11/10/2014 05:34 PM

Mr. Europe?

The Ghosts of Juncker's Past Come Back to Haunt Him

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He only recently took office as European Commission president, but now, Jean-Claude Juncker is under pressure due to potentially illegal tax deals forged in Luxembourg during his stint as the country's prime minister. Some believe he may have to resign.

Jean-Claude Juncker's first public appearance as the new European Commission president was a symbolic one. Early this month, he traveled to Frankfurt to present former German Chancellor Helmut Kohl's new book in the luxury hotel Villa Kennedy. Called "Aus Sorge um Europa" -- "Out of Concern for Europe" -- the book warns that the pursuit of national interests represents a danger to the European ideal. And Juncker is quick to endorse Kohl, a man he calls "a friend and role model."

"Kohl is right in deploring the fact that we are increasingly sliding down the slope toward reflexive regionalism and nationalism," Juncker said.

It is certainly not the first time Juncker has uttered such a sentence. Indeed, his delivery of the message has often been even more direct. "I've had it," he erupted during an EU summit in December of 2012, for example. "Eighty percent of the time, only national interests are being presented. We can't go on like this!"

Such sentiments have served Juncker well throughout his career and have helped transform the politician from tiny Luxembourg into a well-known defender of Europe. Now, though, at the apex of his European career, Juncker and his beloved European Union are facing a significant problem. And it is one that has led even advisors close to Juncker to wonder whether he may soon have to step down from his new position, despite having taken office only recently.

Last week, several media outlets, including the Munich-based Süddeutsche Zeitung, published the most detailed accounts yet of the tricks used -- and the eagerness brought to bear -- by Luxembourg officials to help companies avoid paying taxes. The strategies were often developed together with company leaders and served to entice multinationals to set up shop in Luxembourg. The tiny country on Germany's western border, for its part, benefited from tax revenues it wouldn't otherwise have seen. It was, in short, a reciprocal relationship.

But it was also a relationship that was disadvantageous for Luxembourg's EU partners -- and for European cooperation itself. Many of the companies that set up shop in Luxembourg, after all, no longer paid taxes in their home countries where they produced or sold the lion's share of their products.´

'Artistically Expand'

Jean-Claude Juncker served for 19 years as prime minister of Luxembourg, and his country's tax system was very much one of those "national interests" that he so often complained about. Still, his reputation as "Mr. Euro" did not suffer as a result.

The revelations, to be sure, are nothing new. Indeed, as a German minister said on the sidelines of one of last week's many events scheduled to commemorate the 25th anniversary of the fall of the Berlin Wall: "Everybody knew about it." The minister added that the Luxembourgian tax schemes were consistent with the legal framework, even if they managed to "artistically expand" that framework. "What is the big news?"

That, though, is perhaps the wrong question. The correct one is: Should a politician representing his country's national interests be held to different standards than the European Commission president charged with upholding EU treaties? The answer is clearly "yes". And therein lies the political problem that is currently facing Jean-Claude Juncker.

As the head of his country's government, Juncker -- who concurrently served as finance minister for several years -- helped develop Luxembourg into a tax paradise and blocked outside attempts to investigate its tax system. In 2004, after the Social Democrats joined Juncker as a coalition partner, the government agreed to establish a working group to compare the Luxembourgian tax code with international standards. But the working group never actually came to fruition.

Even back in 1997, Juncker displayed certain alacrity when it came to defending his country's tax laws. At the time, he held the rotating presidency of the European Council as Luxembourg's prime minister. Under his stewardship, the EU passed a Code of Conduct for business taxation rules aimed at "tackling harmful tax competition in the European Union." The code, though, is not legally binding -- a fact for which Juncker is also largely responsible. The European Commission may only penalize country's tax system if the savings it offers to companies are determined to be forbidden state subsidies and thus contrary to EU free trade rules.

Laughably Small Sum

The European Commission's competition authorities, it soon became clear, would receive no help from Juncker when they began investigating his country's complicated tax code. It was only after December 2013, when Juncker was voted out of office at home, that Competition Commissioner Joaquín Almunia received information pertaining to a total of 22 questionable tax deals.

Thus far, the Commission is reasonably certain that it can prove Luxembourg granted impermissible state aid in two cases and has opened investigations into both the Luxembourg branch of Amazon and into the automobile multi Fiat Chrysler. Both companies, officials believe, received precise pledges regarding the future tax burdens faced by their Luxembourg-based operations.

