Breaking up?

Thinking the unthinkable . . .

Is Europe facing a crisis of identity? The European Union envisioned in the Maastricht Treaty of 1992 is no longer any kind of default position for the populations of Europe, especially as it has expanded eastwards since then, to the borders of the now defunct Soviet Union.

While the politics at the heart of the EU is adamantly "international", there is a reluctance to tackle political issues that are related to the systemic contradiction between international cooperation versus international competition in the capitalist dominated, and bogus, "free market". The failure of the EU to tackle multinational companies avoidance of paying appropriate taxes on their activities in Europe, following failed attempts in 2016 when regulators sought to close loopholes laid bare by the LuxLeaks scandal, will amplify pressures on EU states to work the system to gain competitive advantage.

EU principles of the balance between freedom of movement and the freedom of the movement of capital in the "free market" are also under pressure, as right wing nationalist movements exploit people's understandable fears regarding the impact of immigration upon employment prospects. These fears are being stoked up for ulterior purposes, but they are not unreasonable fears in a world of globalisation and socially irresponsible capital movement related to investment opportunities. Capitalism wants, and will find cheap labour where it can, and at the same time avoid taxation, with connivance of a two-faced political class, as with the LuxLeaks scandal.

Jim Brunsden in Brussels reporting for the Financial Times June 23 2017:

Jean-Claude Juncker was a man under pressure when he appeared before the European Parliament’s tax investigation committee in September 2015.

The European Commission president and former Luxembourg prime minister was under tremendous scrutiny due to the LuxLeaks scandal, which centred on revelations that hundreds of multinational companies with offices in the grand duchy had constructed complex strategies to reduce their tax bills to near zero.

Having fended off calls to resign when the scandal erupted in 2014, the veteran politician sought during the parliament hearing to deflect the blame from Luxembourg’s politicians, including himself. Instead, he emphasised the independence of the country’s tax authorities from political interference and the international nature of the problem.

In the packed committee room, Mr Juncker told MEPs that when people talk about LuxLeaks “really what they are talking about is a kind of common practice in many member states”, adding: “In fact, that is why I’d rather say EULeaks than LuxLeaks.”

Nearly three years on from the LuxLeaks revelations, scrutiny from the public and politicians of corporate tax deals remains intense. The response from Luxembourg and the EU has had a profound impact on the decisions companies make when deciding where to base international operations.

Scandal breaks

Antoine Deltour, a whistleblower and former PwC employee, received a six-month suspended sentence and $1,500 fine

The LuxLeaks scandal broke in November 2014 when the International Consortium of Investigative Journalists published thousands of pages of documents, many of them leaked by Antoine Deltour, a whistleblower and former employee of PwC.

The documents revealed details about how more than 300 companies with operations in Luxembourg had cut their tax bills by moving profits around different parts of the corporate group and playing national tax systems off against one another.

The companies had worked with big accounting firms and secured rulings from the Luxembourg tax agency that such arrangements did not flout national laws. Those involved included household names such as Ikea, Pepsi and Fiat.

One tactic revealed in the scandal was companies arranging loans between different subsidiaries within the same group at high interest rates. The result was that profitmaking businesses in high tax countries had to pay back loans to entities in lower-tax countries, effectively transferring profits from where they would have been taxed most.

Multinationals also routed investments through “brass-plate” companies in Luxembourg, which had very little presence in the country other than a registered legal address. This was done to take advantage of the grand duchy’s favourable treaties with other countries, allowing the companies to avoid certain taxes in other jurisdictions they had invested in.

The scandal brought public attention to these practices, known as “base erosion” and “profit shifting”, and put pressure on politicians to tackle them.

Mr Deltour says the problem with the practices is not so much legal as moral. “The big issue is not whether or not Luxembourg respected EU law,” he says. “The main issue is that the European single market allows member states to compete with their tax systems. In the end if you still allow that then it leads to a race to the bottom.” Within Luxembourg, he adds, “no one really took responsibility for this, for the scandal and for all the practices.”

Mr Deltour along with Raphael Halet, another former PwC employee, and Edouard Perrin, a French journalist, were prosecuted for their roles in exposing documents.

Mr Deltour received a six-month suspended sentence and a €1,500 fine on appeal in March, while Mr Halet was fined €1,000 and Mr Perrin was acquitted.

Since the LuxLeak scandal broke, Luxembourg’s politicians and senior financial services figures have argued that the problems exposed were down to international rather than national failings. They say the government has worked with other countries to improve information-sharing among national tax authorities and fix the divergences between tax codes that made it possible for companies to hide their profits from tax collectors.

Pierre Gramegna, Luxembourg’s finance minister, says he aims to create an international “level playing field”. “We need more transparency, and everyone has to play along,” he says. “Now the European Union is doing that and we are expecting others to follow.”

Pierre Gramegna, finance minister, says companies are more interested in Brexit than LuxLeaks

The grand duchy has insisted that, in the years when multinationals were making their tax deals, Luxembourg was not doing anything different from other EU countries. Its says its tax agency was simply providing clarifications to companies, on request, as to whether their arrangements were legal or not. The granting of these “tax rulings” is standard procedure in many countries.

