Internal European Union documents seen by SPIEGEL clearly show how Luxembourg's government, under the leadership of Jean-Claude Juncker, sought to use tax breaks to attract companies to the country. European parliamentarians want to know more.
Jean-Claude Juncker has never suffered from a lack of self-confidence. Shortly before the world's 20 largest industrial countries meet for a G-20 summit in Antalya, Turkey, the head of the European Commission was already handing out praise -- to himself. The European Union has "shown leadership," Juncker wrote to participants, and now it is up to them to follow Europe's example when it comes to the issue of "harmful tax competition."
This, written by Juncker of all people, the very man who led Luxembourg for years, transforming it into an international tax haven, who is now presenting himself as spearheading the effort to put a stop to the tax tricksters sitting on the executive levels of multinational conglomerates.
But hardly a day passes in which the president of the European Commission, the EU's executive branch, isn't dogged by his past as prime minister of the business-friendly Grand Duchy. Before the end of this month, the European Parliament is seeking to approve the language of a report that will denounce all the dodgy arrangements Luxembourg's tax authority has made over the years with multinationals like Amazon and Fiat -- deals that served to push their corporate taxes down to almost nothing.
The closing report of parliament's Special Committee on Tax Rulings, however, is not expected to assign political blame in what has been dubbed the LuxLeaks affair. The reason behind this is that in addition to the European Council, the powerful body that includes the leaders of EU member states, Juncker's Commission has also repeatedly refused to provide members of parliament with access to important files, including the transcripts of confidential meetings of experts from the finance ministries of the 28 member states, who routinely investigated the EU taxation rules for large corporations.
SPIEGEL journalists were able to view several hundred pages of these and other documents from the European Council's Code of Conduct Group (Business Taxation) and the European Council's Working Group on Tax Questions. They demonstrate just how greatly words and actions diverge when it comes to European tax policies -- especially in relation to the long-time Luxembourg leader, who has also been a key figure in European financial policies for years.
Tax Privileges Paramount
In speeches and interviews, Juncker has always claimed that Luxembourg has in no way enriched itself "at the expense of its neighboring countries," and especially not by encouraging tax avoidance. In everyday political life, however, Juncker's people fought for precisely the kinds of corporate advantages their boss used such rich language to denounce.
In order to attract as much corporate money as possible into the country, his officials played around with tax models like "hybrid financial instruments" and, especially, so-called "patent boxes." Introduced in order to spur technological advancement, finance policy experts in Belgium, the Netherlands and Luxembourg led the pack in transforming tax advantages into an instrument allowing corporations to steer proceeds from patents or licenses to their Benelux subsidiaries in order to pay lower taxes there. Under the system, national subsidiaries of large corporations in countries with higher corporate tax rates would pay large patent and licensing fees to subsidiaries in lower tax countries. The system ensured that money got pumped into the government coffers of the Benelux countries, but it also put other EU countries at a disadvantage, in addition to the majority of small- and middle-sized businesses for whom such preferential treatment wouldn't even be considered.
Representatives of the other EU member states knew very well what was going on. The German representative in the Working Group on Tax Questions, for example, filed a cable to Berlin in March 2013 in which he noted there had been repeated "doubts about the harmlessness" of a few of the tax models, "mostly having to do with the license box rules of LUX and NDL," the abbreviations being references to Luxembourg and the Netherlands.
But nothing was done about it for years. Each time the Working Group on Tax Questions proposed changes, Luxembourg, Belgium and the Netherlands warded them off successfully. It's no wonder, either, given that representatives of the Benelux countries regularly coordinated their decisions in advance at their own meetings.
Stonewalling and other Tactics
Working in close collaboration, Luxembourg and the Netherlands refused to reveal information about tax rulings for major corporations as far back as 2010, four years prior to the LuxLeaks scandal.
The new revelations are highly sensitive. It's not just European Commission President Juncker whose past as the leader of the tax-haven Luxembourg is catching up to him. Another important man at the top of an EU institution also now has some uncomfortable questions to answer: Dutch Finance Minister Jeroen Dijsselbloem. Even after ascending to his current position as head of the Euro Group, his country continued to block every call for change.
Sven Giegold, 45, has spent years trying to shed light on the darkness of EU corporate taxation arrangements. A member of the European Parliament with the Green Party, he's used to resistance. But what he experienced when he requested access to meeting transcripts from the secretive tax groups was an altogether new experience.
First, the European Council stonewalled and then the European Commission delivered documents in which important sections had been redacted. Despite all the blacked out passages, Giegold was forbidden from bringing his mobile phone into the room in one of the Commission's buildings in Brussels where he was allowed to view a few of the documents. Officials allowed him to take notes using a pencil and paper, but they didn't let him take his notes with him when he left the building.
The documents seen by SPIEGEL reveal that what EU agencies have long been denying, is in fact mass-scale cheating with the help of the tax law. Internal EU documents show how companies took advantage of patent boxes to simply sign their licenses, copyrights, patents or marketing rights over to their subsidiaries in Luxembourg or The Hague, allowing them to cash in on sweetheart corporate tax deals in those countries. It didn't matter whether the research had actually taken place in those nations, either.
Almost Zero Taxes
The consequence: Even for profits in the billions, the tax bill was close to zero, as a list compiled by EU experts shows. In Belgium, which introduced the patent box in 2007, the corporate tax rate plunged from 33.99 percent to 6.80 percent. In Luxembourg, it sank from 29.22 percent to 5.84 percent.
Another consequence was that the patent box trick encouraged companies to cycle profits earned in other countries through Luxembourg or the Netherlands, a development that did not escape the notice of the working group. "Whereas low tax rates seem to influence the location of patents," a Commission paper notes, there is no proof that they influence "the location of research and development activities."
