Stripping Neighbors of Money Pressure Mounts for EU Crackdown on Tax Havens
Corporations pay low taxes in Luxembourg. As prime minister, Jean-Claude Juncker carried partial blame for this policy. Politicians in Brussels have maneuvered to save him from the scandal, but the case has cast light on Europe's tax-dumping problem.
Jean-Claude Juncker peers to the right. It's where the hope lays, Juncker's hope that he will get through this crisis in one piece. In this instance, hope has a name as well: Frans Timmermans, the Dutch first vice-president of the European Commission.
Last Wednesday, the two held a joint press conference in Brussels. Juncker wanted to explain himself following the Luxembourg Leaks exposé by an international consortium of investigative journalists nearly two weeks ago detailing mass tax avoidance schemes in Luxembourg, where Juncker served as prime minister for 24 years, many of them as finance minister as well, and played a role in steering the country's fiscal policies. The reports raised new questions about Luxembourg's tax loopholes, which are used to attract multinational corporations, but also about whether Juncker is the right man for Europe's top job.
Juncker began the press conference by talking about himself. Then he looked to the right and started speaking about Timmermans and casually mentioned a European Commission investigation into dodgy tax practices in the Netherlands, where the commission is conducting a probe into whether the Dutch authorities cut a sweetheart deal with US coffee store chain Starbucks. Timmermans had previously served as the Netherlands' foreign minister.
It was a way of deflecting attention from allegations cast at Juncker himself and releasing some of the pressure by placing a bit of it on the shoulders of others. It's not a very nice thing to do, but it is pretty common tactic among leaders of countries that offer tax avoidance measures. The message they like to convey is: "We're not the only ones doing this, so don't get so worked up." This still seems to be Juncker's modus operandi as well.
Whether he is still fit to serve as the commission president is a question that could be heard in European capital cities last week and one that is likely to linger for some time to come.
In Luxembourg, corporate income taxes are as low as 1 percent for some companies. An average worker in Germany with a salary of 40,000 ($50,000) who doesn't joint file with a spouse has to pay about 8,940 in taxes each year. At the Luxembourg rate, the worker would only have to pay 400. But some companies have even managed to finagle a tax rate of 0.1 percent, which would amount to a paltry 40 for the average German worker. As delightful as those figures may sound, normal workers will never have access to those kinds of tax discounts.
Anything But Fair
That's why it came across as obscene to many when Juncker defended Luxembourg's tax arrangements on Wednesday as "legal". They may be legal, but they are anything but fair. It also strengthens an impression that gained currency during the financial crisis -- that capitalism favors banks and companies, not normal people, and that these institutions profit even more than previously known from tax loopholes.
But the Juncker case also sheds light on the two faces of European politics. Top Brussels politicians are recruited from the individual EU member states and, as such, have long representated their countries' national interests. Then they move to Brussels, where they are expected to advocate for the European Union. At times like this, though, when dealings in Brussels are becoming increasingly politicized, the idea that these politicians are promoting the EU's interests as a bloc loses credibility. And Juncker, the very man who had a hand in stripping Luxembourg's neighbors of tax money, is supposed to be the main face representing the EU. It's also very problematic that he, as the man who led a country that was one of the worst perpetrators of these tax practices, is now supposed to see to it that these schemes are investigated and curbed in the future.
Its unlikely Juncker will be forced to step down. The center-left and the conservatives working together in the European Parliament combined with a fair amount of backroom maneuvering enabled Juncker to keep his job last week.
Juncker's response to the disclosures began the week before last when he retreated home to Luxembourg. His advisors on the European Commission had suggested he should step out of the limelight for a while. Juncker did, but he didn't find much peace and quiet there.
He got one call from Martin Schulz, the president of the European Parliament and a Social Democrat, and another from Manfred Weber, the chairman of the parliamentary group of the conservative European People's Party (EPP), which also represents Juncker's Christian Democrats. Juncker seemed caught off guard by the impact of the criticism. "Everyone was aware of this," he said. His callers then reminded him that he had defined the European Commission he was to lead as a kind of "European Government." They then called on him to address the criticism -- a step Juncker wasn't initially prepared to make.
Unfit To Serve?
The pressure began to mount a week ago Monday. The leftist GUE/NGL parliamentary group started gathering signatures for a "motion of censure," or no confidence vote, against Juncker. "A person who is responsible for and defends aggressive tax evasion policies, which stands in stark contradiction to the aims of the Council and Commission, has no place at the highest level of EU leadership," it reads. The group "therefore considers Mr. Juncker unfit to serve as president of the European Commission."