But this explanation has been challenged in Brussels, where MEPs held their investigation into the scandal in 2015. The European Commission has picked through tax rulings in Luxembourg and elsewhere over concerns that companies enjoyed special treatment not available to competitors.

The affair has had wider implications. McDonald’s, the US fast-food chain, responded to the increased scrutiny of its affairs after LuxLeaks by announcing last year that it would move its non-US tax base out of the country. LuxLeaks has also reignited concerns about the country’s tax affairs that its current government, elected in 2013, had been working to dispel.

The LuxLeaks revelations emerged as the country was trying to move on from a different, and long running, dispute with its European partners about tax — one focused on banking secrecy.

For years, Luxembourg, Austria and Belgium had opted out of EU arrangements that meant national tax authorities shared data about the bank accounts Europeans set up in other EU countries. The intention of these arrangements was to make sure that people did not hide money abroad to avoid tax.

In exchange for being allowed to maintain their banking secrecy, the three countries had to levy a so-called “withholding tax” on foreign savings.

Banking secrecy had been one of the cornerstones of Luxembourg’s rapid development as a financial centre, which began in the 1960s when the grand duchy set about transforming an economy previously reliant on steel.

Luxembourg had argued that if it shared information it would hand the advantage to non-EU financial centres in Europe such as Liechtenstein and Switzerland. By the time current prime minister Xavier Bettel’s government took office in December 2013, the position had become untenable.

The aftermath of the 2008 financial crisis had galvanised international work to combat tax evasion. The nadir for Luxembourg came in November 2013 when the Organisation for Economic Cooperation and Development branded the country as non-compliant with international standards on tax transparency, and placed it on a blacklist of non-co-operative jurisdictions.

The country then set about reforming its tax laws, effectively bringing an end to banking secrecy. The strategy was endorsed by the OECD, which took the country off its blacklist in October 2015.

“When we took the decision in 2014 that we had to embrace transparency, we had no guarantee that our financial centre would not only survive but eventually do better,” Mr Gramegna says. “It wasn’t easy. Quite a few players at the financial centre of Luxembourg were telling us that we shouldn’t do it.”

He adds: “Because it was done at a time when the international environment was evolving, it had less impact on our financial centre than many had anticipated.”

Reputational risk

McDonald's has announced it will move its non-US tax base out of Luxembourg following the increased scrutiny of its tax affairs since LuxLeaks

LuxLeaks posed an entirely different, and reputationally more dangerous, problem, especially because of the role of Luxembourg’s tax authorities in signing off their rulings.

“In the first days of LuxLeaks it was presented in such a way that . . . rulings in Luxembourg were responsible for all the [tax] problems in the world,” Mr Gramegna says. “We managed to explain that it was a combination of factors that were at work, that rulings exist in 26 countries out of 28 in the EU, and that it is the combination of rulings of different countries — together with international tax conventions between countries — that could lead to companies paying very little or no taxes.”

Luxembourger politicians, including Mr Juncker, have insisted the country operates a strict division of responsibilities where politicians are never involved in granting tax rulings. That task falls to the Luxembourg tax agency known as Sociétés 6 which the government says is fully independent. But this has not prevented the country coming under intense international pressure.

Michael Theurer, a German MEP and co-author of the European Parliament’s reports into LuxLeaks, says that, while the scandal revealed an international problem, Luxembourg is a special case given the volume of tax rulings produced by Sociétés 6.

“We [had] big doubts whether the economic substance underlying these rulings was checked in a diligent manner,” he says. “We couldn’t prove a lack of diligence, but there was significant evidence if we looked at the cases and if we looked at the time they spent on checking each ruling.”

While the schemes helped reduce tax bills, they also led to companies carrying out business in Luxembourg and so bolstered the grand duchy’s finances, Mr Theurer says.

“We could see that for Luxembourg the result was net positive because the tax amount was increasing,” he adds. “Although the companies overall gained an advantage, Luxembourg was also increasing its tax take.”

Luxembourg also faced European Commission probes. Brussels ruled in October 2015 that a tax ruling given by Luxembourg to a subsidiary of carmaker Fiat in 2012 was a sweetheart deal that “unduly reduced the company’s tax burden by a total of between €20m and €30m”.

The Commission said Luxembourg had been too flexible in accepting the tax plans the Fiat subsidiary put on the table, allowing the company to use “an extremely complex and artificial methodology to calculate Fiat Finance and Trade’s taxable profits, which cannot be justified by economic reality”.

Since then, Margrethe Vestager, the European competition commissioner, has opened in-depth probes into Luxembourg tax rulings given to GDF Suez — the French utility company now known as Engie— and McDonald’s. The cases are based on concerns that the companies could have been given an unfair edge over competitors.

In McDonald’s case, Brussels says it is assessing whether the Luxembourg tax agency “selectively derogated” from the country’s tax law and from the terms of a tax treaty with the US, which handed the fast-food group an unfair advantage.

