Juncker and the Luxembourg Tax Scandal

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.