On Tuesday night, Juncker, Schulz, Weber, Gianni Pitella, the head of the Social Democrats' group in parliament, and Frans Timmermans met at 8 p.m. at the restaurant Stirwen in Brussels. The politicians are all members of the new "coalition committee," the informal power center of the current majority held by the center-left and the conservatives in European Parliament and in the Commission's leadership. They developed a plan of attack and persuaded Juncker to go on the offensive in defending himself. First he would meet with fellow members of the Commission, then he would talk to the press before later addressing the European Parliament.
His colleagues on the Commission advised him to speak more candidly about his role in tax policy as prime minister of Luxembourg. They argued he could say that everything had happened in accordance with EU law. They also expressed their belief people would understand that he had simply been representing his country's interests as its leader.
But Juncker didn't take that advice when he appeared before journalists around lunchtime on Wednesday. As EU Commission president, he claimed, he could not talk about his time as prime minister of Luxembourg. Juncker argued vaguely that tax rates for corporations were in some cases very low because of the "interaction between divergent national" laws. He then cast his gaze toward Timmermans again.
'A Shadow Hanging over the Commission'
In European Parliament, Guy Verhofstadt, the head of the business-friendly liberal ALDE group, later spoke of a "shadow hanging over the Commission." "We already have one lame duck in Washington," he said in reference to US President Barack Obama. "It's not necessary to make a lame duck here."
So far, the leftists haven't gotten 10 percent support necessary for a parliamentary vote of no confidence, the minimum amount that would be needed to force a debate on the issue in parliament. Indeed, Juncker is being shored up by the broad conservative and Social Democratic majority in parliament as well as the backroom wheelings and dealings of leaders in parliament and the heads of the European Commission. With a dearth of strong opposition in parliament, the current majority can get away with quite a bit it seems.
Nonetheless, there has been some movement on the issue of taxes. "The question of fair taxation isn't just an issue for Luxembourg -- it is pan-European," says EPP party group head Weber. "Just take the example of the new discussion about the EU state aid investigation in the Netherlands. The member states need to get off their soap boxes and finally take action against unfair tax savings. There needs to be more transparency in particular. The ball is in the court of the European Council (the body that represents the leaders and ministers of the 28 member states). We will be following closely what the finance ministers deliver."
Not everyone is pleased by developments. Take Christian Rollmann, a man whose anger is growing. The Luxembourg citizen believes a financial war is brewing. When he reads the news these days he says he can feel the anger in his stomach. The target of his rage is not Juncker and the tax policies -- it's the foreign media and politicians, especially in Germany, whom he accuses of trying to sully Luxembourg's reputation with what he calls "financial war propaganda."
Rollmann, 54, worked for 13 years for Luxembourg's tax administration, with 10 of those spent in Sociétés 6, the unit permitted to reach deals on behalf of the treasury with multinational companies. Today Rollmann works as a lawyer. He sees the whole debate as being a question of honor -- including his own.
Rollmann says he spent his time at the tax authority "reading and calculating" agreements that his department reached with tax lawyers at companies like Amazon, IKEA and Fiat. Rollmann claims the office acted strictly legally. "Our tax law is exactly the same as Germany's, did you know that?" he asks. His voice grows more indignant with each word. "Did you know that we were forced to adopt German tax law in 1944? It is still in effect today."
Still, Rollmann claims, every law must be interpreted at the discretion of officials, "according to fairness and expedience."
When companies inquired in Luxembourg how they would be taxed in the country for the billions of revenues they generated in Germany or Spain, for example, officials would answer that these sums were considered to be "capital contributions" and that the tax rate for these would be much lower than for income. "That's in line with common sense," Rollmann says.
He says that his division didn't agree on special tax rates with companies. Instead, he says, in individual instances the assessment basis was pruned in order to reach an attractive result. The lawyer claims it was all legal. And yet his apparent need to point out that, "I never signed an assessment myself," also seems important.
Rollmann claims that German tax authorities could have stopped these practices at any time within their territory. "But there was no political will to do so." He alleges that other countries now want to destroy Luxembourg in order to get access to the coffers themselves. "But I can only warn them: The whole traveling circus (of multinationals) won't be moving to Germany -- it will go to Hong Kong or Dubai."
Rollmann says he never encountered Juncker in the hallways of the tax authority. "You don't really believe that the man had time to look after companies' fiscal and economic details do you?" When asked how much responsibility Juncker had for the whole tax system, he says: "He greatly helped Luxembourg and he is now suffering a great deal of anxiety as a result. I don't want to say anything else about it."
That's the mentality in Luxembourg, with its unique tax system, one which Juncker had both a part in and also oversaw as its leader. In 1989 he became finance minister and then served as prime minister from 1995 to 2013.
- Part 1: Pressure Mounts for EU Crackdown on Tax Havens
- Part 2: The 'Dutch Sandwich' and other Tax Treats