Luxembourg is not the only country Brussels has probed since the scandal began. Ms Vestager has challenged tax rulings handed down in the Netherlands and Ireland, and has ruled against an “excess profits” scheme in Belgium that she said unfairly benefited multinationals.

Luxembourg officials, politicians and finance professionals insist that the scandal and its aftershocks are not deterring businesses from setting up in the grand duchy. They argue that McDonald’s decision to relocate should be seen in the light of the steps taken by the OECD and EU to close the loopholes that companies exploited.

The new restrictions are forcing companies to reorganise their international operations — something they argue could lead to arrivals in Luxembourg as well as departures.

Mr Gramegna says that the scandal was “an important event, but it’s been digested”. In his meeting with companies, he says;

“everybody talks to me about Brexit not about LuxLeaks”.

Luxembourg reformed its tax laws in December, ushering in penalties for fraud and making “aggravated tax evasion” a criminal offence. The country has also reviewed the way its tax agency works.

But for David Wagner, an MP from Luxembourg’s opposition Left party, whatever the specific consequences of LuxLeaks on policy and legislation, repeated tax scandals are leading to a growing realisation that the country should diversify its economy.

“We should leave this monolithic economy based on the finance industry,” he says. “It’s a golden cage.”

  

Tony Barber writing for the Financial Times MARCH 2, 2017:

As an illustration of the EU’s doubts about its destiny, Jean-Claude Juncker’s white paper on Europe’s future fitted the bill nicely.
    
Unveiled on Wednesday, the European Commission president’s document contained no fewer than five scenarios for the EU’s evolution up to 2025: “carrying on”, “nothing but the single market”, “those who want more do more”, “doing less more efficiently” and “doing much more together”.
    
The white paper’s vagueness was understandable. With elections this year in the Netherlands, Bulgaria, France, Germany and the Czech Republic, few if any governments have an appetite for ambitious initiatives from Mr Juncker.
    
Still, governments appreciate that the world holds more risks for Europe than at any time since the cold war’s end in 1989-91. Foreign policy strategists in Berlin, Paris and other capitals are re-examining long-held assumptions about the inevitability of EU integration and the permanence of the US-European security alliance.
    
A “multi-speed EU”, encouraging some countries to integrate more closely than others, is back in fashion. Especially attractive in parts of western Europe, this idea received support on Wednesday from Jean-Marc Ayrault and Sigmar Gabriel, the French and German foreign ministers.
    
Another idea is to step up defence collaboration, so that Europe becomes a more credible US security partner.
    
Beyond these relatively cautious proposals, some policymakers and independent analysts are thinking the unthinkable. One example is a report by MacroGeo, a consultancy chaired by Carlo De Benedetti, an elder statesman of Italy’s business community.
    
The report, “Europe in the Brexit and Trump Era: Disintegration and Regrouping”, arrives at bold conclusions. It asserts that the EU in its present form is most likely going to decompose, even if pro-integrationists such as Emmanuel Macron, the French independent centrist, and Martin Schulz, the German Social Democrat, win this year’s elections.
    
“By the 2021-22 electoral cycle, the EU might be entering the last five years of its ‘real’ existence,” the report says, allowing that the bloc’s formal legal structures centred on Brussels would probably linger on.
    
The report contends that, apart from shocks such as Britain’s vote to leave the EU, long-term geopolitical trends are causing the bloc to atrophy. On Europe’s eastern and southern borders, multiple challenges include irregular migration, failing states, terrorism, climate change and Russian revisionism.
    
Meanwhile, the US is slowly disengaging from Europe to focus on China and the Asia-Pacific. Germany will not replace the US as Europe’s indispensable power: it will never let the eurozone turn into a “transfer union” and, despite speculation about a German nuclear deterrent, its 20th-century past means neither Germany nor its neighbours want it to be Europe’s dominant military power.
    
Would not the EU’s disintegration unleash “the dangerous nationalist demons of Europe’s past”, as Guy Verhofstadt, a former Belgian prime minister, fears? The MacroGeo authors do not predict anarchic competition among nation-states, but “the emergence of a German geo-economic core”.
    
This would consist of Germany and countries in its industrial supply chains and comfortable with its monetary and fiscal culture. Disarmingly, they suggest that, “if Italy were to fall apart”, northern Italy might join the Netherlands, Poland, the Czech Republic, Slovakia and some Scandinavian countries in this group.
    
All this implies the 19-nation eurozone’s break-up. Finance ministers and central bankers are adamant that such a step would be devastating for Europe’s economy and global financial stability. However, it is being discussed in circles beyond France’s far-right National Front or Italy’s anti-establishment Five-Star Movement.
    
Mediobanca, an investment bank that was once the exemplar of northern Italian capitalism, published a controversial report in January which suggested that, in terms of public debt, Italy would not be harmed much by exiting the eurozone.
    
In a move reflecting frustration at the European Central Bank’s ultra-low interest rates and bond-purchasing programmes, the Dutch parliament voted last month to commission an inquiry into the pros and cons of eurozone membership.
    
As guides to Europe’s future, these developments deserve close attention — perhaps more close than Mr Juncker’s white paper.