In a 30-page letter to the Luxembourg government, Almunia laid out the Commission's suspicions for why Fiat has spent years channeling financial transactions through Luxembourg. The country's tax authorities allegedly accepted a tax savings model developed for Fiat Finance and Trade Ltd. by the financial auditing firm KPMG. Fiat Finance and Trade lends money to other companies within the Fiat group and has a small office on Boulevard Royal not far from the Luxembourg government quarter. The Commission believes that, on Sept. 3, 2012, Fiat Finance and Trade received confirmation of a tax deal that was to run from 2012 to 2016. The result was that Fiat knew precisely how large its tax bill would be each year. According to Commission calculations, Fiat Finance and Trade was assigned annual taxable income of between €2.3 billion and €2.8 billion, regardless of the company's economic performance. The resulting tax bill on such income translates to the laughably small sum of €732,000.

Almunia's verdict in the letter is harsh. Luxembourg finance officials ignored the company's "economic reality," the document reads, and notes that the deal with Fiat Finance and Trade is not based on "financial logic." The measures had the effect of "lowering the tax burden of the undertakings concerned as compared to undertakings in a similar legal and factual situation," the letter reads. In other words, Luxembourg granted Fiat an unfair competitive advantage. Fiat Finance and Trade is contesting the allegation.

Margrethe Verstager from Denmark has taken over from Almunia as Competition Commissioner and is likely to continue on the course charted by her predecessor. And there are several other possible investigations looming -- such as tax deals initiated by auditing giant PricewaterhouseCoopers for clients such as German energy utility E.on, Deutsche Bank and the US food conglomerate Heinz. Could such deals have been made without Juncker's involvement or approval? It is a question that will dog him for as long as the investigations are underway.

Low Profile

Juncker is not known for being particularly good at handling such situations. During the European election campaign in March, he joined EU Parliament President Martin Schulz for a joint SPIEGEL interview and reacted peevishly when his center-left interlocutor suggested that Luxembourg had become a tax haven under his leadership. "The allegation … that I actively promoted tax evasion is an outrageous attack on my country and my person. I will not accept that," he snapped. There were other incidents on the campaign trail as well, including a lack of overt support from German conservatives and some personal attacks perpetrated by the British press -- to the point that a rumor began making the rounds that Juncker had wanted to withdraw his candidacy but was talked out of it by friends.

Following last week's reports, his first reaction was to keep a low profile, cancelling a planned podium discussion at the last minute. Chief Commission Spokesperson Margaritis Schinas insisted that Juncker was "very serene" about the revelations.

Few have jumped to his defense. "The revelations are a blow that will hit Luxembourg's reputation hard," said the country's foreign minister, Jean Asselborn, who served as Juncker's deputy prime minister. He promised that the new government would make his country's tax code more transparent and noted that the country had already lifted its opposition to EU financial data sharing rules. "Luxembourg cannot become a place that welcomes companies that don't want to pay taxes," Asselborn says. "We will no longer be a part of such tricks."

The revelations have been met with concern in European Parliament, with President Schulz calling for more information. The United Left group in parliament has demanded that Juncker appear before the lawmaking body this week and plans to instigate a vote of confidence against him. Such a vote must be held if supported by 10 percent of parliamentarians.

Euro Crisis

"Someone who ensured the existence of large-scale tax dodging and the creation of an unjust system within the EU cannot lead the European Commission," says Gabi Zimmer, chair of the United Left group. Liberals, the majority of whom voted for Juncker when he was confirmed by European Parliament, have also distanced themselves. "When it comes to Jean-Claude Juncker and the EU battle against tax dodging, it would seem that the fox has been enlisted to guard the henhouse," says Alexander Graf Lambsdorff, a Liberal parliamentarian.

Thus far, it seems unlikely that Juncker will lose his position, but that could change. Were it proven that Luxembourg provided illegal state aid to the companies in question, he would stand exposed for having spent years breaking EU law. "Then, it would get tight," says a political colleague, echoing the sentiments of others. "He would hardly be able to endure." EU lawyers are already researching the question as to whether the resignation of a Commission president would force the other 27 commissioners to forfeit their portfolios as well.

Many are now wondering if Juncker will be able to withstand this kind of pressure for the several months the investigations will take. Some political allies and party colleagues doubt that he can.

Still, he is likely anxious to avoid an overly hasty response, if only out of concern that his resignation could trigger a leadership crisis in Brussels -- particularly at a time when the euro crisis seems to be once again rearing its ugly head. Juncker's widely praised renewal of the European Commission could also be derailed. That renewal was instigated on the basis of years of service as prime minister of an EU country. Now though, it is exactly that experience that could prove his downfall.


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