But that realization was never acted upon. Although most representatives from Germany, France, Italy, Austria and Portugal were critical of the patent box model, Luxembourg had little to worry about. Although the body reached the conclusion that Luxembourg's tax regime is "potentially damaging" for its neighbors, the Benelux countries were easily able to block a related resolution. "NDL, LUX and BEL (Belgium) all decisively argued against a further discussion of this area," the frustrated German group member cabled to Berlin after the April 2012 meeting. "We were unable to reach agreement."
When it comes to EU tax issues, not much can be done without consensus, a reality that also applies to the Code of Conduct Group. The group has been meeting four to six times a year since 1998 and for at least the last half decade, no issue has been as controversially discussed as that of the patent box. But nothing has been done. In the EU, tax-code compliance is treated not unlike age-limits for movies: It is largely voluntary.
That was the situation back in March 2013 when tax experts met to discuss possible future guidelines to address problematic tax practices. "A taxation provision can be harmful," read a statement prepared prior to the meeting, "if its intention is not that of serving the economic targets of a member state, for example that of stimulating the economy or innovation." It is really quite a banal sentence: Tax rebates only make sense when the country offering them benefits as well.
But the Benelux countries immediately understood that the sentence took direct aim at their patent box and, as usual, they joined forces in an effort to have it removed. It would be best, they demanded, were the Code of Conduct Group to no longer focus on harmful practices that had already been implemented. "BEL, NDL, LUX demanded that certain, not-yet-evaluated, potentially harmful regimes could only be evaluated by way of a formal revision," the German group member reported to Berlin. That is akin to allowing criminals to decide when their crimes fall under the statute of limitations.
The timing of the meeting was sensitive for another reason: In March 2013, Dijsselbloem was no longer simply finance minister of the Netherlands. By then, he had already been named head of the Euro Group, the body of EU finance ministers that coordinates finance and tax policy with the common currency member states. It is the Euro Group that helps make important decisions on aid packages for Greece and other euro-zone member states.
But when it comes to the patent box, the Netherlands was not first and foremost concerned about the integrity of the common currency union. Rather, the country's own national interests were in the foreground. That can be seen in the Dutch response to a compromise proposal put forward by Germany and the United Kingdom. Even though the compromise plan was approved by tax experts from the OECD, the Netherlands entered a "reservation of political nature." The rest of the group resolved that changes to the existing patent box guidelines "must be introduced by the middle of 2015."
So far, though, almost nothing has happened. And Luxembourg has continued its efforts to block any changes. After experts from all member states, following years of debate, finally managed to arrive at a cautiously critical appraisal of the tax-rebate model, "LUX requested a written evaluation from the Council's legal services," a German EU diplomat wrote in June 2014. The move was clearly a stalling tactic.
The situation hasn't changed for years. But Commission President Juncker acts as though the obstruction efforts of his countrymen in European decision-making bodies have nothing to do with him. On the contrary: The conservative politician soberly proclaims his country's innocence. "I did not create a system of tax evasion in Luxembourg that harms other European countries," he said recently during a sitting of the European Parliament committee investigating Luxembourg tax practices. "There is no Juncker System."
Yet it's strange that the Commission president strikes a significantly different tone when he praises the success of his tax policies back home, as he did in a speech to Luxembourg parliament back in October 2005. The fact that Luxembourg was able to attract large companies like AOL, and Amazon to the country was not least, he said, thanks to the "advantageous tax environment" that "we have built up here in Luxembourg over the years and decades."
One year prior, he clearly said in an interview that such successes did not simply "fall into our laps," but were the result of hard work. "AOL -- that was the result of more than 200 hours of negotiations," Juncker noted. In response to a critical observation that AOL only brings in tax revenue but no jobs, he responded: "One percent of the gross national product in the form of taxes. I'll take that, even without jobs."
Juncker's partners -- those from the business world, not other EU governments -- were similarly effusive. The otherwise sober consultants from Ernst & Young, for example, enthusiastically recommended the Luxembourg model to investors from Russia and the United States. The country has "accessible officials," they praised, and a "government team involved in (a) close relationship with companies."
Behaving Like a 'Business Partner'
To be sure, there is no proof thus far that Juncker himself promised tax relief to individual companies. He told the European Parliament committee that he had never personally met with consulting firms.
That may be true. But the former head of tax issues for Amazon testified last December that Juncker, in personal meetings between the two, had offered to assist the online retailer in setting up a tax home in Luxembourg. He said that the Luxembourg government had behaved as a "business partner."
Juncker's credibility has been shaken, partly because the accusations aren't just about tax law. They also call into question the image that Juncker has for years been portraying of himself, that of the model European. Now, he stands accused of being the architect of a business model that is based on the extremely un-European principle of steering tax flows away from neighboring countries into Luxembourg's coffers. As Commission president, he demands EU solidarity almost daily when it comes to the refugee crisis. But how credible can he be after years of promoting policies that can accurately be described by the term "tax dumping?"
"The question regarding responsibility must be reexamined," says Green Party politician Giegold. "The European Parliament special committee must continue its investigations." The committee is currently scheduled to wrap up its work at the end of November, in accordance with the wishes of powerful Juncker allies, such as Manfred Weber, head of the conservative European People's Party group in European Parliament, and Parliament President Martin Schulz, a Social Democrat. Now, though, pressure to continue the investigation is growing.
In Luxembourg, meanwhile, Juncker's successors are doing what they can to absolve the country of its image as a tax paradise. Recently, Luxembourg's government opened a large university campus in the capital to finally enable companies to do that which they have long claimed to be doing: perform research.
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