LuxLeaks

Luxembourg Leaks is the name of a financial scandal revealed in November 2014 by a journalistic investigation conducted by the International Consortium of Investigative Journalists. It is based on confidential information about Luxembourg's tax rulings set up by PricewaterhouseCoopers from 2002 to 2010 to the benefits of its clients. This investigation resulted in making available to the public tax rulings for over three hundred multinational companies based in Luxembourg.
The LuxLeaks' disclosures attracted international attention and comment about tax avoidance schemes in Luxembourg and elsewhere. This scandal contributed to the implementation of measures aiming at reducing tax dumping and regulating tax avoidance schemes beneficial to multinational companies.
The judicial aspects of this case concern the persons charged by Luxembourg justice for participating in the revelations. No multinational company was charged. The LuxLeaks trial took place in spring 2016 and led to the condemnation of the two whistleblowers. The appeal trial's judgment delivered in March 2017 confirmed their condemnation. Following a new appeal, the Luxembourg higher Court rendered in January 2018 a distinct judgment for the two defendants and fully granted the whistleblower status for one of them.

Revelations

Two waves of ICIJ revelations

On 5 November 2014, the Washington, D.C.–based International Consortium of Investigative Journalists released LuxLeaks investigation. Eighty journalists from media organizations around the globe had been involved in collaboratively reviewing 28,000 pages of documents. All documents are available online in a searchable database categorized by industry and corporation published by the ICIJ and by other websites. The documents disclose tax rulings between Luxembourg and more than 340 companies worldwide aiming at reducing their tax payments. The Luxembourg Leaks provide insight into 548 tax rulings, dating from 2002 to 2010.
On 9 December 2014, ICIJ revealed new names of about 30 large companies benefiting from tax rulings and tax avoidance schemes in Luxembourg. This second wave is labeled "LuxLeaks 2" in complement to the first revelation wave in November labeled "LuxLeaks 1".
The LuxLeaks revelations have had a worldwide impact, as ICIJ partnered its investigations with many media around the world: CNBC, CBC, The Irish Times, Le Monde, Tagesanzeiger, Süddeutsche Zeitung, The Asahi Shimbun, El Confidencial and many others.
After publishing the LuxLeaks investigation, ICIJ was awarded one of the United States' top journalism awards, the George Polk Awards in the Business Reporting category in February 2015. ICIJ was also awarded 'Investigation of the Year' for the LuxLeaks and SwissLeaks investigations at the Data Journalism Awards in June 2015.
Although the ICIJ LuxLeaks and WikiLeaks show similarity in names and operating mode, this does not imply any known connection between them.

Luxembourgish tax regime illuminated

LuxLeaks revelations shed light on the Luxembourgish tax regime, highly beneficial to multinational companies. Foreign corporations started settling in Luxembourg in large numbers in the early 1990s, when Luxembourg transposed in its national law an EU directive that allowed companies to pay taxes in a European headquarters country other than where their subsidiaries operated.
Tax rulings are set up by large accounting firms for the benefits of their clients, multinational companies, and then approved by the Luxembourgish tax administration. Tax rulings include schemes to transfer revenues to Luxembourg. Transfer pricing is one of the mechanisms used by multinational corporations to reallocate profits. Intragroup loans are another possible mechanism: a company based in a high-tax country makes a loan at a low interest rate to a subsidiary in Luxembourg. The interest rate reflects the credit rating of the company group, for example 1%. The subsidiary in Luxembourg is typically set up with the purpose of loaning money at high interest rates, for example 9%, back to another subsidiary outside Luxembourg. Since the tax regime in Luxembourg is tailored to be advantageous for the financial arm of multinational companies, the profits generated there are taxed at very low rates. Such mechanisms are effective means to erode tax bases in countries with high tax rates and to shift profits to countries where they are less taxed.
In many cases the companies' presence in Luxembourg is only symbolic. For instance, 1,600 companies are registered at the same address – 5, rue Guillaume Kroll – in Luxembourg.

Tax rulings legality under question

The legality of tax rulings is under question. Even if they exist in many European countries, tax rulings tend to become considered as state aids able to distort competition. The European Commission Directorate-General for Competition launched several investigations in the last years.
In October 2015, the European Commission concluded that the tax deals in favour of Fiat Finance and Trade in Luxembourg and Starbucks in the Netherlands are illegal state aid. During her press conference, the European Commission Competition Commissioner Margrethe Vestager confirmed: "We used the information coming from the LuxLeaks as market information The whistleblower also plays an important role here."
Following the LuxLeaks revelations, several investigations were launched against other multinational companies. Between 2015 and 2018, the McDonald's company was subject to an investigation launched by the European Commission Directorate-General for Competition. It looked into a system of licenses paid by the European subsidiaries of McDonald's to its Luxembourg branch. More than one billion Euros of tax loss for the European states between 2009 and 2013 would be at stake. In September 2018, the European Commission concluded that Luxembourg did not breach the rules as regards its tax treatment of McDonald's. McDonald's didn't wait for the investigations' conclusions and announces in December 2016 the moving of its tax branch from Luxembourg to the United Kingdom. Investigations are also now opened against Amazon in 2014, against GDF-Suez in 2016 and against Ikea in 2017 for their tax schemes in Luxembourg.
On 11 January 2016, the European Commission concluded that the preferential tax system established since 2005 in Belgium was illegal. Consequently, thirty-five large multinational companies which benefited from this illegal tax system will have to reimburse a tax shortfall estimated to at least 700 million Euros.

