Leaked documents show 'tax rulings' from Luxembourg allowed over 300 companies to cut tax bills

Out-Law News | 06 Nov 2014 | 2:16 pm | 2 min. read

Over 300 multinational companies appear to have saved "billions of dollars in taxes" after obtaining 'tax rulings' from authorities in Luxembourg, journalists have claimed.

Leaked documents obtained by the International Consortium of Investigative Journalists (ICIJ) showed some companies paying an effective 1% rate of tax on profits moved from higher tax jurisdictions to Luxembourg through the use of "complicated accounting and legal structures", the group said. The ICIJ reviewed nearly 28,000 pages of confidential documents originating from professional services firm PwC over the course of six months as part of its investigation.

The European Commission is currently investigating whether tax rulings granted by Luxembourg in favour of Amazon and Fiat Finance and Trade, a subsidiary of the car company, were illegal state aid. When details of the Amazon investigation emerged last month, tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that it was increasingly looking as if the state was becoming "a focus of the state aid investigations".

"The Commission is now very likely going to scrutinise this dossier of papers in great detail and several more companies could join the ranks of Fiat, Apple and Starbucks and find themselves in the state aid firing line," said Pinsent Masons state aid law expert Caroline Ramsay. "The companies that are on this list should immediately consider how they can restructure their global tax planning in a way that the European Commission will not find offensive."

Tax rulings, also known as 'letters of comfort' or advance pricing arrangements (APAs), can be issued by national tax authorities to confirm particular arrangements. They are frequently used in the context of transfer pricing arrangements, which are the prices charged for commercial transactions between various parts of the same group of companies. Transfer pricing arrangements can influence the allocation of taxable profits between various parts of the group.

The European Commission does not have direct authority over national direct tax systems. However, it can investigate whether certain advantageous fiscal regimes would be prohibited under its state aid rules, which are intended to prevent the distortion of competition that would occur if a national government was able to grant advantages or incentives to particular companies. If the Commissions rules that member states have given unlawful state aid, any company found to have benefited could be required to pay back any illegal reliefs granted.

The documents obtained by the ICIJ, which it has published on its website, contain 548 tax rulings issued by Luxembourg between 2002 and 2010 which act as binding agreements with the companies involved. According to the ICIJ, the small proportion of these rulings which included figures for the profits companies planned to transfer to Luxembourg accounted for more than $215 billion in loans and investments. However, it said that many of the papers did not reveal enough information to clearly show the tax consequences of each group's corporate arrangements, and that some of the letters would have been issued for reasons other than tax avoidance.

In an interview with the ICIJ Nicolas Mackel, chief executive of the quasi-governmental agency Luxembourg for Finance, said that there was "no way" that the arrangements agreed between Luxembourg and the companies involved were illicit "sweetheart deals".

"The Luxembourg system of taxation is competitive – there is nothing unfair or unethical about it. If companies manage to reduce their tax bills to a very low rate, that's a problem not of one tax system but of the interaction of many tax systems," he said.

"We are in a brave new world here," said tax expert Heather Self of Pinsent Masons. "Tax planning via Luxembourg has been the norm for years, and almost every major group will have used a Luxembourg finance ruling as part of its overall structure. The fact that it was common will not, however, be a defence to a state aid enquiry, and companies face having to repay 10 years of tax benefits in a worst case outcome."

"Companies urgently need to assess the state aid risks of their structures, and consider these issues in much more detail for any new structure," she said.