Tiny Luxembourg engages in huge tax avoidance schemes

The Guardian newspaper reported recently that the small European state of Luxembourg has been assisting some of the world’s largest multi-national companies to avoid paying larger amounts of tax to the detriment of its neighbouring EU countries. The report is the result of thousands of leaked confidential documents that have revealed the very complicated tax arrangements that have been used to legally cut the tax bills of companies with household names such as Heinz, IKEA, Burberry and Pepsi among more than 300 otherwell-known companies. Formal investigations have already been instigatedby the European Commission into Amazon’s and Fiat's tax arrangements in Luxembourgwhich were previously reported in the press.

This more recent news due to the leaking of the secret documentation has been highlighted by a london accountantsas pressure grows in the UK and elsewhere in Europe and further afield to prevent large corporations from exploiting international tax legislation to drastically cut their tax liability in a way that many are describing as morally wrong even though it is not illegal. New measures are expected soonfrom the UK Chancellor, George Osborne,to stop the way profits are transferred to countries with more favourable tax regimes in an effort to curb some of the tax avoidance strategies that are currently being used by global companies and some wealthy individuals.

The leaked papersshow that one of the most common financial structures used to cut tax bills involves cross-border lending between companies within the same group. Shire, the pharmaceuticals company, for instance, has its head office in Ireland, is registered in Jersey (the Channel Islands tax haven) but makes most of its sales in the US. There seems to be no sound commercial reason for this particular set up but there may well be a tax avoidance reasoning behind it. That seems likely once you know that one of it's companies based in Luxembourg makes billions of dollars in profits through loans to sister companies in the group, but these huge profits are only taxed at less than 1 per cent because of the favourable tax regime in Luxembourg.

Some Luxembourg-based subsidiaries of many other multinational corporations also handle vast sums of money that are transferred in and out of the country but these corporations appear to have very little economic activity actually taking place within the state of Luxembourg and seem to have even less physical presence with 4,000 companies reportedly having offices in only 3 buildings in the tiny state.

The UK and other major European and world economiestypically prevent multinational companies from moving profits to more favourable tax regimes by imposing a withholding taxbut Luxembourg has various ways to allow companies to avoid any such withholding taxes, whilst at the same time benefiting itself from the tax income it receives.

The knock on effect of the existence of tax havens such as Luxembourg is that other countries feel bound to make their own tax regimes more attractive to multinational corporations by reducing the tax they pay but also reducing their tax income.

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