LuxLeaks impacts

When revealed, LuxLeaks impact on the public opinion was particularly high, as it put in front line the controversial role of Jean-Claude Juncker, president of the European Commission newly appointed a few days before LuxLeaks revelations. Juncker was Luxembourg's prime minister at the time when many of his country's tax-avoidance rules were enacted. Luxembourg's finance minister, Pierre Gramegna, described the leak as "the worst attack" his country had ever experienced. The LuxLeaks raised discussion on tax avoidance in Luxembourg and other countries.

Follow up in the European Parliament

Following the LuxLeaks scandal, anti-EU groups at the European Parliament, including the UK Independence Party and France's National Front, proposed a motion of censure against European Commission's team with J.C. Juncker as its president. On 27 November 2014, the vote led to the European Parliament rejecting the motion of censure, as mainstream political groups supported Jean-Claude Juncker.
On 12 February 2015, the European Parliament set up a special committee on tax rulings in the European Union Member States. The committee is composed of 45 members and initially had six months to report its findings. This special committee was preferred to a committee of inquiry which would have implied a higher power of inquiry. This choice is considered by some parliamentarians as a political willingness not to embarrass Jean-Claude Juncker. In the context of its investigations, the special committee requested information to the Commission and Member States, it commissioned research briefings, held public hearings and Committee's delegations visited several countries in Europe. The Committee facing multinational corporations' unwillingness to testify threatened to revoke their lobbyists' accreditation. On 26 October 2015, the committee published at the end of its mandate a report with several recommendations: country-by-country reporting of multinationals' activities; introducing Common Consolidated Corporate Tax Base in Europe; including the European Commission into the tax rulings automatic information sharing; better protection for whistleblowers. At the end of November 2015, the report was approved by the European Parliament in a plenary session vote.
The special committee of the European Parliament has been reactivated until June 2016. Reactivation of the committee follows press' disclosure of documents, which demonstrates how some countries within the European Commission have been obstructive for more than ten years regarding any reform of the systems allowing aggressive tax avoidance.
The new special committee includes the same members as the initial committee. It aims at following and deepening previous investigations on tax rulings and tax policies in European Union states.

Follow up in the European Commission

The first action at the European Commission level was a Tax Transparency Package that commissioner Pierre Moscovici presented on 18 March 2015. It mainly consisted in setting up a system of automatic exchange of information on advance tax ruling between Member States' tax administrations. Non-governmental organizations and Members of European Parliament consider these measures insufficient as no public release of the rulings is expected. The technical document accompanying the Tax Transparency Package considers LuxLeaks as a major motive for the commission's decision to act on corporate tax avoidance. That's why some anti federalist politicians fear that the European Commission will use LuxLeaks to push for tax harmonisation.
In October 2015, European finance ministers evaluated the system of automatic exchange of information on tax rulings between Member States administrations, leaving however the European Commission and the public in general outside of this information exchange. The automatic exchange of information on advance tax ruling between Member States' tax administrations is effective since 1 January 2017.
The European Commission made a second move on 17 June 2015 by presenting an "Action Plan for Fair and Efficient Corporate Taxation in the EU". In introducing the action plan, Commissioner Pierre Moscovici said "Corporate taxation in the EU needs radical reform everyone must pay their fair share". The action plan on fairer taxation proposes to re-launch the Common Consolidated Corporate Tax Base, four years after its previous attempt met Member States' opposition. It also proposes several measures in order to reach effective taxation of companies in the countries where the profits are made. The commission also published a list of Top 30 tax havens among non-EU Member States. NGOs expressed doubts that this action plan would successfully eradicate multinational companies' profit shifting and underlined the lack of willingness in acting quickly on the subject.
The European Commission released on 27 January 2016 a new Action Plan, including anti-tax avoidance measures such as the automatic exchange of key information related to multinationals' activities. However, in order to be enacted, this plan will have to be unanimously approved by the member states of the European Union. The new Action Plan has already been assessed by tax justice NGOs as being too weak a measure to counteract tax avoidance.
On 12 April 2016, the European Commission presented a new plan to tackle corporate tax dodging. A European Parliament's study estimates that EU countries lose between €50 billion and €70 billion in tax revenue every year, due to corporate income tax avoidance.
In 2016, European Member States came to an agreement on fighting against the main tax optimization tools used by companies within Europe and adopted a first Anti-Tax Avoidance Directive. However, the final political agreement could be reached only with the inclusion of exemptions and an increased implementation time length, which are expected to weaken the effects of this deal. In spring 2017, a complementary Anti-Tax Avoidance Directive was adopted to fight differences in tax treatment among firms under EU and third countries’ laws. It started to be applicable in all EU Member States as of January 2020.
In October 2016, the European Commission proposed to create a Common Consolidated Corporate Tax Base for companies operating in the EU.