 other news organisations worldwide, revealed that about 340 companies – including Fedex, Pepsi, Shire Pharmaceuticals, Icap and Ikea – had secured tax deals with Luxembourg with the assistance of accounting firm PricewaterhouseCoopers.
Last week, the finance ministers of Germany, France and Italy demanded a clampdown on Luxembourg-based tax avoidance in a letter to the EC’s commissioner for economic affairs, Pierre Moscovici. They said: “Our citizens and our companies expect us to cope with tax avoidance and aggressive planning.” The latest batch of documents show that the creation of aggressive tax structures is not limited to PwC alone. The new papers include similar deals secured for big clients by the remaining members of the big four group of accounting firms – EY, Deloitte and KPMG.
I am not the architect of the Luxembourg model because this model doesn’t exist.
Jean-Claude Juncker, 2014
On Monday, the chair of the Commons public accounts committee, Margaret Hodge, said last month’s revelations had raised serious questions over Juncker’s suitability as the head of the EU’s executive arm. “Since I have uncovered all this I have questions about if Mr Juncker is fit to be the president of the European commission. I think if this had been around during the period of his appointment it might well be a different decision.”
Widespread use of complex tax structures is believed to cost western countries billions in lost revenues every year. The structures revealed in the Luxembourg documents shelter corporate profits, leaving a hole in tax receipts for nations around the world.
After being shown the Guardian’s investigations into Skype, Stephen Shay, a Harvard Law School professor who last year gave expert testimony on Apple’s tax avoidance structures in a Senate investigation, said: “ What Skype is demonstrating is the extent to which the smaller countries are willing to engage in tax competition – and they’re getting relatively little out of it. The losses to the other countries compared to the gains for the smaller countries are really disproportionate.”
The new whistleblower revelations follow the leak of 28,000 documents from accountancy group PwC last month. Speaking this week, Hodge described PwC’s work as a “mass-marketed tax avoidance scheme”. PwC has denied mass-marketing tax avoidance.
Skype and Koch Industries were advised by EY. The leaked documents detail confidential tax deals thrashed out by accountancy advisers with Luxembourg tax officials. They are known as “advance tax agreements” or “comfort letters” and give the green light for advantageous structures to be established. They are completely legal but increasingly controversial.
Koch Industries said: “Like all Koch companies, Invista conducts its business lawfully, and pays its taxes in accordance with applicable laws. As the Guardian has previously acknowledged, all of our activities in these matters are legal.”
US parented companies including Koch Industries’ Invista division, Skype and others included in the new cache of papers are taxed on their worldwide income by the American tax authorities. However, US tax rules offer generous loopholes for keeping tax on foreign earnings to a minimum.
Microsoft, Skype’s parent, said: “Microsoft’s acquisition of Skype was finalised in October 2011, so we can only speak to activities after that date.”
The statement added that Microsoft had since changed Skype’s business model: “As a global business, Microsoft adheres carefully to the laws and regulations of every country in which we operate.”
Asked whether Skype’s 2005 tax ruling was still active, Microsoft declined to comment.
PwC’s new Luxembourg offices.
PwC’s new Luxembourg offices. Photograph: NICOLAS BOUVY/EPA
The big four accountants have substantial and growing operations in Luxembourg. According to the ICIJ, EY’s office in the country brought in $153m of revenue in the most recent year with most growth coming from its tax business. It is planning to hire 350 new employees there. Just after last month’s PwC revelations, the accountancy giant held a grand opening for a vast new office complex in Luxembourg attended by the country’s prime minister Xavier Bettel and finance minister Pierre Gramegna. PwC had invited reporters to the event but withdrew the invitations in the wake of the first batch of document leaks.
The EC has pledged to fast-track new legislation to establish greater scrutiny of sweetheart tax avoidance deals for big companies. Last week a spokeswoman for Pierre Moscovici, the European economics commissioner whose brief includes taxation, said draft legislation would be tabled within months obliging EU governments to share information on corporation tax agreements they have struck with multinationals.
The latest revelations are likely to ramp up the pressure even further on Brussels to demand greater tax transparency among EU nations. The commission is already investigating tax deals awarded to several companies and is examining whether they amount to illegal state aid. In the case of Luxembourg it is probing deals handed to Amazon and a subsidiary of Fiat.
Separate investigations are underway into Ireland’s tax relationship with Apple and Starbucks in the Netherlands.
How it works: the ‘Swiss branch of a Luxembourg finance company’
One of the schemes used by multinationals is known to tax planners as “the Swiss branch of a Luxembourg finance company”. Our graphic explains how this works.