Last week it came to light that there were serious tax
avoidance practices in Luxembourg that allowed companies to funnel profits
through the Grand Duchy in order to avoid paying tax in the countries the
profits were generated. After avoiding
commenting on the scandal for a week the “cool” Commission President
Jean-Claude Juncker has denied that he was involved in anything illegal in
Luxembourg, and says that everything was done in “compliance with national
legislation and international rules that apply in this matter”.
The new Commission President was prime minister of
Luxembourg for 19 years (as well as finance minister for most of that time), so
the denial is hardly going to silence his critics. Juncker himself said that he
was politically responsible for what happened throughout Luxembourg during his
time in office. In an extraordinary debate on tax avoidance in the European
Parliament, Juncker admitted that “there probably was a certain amount of tax
avoidance in Luxembourg, as in other EU countries. We find this everywhere in
Europe because there is insufficient tax harmonisation in Europe”.
The International Consortium of Investigative Journalists is
releasing 548 “comfort letters” (effectively private tax rulings that clarify
for specific companies on how their corporate tax will be calculated) between
2002 and 2010 which Luxembourg provided to corporations for favourable tax
treatment. The investigation that Juncker’s own Competition Commissioner
Vestager will be looking into is whether or not Luxembourg’s support for these
corporations through the tax system amounts to illegal state aid (earlier in
October the previous Commission launched an investigation into the taxation of
Amazon in Luxembourg). In the case of the FedEx Corp, the ICIJ found that Luxembourg
agreed to tax only 0.25% of FedEx’s non-dividend income that flowed through the
country through its tax arrangements.
There are two aspects to this: whether comfort letters for specific
companies constitute illegal state aid (and the extent to which Luxembourg was
using these), and the extent to which there is legal tax avoidance through tax
competition. Europe has gone through years of austerity and it is politically
poisonous to have tax avoidance at such levels where companies are only paying
0.25% corporation tax through certain Luxembourgish tax arrangements. If
illegal state aid is found, then it will dramatically increase the pressure on
Juncker. If no illegal state aid is
found then there could still be significant political damage – “how could such
practices be allowed to continue?” would be the question in most Europeans’
minds.
In the European Parliament Guy Verhofstadt, leader of the
Liberals, proposed setting up a special investigative committee into tax
evasion by the Parliament, saying “This is also a clear case where we need more
Europe – to set up common tax compliance legislation and a convergence code not
general harmonisation, because we don't know at what level to harmonise.” Such
an investigation would require the backing of the Economic and Monetary Affairs
committee and would probably look into the various ways companies limit their
tax bills. Juncker wouldn’t have any say in such an investigation as it would be
purely run by the Parliament.
This scandal is so toxic because it has a highly political
idea of tax fairness at the heart of it. Juncker will probably be able to hang
on in office if there are no or only limited infringements on state aid rules,
but the first political Commission would be politically stunned if it could not
properly address the tax avoidance issue. The Commission President has already
stated that Commissioner Moscovici will “initiate proposals for an automatic
exchange of information regarding national tax rulings”, but Junker, and the Commission,
needs to go further.
Tax is a sensitive issue, and it would be difficult to bring Member States along with even mild proposals on tax systems, but Juncker needs to display political initiative by pushing forward on tax transparency and by articulating a position on corporate taxation in the EU. Juncker's political Commission could very easily be undone by politics and his own record as Luxembourg's premier - if he's to survive, Juncker has to show that his Commission can take a political lead that will address citizens' concerns on tax fairness.
