Luxembourg tax files: how tiny state rubber-stamped tax avoidance on an industrial scale

An unprecedented international investigation into tax deals struck with Luxembourg has uncovered the multi-billion dollar tax secrets of some of the world’s largest multinational corporations.

A cache of almost 28,000 pages of leaked tax agreements, returns and other sensitive papers relating to over 1,000 businesses paints a damning picture of an EU state which is quietly rubber-stamping tax avoidance on an industrial scale.

The documents show that major companies — including drugs group Shire, City trading firm Icap and vacuum cleaner firm Dyson, who are headquartered in the UK or Ireland — have used complex webs of internal loans and interest payments which have slashed the companies’ tax bills. These arrangements, signed off by the Grand Duchy, are perfectly legal.

The documents also show how some 340 companies from around the world arranged specially-designed corporate structures with the Luxembourg authorities. The businesses include corporations such as Pepsi, Ikea, Accenture, Burberry, Procter & Gamble, Heinz, JP Morgan and FedEx. Leaked papers relating to the Coach handbag firm, drugs group Abbott Laboratories, Amazon, Deutsche Bank and Australian financial group Macquarie are also included.

A Guardian analysis has found:

A Luxembourg unit of Shire, the FTSE-100 drug firm behind attention deficit pill Adderall, received more than $1.9bn in interest income from other group companies in the last five years, paying corporation tax of less than $2m over four of the years despite minimal overheads.
Vacuum and hand dryer firm Dyson set up companies in the Isle of Man and Luxembourg to pour £300m of internal loans into its UK operations in 2011. Interest payments made on those loans slashed Dyson’s UK tax bill and were instead taxed at only around 1% in Luxembourg, saving Dyson companies millions in tax.
Icap, the financial trading firm run by leading Conservative party donor Michael Spencer, lent $870m from Luxembourg to its US business for seven years. Interest paid out from US companies on those loans was £247m, which was taxed at a fraction of official corporation tax rates in the US and UK.

Stephen Shay, a Harvard Law School professor who has held senior tax roles in the US Treasury and who last year gave expert testimony on Apple’s tax avoidance structures in a Senate investigation, said: “Clearly the database is evidencing a pervasive enabling by Luxembourg of multinationals’ avoidance of taxes [around the world].” He described the Grand Duchy as being “like a magical fairyland.”

“Luxembourg is like a magical fairyland”
Stephen Shay, Harvard professor

There is growing political pressure in the UK and abroad to stop companies exploiting international tax rules to slash their tax bills. In January last year David Cameron told business leaders gathered at the World Economic Forum in Davos he would not tolerate big multinationals avoiding tax. In particular, he criticised how “companies navigate their way around legitimate tax systems … with an army of clever accountants”.

Chancellor George Osborne has pledged to reveal new measures next month to stop global corporations diverting profits offshore. Barack Obama has condemned tax avoiding companies as “unpatriotic” and the G20 group of nations is working on new rules to rein in aggressive tax planning.

The revelations will be embarrassing for the new president of the European Commission, Jean-Claude Juncker, who was prime minister of Luxembourg between 1995 and 2013. In a speech in Brussels in July, Juncker promised to “try to put some morality, some ethics, into the European tax landscape.” He has insisted that the country is not a tax haven.

Pressure is already building on Luxembourg after the European Commission launched a formal investigation into whether Amazon’s tax arrangements in the Grand Duchy amount to unfair state aid. The Luxembourg tax arrangements of Italian carmaker Fiat’s finance unit are also under official scrutiny by Brussels.

Asked recently if such a crackdown risked damaging the economy of Luxembourg, one senior figure closely involved in the G20 reform programme said: “I don’t care. It is like saying: ‘If you fight drugs there will be no jobs in certain parts of Mexico.’”

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