While most people picture countries outside of Europe when discussing tax havens, some countries within the continent, such as Luxembourg, are also widely considered havens. In recent years, Luxembourg has made positive changes, which the country claims should be enough to end its classification as a tax haven. Even so, not everyone agrees, and many are still critical of the country’s tax policies.
The Initial Tax Haven Controversy
Luxembourg’s reputation as a tax haven started to gain traction in 2014 during the LuxLeaks scandal. The European Commission president, Luxembourgish Jean-Claude Juncker, had previously served as the country’s Prime Minister. He had to crack down on the same tax avoidance he had followed in that role. During Juncker’s time as the Prime Minister of Luxembourg, which lasted 18 years, he had enabled tax avoidance for companies on an industrial scale.
Specifically, over 300 multinational companies received secret tax deals from Marius Krohl’s tax authority. These companies included Pepsi, Fiat, Ikea, Apple, and Amazon. Some ended up with effective corporate tax rates of just 1 percent. The result was billions of dollars moving through Luxembourg’s corporate subsidiaries without taxation.
Critics at the time claimed that Luxembourg “commercialized its sovereignty” and worked with taxpayers so they would not have to pay tax in other countries. The criticism included violating state aid rules of the EU, as these prohibit giving companies unfair advantages via taxes or subsidies. By 2015, Luxembourg was under intense pressure to change.
Xavier Bettel became Prime Minister in 2013, and together with his new finance minister, Pierre Gramegna, they worked to stop bank secrecy. One of the earliest steps was to automatically exchange tax information with the other EU countries as of January 2015. This change was enough for the OECD to take Luxembourg off its tax haven blacklist. The OECD’s most recent peer review described Luxembourg’s taxation as “largely compliant.”
Another change occurred in 2019 when foreign companies that have operations in Luxembourg have to provide documentation on transfer pricing when requested. For those unfamiliar with it, transfer pricing is a mechanism that multinational companies use to spread profits globally. This 2019 ruling meant that Luxembourg was compliant with the anti-tax avoidance directive from the EU.
The last and most recent change was a 2020 budget law that essentially voided all advanced tax agreements made before 2015. This overcame the criticism that tax avoidance was previously granted with ease.
According to Luxembourg, all of those changes should combine to end criticism that it is a tax haven.
Critics of Luxembourg’s taxation policies remain. The Tax Justice Network, for example, argues that even with these changes, Luxembourg is not even close to compliance regarding tax avoidance rules. The same Tax Justice Network has completed extensive research, including some that found that European Union countries lose over $12 billion annually from corporate tax revenues from United-States-based businesses due to Luxembourg allowing those corporations to shift their profits. Luxembourg is still number six on the Tax Haven Index from the Tax Justice Network.
Economists like Kimberly Clausing from Reed College with a specialty in global taxation and profit shifting, say that the data does not show any sharp downward movement in Luxembourg’s tax haven role when looking at US multinational companies.
Critics also point to the 2019 IMF report that indicated that Luxembourg hosts $4 trillion of direct foreign investment, a full tenth of the world’s total. To put this in perspective, despite having only 626,000 people, Luxembourg has the same share of foreign direct investment as the United States and has more than China does.
Even with the changes it has made in recent years, Luxembourg will likely continue to be at the center of many debates regarding tax havens, including which jurisdictions should consider them and if action should be taken against them.
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